Cairn Homes plc (CRN) Earnings Call Transcript & Summary

Hello, and welcome to the Cairn Homes 2020 Interim Results Investor and Analyst Call. [Operator Instructions] Just to remind you, this conference call is being recorded. Today, I'm pleased to present Michael Stanley, Co-Founder and CEO. Please go ahead with your meeting.

Thank you. Good morning, everybody. I'm joined today by Shane Doherty, our Chief Financial Officer, who will be presenting the results with me for the first time. I'd like to welcome Shane to the company and thank him for today all his incredible work since he joined our business this year. And I'm also joined by our Head of Investor Relations, Declan Murray. So good morning, everybody. Thank you for joining us on the call. Firstly, I suppose just reflecting on my own working experience and particularly my time in housebuilding, I can tell you that the challenges faced in the first half of 2020 have been the toughest I've ever experienced. Given this, I'm particularly proud of the resilience my colleagues have demonstrated in the space in the first half of this year. The fact that we are reporting an operating profit of EUR 5.8 million for the first half when all of our sites were closed for 2 to 6 months is testament to the commitment to getting the job done to continue our standard and particularly in the safe-working environment across all of our active developments. We are now back at 85% of pre-COVID levels. We have 2,000 people working safely full-time across our 15 active developments, soon to be 17 sites before the end of the year. We have experienced a surge in sales interest in the summer months after the lockdown, which is carried through into the traditional autumn selling season. Today, we have 1,030 closed and forward sales with the value of that pipeline in the region of EUR 237 million. In this morning's interim statement, we guided full year closed units modestly above 700 and operating profit for the full year of EUR 20 million and a gross margin of circa 16.5%. As everybody in the call knows, there is an underlying pent-up demand in Ireland for home ownership. This has been reinforced as a consequence of the lockdown. The experience has changed people's priorities on owning their own home in a well-designed energy-efficient home that they can live and sometimes work. And that has become paramount to many. I'm pleased to see the Irish government's commitment to putting homebuilding at the center of their policy program, particularly their emphasis on affordable homes and on supporting aspiring homeowners more generally. Given the scale and responsiveness of our construction platform, Cairn is in an exceptional position to materially assist in delivering new homes at affordable prices over the coming years. So I'll move on to the highlights on Slide 3. Our top priority has been the safe return to work. And we're really pleased that we have over 2,000 full-time employees back active in a safe environment, and we are also very conscious of protecting not just our own direct employees or subcontractors but also the communities in which we work in. We will be active on 17 sites by the year-end, and I'll talk a little bit more later about productivity, but we're seeing our construction productivity back up to that 80% -- sorry, 85% of pre-pandemic levels. We're reporting an operating profit of EUR 5.8 million. And most importantly, on the bottom half of this slide on Slide 3, we have been able to invest in our future growth. Our WIP investment in the period is EUR 56.8 million. And we are seeing substantial sales momentum of 1,030 forward sales, 350 of which will close in 2021 due to mainly program delays and new protocols on our site. Moving on to slide -- on to the next slide, our operational review. I mentioned health and safety. We believe all our sites are now working efficiently to our new protocols, and we've had a very successful implementation on the return to work strategy. On the subcontractor and supply chain side, we believe now more than ever that our subcontractors and supply chain appreciate the platform and the security of work that we offer them. We operate a very much a partnership approach. We have found that our subcontractors are more organized. We are helping it to plan ahead more further. We are splitting our trades and this is beneficial. Shane will chat a little bit later about how some of our strategies and our programming has helped us manage the impact on our margin that the new protocols have resulted in. Our site personnel are down by about 10% to 20%, but we are seeing the output back to pre-COVID levels, which is a key lever for us in managing that cost difference. Moving to the next slide, our ambitious growth plan. Our total WIP investment today is just over EUR 260 million, which is a combination of 932 units either completed or under construction. A significant portion of our EUR 261 million construction work in progress, including the EUR 56 million net investment in H1 is in our core starter home market and already contracted PRS units. Overall, our WIP investment is largely covered by our EUR 237 million forward order book. And our WIP profile and continued investment will allow us to respond to demand, not just this year but well into 2021. Moving to the next slide, which is a breakdown of our forward order book by period, including the 350 units that we will now close in mainly H1 2021. Our marketing strategy has adapted to post-COVID protocols. We've enhanced our online offering and we are doing one-to-one viewings and appointments. That is actually leading to a higher sales conversion rate as evidenced by our strong pipeline. Our inquiry levels this year are up by 59% at year-on-year. As I reflect at this time last year, when we were facing into Brexit challenges, and we didn't expect a coronavirus pandemic to be sitting here today, 12 months later, with a stronger and higher order book, both in terms of volumes and value, is reflective of the housing crisis and the supply -- the poor supply response and the underlying demand. The good news for us is the majority of our recent sales are to customers who are mortgage approved post lockdown, and it's really encouraging to see the banks in Ireland supporting our homeowners. Moving on to the next slide, it calls out our sales rate per active development. And our starter home sites are currently selling at a rate of over 2 homes per site per week across our portfolio, which is very encouraging. Our starter home prices ASP this year is pretty much identical to last year at EUR 322,000 ex VAT. As we look forward, we expect pricing to be flat to marginally better than we've previously experienced this year. I'm going to hand over to Shane to bring you through the financial results and guidance. Thank you.

Thank you very much, Michael. Good morning, everyone. First, I'll start with Slide 9, which gives an overview of our first half financial performance. Michael has already called out some of the key numbers, and maintaining profitability was a key focus for us in a situation where core construction was curtailed for 6 weeks and marketing activity significantly curtailed until early June when show homes were reopened on an appointment-only basis. Therefore, in that context, we believe that securing 200 sales and more importantly, the closed and forward order book of the 1,030 units shows the resilience and strength of the current operating model. The EUR 80 million in revenue is underpinned by a continued strong cost of fund efficiency and cost discipline. Gross margin remained above the level across the industry in Ireland at 16.1%, despite a number of COVID-related costs incurred in that number. And I'll give you more detail on that later in the presentation. OpEx was kept very tight in the first half, notwithstanding the continued investment in our platform from a headcount perspective across a number of key disciplines, including construction, IT and health and safety. You will note in that context that operating expenditure is 13% lower than prior year. We expect that run rate to increase in the second half of the year due to the scaling impact outlined above and more critically, the increased visibility that we now have in the market and our own strong pipeline. As outlined previously, both myself and Michael are very conscious of the total operating environment for all of our stakeholders, including our investors, and we will forgo our bonus this year. The result of that, of course, is reflected in our operating expenditure numbers for H1. And then the gap between our operating and PBT, that will start to reduce in future periods, as we look to manage our revolving credit facility more efficiently following the full drawdown that we implemented in March. The resilient positive performance, of course, is underpinned by a very strong balance sheet position. We will go through that in more detail later, but it is worth pointing out that we trade at a net asset value of EUR 0.99 per share with a very strong amount underpinned of nearly EUR 700 million. The [ vast book ] which was acquired very competitively in 2015 and '16. With our strong operating scale platform, we are very well positioned to grow this KPI through unit delivery and monetization of the land bank, as evidenced by the growth in our sales pipeline over the summer months in particular. I'll take you now on to Slide 10, which talks in more detail around our revenue and sales performance KPIs. You will note that our blended ASP was down year-on-year to EUR 337,000 from EUR 449,000 in 2019. And really, the main reasons for this were mix driven and the average sales price across our starter home remains at just around EUR 322,000. During that, we continue to provide high-quality A-rated starter homes to a large pool of buyers in excellent locations around the Greater Dublin Area in particular. We saw no evidence of any price declines in our apartment or trade up or trade down in housing stock. The ASP in the apartment is purely down to the impact of Hanover Quay in our homes in 2019. Also included in our EUR 81 million of revenue was EUR 11 million of revenue from development sites. Our closed and forward order book of 1,030 units and EUR 326 million in revenue underpins our guidance of completing over 700 unit sales in 2020. We anticipate that roughly 350 of these units will close in 2021, which coupled with our ongoing WIP investments, really sets us up very well for unit delivery and sales into that period and beyond. As the table at the bottom illustrates, momentum in our pipeline has been very strong with average monthly increases in the summer months of over 54 per month, including the quieter holiday period in August very encouraging and for us. Turning to Slide 11. I thought it was important just to talk about in more detail around the gross margin considerations. Michael alluded just to the very difficult operating landscape which has been [indiscernible] at the moment. So I wanted to kind of bring it through the impact of COVID-19 on our gross margin in particular. You will see in the chart on the left, the core housebuilding margin was 16.6% roughly for the first 6 months of the year. And when you adjust for the impact of COVID-19 on our recurring margin, we estimate that our underlying margin remains at similar levels to last year at roughly 18%. And in arriving at that number, we did a full review of our sites to ascertain the impact of additional preliminary costs associated with the full lockdown during April and May in particular, and of course, the increased lead time on sites that may arise due to COVID-19. We estimate that, that impact will be around 1.4%, which will obviously predominantly impact active sites during 2020 when we are selling. Assuming there are no material further site closures relating to COVID-19, we would not expect this negative impact to sustain materially into the future beyond that period. The exercise is complete and obviously, bearing in mind that obviously only 10% to 15%, depending on whether it's low or high density of our overall cost stack in homebuilding is variable to COVID-related cost changes on the basis of our cheaper land bank and obviously, the fact that the [ vast course of ] raw materials are procured between 2020 and 2021. Moving on to Slide 12, our balance sheet position. It really is underpinned by land at an historic low cost, and then with investment into our forward order book. Our net asset position at EUR 740 million, needs to be borne in mind that after making shareholder returns of EUR 60 million in the last 12 months. And of course, we've got a very strong liquidity position after that investment in H1 of EUR 155 million, having built up a really strong WIP profile of EUR 261 million and our land banking fully secured. We have no debt maturities over the next 24 months, and our debt to gross asset value of 32% really shows how strong we capitalized our balance sheet to take advantage of the continued strong demand for our product, when other housebuilders may be more constrained in the short term, with less well-capitalized or little balance sheet. I'll take Slide 13 and 14 maybe together. I just done a bridge on our net debt movement and obviously, a detailed cash flow on Slide 14. Whilst our net debt has increased by EUR 95 million in the period, this can be attributed in the main to the completion of our share buyback program and our WIP investment program. Cash generation will, of course, return over the next number of quarters as only roughly 20% of the overall sales pipeline, which Michael spoke about, has closed at the half year. We will continue to invest in a number of our sites in parallel with the cash release of the pipeline that we will obtain over that coming period. Turning to guidance on Slide 15. Obviously, it's quite difficult to guide in these tough operating circumstances. But we do believe we've got good strong visibility as we get to the close of this year off the back of a solid test of financial results, maintaining profit, strong liquidity and margin management with a strong pipeline positions us really well to take advantage of the strong demand that remains in our sector which is really evidenced by our sales pipeline and [ WIP ] pipeline. So taking all that into account, we anticipate the closing units this year will be roughly probably monthly in excess of around 700 units with similar levels of average selling price and pricing. And assuming no additional impact -- material impact of COVID restrictions, we would expect gross margin to remain close to current levels for the year with operating profits of around EUR 20 million. We're very conscious obviously that dividends and shareholder returns remain an important consideration for many shareholders and indeed caring as a business itself. But given the context of COVID and the uncertainty that it has brought, we made a conscious decision to preserve cash throughout the period as we see and as such, the Board has proposed no interim dividend for H1 2020. Clearly, in a normalized operating environment ordinary Cairn would be generating significant cash, which we have spoken about before, which provides options in terms of how we deploy capital to deliver strong returns to shareholders. And therefore, return on capital is something that we will reconsider in 2021. I'll now turn the call back over to Michael.

Thank you, Shane. Thank you. Just moving on to our next slide on Slide 17. Our ambition is to be a sustainable long-term Irish homebuilder for generations and to be a market leader. Part of being a true market leader in our sector is measuring our environmental and societal impact. We've now transitioned from CSR and developed an ESG framework for our business to define our sustainability agenda. Our next step is to complete materiality assessments to form the basis for future measurement of our sustainability agenda across environment, social impact and governance. As I move on to the next slide, we'll talk about some of our highlights in this area for 2020. Our low carbon pledge being awarded the Green Economy Mark from the London Stock Exchange. Our commitment to biodiversity and our innovation agenda, which I'll talk a little bit more about later. What's key for me, I suppose, is that over 5 years, we have built an exceptionally talented team in Cairn that I believe will deliver into the future. And I'm really proud that the employee satisfaction surveys we've done have shown that we are providing rewarding careers for these very talented people. We've also, for the first time, introduced an engagement survey across our subcontractor platform and achieved an NPS score of 56 which we've called out also on Slide 18. I will spend a little bit of time on the next slide, 19, which is our product innovation and supply chain. The lockdown period offered us an opportunity to even focus more further on how we think about our product innovation into the future and how people will maybe change how their homes are used. We've introduced garden pods for the first time. And we were able to quickly introduce them into our homes straight after the lockdown because we used the lockdown period to work with one of our key suppliers to design that new solution. But we're also looking at different ways to evolve our homes, not just in houses but in apartments. On the design side, structural provision of attic conversions, allowing for future-proof is also important to us and some of the internal layouts to allow for more home working. We are improving the efficiencies of our subcontractor sequencing to enhance productivity with better on-site logistical management. We've looked at different ways to move our people around our sites through hoists and crawler platforms, more flexible scaffolding and access systems. We've continued to use modern methods of construction to improve our efficiencies, off-site manufacturing materials like timber frame, pods, metsec framing and [ interlease ] and prefab balconies. And we're trying to simplify our design and construction techniques with flat concrete frame and precast rising elements. We're working very closely with our engaged supply chain and always looking for a solutions, and we will always be customer-centric in our design. That's at the core of our approach as a house builder. Moving on to the next section, our land bank and our market. We believe that our future profitability is underpinned by our low-cost land bank. Over 76% of the total capital we deployed since IPO was invested in, what I believe, was a unique time or once in a career opportunity to buy low-cost land in Ireland during 2015 and '16. Over recent years, our land acquisition strategy has moved more towards acquiring adjoining sites and adding to sites where we already have a presence and have a proven track record. I'll talk a little bit more about that later on. I suppose just to reinforce one of Shane's earlier points in the financial review. The remaining land that we have on our balance sheet at cost is valued at about EUR 700 million. That is the cost of that land when we bought it in 2015 and '16. If you look at our current share price, the company is valued today at a market cap of EUR 600 million. Moving on to the next slide which is our land acquisitions. We talked a little bit about Clonburris, which we believe will be an exceptionally a great site for Cairn, as we look forward into the years ahead, particularly for affordable and well-priced starter homes. We've acquired 2 separate adjoining land parcels for circa EUR 20 million. And on an overall basis, Cairn now controls about 55% of the strategically zoned land in Clonburris. The local authority sector of county council are the major land owner with 31% of the land in that location. And we look forward to commencing our construction in Clonburris in early 2021 is our hope to get active on that site. In Parkside, we entered into our first joint venture partnership with NAMA in 2016 on adjoining land that we're already building on. To date, we have built and sold over 450 units in Parkside, and we entered our second joint venture with NAMA late 2019. After a successful commencement to that joint venture, we have now brought out NAMA's interest in that joint venture, and now we wholly own that opportunity where we hope to deliver in excess of 650 units in the coming years on a very successful development. Today, we've also announced a joint land acquisition of actually well-located site adjoining our Blake site in Stillorgan in County Dublin. This combined land allows us to enter into a planning application, and we intend to seek planning for approximately 460 apartments. And we believe this acquisition will create incremental shareholder value as a result of the synergies from the development and sale of the combined assets in the future. Moving on to Slide 24 and calling out some of the key characteristics of our housing and apartment sites. I suppose what's really crucial for us looking into the future and responding to the demand we're seeing and have seen over the last number of years, but particularly the current strong demand we're seeing for well-located and well-priced starter homes, over 11,900 of our land bank our housing units at an average sales price of EUR 299,000, excluding VAT. We believe this is a very compelling price point and a price point where people will be able to get access to mortgage finance. Our targeted IPO was to target a land bank where our land cost would be below 20% of net development value. Our current land bank at cost bought at an exceptional time in great locations, currently stands at 11.6% of net development value. We believe that, that low land cost, along with our platform and our capability, will underpin our profitability going forward and our cash generation as we unwind the land value and reduce our overall landholding to a more steady 4 to 5 years annual output. Moving on to Slide 25 which is a breakdown of the land bank across expected ASP ranges. And as you will see from the slide, about 54% of our total land bank can be sold at ASPs of below EUR 350,000. And again, this is really important for people who need to get access to mortgage finance. The other important call out for me, I suppose, is that we are seeing significant opportunity for people who earn between EUR 40,000 and EUR 65,000 in Ireland. The government has highlighted this as a key area and an area where the government may look to further support this cohort, broadening Cairn's addressable market, and we look forward to playing a big role in that market segment. Moving on to Slide 26, the market backdrop on the supply side and our ability to respond. And what's I suppose really important to look at for me when you look at housing supply is not just completions but commencements and the number of new homes that are starting. My belief is that over the summer months, many housebuilders in Ireland have been completing the homes that they'd already largely constructed pre-lockdown. Most of the activity we're seeing and talking to our subcontractors is across finishing trades, where many housebuilders are completing those homes. If you look at the commencement numbers for H1 in Ireland, they're down 35% in the first half of the year. That's nationally about 9,000 starts. And about 20% of those homes are only one-off homes. So I think, unfortunately, as can be illustrated by the graph on Slide 26, we are seeing a significant falloff in supply against very sustained demand. We are also worth noting that as well as in the starter home area, we're also seeing sustained demand in the multifamily area. The type of investors we're now seeing coming into Ireland, looking for access to multifamily PRS are taking a 20- to 30-year view. They tend to be the longer-term holders of these assets. And they still see Ireland as a very viable opportunity for long-term stable investment in the residential sector. So finally, I suppose the outlook for our business. There are broader industry challenges, which will last through 2021 and probably beyond. New site starts have decreased dramatically, and many homebuilders are just focusing on finishing off the projects, as I've said, that they've just commenced before the pandemic struck. However, thankfully, for Cairn as we have an advantage. We have a strong balance sheet and credit facilities. We have a responsive and mature platform from which to operate, and we are continuing to invest in existing sites and will commence construction on new sites over the coming months. The robust demand from first-time buyers in recent months will, in our view, sustain, particularly given the persistent demand/supply imbalance and in -- particularly in competitively priced new homes. Despite the huge disruption of the pandemic, Irish demographics will continue to underpin this demand. The key drivers remain the same. Many young families yearn to own their own home. As referenced in our interim statement this morning, we expect to announce more than 700 closed -- more than 700 -- mostly more than 700 closed unit sales this year. A gross margin of 16.3% and an operating profit of circa EUR 20 million. Cairn will be significantly cash generative with growing profitability, based on a well-invested sustainable business. And we look forward with real confidence. Thank you very much, and we will open up shortly to questions.

[Operator Instructions] Our first question comes from the line of Arnaud Lehmann from Bank of America.

Thank you for the detailed presentation. Maybe 3 questions on my side. Firstly, on the apartments, I think you could only complete 1 unit in the first half at an ASP, which is, I think, below the average. I'm assuming that you're on the building side due to social discounting you've got a few more challenges to complete and to progress on this apartment site. So could you give us a feel for when you might be able to, let's say, deliver a slightly more normalized level of apartments in the coming months? That's my first question. My second question is on your gross margin outlook. You explained very well, also the 16% would have been 18% without the impact of COVID. Are you confident that you could go back towards 18% next year? And thinking more medium term, do you see upside to be able to, let's say, round it up to up 20%? And lastly, you gave a bit of color on the competitive environment already. You said that some of your competitors might be struggling with liquidity issues. Would you expect to be able to gain significant market share in the next 6 to 12 months?

Thank you, Arnaud. I suppose, look, it's important to say, Arnaud, that we need an industry that's producing volume houses and apartments in Ireland and sustaining our infrastructure and subcontractors. So on an overall basis, I don't necessarily see it as a real positive that our industry are struggling. Obviously, unlike internationally, in most developed economies, Northern Europe, as you know, Arnaud, and U.K., most of the housebuilders that operate in those sectors are very similar models to Cairn, well-capitalized equity led. Unfortunately, in Ireland, a lot of our housebuilders are still very dependent on financing from their banks and are not equity led. So I think it will be a challenge. Not necessarily good for our economy and our sector. It may mean and maybe some of our sales volume we've seen over the summer is because we weren't competing with as much product from other housebuilders. But I suppose we need to view that over the coming months and years. I think our price points and our scale will give us a sustainable advantage relative to our competition, Arnaud. On the gross margin outlook, obviously, we suspended guidance. We're pleased with where this margin is. We would probably see it as the floor, Arnaud, if it's fair to say that. We don't see any further margin erosion due to COVID. And therefore, in the current environment and maybe macro environment as we hopefully come out of the COVID pandemic, we can look forward with some confidence on our margins. But as I say, we have suspended longer-term guidance, and I think that's prudent in the current environment. On the apartment delivery, which you asked, most of our apartments were scheduled to deliver in the second half of the year. As part of the program of delivery for those apartment schemes, we will start delivering those apartments in H2. You will see that feeding through our H2 results. Unfortunately, about 350 of the units that we would have expected to close this year will push into H1 and quite a number of those are apartments as well, Arnaud. So we've had to -- due to the confined environment in apartments, we've had to work a little bit harder there around social distancing and bringing in new protocols, but they've been successful. So while there's been a bit of a timing delay, we will -- you will see quite a decent flow of apartment completions in H2 and H1 next year.

And the next question comes from the line of Andy Murphy from Panmure Gordon.

I've got 3 questions, if I may. Can you give us a little bit more color around the Stillorgan side? I was interested to know what the ASPs like to be there or the gross development value, if that's possible and the timing of that development, just give us some sense of scale. And aligned to that, I was a bit confused about the actual size of the site, in 1 time, you said 1.35 acres. And in the presentation, you seem to say 3, so -- or 3 and a bit. So I was just curious on a bit of clarity around that. And second question is around about sort of COVID situation. I was wondering if you're operating at 85% now, how close to a sort of a normalized 100% can you get, say, in Q4 and into the first half of next year? And if there are any ongoing costs in terms that relate to that and how you might be operating going forward? And then the third question around dividend, clear that there's no interim given the wording of what you're saying and the cash generation that I'm sure is going to come through in the second half. I was wondering to what extent you can give us some color as to what you're thinking about potentially being able to deliver a final dividend in relation to 2020, obviously, announcing it in the early part of next year?

Okay. I'll take the question on dividend. Really, there's probably not a huge amount more to say around what I've already said. Clearly, this isn't a year of significant cash generation. It's retrenchment on really getting on top of the significant opportunities that are there for us in the market with investments. So it's something really that we will be revisiting in 2021. I think as you can see from the percentage of the pipeline that's actually closed, like cash generation will occur. So I think it's prudent that we visit that at that point or at some point in 2021.

Yes. Thanks, Shane. On productivity, yes, 85%, Andy, is probably a reasonable level until we see how the health pandemic develops over the coming months. I think it would be irresponsible to push it much further than that. We have to respect social distancing. We have to protect not just the people who work on the sites but also the communities they work in. The vast majority of our sites, we have existing residents as well, Andy, working -- living alongside our development. So we're comfortable with that. As I said earlier, even though site personnel is down by about 10% to 20%, we're actually seeing productivity per person of that pre-pandemic levels. And what it might mean, Andy, if this situation prevails for the longer because we have so much more of our sites now through the planning process, and we have over 35 individual development sites, we may look to become more active over the next 12 months on more sites than they might have previously planned, and that might be a more sustainable way for us to drive our future volumes, if that makes sense. And in relation to the Stillorgan development, the overall size is 3.3 acres, Andy. And in terms of value, it sits very comfortably within our -- I suppose, our intended PRS or multifamily portfolio. We have made very good returns in similar schemes. As you probably are aware, in Citywest, we're currently building quite a similar scheme to our planned scheme in Stillorgan at Griffith Avenue in North Dublin. So it's an exceptional site, an exceptional location. And I think the target rental levels for a scheme in that location with the overall really low-land cost of the entire site. That -- our portion of that site was bought within the project Cairn portfolio. So it aligns with our adjoining site strategies in places like Clonburris and Parkside. So we expect that to be a very successful development probably geared towards that multifamily PRS market.

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

I've got 3, please. The first is just on the COVID impact, if I understand correctly, you're essentially saying that the impact of 140 basis points of COVID cost in H1, you think that it's going to be the same in H2 but nothing for next year. Is that right? And then my second question is just on gross margin again. I think at full year results, you're obviously talking about a gross margin of 20%. Just the 200 basis point difference between the 20% and the 18% that you're talking right now, is that purely about the longer prelim costs or the mix effects, et cetera, in there are sort of apartments versus houses? And just trying to get a bit of a sense of how we should sort of think about that into next year and sort of what the moving parts are really? And then just finally, on volumes for next year. I realized you're not giving guidance now, but are you able to sort of give us a sense of what the potential range of outcomes could be or sort of assuming the market looks sort of broadly similar today, what the range could be or sort of within there, like how you get to sort of the bottom or the top end of that range, what drives it?

Okay. I'll take the first 2 questions. Clearly, it's easier for us to have a good sense of what COVID is going to cost us in this financial year. So we think that 1.4% is a decent estimation based, obviously, on the fact, as I said, we were locked down for April and May, and then we had a productivity ramp up. When we went back on site, we were seeing productivity levels of close to 60% initially, and that has been ramping up. So I wouldn't say that it won't be there next year, but we don't think the impact would be nearly as material next year as it was this year. So the 18% would really take account of that within the numbers. And as I said, that's predicated on current work practices continuing. So there will certainly be a residual impact, which obviously does drive down the margin next year compared to probably what you would have seen previously in historical guidance, but not to the same level of impact I think that you would see this year. I don't really want to say too much around margin for next year at this stage, because clearly, we have to spend [ and guidance ] into next year. But yes, there would be a variety of kind of mix issues that you have to bear in mind in terms of apartment housing stock and everything else. But as I said, already, our pricing has held up quite resiliently over the first part of the year. Michael, I might think you take that.

Yes, it's probably fair to say, all we can say at this stage is our current forward order pipeline, which is not yet completely sold is not at a lower margin than we're currently reporting. So I think the best we can say at the moment is our margins are in terms of just both COVID impact and mix are what we would refer to as kind of the floor level, if that makes sense, and -- but we have suspended guidance. In terms of volumes for next year. Again, similar, I suppose, if we reflect on this year and what our ambitions were, we had expected to complete about 1,250 to 1,300 units this year. We'll do 750 -- we'll do 700, should I say, or modestly above 700 we expect, assuming that we -- our sites remain open between here and the year-end. And 350 units we would have closed this year pushed into next year. So if you look at that sort of level for the current year of 2020, with sales activity 0 for 2 months, we were well on track to hit our current unit numbers of 1,250 to 1,300. And with our current pipeline, with our investment in WIP, with the flexibility of our land bank, we're very confident about our growth opportunities. And we're very confident that we will quickly return to those sort of levels, and our ambitions are to grow well beyond those levels. But at this point, we have suspended guidance, and I think that's prudent in the current environment.

And the next question comes from the line of Colin Sheridan from Davy.

Just a few from me, if I can. I mean, first, just a point of clarity on the guidance. I mean you've obviously said that you're back to about 85% of pre-COVID production rates. I assume that the guidance that you've given today in terms of the modestly above 700 units is not assuming any improvement in that race. And I suppose, moreover, once you get back to a situation where social distancing requirements are removed, how quickly do you think you can get from that 85% back up to 100%? Is that a step change? Or is that something that might take some time as well? And then just a quick question on demand. And clearly, it's remained strong through summer. I'm just interested in seeing or hearing, what might have been the changes that you saw following the July stimulus, particularly the Help to Buy expansion? Whether or not there was a noticeable change in underlying demand once that was announced? And then finally, maybe just to circle back on Arnaud's and Emily's questions on gross margin. And really just trying to understand the responses, particularly in relation to the 18% gross margin that you're quoting without COVID. I'm just trying to understand, is there a negative mix impact in that 18% that would have been felt this year? Or is that 18% representative of the land bank as it stands today?

Colin, challenge a little bit maybe about the demand point and hand over to Shane for the much harder questions you've asked. I suppose -- yes, it's well beyond, I suppose, my expectations in terms of demand column, but not necessarily surprised. I was optimistic that the type of increase in demand we've seen in Q1 as well was post Brexit was pretty obvious to us. So we were starting to see people's confidence maybe returning a little bit after that sort of Brexit shock and that realization maybe that Brexit would have an impact on our economy. I think it's also possible, Colin, that many people have lived through that lockdown period probably question their living environment. And that's certainly the feedback we're getting from a lot of customers, maybe people that were on the fence and I'd been mortgage approved, pre-locked down or were in that category of people that were maybe renting and felt they wanted to own their home. So the demand has certainly been strong. I think what's interesting for me is that we're seeing it across price points, not just in starter homes, but in some of even higher price schemes, where our ASPs are actually higher, calling out places like Mariavilla in Maynooth, Glenheron in Greystones and some of our some small number of remaining units in Marianella in Rathgar, where we're largely sold out now. The -- it's been pretty much across the board. And most encouraging for me, we're seeing new mortgage approvals coming through. So I didn't see a specific spike when the Help to Buy was announced. It's really been steady, Colin, over the summer months. And I suppose for us, we were bringing new launches to the scheme, to the market as well, and maybe that wasn't happening more broadly. And indeed, over the next number of weeks, we have 3 new further sales launches on new schemes, where we'll have show units for the first time in Newcastle. We're launching Donnybrook Gardens as well. So we expect that over the second half of the year, that forward order book should continue to actually grow despite the fairly significant closings we will do in H2.

Thanks, Michael. I'll take -- I think, Colin, your first question might have been just a clarification around the unit guidance. So obviously, we're very comfortable with that guidance at this point. We brought it to the pipeline. So I think the only caveat I put around that is it assumes no further significant lockdown, but we would be comfortable with the range of early 700 based on what we're seeing at the moment in terms of existing work patterns that are out there at the moment. In terms of the gross margin for this year, yes, I mean, look, as you'll appreciate, there's so many moving parts at the moment with COVID. But we do kind of see an underlying gross margin at the moment in our core business of around 18% before you consider any kind of price increases mix. May probably comes into play further down the line, but we're not really looking materially beyond this year in terms of gross margins beyond, I guess, really quantifying what we've seen in the first half of the year, what that does to your kind of adjusted gross margin. And then really to say that we wouldn't expect that 1.4 impact to be as material into next year. I don't really feel I can say much more beyond that at this stage because, as Michael has said, we've suspended guidance into next year.