Cairn Homes plc (CRN) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to the Cairn Homes 2023 Interim Results Analyst and Investor Call, which will be hosted by Michael Stanley, Chief Executive Officer; Shane Doherty, Chief Financial Officer; and Tara Grimley, Company Secretary and Head of Sustainability. [Operator Instructions] I'll now hand you over to Cairn's CEO, Michael Stanley.

Thank you, Alex. It's a beautiful sunny morning in Dublin. Good morning to everybody and thank you all for joining us for our analyst and investor call as we review 2023 interim results and look forward to the remainder of this year. I'm joined this morning for our presentation by Shane Doherty, our CFO; Tara Grimley, our Company Secretary and Head of Sustainability; and Declan Murray, our Head of Finance and Treasury. The success of our strategy and momentum of our business is most clearly demonstrated by delivery. As we report today, the outlook for our business is extremely positive, illustrated in part by our forward order book with a net sales value of over EUR 1 billion. We have been consistent in delivering on our commitments and today, we are again upgrading our guidance for 2023 for unit output and profitability. Ours is a differentiated strategy that is clearly working. We are Ireland's fastest-growing homebuilder, delivering quality homes at scale and at pace. We have created a sustainable long-term business and we'll continue to make a significant contribution to Ireland's housing needs into the future. With a talented team supported by a mature subcontractor base and supply chain, we are delivering for our homebuyers and for our shareholders. So if you could please go to Slide 4 on our investor presentation, I will take you through our highlights and performance for the first 6 months. As I mentioned, the company has a record closed and forward order book comprising 2,730 new homes and a value in excess of EUR 1 billion. Reflecting the long-term nature of this pipeline, 950 of these homes are forecast to close in 2024. This also means that we are effectively secured -- we've effectively secured all of the sales needed to meet our upgraded guidance of 1,800 closed sales in 2023. We closed 535 homes in H1. And as ever, our sales profile is more heavily weighted towards the second half of the year. In H2, we will close 1,265 new homes, an impressive 30% increase on our H2 closings in 2022. As a result, core homebuilding revenue of EUR 217 million in H1 will grow to an excess of EUR 675 million by year-end. This, in turn, will increase our EUR 30 million operating profit in the period to between EUR 110 million and EUR 115 million for the full year. 2023 will be another year of significant unit, revenue and profit growth and we are pleased to again be upgrading guidance, which Shane will bring you through in more detail a little bit later. Our margins are stable, as you can see, with a gross margin of 21.2% and an operating margin of 13.5%. With the increased output, operating margin will improve significantly in the second half of the year to around 16.5%. So, I might move on to Slide 5. Our growth is supported by our continued reinvestment in our business, increasing the capacity of our operating platform across both housing and scaled apartment developments. We started construction on 1,000 new homes during the first half of '23. We have over 10 site commencements planned for the next 12 months. And as you can see from the growth in our forward closed and order book, the demand for our new homes is rock solid. Our EUR 419 million WIP investment is 1.9x covered by the EUR 793 million element of our forward order book. We made sound strategic decisions in 2021 and '22 due to many factors, but partly because of the predictable deterioration of Ireland's planning system. The result of that investment and confidence in our business will see our housing output grow by nearly 20% to at least 1,800 new home completions for 2023. This is against the backdrop when output in the broader homebuilding industry in Ireland would remain relatively flat year-on-year. Total investment in our business, as you can see from the slide, is over EUR 1 billion between our land bank and work-in-progress across our 19 active sites. We have more than 4,000 people fully employed across these developments today and we've increased our net investment in construction work and progress by nearly 25% in the first half of 2023, as I said, balanced by the strength of our forward order book. We are making very solid progress towards our 15% ROE target. 2023 we'll see ROE above 12%, following an 11% outturn in '22 and the 6% we delivered in 2021. We are declaring an interim dividend of EUR 0.031 today. We are also increasing our share buyback program by EUR 35 million to a total of EUR 75 million. And with a progressive ordinary dividend policy and a payout ratio of 40% to 50% of profit after tax, shareholder returns will be between EUR 115 million and EUR 120 million this year. On to Slide 6. You can see a chart illustrating the growth of our closed and forward order book that I've also -- that I've referred to. We've agreed 1,630 new home sales in the year-to-date from a very strong starting position in January. I've also spoken previously about the intention to grow our longer-term sales pipeline. The autumn selling season will likely add significantly to 950 homes forward sold beyond the current year. Our low-cost land bank and construction efficiency means we can retain strong and stable margins at competitive price points. The average selling price in our order book also remains stable at EUR 370,000 net of VAT. We have seen very good sales this year in our higher ASP trade up/trade down developments. As a result, we are now almost completely sold out of our current mid and higher price point developments. We are now increasing our delivery in our core starter home market, particularly in our well-located and well-connected greater Dublin area sites, including new schemes like 7 Mills, which we'll [indiscernible], more of that later; Blessington, Newcastle and Navan. We have also materially increased commencements of well-located and scaled social and affordable apartment schemes. And moving on to Slide 7. This slide outlines our pricing by market segments. Our average starter home price in H1 was EUR 342,000 net of VAT, while the reduction in our trade up and trade down housing and apartment prices is more reflective of changes in mix. We are delivering starter homes at extremely competitive price points against an inflationary backdrop that we've witnessed in recent years. We have sold starter homes across 8 of our new developments to first-time buyers who are now availing of the First Home shared equity scheme. This support for first-time buyers is gaining significant traction as it enters its second year of operation. In the current interest rate environment, government initiatives continue to deliver more realizable demand for young families seeking to own their first home. Next to Slide 8, which covers a number of key operational highlights, each of which are important for the progression of our business. And to highlight just a couple, we are delighted yet again to receive award winning recognition for our developments. We are now pushing from nZEB nearly zero-energy building towards Passivhaus standards, which Tara will talk about in more detail a little bit later. And it is a notable achievement for our team to secure 3 separate ISO certifications at the same time across quality management, environmental management and the important area of health and safety. Moving to Slide 9. And we expect build cost inflation to fall this year to approximately EUR 10,000 per new home built from the EUR 15,000 level in 2022. Our focus is on managing and controlling our significant procurement spend through supply chain partnerships, delivering productivity, efficiencies and innovative product development. Our procurement will grow considerably with a EUR 1.75 billion forecasted spend over the next 3 years. Since 2015, our average spend with each of our top 20 subcontractors is circa EUR 50 million. More importantly, our top subcontractors each worked across an average of 20 Cairn developments. This underpins our sustainable approach to business. We will continue to leverage these mutually beneficial partnerships to deliver value-for-money new homes for our customers. On Slide 10, our capital allocation strategy is focused on continued scaling and reinvestment in our business, balance sheet efficiency, and returning surplus capital to our shareholders. We will continue to create value for all our key stakeholders, including record housing output for our customers this year, growing our team to more than 5,000 people working across our active sites, promoting Ireland's economic attractiveness with much-needed housing and tangible ROE growth for shareholders and continue to outperform on our business objectives. I will now pass you over to Shane to bring you through our 6-month financial performance and our 2023 full year guidance.

Thank you, Michael, and good morning, everyone. I'm delighted to present a very strong set of financial results for Cairn for the first 6 months of 2023 this morning as well as reiterating the very strong outlook for our business as we look to close out on what we expect to be a record financial year for Cairn in terms of volumes, revenue and profit generation. Over the next few minutes, I will talk you through our half year 2023 financial results as well as our continued strong momentum from our upgraded forward-looking guidance. Moving to Slide 12. And before I take you through our 6-month financial results, I would like to talk to you about the macro environment and how it complements the strong financial performance and outlook that we are seeing. We are operating in an economy where practically all economic indicators are positive. From the top down, continued robust economic growth, whether measured through the GDP bands or the more locally focused modifying domestic demand, growth is forecast for 2023. The structured owner supplied by new home simply is not keeping pace with our growing population and record employment figures. Our population has grown by over 380,000 in the last 7 years, but quite incredibly, our working population has grown by over 560,000 since 2016. Exchequer returns are exceptionally strong and looked like they were hinting to be so into 2023. Our government is forecasting a cumulative EUR 65 billion exchequer surplus into 2023 to '26 period. Household balance sheets are among the healthiest in Europe and deposit levels continue to rise. With these strong economic fundamentals, the government is quite rightly prioritizing new home supply across all tenures through Housing for All and is investing EUR 5 billion in capital funding in 2023 to meet its housing targets. And moving to Slide 13. Our first-time buyers are now supported through both Help to Buy and shared equity, which is having a positive impact on mortgage-backed demand. The Croi Conaithe initiative will be important to unlocking the scale of apartment market and owner occupiers also. The 4 charts show how these initiatives for first-time buyers are having a positive impact. Importantly, we continue to have a supportive and functioning mortgage market and first-time buyer mortgage drawdowns for new homes grew by 7% in the first half, while approval volumes were up 9%. Pillar banks, in particular, are providing significant discounts to our first-time buyers for current A2-rated homes through their green mortgage offerings. The industry is also responding with H1 new commencements up 12% year-on-year. Moving on to the numbers now on Slide 14. You will see we had a strong start to 2023. Some key callouts include: revenue of more than EUR 219 million from 535 new home closings in the first half of the year. That's roughly 30% of our expected 1,800 new home completions for the full year. Gross margin remained solid at 21.2% and operating investment expenditure has remained broadly in line with our expected full year run rate. We continue to invest in our ambitious growth agenda across key disciplines, including construction, innovation, IT, health and safety. We anticipate the top line growth, combined with well-considered investment in operating expenditure will continue to drive operating leverage expansion in the second half of 2023. Operating profits were EUR 29.6 million in the first half, and we expect those to grow to between EUR 110 million and EUR 115 million for the full year. A net asset value of EUR 1.09 per share at the half year demonstrates the strength of our balance sheet. That includes a wholly owned land bank of nearly EUR 600 million, much of which was acquired at very competitive prices. Our forward order book of more than 2,700 units and over EUR 1 billion in value as our proven and ever-increasing operating platform, all of which makes for a very compelling valuation thesis for our business. It's also important to highlight what our expected sales closing in 2023 mean for our market position. Our market share last year with 1,526 new home completions was circa 6.3% when one-off homes are excluded. We expect market output to be relatively flat this year, meaning that our expected 20% increase in completions this year will grow our relative market share to circa 7.5%. That is a market position that's significantly ahead of broader trends. Slide 15 demonstrates the continued strength of our forward order book. As of today, we have forward sold nearly 2,200 units with a net sales value of nearly EUR 800 million. More than 1,200 of those units are expected to complete in the second half of 2023. This means we've effectively already hit our upgraded volume target for the full year. The growth in both the number and value of new home forward sales compared to previous periods is supported by the increased investment in work-in-progress. In terms of the value of those forward sales, we are 1.9x covered on our closing WIP balance at the end of H1, which is a very comfortable position to be in. Everybody knows the confidence which we've had in our business and the opportunities which have existed in recent years to scale at pace. We continued to invest in construction activity and scaling when other industry players did not. That investment is reaping the rewards now in the context of the quantum and value of our forward sales pipeline. On Slide 16, our balance sheet position continues to be supported by land at historic low cost and with investment that I just mentioned is backed by a forward order book of nearly 2,200 units. At EUR 419 million, our WIP supports the board order book with a value of EUR 793 million and represents an increased net investment of more than EUR 80 million compared to year-end. This WIP investments will unwind during H2 as the bulk of 2023 new home sales complete. Following shareholder returns of EUR 43 million in the period, our net debt increased to EUR 228 million. Similar to our work-in-progress, this will drop significantly in what will be a very cash-generative H2 and we are forecasting a year-end net debt position of circa EUR 130 million. Our net asset position of approximately EUR 733 million is after shareholder returns of nearly EUR 250 million made over the last 2 years through both dividends and share buybacks. At 28%, our debt-to-GAAP ratio reflects the significant investments we made in our continued growth in H1 and this will similarly reduce significantly by year-end. We outlined the key cash flow movements during the first half of 2023 on Slide 17. We maintained an available liquidity position of EUR 130 million, reflecting the normal liquidity cycle of our business, where the majority of revenue and free cash generation occurs in the second half of each financial year. The closing WIP balance of EUR 419 million will enable us to increase our unit output once again in the second half of the year of 2023 to more than 1,255 new homes compared to 979 completions in H2 2022. That's an increase of nearly 30% year-on-year. And finally, to guidance on Slide 18. We are again upgrading our expected 2023 outturn. The company continues to make strong progress to our 15% ROE target with ROE growing to an excess of 12% this year. Our closed and forward sales order book, along with our proven track record of scale delivery, allows us to upgrade already strong 2023 guidance. We are, therefore, confidently guiding the following: in excess of EUR 675 million of revenue from more than 1,800 new home sales closing; gross margin of circa 21.2% for the year; and operating profit of between EUR 110 million and EUR 115 million from the EUR 103 million delivered in 2022. I'm delighted to say we are announcing an increase in our buyback program to EUR 75 million from the previous EUR 40 million amount. And therefore, we expect to deliver shareholder returns of between EUR 115 million and EUR 120 million from our EUR 75 million share buyback program and a 40% to 50% profit after tax dividend payout ratio, including a EUR 0.031 interim dividend declared today. Thank you for your time this morning and I'll now hand you over to Tara to bring you through our sustainability update.

Thanks, Shane. Turning now to Slide 20 in the deck. And we detail here some of our H1 2023 highlights under our ESG agenda as well as improving our CDP score to an A-, our Scope 1, 2, and 3 carbon reduction targets have now been externally verified by the Science Based Targets initiative. I'll talk to one of the more material changes we have committed to rolling out in relation to Scope 3 on a later slide. We were pleased to join with some of our construction peers in Ireland, becoming one of the founding partners of the newly established Supply Chain Sustainability School. The goal of the school is to educate and raise awareness amongst our supply chain partners on ways we can collaborate to reduce carbon emissions within the construction sector in Ireland. We also invested further in our sustainability team by appointing a new Head of Sustainable Construction to lead on operationalizing our carbon reduction strategy and further developing our net zero transition plan. On the next slide, we provide an update on our progress to delivering a biodiversity net gain town in 7 Mills, Clonburris. Michael will talk in more detail shortly on this new suburb, which will deliver over 9,000 new homes to over 25,000 residents. As you can see from the image on the slide, 7 Mills runs alongside a canal, which from a development perspective, presents us with both challenges and opportunity in terms of biodiversity. We are pleased to be collaborating with Waterways Ireland to ensure the protection of species along this wildlife corridor. Some other initiatives that we are incorporating within this new suburb include wetland creation, over 90 hectares of parks, wildflower meadow and native hedgerow planting as well as planting over 5,000 native trees in the Portlaoise alone. On the next slide, I just want to touch briefly on the new more material change I referred to earlier relating to passive buildings and in particular, our commitment to begin the transition to building passive apartment schemes. We intend to start with our development in Charlestown in Dublin, which will see us deliver almost 600 new passive apartments in 2024. I won't go into the technical details of passive building, but I will say that when complete, this will be one of the most sustainable scaled apartment developments in the Irish market and will help us to materially reduce our Scope 3 carbon emissions, whilst also providing significant cost savings for occupiers when it comes to their annual energy bills. It's a real step forward in Cairn's decarbonization journey and we will continue to provide periodic updates to the market as we progress. I'll now hand you back over to Michael to take you through the outlook.

Thank you, Tara, and thanks to you and your team for the progress on our sustainability agenda. I am excited to update you on a significant progress at 7 Mills, Clonburris on Slide 24 and the meaningful start we've made. Tara mentioned the 25,000 people that will live in Dublin's largest suburb and it will be a EUR 2 billion development to establish this large new town. Having commenced construction in December last year, the scale and pace is very evident from the photos, which show how construction has advanced significantly since our last update. Tara brought you through a number of the initiatives, which are underway at 7 Mills as part of our commitment to deliver Ireland's first biodiversity net gain town. Many of these were seen by more than 2,000 people who attended our first private sales launch at [indiscernible] last weekend, which was very quickly sold out. Photograph on the right-hand side shows you how we were able to present the development to our new buyers, only 9 months from site commencement. Many of these customers, we are very pleased to say will be able to move into their new homes before this year-end. While we get planning consent, we have already completed much of our preconstruction preparations and we start on site as quickly as possible to deliver Cairn Homes at pace. Slide 25 is an illustration of the 24-month delivery timeline from site commencement at one of our larger apartment developments in Citywest, a 405 unit scheme. First-time buyers in Ireland still only have approximately 6,000 or 7,000 new homes available to purchase each year and now shrinking rental stock means it's imperative for government and the private sector to significantly increase the development of larger apartment schemes close to public transport and areas of high employment. We have a proven track record as Ireland's largest self-build apartment developer. We have the people, resources and knowledge captured from over 4,000 apartments already built or currently under construction. We've established a clear market advantage with our planning consent, land bank, scale, quality and pace of delivery. We need to continue to test ourselves and the efficiency of our business as a homebuilder in Ireland. From publicly available information on the building control and management system, we undertook an analysis which shows that on average, we do build our new homes 9 weeks faster than the broader industry and 11.5 weeks faster than large main contractors. With the increase in cost of capital, this is an important measure for us. So to wrap up today's presentation on Slide 26, we have a mature and sustainable business platform. The exceptional demand for our new homes is illustrated by our forward order book. We have a market-leading position and competitive pricing. We are committed to shareholder returns and we are operating in a country with strong macroeconomic growth and supportive government housing policies. We will deliver a record year of at least 1,800 new homes, grow our revenues and operating profits and will achieve a circa 15% ROE as we exit 2024. Thank you all for your continued support for our business and your time this morning. And I will now hand you back to Alex, who will manage the Q&A.

[Operator Instructions] Our first question for today comes from Shane Carberry from Goodbody.

Three, if I may, please. Firstly, in terms of -- like it's a pretty significant uptick in the order book over such a short time frame from the July trading update. Could you delve into a little bit more detail, I suppose, in that in terms of what are you seeing in the private market versus is there any kind of state sales in that as well? Just a little bit of more color there would be helpful. Secondly, just in terms of the kind of build cost inflation guidance, it's still being maintained at relatively modest levels. A little bit more color there would be helpful in terms of what are you seeing in terms of materials versus labor and are there kind of any availability kind of issues we should be aware of? And then lastly for me, look, I suppose just taking a step back and looking at how you've guided for this year, the upgrades that come with that, the distribution of cash, like it's a stark kind of contrast to what we see in kind of European peers. Just kind of what do you feel like are the key differentiators that kind of enabled this outperformance?

Thanks, Shane. Yes, the order book, I suppose, the first question. I suppose the advantage we've had in growing the order book is availability of products, Shane. There's no doubt we steered through choppy waters, not just our business, not just our business, but all of the industry and in Ireland and internationally. We are in the midst of a cost-of-living crisis and higher interest rate environment. But we've come out of COVID, it's a very sad situation in Eastern Europe. It continues to be with us. So I suppose we were confident in our business in 2021 and '22. We referenced the planning system, which it was obvious to us in that period that it was going to deteriorate in Ireland. So we had to make a decision to aggressively invest in our business because we were confident in our future. We did acquire some development land. Much of it were ready to go a planning permission. We got on site very quickly. And we've been able to bring products in the market. So that's at times when maybe others in the industry, some of which have capital constraints are finding it very difficult to do that. So that is one of the main reasons for the growing order book. Private sales are strong. But equally, we're moving and building on many apartment schemes. The average WIP investment on one of our apartment schemes is approximately EUR 50 million before we become cash flow positive. So it's really important that we balance our increased output of apartments with a longer and more secure forward order book. And I think you'll see it continue to grow as we move through the year. And if we can continue, as we believe we can to offer the state a significant advantage on not just on delivery, but at price point and value, we will become a long-term partner for the state as part of our overall business. But that's not to say that the private market is not very robust. And as I said earlier, very rock solid as well. Materials, probably slow to unwind in certain areas. Announcement yesterday on a concrete levy, which we'll have to see the outcome of that and what that will mean for cost. But it's something that we're going to have to manage. We are pleased when we think about apartment developments that precast products are not included in that and I think that's an important measure. More broadly, labor reasonably stable and I think we talked a lot about the nature of our subcontractors and the fact that the vast majority of people that work on Cairn sites are in full-time employment, they're salaried. And that certainly gives us a very good protection when it comes to labor inflation more broadly. I don't know, Shane, would you want to add anything on the stark contrast between us and others, but it probably does just refer back to that time frame when we probably were brave on the decision we made on capital allocation. We probably did, Shane, balance shareholder returns with good investments. I don't know if you want to add anything to that.

Yes. No. Look, I think it's as you outlined in our capital allocation policy, we've never been afraid to back ourselves in the context of our really well-located land bank and the underlying demand factors that are there from our customers and we'll continue to do that. And we will balance obviously the need to keep our balance sheet as efficient as possible with really exciting growth opportunities that we see and that will deliver good, efficient returns for our shareholders.

Our next question comes from Jonathan Coubrough from Numis.

If I could ask 3 questions, please. I mean, the first one would be on the land market and how you're seeing that hold up at the moment? And also if you're seeing a potential to structure deals differently and any potential impact to the zoned land bank there? The second question would be on current year guidance, which you've upgraded and as you say, it's well-underpinned by the forward order book. I'd just be keen to hear any comments about how progressed you are on build on those completions with 4 months of the year remaining. And then the third question, probably for Tara on sustainability is that I think it's quite clear that the Irish housing market is ahead of others in terms of the sustainability of the homes and I'd be interested to hear on what you think the customer experience has been around things like SOC funds? And then also you said in the RNS this morning that green mortgages are about 100 basis points lower than standard ones, which suggests about 4% mortgage rate in Ireland. Is your expectation now that most first-time buyers of Cairn Homes are using free mortgages?

Yes, do you want to kick off, Tara? I mean...

Sure. Thanks, Jonathan. In relation to customer experience, we do survey our customers annually as part of our customer experience KPIs. And we do use that opportunity to engage with them on the homes themselves and the features within the homes. So we do have some anecdotal information from them on their experience in terms of the products and the way the house is constructed and how energy-efficient it is and all of that good stuff. It's interesting, we get good feedback and mixed feedback. In terms of some of the biodiversity initiatives, for example, some of the areas that you would have wildflowers growing on, some people really love that and they get it around biodiversity and the bees. Other people think it looks untidy. And it's just you have to balance that look of the development with the biodiversity credentials. In terms of the energy efficiency of the house, we do get really good feedback. The heat pumps are working well for us. We're always looking for new initiatives that we can put into houses. But we do actually get a lot of feedback that the houses are very warm actually which can sometimes be difficult on days like today when we're sweltered here in Dublin. It's not often, but it does happen. But no, overall, I'd say the customer experience with the initiatives and the things that we're putting in are well-received. We also do try to educate our customers and raise awareness amongst them about -- and we'll be doing that actually a lot more now with respect to moving to passive buildings and using our team here to educate our customers on how they use the building so that the energy and use is as controlled as possible and they then reap the benefits of that from a cost perspective. And so overall, customer experience very positive. On mortgages...

Yes, maybe I'll take the -- on the mortgages. I think that is a very interesting development, Jonny. The banks are aggressively targeting the green mortgages. I think it's really smart. So they're very committed around the ESG agenda as we are. So to show that in evidence, you can get a green mortgage for around 3.85%, 5-year fixed at the moment and the equivalent for a non-green home, which generally all of our homes qualified for green mortgages and our customers can all avail those at over 5%. So you're talking about a 20% differential in terms of what you're going to be paying every month. So it is very significant. So I think that anchor is very important for our customers, the fact that they can still get a 5-year mortgage for less than 4% in the context of where interest rates already are and hope we were getting to the top of the interest rate cycle.

Yes. There's bit of a [ button ] raging, Jonny, as you probably know and may have read in ARM that the level of household savings is EUR 152 billion, I think, and the fact that our banks are not necessarily passing on or offering decent deposit rates. I think I read yesterday about 90% of that money is sitting in current accounts in our banks. We fall very much on the side of the argument where we like the way our banks in Ireland are prioritizing mortgage rates and lower mortgage rates. And we have transitioned one of the main -- I suppose one of the things that would have possibly been a challenge for Cairn's business in years past was market prudential lending rules, much higher mortgage rates in Ireland than in much of Europe, considerably higher at one point. It's great for our customers now that we're trending now towards having the most competitive mortgage rates in Europe, which is really a positive for our business. The land market is probably reasonably benign in terms of number of transactions. There's quite a lot of land still in the planning system or transition to a new planning regime. Zoned land tax is too early for us to comment on that, to be very honest, because the idea and the concept we believe is sound, but we have pretty strong opinions as to how that zoned land tax should be implemented. As I said in our presentation, we're waiting at the gates with the bulldozers when we get planning permission. That's what we do. There's no doubt that there has in the past been evidence of zoned land tax -- zoned land in Ireland not being converted into housing. There can be other challenges around that as well, Jonny, whether it's infrastructure deficit or whatever else. So from a [indiscernible] perspective, the land market, I suppose, has remained strong. We've been opportunistic over the last couple of years in areas where we felt if we were going to get challenged on delays, we need to keep trucking with the business. We need to keep growing. So we have been opportunistic in the land market, particularly on apartment developments where maybe others don't have the skill set that we've developed to complete out large apartment schemes and possibly the balance sheet and capital to do that as well. In terms of moving people in and to build out of our forward order book for this year, the vast -- almost the entire of our sales for this year, the product is built. And pretty much completed, Jonny. It's that challenge again, the length of time it takes for people to draw down their mortgage facilities, get themselves lined up. In certain cases, as you know, this year, we have a lot of trade up/trade down sales across about 5 or 6 games where our customers might be selling their existing home. That's another reason why it tends to be more in H2 that we see our closes. But we wouldn't have slightly upgraded our volume guidance if we were uncomfortable with that 1,800-plus number that we've mentioned this morning, Jonny.

Our next question comes from Colin Sheridan of Davy.

Congrats on a great set of results today. I have a few left if that's okay. The first couple are just follow-on from Shane's question on build cost. I just wonder if you could comment a little bit on the 4% that you flagged and the statement is obviously consistent with what you said before. I wonder what your comments in the presentation on moderation there, but at the same time, the levy that you're flagging as well, what it feels like really in the short-term the pressure on numbers? Does it feel like it's about to move forward down, or is it going to continue to remain stable maybe as we look in towards the end of the year and into 2024? And then just on Passivhaus, great to see that being put forward as a concept being driven through. I just wonder, on the other side, is there an additional build cost to be assumed when going to that higher standards and to what extent you might have any view on how much that might be or the time that it comes about? And then maybe on the other side, maybe an update to what extent you might have one on business development levy removal and to what extent that might be able to help you out on the build cost side in the next couple of years to the extent that you're exposed to it. And just a couple of questions then just on the more generally, the 21.2% that you're guiding to now for full year '23 on a gross basis. Just wondered to what extent is there any mix impact left in the land bank could put that move over down naturally? Effectively is that 21.2% representative of in the land bank or is there potentially some mix impact that could happen in the future? And then maybe finally, one just on the financials. In relation to the net debt reported at H1, given the company is coming quite a bit bigger than it has been in the last couple of years, do you think that the requirement for a little bit -- for the company to have a little bit more debt capacity than we thought in the past as the company gets bigger in the next couple of years? And should we expect to see some of those metrics tick up on a relative basis or is the sort of net debt reported at June more of a one-off just for this year given the [indiscernible] development status?

Okay, Colin. And I'm sure I'll get some help from Shane here as well and remind us if we -- if we're not covering everything you've asked there. I'll start with Passivhaus and feel free to chip in, Tara. It is more expensive to build to Passive standards. Tara didn't get in too much of the technical details and our team has done a lot of work to try and understand how we best achieve this standard. A lot of it's in workmanship around air tightness and the level of supervision that we have to bring into our partner development to ensure that we hit those standards. It also includes upgrading -- we believe upgrading in window systems, thermal bridging, which is some of the areas where we need to ensure that we hit higher standards to get to those passive standard. But it's not, we believe, when you look at the long-term benefit to not just the consumer, but the building owner. So as you're probably aware, Colin, if we are developing apartments blocks in prime locations for state partners, be it Ahps or LDA or others, they are long-term assets for the state. And when you look at a 60-year life cycle, Tara, we've done some of the analysis and the level of energy saving and cost saving, which will accrue to the state over the lifetime of those apartments. We think it's a really strong initiative and more than pays for the upfront cost. It's likely that we, as a business, we'll have to make some investments in that cost. We won't be able to pass on all of those costs, but we think it's a really massive development, Colin, and something that we're really keen to back and support. Tara, can you...

Yes. I think like as Michael said, like we wouldn't be progressing if it was cost-prohibitive upfront, but delivering at scale means we should be able to manage our costs efficiently and effectively, and that's what we hope to do over the next period. So...

Yes. I mean the upfront cost is below EUR 10,000 per unit, Colin. That's as much as I'm probably prepared to say and a little bit below EUR 10,000 per unit. But when you say -- when you look at the life cycle of that over a 60-year house and the reduced energy, as you can see it on the slide, for heating obviously there's a significant saving and long-term cost benefit. Build cost, yes, look, at least it's trending in the right direction. I mean roughly EUR 20,000 a unit for us in '21, '22, so that dropped to EUR 15,000 and now it seems to be kind of averaging around EUR 10,000 this year. Too early to say where that will go next year, the concrete levy will have an impact. What we're seeing most of the materials fairly stable at the moment and possibly trending down. The U.K. is challenged and some of the materials that are sourced in the U.K. and Europe are trending down as well. And I suppose at the current output on housing, when you consider the significant reduction we're going to see in office development that we've already seen in office development, possibly hotels, possibly other areas of construction, we feel reasonably confident that there will be decent competitiveness when it comes to building materials and labor resources, Colin, over the next couple of years. And hopefully, that will mean a higher concentration of resources, both material and labor into much needed residential development. So we're in a reasonably confident place when it comes to build cost inflation, albeit it's been a pretty stubborn unwind of some of those sticky costs that we've experienced over the last few years. Look, been able to absorb EUR 40,000 to EUR 50,000 per unit and hold on to our ASPs at these levels to ensure we can bring reasonable value for money for our customers has probably been the biggest achievement in the business in the last couple of years and we will continue to work hard. We'll have to work harder also on more modern methods of construction, off-site components. We have an incredible captive supply chain, some large companies that are thinking the way we think, working with us to bring in new ways of building. And we feel that's a smarter way for us to drive down value than vertical integration as a business at this point. And we think that our numbers bear out that strategy. We'll continue to work harder on supply chain to try and find ways to reduce costs. Margin, Shane, or anything else on...

Yes. I mean, I think maybe just to reiterate a little of what Michael has said without going over it again, I think that level of gross margin percentage there at the 21% to 21.2%, that that's a level of gross margin that, obviously, you can't take anything to the bank and we're not giving massive forward guidance beyond this year. But I think that's a margin range we're comfortable with for all the reasons that Michael has outlined. And the reality around BCI, as Michael said, is that we have shipped a lot of cost increase over the last number of years. We are very high on precedent levels of interest rate increases. So you have to take at some point, a lot of economics kick in terms -- and which more of that can go up, but we're never complacent around that and all the initiatives that Michael has spoken about. So I do think that 21% margin range is something that we're very comfortable with for the foreseeable across all the revenue and kind of cost dynamics that we have to deal with. I think your other question was around the net debt, it's always a very interesting question and something that myself and Michael spend a lot of time discussing. We have a really good debt facility at the moment. There's a lot of flexibility in [ units sold ]. There's significant on the debt revolver. The reality is that for the first half of this year, our sales closings were only roughly 30% of our total for the year and we still have EUR 130 million of WIP in liquidity. And the great thing about this business is we've got lots of optionality as we think about cost of capital allocation and all those exciting growth opportunities that Michael has spoken about in terms of the significant cash that we're going to generate. We absolutely have the ability to raise more debt as we need it, but we're struggling to see any scenario at the moment where we would actually need it, but if that was required, it's something we do have. It's worth just reiterating that we have guided that our net debt will reduce to about EUR 130 million in the second half of the year. We will generate all of our operating cash flow for the year in the second half. So I think if anything in H1, it's probably just a good bellwether around how robust our debt structure is and our capital structure in the context of the growth opportunities that we have and the reality that a lot of our revenues tends to be back-ended in the financial year in question.

Anything else, Colin?

Yes. Sorry for all the questions. But just one on potential benefit of government's development levy?

Yes, look, I suppose there is a recognition that development levy is a hard cost that has increased over the last number of years. Local authorities need to be well-funded. But assuming that the industry will act responsibly and I think they will and we will, it's a good initiative that reduces the cost of homes in an inflation environment. And the evidence, if you look at the average price of new homes in the market and there's other mechanisms around pricing caps for other supports the government have brought in, this industry has absolutely worked hard to try and bring reasonable value for money for our customers. It's a challenging environment. And albeit it may be temporary, it's a really good support and it supports all of the new developments that we get building on between here and the end of 2025, I think, [ Jackson ], isn't it, it's roughly where we think this would be capped off. So it's a strong support for this year, '24 and '25, Colin, which we welcome, particularly as it does appear that that saving is being passed on to customers and loan pricing.

Our next question comes from Arnaud Lehmann from Bank of America.

Just a couple of questions left on my side. Firstly, could you comment on the increase in the buyback to EUR 75 million? I mean, that's more than 10% of your market cap, so quite significant. How do you decide of the number? And how do you arbitrage relative to your need for increase in WIP and the loan purchase? That's my first question. And I guess related to the first question, my second question is, could you -- you increased your work-in-progress quite significantly, I think, 25% more or less over the last 6 months. The tone of your message now is that you're talking up also on 2024 sales and completion. What are the key challenges of scaling up these volumes? What are the key execution risks in terms of supply chain, finding the right employees, supervision of the site, et cetera?

Shane, probably if you want to take the first one.

Yes. If I understand your question correctly, I think you're trying to understand the dynamic of the trade-off between the buyback and our WIP requirements.

Correct.

So, I think I probably touched on some of them in the previous answer. The reality is there will be a significant WIP unwind in the second half of the year, which has already started as we're into September and as we've got very good visibility of that, as you can see from the composition of the forward order book. And look, the reality is that they're trying to talk of their own book. And we talked about our net asset value per share being up at close to EUR 1.10, that will grow by the end of the year. And our return on equity journey, you guys know the valuation piece is more than we do at these levels, it's very compelling for us to buy back our own stock as while there -- at these levels of the book, we will absolutely continue to do that. And we have significant capacity to do that as our cash generation comes in the second half of the year. We know that's anyway impacting the firepower that we have within the business, particularly around with deployments.

Yes. The only thing I'd add to that is it is important for us to reiterate that we do have a large land bank. And despite acquisitions, we have, on a net basis, we haven't invested heavily in new land because we've had disposals also. And as we increase our output as a business, we do intend to reduce that land bank size quite considerably and we will be very cash-generative as a business over the years ahead as we spoke about before. And that just gives us more optionality as a business and gives us the opportunity to reward those shareholders that have took the journey with us and support us so well over the last number of years. The other question I think was about labor resources, Arnaud, was it?

The challenges of filling up the WIP business.

Yes, yes. I probably see it as an area of significant advantage for Cairn. There are 2 PLCs in Ireland. I think we both have that very significant advantage there, maybe 1 or 2 small private -- small midsized private companies. The vast majority -- the vast, vast majority of housing, Arnaud, in Ireland is built by single-site developers. They're not sustainable businesses. They don't unfortunately have or haven't been able to organically grow their businesses. In fact, the current environment is making it more challenging for them. So if you're a large house builder in Ireland and you think about other international economies and developed economies, businesses like Cairn probably -- probably account for as high as 50%, 60% of housing output relative in terms of our type of model. That doesn't exist in Ireland. What that means is that our pipeline, continuity of our work, our scale makes us a very, very attractive employer for those subcontractors. And we'll be talking soon -- very soon about an initiative to try and improve the long-term health of the workforce that work with Cairn. We're going to announce something, we believe, very sizable and a very sizable initiative very soon on how we attract apprentices and new trainees into the industry, but more about that later, but that's not a response to the current environment. It's just thinking about the long-term success and sustainability of the Irish house-building industry and our own business. But I talked about it a little bit later. I mean, the key -- if you're a small house-builder and you're on one side, you're effectively having the price work in the market at that point in time. And you are exposed to what's available. If you're working on a Cairn side for one of our subcontractors, you're very, very likely to be a salaried employee. And there are subcontractors that started with us 8 years ago and their employees have never left the Cairn side. They've continued to work site for site for the same subcontractors that have grown their businesses on the back of our platform. So we believe that's a very secure and stable and a key advantage that we hold in Ireland as we think about our business growth. If that answers that question, Arnaud?

That's very helpful.

We have no further questions for today. So I will hand back to Michael Stanley for any further remarks.

Thank you, everybody, this morning and we look to see -- we look forward to seeing many of you in person over the next couple of days and chatting to you and appreciate your time this morning. Thank you very much.

Thank you.

Thank you.