Crest Nicholson Holdings plc (CRST) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Crest Nicholson interim results for the 6 months ended 30th of April 2020 call. My name is Heidi, and I'll be coordinating your call today. [Operator Instructions] I'll now hand over to your host, Peter Truscott, Chief Executive, to begin. Peter, please go ahead.

Thank you, Heidi. Good morning, ladies and gentlemen. Welcome to the half year results presentation for Crest Nicholson plc for the financial period ended 30th of April 2020. I'm Peter Truscott, Group Chief Executive. I'm joined by Duncan Cooper, Group Finance Director; and Tom Nicholson, Chief Operating Officer. Duncan and I will present the slides. Tom will join us during the questions-and-answer session at the end. So starting with the overview. Firstly, I'm really pleased with the progress that we've made against our strategic priorities. In many respects, we're ahead of our own targets on these. Also our cash management has been outstanding in recent months and with a strong outlook. This has been a very volatile 6 months and at times trading conditions have been quite challenging. So starting with the period prior to Christmas, the market was very subdued in the run-up to the general election on the 12th December. As understandably, consumers were nervous about committing to the purchase of the home with so much background uncertainty. However, with the decisive election result, confidence and with it activity resumed in January, and we saw growing momentum as we approach the spring selling season. In fact, prior to the week of the lockdown, we saw our best sales week in a rolling 12-month period. Following this period, after the introduction of the lockdown, sales activity reduced significantly although we did take some reservations during the period, but they were well below normal levels and also cancellations did increase. Overall, as I've said, up to the point of the lockdown, we are making excellent progress in all of our strategic priority areas, and we were very confident that we would meet management's expectations around our financial targets for the full year. As soon as it became apparent that COVID-19 will have a major impact on us as a business and the economy in general. We took very decisive action to protect our balance sheet. This included the decision to cancel the planned dividend payment in early April. As a decision that was not taken likely at the time and one that continues to feel appropriate now. Our cash performance in recent months has been very strong with that improving outlook ahead. Outside of the trading environment and the balance sheet decisions, 2 other areas of importance saw good progress being made. Health and safety will always be our #1 priority and the actions taken in restructuring our delivery have resulted in a 20% improvement in our accident/incident rate. Also, very pleasingly, we have achieved one of our 5 strategic priorities by gaining 5-star custom service status during the period. So just before handing over to Duncan, I think this graph from Yandell illustrates why the landscape going well. It's mainly a backward-looking commentary, but it also aligns well with our own experiences of the market that I've talked about. As you will see, the market was relatively stable until September when activity tailed off as the election campaign unfolded. And then there's the Boris bounce after Christmas when conditions were really pretty good. The data then went into free fall at the time of the lockdown and then following the opening of the reopening of the market, inquiry rates were really very strong, and albeit they are coming off just a little now, and I think the latest of these charts does actually see that continue. So as I've said, all of this is very much mirroring what we've seen ourselves. It doesn't necessarily give too many insights into the future, but I think it does suitably frame the volatile conditions that we've seen over the last 12 months or so. I'm now going to hand over to Duncan, and then I'll return to pick up on how we've dealt with the challenges around COVID-19 and look at our strategy update and review process as we start to think about the landscape beyond this current crisis.

Thanks, Peter. Good morning, everyone. So I'm going to start by running down the face of the income statement for the half. At a summary level, both sales and gross margin have been impacted by the trading conditions Peter has just alluded to: The initial political uncertainty as we approach the general election in the first 2 periods of the half. And then latterly, the impact of COVID-19 at the end of the half. Group revenue of $240 million, down from GBP 501.9 million last year. And gross profit down to $35.9 million versus GBP 100.3 million last year. We're not going to break out our perceived impact from COVID-19 versus our internal forecast throughout the presentation today, but I do share on this slide 3 other material building blocks in that bridge down from last half year. We recognized GBP 12.1 million more land contribution in the first half last year. Delivered $13.7 million more bulk contribution in the first half last year, which broadly half of that was upfront land contribution. And we took a charge this year of GBP 2.6 million in respect to more prudent assumptions related to the carrying value of our freehold reversions. We obviously guided at the prelims back in January, that going forward, we would expect a lower level of land sale contribution as we laid out a clear prioritization of how we intend to develop our land portfolio in the future. Coming now to administrative expenses of GBP 24.8 million versus GBP 29.5 million last year. I also talked at the prelims about the strong focus on costs and, in particular, used the expression cost-led recovery. As you can see, we've made good progress on this in the first half, and I'll share more detail on how we've achieved that later. And give some further forward guidance on how we see our cost base developing. Adjusted tax rate of 20% for the half and a pretax exceptional charge of GBP 55.7 million, of which $51.2 million related to COVID-19 and its impact on our balance sheet and GBP 4.5 million, which relates to one-off restructuring charges incurred in the half. I'll come on to talk about both of these in more detail later on. Those items lead down to GBP 40.5 million loss after tax, and adjusted basic EPS of 1.4 p, and obviously, no proposed interim dividend following our decision to cancel the full year dividend and reflecting the continuing uncertainty in trading conditions. Over on to the next slide. I won't spend long on these next 2, but they provide the usual trading KPIs we give you. And in respect to both unit completions in the half and SPOW rates, you can see both were significantly impacted by the uncertainty we have referenced with all values down on the prior half comparative. We have, however, made good progress in growing our outlets in the half, up from 58 to 64, which was a key part of our land portfolio strategic priority I've already referred to, and which Peter will come on to discuss in more detail later. Over on to ASPs by channel, all completion ASPs continued to reduce in the half. And a key feature in the mix is the ongoing unwinding of the ex London portfolio, where we sold 42 units in the half and at the end of the half, had 145 remaining across 6 sites. That's the legacy London portfolio as we have historically described it to you and its impact on gross margins. However, following the impairment review, which I will come on to later, our 50% share of the 290 units at London Chest Hospital should also really constitute any reference to London-based performance. And this will need to wash through in the future as well, albeit at a PBT level, not gross margin as it's held in the joint venture. And finally, bulk pricing on office and bulk deals are remaining stable as we emerge from lockdown and we will discuss this in more detail as well later on. On Slide 10, we've graphed last year's unit completion profile with this year's, and you can see 2 things. Firstly, as we traded into February and March and before the impact of COVID-19 became severe, we were actually trading ahead of the prior year. In fact, the week before the U.K. lockdown was introduced was our strongest sales week in a 12-month rolling period, as Peter has already mentioned, and we were building what we felt was good momentum heading into the spring selling season. Then in March and April, you can see the magnitude of the COVID-19 impact take hold. Since reopening for trade, we've seen encouraging early indicators, appointments and footfall have steadily been increasing. Conversion rates released the same and our cancellations percentage falling as we return to a more normalized level of trading. And as of the 19th of June this year, we had 4 sales of 2,715 units representing GBP 575.1 million GDV, meaning we have about 85% of our full year '20 revenue expectation covered. Coming next on to the balance sheet. I referenced at the prelims that on joining the business, I felt the balance sheet was robust and well financed, but that we had opportunities for further self-help, particularly in better WIP management. Actions to address these were already underway before the impact of COVID-19 and these changes in both process and culture will provide strong foundations as we emerge from the crisis. So over the next few slides, I'll try and bring to life the current financial position, the underlying impact of better cash management and then finally, some of the specific actions we've taken as a result of COVID-19. So starting with the current financial position. Net debt at GBP 93.3 million, up from GBP 68.3 million last year, and including land creditors up to GBP 317.2 million versus GBP 260.4 million last year. Average net debt actually reduced during the course of the year despite the headwinds we faced and the disruption to cash receipts, and that's as a result of the changes we have made in ways of working. The pension deficit on an IA S 19 basis increased to GBP 8.4 million versus GBP 1.2 million in prior year, principally because of the movement in the discount rate. Inventories are slightly lower at GBP 1,168.3 million with a slower sales rate being more than offset by the GBP 43.2 million NRV adjustment. And from a financing perspective, we have long-dated support in place from several sources, a GBP 250 million RCF facility supplied by 4 banks out to June 2024, GBP 100 million of senior loan notes maturing from 2024 to 2029 and last week, we finalized arrangements for GBP 300 million of funding under the CCFF. The second slide breaks out in more detail the underlying good work that has been taking place on cash management. Looking down the face of the table, you can see that receipts has been hit by the timing of COVID-19 and we've derived less cash from land sales, as I've previously mentioned. Land expenditure is down GBP 25.3 million on prior year as we have sort to trim the length of the short-term portfolio. We will need to be active in the land market in the coming years to meet our growth objectives, but we'll remain disciplined and selective on acquisitions. On build expenditure, a significant reduction of GBP 49.5 million as we have driven a much greater focus and discipline throughout the business on running efficient site operations. In the longer term, the other aspects of our operational efficiency program, the standard house-type range, the specification review and plotting efficiencies, all will further enhance our billed cash utilization. Further down, you can see reductions in both marketing and overhead cash outflows as we seek to bring growth ratios -- both of these ratios into line with industry norms. And then the cancellation of the dividend, which hopefully set against this context, continues to look an appropriate and sensible call with the benefit of hindsight. Tax outflow of GBP 8.2 million, and that does have a timing adjustment element to it as due to the impact of the exceptional adjustments and the consequent loss, we've already received a GBP 5.1 million refund of the Q1 2020 tax payment already made and then no further payments throughout 2020. And then finally, the third slide outlines the actions we took to protect the balance sheet, specifically as a result of COVID-19. As at the close of business on 22nd of June, we had GBP 241.8 million of available cash. Our position has steadily improved since the start of the COVID-19 position as we immediately implemented a number of additional group-led controls and reviews. All uncommitted [ lab ] forecast land expenditure was reviewed in detail and where possible, canceled, renegotiated or deferred and I've broken out the maturity of the land creditors on the right of this slide. Whilst the 1-year maturity has increased, you can see the 2-year wrap is broadly similar as we had a greater repayment maturity into years 2 and beyond. And we think that's the right course of action in this current market. We would actually expect our land creditors to be broadly similar as we head into the year-end, but with it, our net cash position to be stronger than last year. We will continue to main strong -- maintain strong controls on both land and WIP expenditure as we move forward. We've also secured various deferrals of other payments in the half, including tax, support from the pension scheme, for which we are very appreciative and other items as well. It's very important for us that we continue to treat our suppliers or subcontractors well during this period of uncertainty, and we have ensured our financial operations continue to run smoothly. And enable us to pay suppliers on time and to the relevant terms. Finally, we completed arrangements last week for a GBP 300 million commercial paper program as part of the Bank of England's COVID Corporate Finance Facility. That facility is currently undrawn, and our aspiration and expectation is for that to remain the case unless conditions deteriorate so severely that we need to use it. Coming on to now some of the detail I said I would share on the good progress in reducing the administrative expenses in the group. On this slide, we've walked the cost reduction year-on-year. And you can see most of the fall arises from headcount reductions we implemented last year, starting to now flow-through, other discretionary cost reductions and a month's worth of the JRS credit for those employees on furlough. The share-based payment adjustment reflects the comparative credit in last year's numbers as we adjusted for the LTIP schemes being under the water. It was always our intention to go further than the impact of the plans realized in this year's improvement. But the onset of COVID-19 did initially store some of that thinking as we considered it appropriate to carefully and sensitively weigh up and consider further organizational changes during the period of peak uncertainty. However, as I'll leave Peter to explain in more detail later, we've now internally announced plans to go further, and the chart on the right seeks to outline how we see administrative expenses evolving, looking at likely outturn for this year and providing a range for next, recognizing that the proposals we have announced are at an early stage and elements of it are subject to consultation. On the next slide, we provide more detail on the GBP 55.7 million of exceptional charges taken in the period. If I take the COVID-19 impairments to start with. As you'll be aware, the accounting standard for impairments requires you to assess the carrying value of any assets on the balance sheet. And if, as a management team, you believe there is a trigger to do so as we think COVID-19 represents, propose and make the appropriate and necessary adjustments. Such a trigger can be a change in market conditions, and we believe COVID-19 will present such a change for the housing market. We've assessed a wide range of analyst, agent and economist forecasts and developed portfolio-wide assumptions for future reductions in achieved selling prices of 7.5% for residential units and 32% for commercial units. We then apply those reductions across the stacks of each scheme in our portfolio as appropriate and where that results in the theoretical realization of a negative gross margin, we book a provision for that amount below 0. The total provision for these adjustments totaled GBP 33.9 million and covers 13 schemes. We then also see a small adjustment of GBP 0.6 million on our shared equity loan portfolio, extending the same logic and assumptions to their carrying value. In anticipating a more challenging trading environment, we've also reviewed our portfolio for complexity and risk. Two schemes have incurred further impairments as a result. Ingress Park Greenhithe is development in our Eastern division. It's a complex waterfront-based scheme with a low margin, which would have required further construction activity to take place out over the River Thames. Once further downside assumptions were modeled, we decided to stop development at the site and write-off the costs incurred to date and provide for committed spend. WIP of GBP 7.8 million has been written off and a provision of GBP 1.5 million recorded for Crest obligations to construct a sea scout center and other areas of public realm. The total abortive WIP of GBP 9.3 million, being joined to the GBP 33.9 million I've already referenced, representing the GBP 43.2 million inventory impairment on the slide. We also have a site in East London, the London Chest Hospital, which is held in a joint venture called Bona Road. Crest and its JV partner provide funding to the JV, which accrues interest. At year-end, we established that the scheme would return a negative margin after the repayment of interest and so recorded a charge of GBP 3.2 million in respect of an expected credit loss on the loan receivable. During the first half, further downsides have been reflected into the schemes financials, the price fall assumptions I've just discussed, delays to planning and planned construction and further contingency has been embedded to reflect the complexity of renovating a listed building. As a result, we've taken a further GBP 7.4 million expected credit loss charge on this scheme, taking the total provision to GBP 10.6 million. Finally, the new executive leadership team has already made a number of changes to the way the group is structured to run, and as a result, has incurred one-off costs of change. These totaled GBP 4.5 million in the first half, of which GBP 2.8 million relates to the accelerated depreciation of legacy IT systems and GBP 1.7 million relates to reorganization costs. Peter will come on to talk about our proposals for further restructuring in his section, but you can expect a similar exceptional charge in H2. So just so I leave everyone clear on the cash and noncash split of the exceptionals, obviously, the COVID-19 impairment, all noncash, GBP 1.7 million of the restructuring in H1 being cash and a similar charge to the GBP 4.5 million in H2, again, all cash. The last detailed slide before I summarize relates to the usual land portfolio disclosure. We delivered 775 home completions in the half and added a further 422 to the short-term portfolio. You'll notice the GDV reduction is significant, and that is almost entirely down to the application of the NRV adjustments I've just talked through. In the strategic land portfolio, we secured a further 1,057 plots across 3 sites. So to summarize, the trading environment will remain uncertain as we head into the second half. We've made really good progress strengthening our underlying cash position and the addition of CCFF provides reassurance that our funding position is secure. We will continue to operate a very disciplined approach to cash management and costs as we move forward. Whilst early trading performance post lockdown is encouraging, and we are alive to the economic risks posed by COVID-19 over the medium to longer term. And hence, why we've acted decisively and swiftly in respect of the NRV adjustments and the further steps we have announced in our operational efficiency plans. These proposals should deliver circa GBP 5 million of further annual savings and will see us incur a similar exceptional charge in H2 to the GBP 4.5 million incurred in H1. Our current forward sales position is 2,715 units with GDV of GBP 575.1 million, and we expect our full year net cash position to be stronger than full year '19. And that guidance is clearly linked to my final bullet on this slide, which is to say that although the market remains challenging and uncertain, we are today reinstating full year '20 profit guidance. With an expected range of GBP 35 million to GBP 45 million for adjusted profit before tax. This guidance assumes we continue to see a gradual and progressive easing of the U.K. lockdown restrictions and trading activity continues to follow a similar trend to recent weeks. And with that, I will hand you back to Peter.

Thank you, Duncan. As the scale of the crisis around the pandemic came into view, we quickly set out our 3 priorities for the business. #1 was health and safety, could we operate our sites safely during the lockdown as envisaged by the government at the time. Initially, we did continue to work on sites but increasingly the inconsistent availability of labor and materials significantly reduce productivity. And then importantly, the government announced that it was actively discouraging buyers from participating in the housing market itself. Therefore, we decided to close our sites from early April. Homeworking was introduced throughout the organization, and this has actually worked really well for us. Whilst this dreadful disease has caused so much disruption, the homeworking requirement has given us some very valuable insights into what is possible for us around this area in the future. The second priority was the protection of the balance sheet. We have a strong balance sheet and good liquidity, but the nature of this particular crisis was unprecedented. There wasn't really an obvious reference point. By necessity, accordingly, our actions were defensive, and this is the context for the cancellation of the dividend payment. We also needed to give a very clear steer to everyone in the business itself about cash conservation, and this impacted decisions around land buying, work in progress and capital expenditure. Overall, our cash management in this period has been excellent, and we've maintained healthy balances throughout the period. The other thing that we needed to do, though, was to start to form a view of what the landscape might look like beyond the crisis and how the business would have to be structured in this potentially changed world. This is the context of the strategic review that I'll come on to. Our sites and sales offices were closed for around 6 weeks. And although our regional offices have and now reopened, most of our office-based staff are continuing to work very effectively from home. Before returning to site activity though, we signed up to the safe working charter developed between MHCLG and the Home Builders Federation, and we were back on-site from the 18th of May. At this stage, it was really a gradual buildup as we needed to do site-by-site protocols, and these were developed. And of course, we also needed to set out very clearly to our teams what level of activity we wish to see to ensure that the work in progress was controlled to closely align to demand. Our priority is to complete sold units, whether for private sale, ERS or affordable. We will then complete unsold homes, which are in advanced stage of construction, but there will be some investment in less advanced plots and on new site starts, but only where it's right to do so in a prudent and sensible manner. We have good quantities of stock and units that are well advanced that can be converted into cash with low levels of further work in progress as required. We've made strenuous efforts to keep our colleagues fully engaged and informed during these difficult weeks, whether they were on furlough or still working. We held daily executive team briefings and have also had a lot of dialogue with our Board who have been able to provide helpful insights from a variety of different sectors. We found that remote working was very successful and does work well with our business model. Directionally, we've already set out a strategy towards agile working. And this period has proved the feasibility of doing this on a much wider basis and more rapidly. It's something we can now adopt in our business with confidence. 75% of our workforce was furloughed from early April and were all being back at work by the end of May. Most of our people were returning on a gradual basis from the 18th. Throughout this period, all of our staff received their full pay and benefits. I'm incredibly proud of our team and how they took up the challenge and volunteered to help to provide care, or to support the NHS, amongst other initiatives whilst on furlough leave. And the Board donated 20% of their salaries and fees to charities during April and May. With the closure of our sales offices, we've quickly introduced remote interaction models, which included online video appointments, virtual property tours and e-signatures for reservations. We were able to have full end-to-end processes that led to a number of completions being enabled in this way. Again, as with remote working, I think there are some really valuable things that we will have learned throughout this process, and we will adopt as part of the way that we work in the future. As far as customer service is concerned, our main priority was around dealing with emergencies. And again, we coped very well overall. What was important was the regular dialogue that we had with all of our customers. I think the business has gone a long way towards retaining goodwill. It's vital to keep in touch with our suppliers and our subcontractors who are, after all, an extension of our own team. We needed to keep them abreast when we were thinking of returning to work. And when we did so, what sort of activity levels they could expect. All of our supply chain willingly signed up to our safe working practices. The situation on the ground is actually working very well so far, with strong compliance, safe working and good availability of resources. I'd say we're probably able to deliver about 75% of normal productivity levels under these current arrangements, but that does actually align pretty well with our desired levels of build activity just now. We're being very rigorous with our investment in work in progress. This is being managed very tightly by our site teams. It's also very important that the leadership team gets to hear quickly about any issues such as a breach of safety requirements or shortages of materials. And we have put in place fast track communications so that we can hear about these things in real time. We set out our new strategy in January, a strategy that has the flexibility to work well in periods of growth, which were anticipated then or now where the outlook is perhaps a little bit more challenging. This flexibility means that although some adaptation is now necessary, our 5 key priority areas still remain the right ones for our business. These key priority areas: placemaking, which is a real differentiator for us, it's something we've always done well; our land portfolio and how we best utilize it; operational efficiency, always important, but particularly so in challenging times; our desire to be a 5-star customer service provider, which as I've mentioned, we've achieved in the period; and finally, our multichannel approach, sourcing land and selling homes, again, directionally, with even greater importance just now. So overall, this remains a strong strategy and appropriate for us. So just turning to the strategic priority areas in a little bit more detail then. Starting with placemaking. This is something that Crest Nicholson does really well, and we'd always want to retain. As the market does become a little bit tougher going forward, then having well planned attractive developments in the right locations, has to be a huge positive and a big differentiator for us. This is not something that we would ever want to change. We have a large and flexible land portfolio amounting to some 37,000 plots, which is either owned or held under auction. This gives us both great visibility over our future output, and it could also be held in an efficient way on our balance sheet. I think that the locations are also a real positive for us. We're already seeing far more inquiries from people looking to move out of the larger metropolitan areas such as London, into towns and villages within commuting distance of work and also where some homeworking is going to be possible. Gardens are increasingly becoming important. These themes really do play well with our mainly southern-based land holdings and also those parts of the Midlands and the Southwest, where we have growing investments in land. We do need to continue to be really focused about how we best utilize our land. Firstly, 1 or 2 Crest Nicholson outlets should be our main priority. And then we should look to be utilizing our land for PRS delivery and affordable homes. Where appropriate, we can deliver some sites for joint ventures, the institutional investors or RV partners in order to spread the risk. Only then, and sometimes it will be the right thing to do, will we sell our land to competitors. We'll come on to operating efficiencies that drive cost reductions later, but they shouldn't simply fuel higher land costs, they should drive higher margins for us. We've twice increased our hurdle rates for new land acquisition over the period. Firstly, at the time of the strategy, when it was laid out in January, and also more recently, to reflect the higher macro risk out there. Of the land that we bought for private sales in the period, we've attained about 350 basis points improvement versus the land bank average. But we do need to and will deliver more than this in the future as part of our margin rebuild plan. The types of site that we buy will also change. Ideally, we'd like to have more outlets in order to spread our sale profile. So we will still want to invest in some land, albeit perhaps on a smaller scale, but only where overwhelmingly the right thing to do, and these sites that we purchased will be lower risk and with lower average selling prices than before. As Duncan alluded to in his slides, for Crest Nicholson, the margin rebuild has always been around a cost-based recovery. And central to this has to be our product. We're extremely pleased with our new house-type range, and its rollout is well on track. We're expecting the first foundations to be completed later this month, a little delayed due to the site closures that we had. But once we get started and more and more of our product will come from this range. The benefit will also accrue from its build simplicity and the consistency that we will get. Overall, it's a far more cost-effective and efficient product plot and therefore, drive better densities. All of these factors will help to enhance our margins. Eventually, we're targeting 80% of our products to come from these new house sites. Already, we're seeing strong margin improvement on our replans. And in total, we're replanning over 3,300 plots across 55 sites and nearly 600 of these across 14 sites have already been approved. So we're really very excited about what this initiative can do for us over time, and we've tackled the task at pace. You may recall that we put up a similar slide regarding the Ludlow replan in January. Well, that was related to Phase 1, and this is now Phase 2. As you can see, there are similar positive results. We're now moving on to Phase 3. And although the scale and benefits accrued will vary from site to site, they are always positive in both coverage and value capture. With a more challenging outlook, we really do need to continue to drive cost out of the business and instead to add value. Again, progress is being made, and we're tackling this with a real energy and focus. Specification changes that we introduced were primarily about better procurement. Overall, we have now improved specification, and it is more consistent. And by concentrating our buying power, we've identified GBP 30 million worth of savings with GBP 20 million embedded into our portfolio. And we're continuing to find further savings and value elsewhere, not only through better plotting of the new house-type range as mentioned but the simplicity of the build, which will save on labor and material costs. Officially, we're now saving around GBP 2,000 a plot on our professional fees through discipline. And in addition to the $3 million of sales and marketing savings identified in January, we found a further GBP 3.5 million as we continued to retender all areas of our marketing spend. I'll come on to overheads a little later, but the other point that I wanted to highlight, and this is really important, is that all of our teams are really focused and engaged in this process. Benchmarking is being widely used now, and that in itself is helping to continue to breed new initiatives for us. As I've mentioned earlier, I'm very pleased to say we achieved our ambition to be a 5-star customer service business in the period, and we're actually continuing to track higher than last year as we go through this year. We're delivering our customer service in a different way now with a much greater focus on delivery by the site teams directly with customers and with less reliance on the customer service teams in the divisional offices providing this service. We put together this new multichannel business format in January, building on the work that had already been done in recent years. And I think this is going to be a really important part of Crest Nicholson business in the future. Just for now, it's probably less about engagement with multichannel land investment, although that will continue and is always going to be an important part of its brief. But the main focus just now is this different channel to market for our product. And we've been really encouraged by the demand we've seen. Historically, we sold our PRS units to a select number of counterparties, but we have significantly widened the pool of institutional investors that we're now engaging with. There are a growing number of very credible parties out there looking for product, and they've got the firepower to transact. They are seeking to participate in what has actually been a very stable investment class over the last decade or so. And this competition is keeping pricing stable. Typically, deals are done at 10% to 15% discount to open market values, but this has been narrowing as we get our product more aligned to our partners' needs and where competition is driving better value for us. This is still pretty embryonic when compared to the potential that does exist in this area. But again, we're tackling this with real focus. And as new sites come forward, over time, our offering and returns will continue to improve. On the registered provider front, again, there's plenty of competition, particularly for the Section 106 product. And we're seeing some very good buying gains when these deals put to market. We have a good strategy and it's appropriate and flexible for different market conditions. And as demonstrated, we've made excellent progress across all areas. But it's only right that we should review and adapt our strategy to meet with the challenges that may lay ahead. We do anticipate more difficult market conditions in the next year or so. Whilst we're very pleased with the sales rate we're seeing over recent weeks. In fact, they're back to where they were pre lockdown, we can't ignore a strong likelihood of a recession in the U.K., the difficult market conditions for the economy across multiple sectors. This is probably going to feed through eventually into the housing market and to us in some way. We can't ignore that. We have to plan for such an eventuality. Although it's actually quite difficult to conclude exactly what this impact will look like. I can see some reduction in volumes and perhaps some price pressure, and that is why we took the decisions that we did regarding impairments. What we've concluded is that we need to be a leaner and more flexible business going forward. This will also stand us in good stead when we conclude that the time is right for us to grow again. This flexibility set around our strategic priorities is the real strength for us. We need to have absolute focus on our balance sheet. It really is in good shape, and we have strong liquidity, but we won't be taking any risk to this. We'll continue to take smart, considered decisions around our land, our work in progress and our capital expenditure. In January, we set out Crest Nicholson's credentials as an investment case. Our strategic priorities are designed to rebuild margins, an area of weakness in recent years, and we will aim to outperform against expectations once these benefits start to flow through to our bottom line. We set out a plan in January to create a sixth operating division, Southern counties, and we recruited the leadership team in order to facilitate this, but we've now decided to defer this plan instead to reallocate the assets intended for this business into our 5 existing operating divisions. These 5 divisions will be capable of delivering a very flexible output, somewhere between 550 and 650 homes per year. So in total, that's 2,750 to 3,250 dwellings per year. This, we think, has widened our scope for any reasonable conceivable market conditions in the near to medium term. We are now proposing to merge our strategic partnerships arm who manage our strategic land portfolio with our newly created partnerships and regeneration business. This new merged business, to be called Crest Nicholson partnerships and strategic land, will continue to be based in Chertsey. The new entity will be led by [ Kieron Dyer ], whom we recruited earlier this year. There is a clear rationale around this decision. Although our 5 divisional businesses will still be responsible for all the building sales activity on sites, the procurement of the major projects and the strategic land and the ongoing management of these projects will now sit in one place. There will be a much closer alignment from the outset around the identification of the various parts of these sites, whether for private sale, the PRS, or for the affordable homes elements, together with any decisions that will need to be made -- that need to be made around joint ventures. And the relationship management is also better aligned, whether with MHCLG or Homes England, the institutional investors acquiring a PRS elements, or the registered providers who'll be purchasing the affordable homes. And we'll also need to have real focus on our overhead costs, both at a divisional level and at our head office. And this is not about getting people to work harder. Our teams already work incredibly hard. This is about the elimination of tasks that add little value by smarter working. And we've already seen how remote working can be very productive, and we'll be embracing this where it's appropriate to do so. Also, just to mention that the changes that I have referred to in this section are, as Duncan mentioned earlier, still the subject of consultation. This process will conclude over the next month or so, but will be completed in this current half. And finally, our head office lease is due to expire the next year or 2, and we will be reviewing the location and the size of the facility that we will now need. So as a summary, we've made excellent progress against all of our strategic priorities in the first half of this year, and we will continue to focus on the reshaping of our business, and this will stand us in good stead whatever the market conditions. The balance sheet will continue to be an area of real focus. We have a strong and resilient balance sheet, and we will only take investment decisions that are proportionate and appropriate for the prevailing market conditions. As I've said, I'm very pleased with the sales environment since the housing market was reopened, but we must be prepared for the more challenging conditions that we're anticipating in the next year or so. That said, if the market is stronger than it's being planned for, equally, we're flexible and able to adapt and to take full advantage of these conditions due to our structures and our concentration and focus on our cost base. Finally, I conclude by saying that we do recognize the importance of dividends to many of our shareholders, and we will set out a plan to recommence payment of these as soon as it's appropriate to do so. So thank you for listening, and I'll now take questions from the floor.

[Operator Instructions] Our first question comes from Will Jones from Redburn Partners.

Three questions, if I could, please. The first is just around gross margins and perhaps you could help us, I think, the first half gross margin is around the 15% mark. In the second half of last year, it was around 17.5%. So about a 250 point -- basis point change. Could you just help us with the understanding of that bridge, broadly speaking, please? And then linked to that as well, when you think about the impairment exercise that obviously as a result of the 7.5% price reduction assumption in residential, I'm quite -- I'm surprised, I suppose that, that degree of price and function drove the degree of inventory write-down that it did with the implication, obviously, that these sites were would have been [ below ] 0 gross margin without the impairment change. So just big picture, when you think back to the land bank gross margin data you gave us back in January, I think presented something like a 24% view of the average gross margin. Has this impairment exercise affected your view, I suppose, of what of the data you presented to us back there? And what would you think is the more live picture on the land bank, please? Sorry. That was 2 questions in 1 around gross margin. The second was just when we think about your activity at the moment on-site with regard to build and about you're prioritizing sites with good forward sales, which is understandable. Obviously, land market activity pretty limited at the moment. But the implications of that, I guess as we look beyond the second half and think about the potential for volumes in 2021. When do both those levers need to change? I suppose in order to drive a decent level of volume in '21, if at all? And then I guess the last one is just around the balance sheet. Just big picture, I suppose, what do you -- what metric are you targeting or thinking about is most important? Is it the year-end position? Is it the average debt? Is it the inclusive of land creditors picture because obviously altered for quite a bit? So just where you consider the most important metric? And I guess overlaying all that, to what extent did you consider the need or the potential for new equity, I guess, to support the balance sheet as you look to the April position?

Okay. Thank you very much, Will. Duncan may wish to add on some of these answers. On the gross margin, I think the 250 bps, I think it's really a mix effect in the period. We are actually seeing pricing holding up pretty well. So it's not about reduced pricing on sites. On the impairment exercise, obviously, with a margin at the level that we did have, we have a whole range of margin across -- those are the newer sites, perhaps, with more normalized margins and those that were historic and particularly some of those in London that were already being challenged. So you come to the rationale for why would we impair? With our business, that probably comes into focus a little bit more because we have got lower margins than those across the sector. And of course, therefore, a number of our older and weaker sites are captured first. But it is lumpy. You can't just read across as an average across the land bank there. As far as build is concerned, and Duncan will just add on that after I finish. As far as the priority on sites are concerned, the production that we're undertaking at the moment is about 75% of what you would call normalized production. So there is a natural impact anyway, just in terms of productivity. And there will be the on-site where there would be a large capital investment needed to get started that we would perhaps review and delay. But generally speaking, we will be continuing with production on all of our sites, but we do already have a strong inventory of work in progress that we will be unwinding gradually anyway. So we do have that opportunity to convert that into cash. So I suppose the opposite and inverse of where we are on land is a strength for us in that we can generate cash by lower levels of production. On the balance sheet, there are a number of metrics, and it's not just going to be about where we are at year-end. I think that is a snapshot in time. I think we recognize that. It is important that we look across the round, both including and excluding land creditors, and we are comfortable with where we are on that. We definitely need to be looking at the average. I mean as far as equity is concerned, I think we're comfortable with the state of our balance sheet at the moment and the outlook for it going forward. Duncan?

Yes. I mean it really builds -- well, I'd make on Peter's point is on the impairment piece. I mean look, the impairment and review of our portfolio and the presentation of our portfolio overall GDV, they're obviously entirely internally consistent and linked and subject to order review. And I'll cross maybe try and give a better flavor across the schemes. Around -- just under 3/4 of that impairment charge relates to 3 sites only. And so it doesn't -- Peter is right just to say and I would support it as one of the reasons why we felt it was appropriate to be front footed with the impairment. We do have a higher proportion of our portfolio that is closer to falling into 0 gross margin if you assume a future negative price reduction, and hence, why we've acted. But it's actually 3 sites, in particular, where we faced into that most pertinently. And then to your point around the -- what does it mean around our land portfolio going forward. Again, there's just an -- it's not a judgmental exercise. There's just a simple extension of that intellectual logic on the GDV down to GBP 11.3 billion for this year, and that is almost all exclusively down to applying a 7.5% price reduction on resi and 32 on commercial to the portfolio we presented to you the last time we updated it. So it's just a -- it's just a reflection of that math. And on the balance sheet, yes, look, I agree with Peter. I mean it's -- I think it's worth reflecting we said back in the prelims, we felt there was lots of self-help opportunity. And I think we would have been able to get at and demonstrate more self-help opportunity even more positively if trading had not been disrupted as it was. But at the point in March when we went into crisis, it was cash preservation and ensuring that we took all the right decisions to protect the balance sheet. And I would hope, and we may come on to talk about it, some of the actions we've taken on that. And indeed, the cash position we find ourselves in, as announced in my part of the presentation, it demonstrates, actually, we have hopefully allayed some of those -- some of the commentators' views around some of our liquidity challenges and some of the security of the business. So you will clearly look to paint the more positive picture and what's possible more than that going forward. But if you go back to March, it was very much around us addressing the challenges of the here and the now.

Thanks. And just another thing to bear in mind when you think in terms of gross margin, you've also got to overlay the cost initiatives that we're taking ourselves. And also the fact that I think in reality, and I'm preempting a question I imagine from the floor here, that there will also be some downward pressure on subcontract material costs. So that will actually help the gross margin. So I don't think it's just a case of looking forward at a view on price. So I think there will definitely be some opportunities for us as an organization, probably more particularly for us as an organization to address that and get some benefits from cost if there is some pressure on price.

Our next question comes from Emily Biddulph from Crédit Suisse.

I've got 2 questions, please. The first one is just some clarification on the guidance range that you've given us. You've obviously given us some operating cost guidance, so we can get to sort of an implied gross profit guidance range essentially. But I wondered what the moving parts were in there. Do you need to see some sort of negative price to get to the bottom end of that range? And then sort of from a gross margin perspective, are the sort of implications of building at a slower rate? So should we be assuming that gross margin is lower than in H1? And there are other sort of bulk sales you're sort of factoring into that. I just sort of wanted to get a sense of kind of what the kind of -- how you end up at the bottom or the top end of that range really. And then on the second point, just on your 75% build rate you're talking about at the moment, do you see scope for that to increase in the short term? Or is that what we should be sort of factoring in on an ongoing basis?

I'll answer the second one first, Emily, if I may. No, I think the range on build, it obviously varies from site to site. But if you think in terms of somewhere between 70% and 80% productivity being possible under the arrangements that we've got. And I don't think that there's a huge difference if we move to 1 meter either. There is a loss in productivity. I think that's just naturally where we are until we get back to a more normalized environment. So I think, if anything, it does focus again on the need for us to utilize our land bank in order to drive outlets to give us more opportunities to build more product. On the margin piece, yes.

Emily, I'll try and give some help as I can. I mean, look, in terms of the kind of key constituent parts, a continuation of a sales rate that is sensible, and it's not naturally clear, I know in terms of where we've exited lockdown, how we see that traveling forward. Yes, some assumption of some bulk deal activity in the second half, of which we have deals in varying stages of closure or early conception. We think the land market will be tougher in the second half because of the environment we're in, so we're not assuming any quantum of land sales. And then that's not to say we wouldn't do any or never, but that's the underlying assumption that you've got the cost piece. Of course, what plays through there, which is the biggest -- I've skirted over those quickly because the biggest item in play in relation to that range, of course, is what does happen to pricing in the second half in between that, that we've assumed, and that that's realized. So as part of taking the NRV adjustment at the half, also is a carried through an expectation that we see those price -- that level of price discounting for the second half. And of course, if we don't see that level of price discounting, that number would be higher. And hence, why we've given the range that we have. I think it's worth -- within the range, just so that's clear. So if that's the 35 million, the lower end, and then if we weren't to see that fully manifest itself, then move towards the higher end. But I think it's worth just also saying on the guidance, we reinstated that because we felt that the nature of or the size of the [ outlets ] for H1 being as it was, it was potentially going to be quite difficult without having laid out some of this color for people to get a clearer view on the second half. I think we'd say, look, with the guidance, and I'd reiterate it, it is, of course, very uncertain. And hence, why we put some of the caveats around it that we have. But we think on balance, it's helpful to try and shine some light as to how we see the second half trading because of the timing impact on the deferrals of COVID-19 and our half year date.

Our next question comes from Chris Millington from Numis Securities.

Peter and Duncan, a couple if I may, please. Firstly, just wondering what the amount of deferred creditors you're holding on the balance sheet at the moment, which I presume are likely to go out during the course of 2021. The second one is just really about your comments around looking to resume dividend payments as soon as possible. I think you've drawn down on the job retention scheme, which seems to be a bit of an obstacle for most in resuming dividend payments. So just curious about what you would need to do or what you would need to see with regard to the balance sheet to actually restart that dividend? And the final one I just wanted to ask is what you're seeing in the land market. I understand you're not very active in it at the moment, but it does sound like you're planning to buy a few sites to broaden that outlet profile. I mean are you seeing any very good opportunities out there? And maybe just give us a feel as to kind of the quantum of movement you might be seeing in the land market?

Sure. I'll pick up some of those. I'll pick up 2 and 3. With the deferred creditors, are you talking about land creditors or trade creditors?

No. No, sorry, ex land creditors. So the HMRC and such and such.

Yes. Duncan will take that one up. So just let me start with the dividend. The JRS doesn't give us an impediment to reinstating the dividend. That's not going to be a major consideration for us. I mean legally speaking, it's not an impediment. And I think morally speaking, it's a relatively modest amount that we will be drawing over the couple of months from that. So we don't see that as being an impediment. I mean the conditions that would enable us to reinstate. Clearly, it's a decision that the Board would need to take. But I think visibility of outlook is an important consideration there. The balance sheet is strong and is strengthening. And that, of course, is a consideration. But I think more than anything, it's probably just outlook that we'll be looking at. The land market is quite interesting. We are participating modestly in the land market, and that is because we already have a very strong land portfolio and more than enough in most circumstances to meet our own production needs. Yes, we will buy some because we want more outlet but modest. We're not seeing, at this stage, a whole raft of new opportunities coming that are incredibly well priced. I mean pricing is a little bit keener now than it was before. But for me, it tends to be a lagging indicator. So I think there will be real opportunity in the land market if the market is as difficult as it might become. But I wouldn't necessarily judge today to be that inflection point where the best value will be obtained and derived. Duncan, on the creditors?

Yes. Chris, obviously, the insight to materialize in the land creditors, and you've got the maturity profile on the slide that I've referred to. But the other item, obviously, of note, which we announced at the year-end in relation to the fire provision, which is not insignificant, we've -- about GBP 2 million of spend incurred in the first half. I would expect around GBP 3 million in the second half, and then the balance of that around GBP 9 million, GBP 9.5 million to unwind in the following financial year. I would say with all of that, it is becoming -- it's very difficult to predict that with absolute certainty, so trying to be helpful. But the challenges of us getting that work closed out and predicting that with certainty is difficult just because of the nature of the environment. And then the other items on the balance sheet, the only other one that will be a timing difference would be the pension contributions where we've got some -- we had a lower cash out for this year and then a higher one to next year as a result of some of the deferrals. So for the purposes of your model, assume [ 6.74 ] out for this year and then 11.3 out for next year, just as there's a deferral of some of this contributions out. But apart from that, there's not really a lot of else going on, I don't think.

And then nothing on the [ pay-ye ] or NI, or anything like that [indiscernible]

No, it is actually -- whilst a lot of initial support on that was committed from the HMRC, which was welcome. Actually, the government's moved its position on some of that and is asking for that back. And I think, linked to your point around JRS, I certainly haven't felt it appropriate to make a case that we don't have appropriate liquidity to settle those, so we have done.

Just trying to get through a couple more before we have to go.

Our next question comes from Gavin Jago from Barclays.

A few from me as well, please. The first one is really just trying to tie, I guess, the forward order book into the reinstated guidance. And the implication is there -- are there already price decreases in the forward order book? Or is the range there because there's obviously a chance that some people may come back in and try and renegotiate it. I'm just trying to get a sense of that. And linked to that, could you give us a mix maybe or a split within the order book of what's of open market, what's bulk and affordable, please? And then the final is just around the sales rates. You talked about sales rates returning to kind of pre lockdown, but obviously, there was quite a spectrum of trading conditions before then. Can you give us a sense of where they have sort of had that record week just before the week of lockdown, but a pretty poor run preelection. So just a sense of where I think the current [ sales rate ] have been trending, would be great, please.

Okay. If we've got the breakdown to hand of the order book, then Duncan will give you that. But if not, then we'll have to send that through. To answer a couple of those questions, sales rate, we're not being specific about what the sales rate is because it does depend to some extent on what the cutoff is. But I think we're trying to instill that the sense is that it's pretty good out there and the sales rates are similar to that strong period that we had leading up to the lockdown. I mentioned that we had the strongest week in the 12-month rolling period the week before the lockdown, and that had been building, and we are seeing similar rates to that at the moment. And if you go back to what's in the order book in terms of pricing, pricing is actually holding up pretty well. It's pretty close to what you would expect as a normalized price. Maybe there's the odd deal here and there that's been given away. But in this period since we reopened, pricing is holding up, and that will be reflected in that current order book. So I suppose the pricing going forward is the bit that is more judgmental. The element that isn't sold for this year and of course, that isn't sold for future years. Duncan?

Yes, Gavin. So around some numbers just to give us -- trying to give us some about GBP 400 million open market, GBP 100 million bulk and then around [ GBP 50 billion ] HA, and then obviously, some other bits and pieces into the GBP 575 million. And just to build on Peter's point, obviously, what you take of the actuals, which we've taken in that slicing that forward order book to the end of May with the prices that you've struck at that point. And as Peter then said, you've got an extension of those overall NRV price adjustments in the forward-looking component part of that, and we'll see what happens in relation to that.

Okay. And Duncan, you just -- on that GBP 400 million in the open market, is there a proportion that's exchanged versus what's just been reserved?

I'm not going to give you that detail today.

But you can infer that there is a proportion that is exchanged and a proportion that is reserved. And yes, you do get the odd buyer that wants to come back and try and renegotiate. But in the round, we're not talking about anything material here across the portfolio just now.

Okay. Great. So just one final quick one. So the geography of the 3 kind of main sites, which were, I guess led to the bigger parts of the impairment. Could you give us an idea of whether they're kind of clustered in kind of close to each other?

Yes. I'm happy to share them. One is Longcross, one is Farnham and the other one is Hayes.

Of those 3 I referred to as being just under the 3/4 of the total proportion.

Our next question comes from Glynis Johnson from Jefferies.

I have 15 questions, if I may. I just have a couple, if I can just maybe tidy up on some of the numbers then push a little bit harder. I'll ask you about gross margin in the land bank. I'm wondering if you're willing to give us where you think that is now. And you talked about the WIP and how there's still quite a lot on the ground that you can take advantage of. I wonder if you could maybe give us that WIP, that build WIP number so we can put it in some sort of comparison to your peers. And then just lastly, pushing you a bit harder on the 7.5% price decline that you're forecasting. Is that an absolute -- the same number across all the sites? Is there a variation in terms of product or geography? Those 3 sites that you wrote down, is it about the timing of when they were bought? Or is it about how they were bought? Or is it about just the price movement in there?

Clearly, I think I can take those and hopefully enough reasonably quickly. So again, back to the comment I made to Will around an arithmetic read-through in relation to the implied portfolio on the short term would come down to around 18.6% on that 7.5% adjustment flow-through. And the strategic would come down to around 27.9. In relation to the breakout of the WIP, we don't disclose it in the half in our stats. We give more measured disclosure at the half year. So I can't give you that. But I will give it you at the -- we will disclose it, obviously, at the full year. And then in relation to the application of the 7.5%, it's indiscriminant. We -- firstly, you have to go through a fairly extensive and detailed process with your auditor in terms of pooling a wide range of information to land on that 7.5% assumption. And then it is applied indiscriminately across geography, across sites as our assumption for resi and the same for the 32% of commercial. And it is simply what your portfolio analysis splits out as your adjustments.

And the reason for those 3 sites being the ones that written down about what they are, where they are. And the last one was just in terms of the 3 sites you talked about being written down. Is it about just the price reductions because of the size of the site? Is it how the sites were bought? Is it the product that was on the sites? Why were those sites the ones...

Without being unhelpful, I mean, it's all of the above that you've raised. It's a consideration of the site in the round and its current prevailing...

Complex site [indiscernible] that have carried a low margin for some time. So it's more about cash recovery. But the NRV process has, of course, now pushed them under water. We've got time for one more. I think we've got a straight [ guillotine ] quarter past. But got time for one more if we can just get that in.

Our next question comes from Charlie Campbell from Liberum.

Two quick ones, I think. So at the full year, you gave us an idea that we should think about split of volumes sort of 60% private, 20% bulk and 20% affordable. I just wanted to check that, that was still kind of appropriate guidance going forward. And then the land bank, you...

[indiscernible] yes.

Okay. But clearly, moving parts this year, so difficult to call, I suspect.

Exactly, yes.

Okay. And then the GDV, looking at the land bank, the ASP is [ 299 ]. Do you think that's roughly kind of right where you want to be? Or can you see yourself kind of pushing that further down in due course with future land buying?

I think it's reasonably reflective of where we would expect to be, Charlie. I mean it's always going to vary slightly. But that's broadly speaking, around 300 is about right.

Yes. Charlie, it's Duncan. The other thing I'd add to that as well as I touched on it on the slide, we've still got circa 145 of the legacy London units to unwind in that mix as well, and that's the London Chest Hospital. And those would be obviously typically much higher than that, which obviously also, if you -- as we unwind the -- continue to unwind those out of the portfolio, we'll see the natural drift down anyway.

The land is consistent with where you are obviously?

Sorry, Charlie, I did not follow that very clearly.

So the land bank is then where you'd like it to be in terms of your medium-term strategy?

Yes, it's pretty consistent with it. It's not that we have to make a huge directional change in our land buying. And of course, because an awful lot of it is held under option in the strategic land portfolio, the product that we plot on there is, to some extent, in our gift. We're going to have to wrap up now. Thank you very much for listening in this morning and for the questions. I think clearly, if anybody has anything else that they'd like to ask, then feel free to send those through, and we'll try and answer them if we can. So thank you again.

Thanks.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.