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

Ladies and gentlemen, hello, and welcome to the Crest Nicholson preliminary announcement of results for the year ending 31st of October 2020. My name is Maxine, and I'll be coordinating the call today. [Operator Instructions] I will now hand you over to your host, Peter Truscott, Chief Executive, to begin. Peter, please go ahead when you're ready.

Thank you. And good morning, ladies and gentlemen, and welcome to our full year results presentation for the year ended 31st of October 2020, and a very interesting year it was too. The photograph that you can see is our Elmsbrook scheme, at Vista and Oxfordshire, which is a joint venture being undertaken with A2Dominion, and this comprises an eco-village of zero-carbon homes. So turning to the agenda for this morning. Firstly, from myself, an overview of the year and some market context. I will, of course, touch upon current trading later in the outlook section as well Duncan during his slides. Duncan will go through the numbers in some detail and will also provide data that will give you a sense of the trajectory towards our margin rebuild, which is now our key strategic focus. I'll then come back and update you on how we're progressing against our strategy, and we'll also provide a summary and some comments on the outlook going forward. And finally, of course, there will be a Q&A session where Duncan and I will be joined by Tom Nicholson, our Chief Operating Officer. During the year, we made strong progress against all of our strategic priorities. The highlight was the work undertaken to address our cost base with significant reductions in both overheads and sales expenses. Our new house type range being rolled out, which will simplify our business in the future as well as drive significant benefits in terms of value-add through replans. We've also made good progress in other strategic areas. We increased our outlets. We acquired land at stronger margins, and we're now announcing new stretching sustainability targets. Scope 1 and 2 carbon emissions will be reduced by 25% by 2025, weight will be reduced by 15%, and we will purchase all of our electricity from renewable sources by this date. Our leadership team has been strengthened as part of our wider internal reorganization, which is now complete. We have a very strong and experienced team to take this business forward. Another highlight has been the transformation of the balance sheet with a significant reduction in average net debt throughout the year and a strong period end cash balance in excess of GBP 140 million. And this and our wider confidence in our prospects going forward has enabled us to reinstate our dividend from half year '21 on a 2.5x cover basis. As you would expect, though, much of the year was dominated 1 way or another by COVID-19. And of course, during the pandemic, our principal focus was on the safety of our employees and customers. There was a significant impact to group productivity on sites during the first lock down. But by autumn, levels have returned more or less back to normal. There is now once again some minor disruption during this later lockdown but certainly far more manageable than it was in the spring. Firstly, a reminder that there are some really very strong fundamentals that underpin our business. There's been an insufficient supply of homes to match demand for a generation or more and this is especially the case in the Midlands and Southern England, where we mostly operate. The greater portion of our land portfolio lies in the southeast, where demand is the strongest and where lifestyle changes arising from the pandemic and most likely to be beneficial. As we have seen, just in this last year, firstly following the general election result at the end of 2019 and then more recently, after the end of the first lockdown. Once uncertainty is removed, the housing market can recover strongly. To support this, there remains a good and increasing availability of attractively priced mortgage products from the lending community. And where needed, fiscal stimulus from the U.K. government. For example, with the extension of help to Buy until 2023 and then the more recent stamp duty holiday. Furthermore, the decision to keep the housing market operating during the more recent knockdowns is a clear illustration of the importance of the housing sector to this government. Of course, we recognize the potential for more uncertainty in the short-term as the furlough scheme ends, along with the stamp duty holiday. But so far this year, we've been encouraged by the continuing strength of demand for our homes. Also, pleasingly, we have not seen any notable fall off in the buyer appetite for Help to Buy as we moved to the new scheme following the end of the slightly more generous original version, and this is also very encouraging. So whilst, of course, we're prepared for some bumps in the road in 2021, and in particular, in the first half as a result of the current lockdown, there is every chance of another very strong recovery in the spring, of course, as I have touched upon already, the structural changes around homeworking offer further opportunities for us, particularly given our product type and our locations. So at this point, I'm going to hand over to Duncan Cooper, who will go through the detailed financial review for the year.

Thanks, Peter. Good morning, everyone. I want to try and do 2 things in my slides this morning. And firstly, and in spite of the obvious impact that COVID-19 has had on our full year performance, highlight the good underlying progress we have made in a number of areas. Progress that sets us up strongly for 2021 and thereafter. Secondly, I'm going to give some additional insight above and beyond the usual guidance slides into the evolution of gross margin, and why we are increasingly confident in the medium and longer-term outlook. So starting with the income statement then, and I'll pull out the key items, some of which I will come back to later on in my section and talk about in more detail. Firstly, coming to adjusted profit before tax. First, we obviously gave guidance of the half year of GBP 35 million to GBP 45 million and updated that guidance in our November trading statement to the upper end of that range. I'm pleased to report that we have come in at GBP 45.9 million, beating that range. Group revenue of GBP 677.9 million, down 37.6% on prior year and adjusted gross profit down to GBP 107.7 million, a fall of 46.7% on prior year. And both of those declines have been, of course, principally driven by the impact of COVID-19 disruption in the spring and the lost sales that resulted from that disruption. It is also worth reminding everyone, again, as we outlined at the half year, that we did start the year with trading below our expectations as we ran into the December general election as well and the uncertainty that continues to bring to the market. Performance in the second half of 2020 was unsurprisingly, much stronger, as I'll come on to discussing shortly. Also in the year-on-year adjusted gross margin bridge is circa GBP 20 million less land and commercial contribution as we've sold less, in line with our strategy. And finally, these downward anchors on performance have been offset by around GBP 18 million less sales and marketing expenses being incurred this year versus last. And that's not solely a function of COVID-19, i.e., truly variable cost on selling activity being lower but the result of the detailed cost review work we started in 2019 and have continued into 2020. And that lower cost structure will now annualize into full year '21 as our baseline for sales and marketing activity. Coming down to adjusted administrative expenses, down 23% on full year '19, and this represents the delivery of the internal reorganization we previously outlined as well as the reduction of other discretionary costs. I'll come on to talk again about this in more detail later, an adjusted effective tax rate of 18.4%. And finally, GBP 48.1 million of exceptional charges net of tax which contains within it GBP 7.5 million one-off cost of change associated with the restructuring activity I've just referred to. Moving on to the next slide, looking at sales metrics. We increased our total outlet numbers from 59 to 63 and delivered a full year SPOW rate of 0.59. Total home completions were 2,247, down 27.5% on prior year. We actually saw a much stronger second half bulk performance up from 183 units at the half to 595 by year-end, including 119 units at Sherborne Wharf, which is a multistory development in Central Birmingham. During the year, and given the increasing trend we are now seeing for PRS interest in single-family sized homes, we have taken the opportunity to trade some margin for cash on apartment schemes, Sherborne Wharf being a good example of this and carry similar deals into our forward order book for full year '21. Given some of the changes that COVID-19 has had on customers' perspectives on urban versus more rural living, we think this is a sensible call, and Peter will talk in more detail in his section about our growing Crest Nicholson partnerships and strategic land capability, which coordinates our activity in this channel to market. Our open market ASPs continued to decline, reflecting the changing type and location of our build activity and also the continuing unwinding -- continued unwinding of the legacy London portfolio. The 88 units sold on these schemes this year worth an ASP of over GBP 500,000, which obviously continues to hold up our overall private ASP. That portfolio now only consists of a handful of units remaining across 5 sites. The Old Vinyl development in Hayes, which I'll come on to discussing specifically and the as yet undeveloped London Chest Hospital. Finally, our forward sales position at the 15th of January 2021 was 2,435 units and GBP 564.5 million GDV, covering circa 55% of full year '21's book. Our reference trading in the second half have been much stronger, and near-term trading has continued in line with our expectations with our year-to-date SPOW rate of 0.6%, reflecting this. Over on to Slide 9 and some more detail on the impairment charges we took during the year. Firstly, on the inventory impairment and a reminder of the assumptions we used when introducing this at the half year. A 7.5% reduction in residential selling prices across the portfolio and a 32% decrease on commercial units. The total NRV provision charge of GBP 43.2 million includes GBP 9.3 million of abortive WIP relating to our Green line scheme on the [indiscernible]. And you will notice the charge is the same as the half year, the total charge is the same as the half year. That is simply a coincidence as we are, of course, required to complete another full impairment review at year-end with up and down movements occurring across all sites as they traded through the second half. The second charge of GBP 0.6 million for combustible materials comprises a further GBP 2.6 million charge in respect of those developments, which we have previously identified need either investigation or are being actively remediated following investigation offset by a GBP 2 million paying credit arising from successful claims against architects and subcontractors for poor design or workmanship. GBP 7.6 million represents the full year expected credit loss on the London Chest Hospital, which is an asset held in a joint venture and finance plans company loans from Crest and our partner and GBP 0.5 million relates to adjusting our shared equity loan portfolio from a 3% inflation assumption to the 7.5% deflation assumption. Finally, we recorded a GBP 7.5 million restructuring charge, split GBP 5 million for the impact of the internal reorganization and GBP 2.5 million for accelerated depreciation on IT infrastructure. At the half year, this charge was GBP 4.5 million, and I guided to a similar level in H2. The slightly lower outturn due to us not booking and anticipated onerous lease charge for vacating [indiscernible] head office early. The methodology and rationale for each of these exceptional items is provided in detail in Note 4 to this year's financial statements. I want to come on to now talking about the evolution of gross margin within Crest. This next chart seeks to make a number of points. It maps our full year '20 gross margin on the left-hand side and ties to the 15.9% gross margin rate delivered this year. We then stratify our portfolio into less than 10%, 10% to 15% and greater than 15% gross margin and show how the composition of those segments changes by full year '23 on the right-hand side. You can see the dilutive mix effect of these lower-margin schemes in this year's performance but also how they continue to weigh heavily on next year's gross margin as well. If I go back to last prelims, you will remember, I used the phrase cost led recovery being necessary because of this portfolio outlook. The group will deliver margin rate accretion next year, and Peter will touch on the initiatives that deliver this in his section later on when he talks to our operational efficiency, strategic priority. But the full impact of these self-help measures, buying land at better rates, greater operational discipline, build, procurement and plotting efficiency is not fully realized until full year '22 because of the unavoidable and dilutive effect of these sites. An economist might describe this as us passing a peak through the python, and we have another year of having to work this peak through. On the next slide, I want to share 4 examples of the types of sites I'm referring to you to give some more color on this. I'm not going to go into detail as to why these sites generate negative margins. I think we have explained that in some detail in previous updates. I'm equally not going to go through the features of each scheme in detail, but you will notice some common characteristics from the photos, multistory, complex, urban located development, some with mixed-use elements as well. All 4 schemes are catered for within our NRV provision at year-end, meaning we forecast that the whole scheme or specific phases of it will generate a negative gross margin. All of these sites, therefore, will continue to weigh on gross margin progression in full year '21. And in addition to the impact on profitability, you can also see they require significant cash commitments to progress work in the year. Again, a reflection of their complexity to build. The 2 sites on the left of the page are Centenary Quay in South Hampton and Farnham will require just under GBP 50 million of combined cash this year and both are still relatively early in their sell-through profile, albeit we have already secured 2 retail tenants of Farnham. The 2 sites on the right, Sherborne Wharf and Old Vinyl, a good examples of where we have been able to successfully mitigate their large cash outflows and address a likely slow sales rate if we have developed and held it for private sales by way of a bulk deal to ensure the whole development is pre sold and delivers an overall net cash inflow next year as a result. Some of these schemes, including those, not limited to the 4 on this slide will take until full year '24 to fully unwind. But as you can see, going back to the pie charts, we will be through the worst of this dilutive effect by the end of this year, at which point, the margin -- portfolio margin starts to inflect strongly as we see the incoming effect of the operational efficiency benefits, which Peter will cover in more detail later. Cash generation follows a similar path. And of course, we won't be refilling the pipeline of developments with such complex schemes in the future. On the next slide, the administrative expenses. I won't spend too long on this slide as hopefully it's self-explanatory. Following the decision to restructure, we now have 215 fewer permanent roles in the organization. And as we expected, this has benefited our productivity and simplified our approach to a number of tasks. In addition, we are now seeing an attitudinal shift towards how we spend money. This year's budget was a great example of this, where our divisions took on the challenge to deliver further efficiencies with little guidance from group. Total overheads are about GBP 15 million lower in full year '20 versus full year '19, and that represents a new baseline with overheads a little higher in full year '21, as we have repaid the GBP 2.5 million of JRS funding which was, obviously, a credit in full year '20. We expect to run a slightly higher bonus accrual, full year '21 versus full year '20 and recognizing that the biggest driver to lower expenditure is, of course, having employees on furlough where they aren't spending money on discretionary items, we don't anticipate this being reflected in full year '21. So if you normalize this chart for those factors and look to underlying progress, you'd see a glide pass down from full year '19 and to full year '20 and then the full annualization effect of savings being realized in full year '21. On to Slide 13 in the statutory cash flow. The decrease in trade deficit is largely accounted for by the settlement of a number of large -- number of [indiscernible] in the year. The decrease in inventories is down to better WIP management, and I'll come on to talking about this specifically in a later slide, along with the pension outflows. Tax cash out was impacted by the impairment charge. And for the purpose of your models, I would assume circa GBP 13 million cash out for full year '21. And then the RCF utilization being lower during the year, accounting for the lower interest paid and the net cash flow from financing activities principally relating to us repaying the RCF in full at year-end. Slide 14 then provides the key balance sheet movements. Net cash at GBP 142.2 million, average net debt down to GBP 99.6 million and land creditors of GBP 205.7 million with the rollout of that land creditor balance provided in the graph. I'll come on to balance sheet efficiency in the next slide. But before I do and again, for the benefit of your models, let me touch on the pension. The deficit increase, principally due to a lower discount rate and the usual GBP 9 million per annum cash outflow was lower at GBP 6.7 million this year as the trustees were supportive in deferring some of full year 20's contributions into full year '21, something we agreed at the peak of COVID-19 uncertainty, and therefore, you should model an outflow of GBP 11.3 million in full year '21. And then of RCF I've already touched on. The next slide outlines the work we've done in improving our working capital discipline. It would be easy to equate the year-on-year net cash improvement of GBP 37.2 million to GBP 142.2 million through not paying a dividend. However, even adjusting for that and some of the other lower comparatives, we would have delivered a similar level of net cash with revenue down in the year, nearly 40%. The chart on the right illustrates, clearly, this hasn't been achieved by greater utilization of land creditors. In fact, that's dropped year-on-year as well. It's being delivered through not just a more favorable closing stock position but also a lower average level of WIP throughout the year. And we've also managed to reduce the quantum of age stock in that closing position as well. It was clear last summer during our first budget as a new management team that our build program was disconnected from our sales rates. At that point, our stock levels were predicted to double, and this wasn't immediately considered a problem. As you would expect, we were already rapidly setting about challenging and changing this before COVID-19 hit. Tom was busy overseeing both a change of culture and also implementing a more rigorous control environment, which includes our forecast review process. When COVID-19 did hit, we realized our balance sheet at the time that we have to go further and faster in this area. We're in the year not with stock doubling but down from 459 completed units to 196. And as we look forward to the introduction of the standard house types, we will start to accrue even greater benefits as our build processes, build timelines and materials all used become much simpler to forecast with greater levels of accuracy. Looking to the end of this year. And of course, it's difficult to call the market at this stage and its impact on net cash, but I would expect net cash to be lower than last year as some of our planned bulk deals for full year '21 were successfully pulled into full year '20, and we still have to work through some highly cash consumptive schemes, which I've touched on. However, the balance sheet will still be materially stronger than at the end of full year '19. And hence, our confidence in reinstating the dividend. My [indiscernible] slide covers the usual land disclosure we provide, only 2 points I want to draw out from this. Firstly, the GDV and ASP of the portfolio both reduced correspondingly with a 7.5% NRV assumption. Secondly, we have been active in the land market during the year. But as you would expect, in a disciplined way, having approved 1,812 plots with an average gross margin of 28.7%. So in summary, it's impossible to overlook the impact of COVID-19 on this year's financial performance. But looking through that, we have made great progress on the 3 commitments we laid out last year. Namely, addressing what we consider to be an inefficient balance sheet, delivering significant efficiencies to kick start what I described as a necessary cost led recovery and delivering profit ahead of guidance. And Peter and I have said consistently, we are very clear that rebuilding confidence in the equity case of Crest depends on consistently hitting or exceeding our expected numbers, and we look to full year '21 with that firmly in mind. The market will remain uncertain, but the delivery of a Brexit deal is very reassuring. And current trading, as I've outlined, remains encouraging and in line with our expectations. As we look forward, and Peter will lay this out in much more detail, our focus now has to be on rebuilding margins in Crest. And hopefully, what I've been able to illustrate this morning is that the strategy does deliver good margin accretion in full year '21, it's just that the full potential of recovery is held back as we work through some of the more complex schemes. We are then largely through those by the end of full year '21 and have good visibility to strong accretion thereafter. And with that, I'll hand back to Peter.

Thank you, Duncan. And I hope that you found that very helpful in explaining the year that we've just had and also providing some data on the look forward. Now to update you as to where we are with the strategy that we set out this time last year. So let me first remind you about 5 strategic priorities and also the 4 foundations that underpin them. Our 5 priorities: great placemaking, something that we've always been known for, our strong and diverse land portfolio and how we best utilize it, operational efficiency, this really is the key to the margin rebuild plan, customer service. Again, I'll come on to the great progress made last year. And finally, our multichannel approach to buying land and selling homes. And our 4 foundations, our people, a vital part of the plan to improve the business, sustainability and social value. We've now set ourselves some really challenging targets in this area. Safety, which, of course, continues to be our #1 priority, reinforced by the challenges around COVID-19. And lastly, our financial targets, returning Crest Nicholson to its rightful place as a leading U.K. housebuilder. So turning to each element of our strategy and starting with placemaking and quality. And as you can see from the photographs, which are of Longhurst Park, Horsham and Tadpole Garden Village In Swindon, great places to live is what Crest Nicholson is all about, and we really want to build on this rich legacy. When designing our new house type range, we ensure that we have sufficient variety in style and elevations in order to create really interesting street seats in the way that we have always done, but with a greater consistency and quality that a standard product can bring. We have a really strong land portfolio, both owned short-term land and/or more strategic holdings held in a balance sheet efficient way mostly under option. The vast majority of our sites fit very well with the lifestyle changes that we are seeing with a greater demand for family homes and products with gardens or other private outside space. As we set out last year, it's very clear that -- it's very important that we're clear as to how we wish to utilize our land. Our first priority will remain to grow our outlet numbers. Pleasingly, these averaged 63 last year, up from 59 in the previous period. Secondly, we will utilize our land for our multichannel business, seeking opportunities to sell units in bulk, for example, into the PRS market or additional affordable homes. Occasionally, we will dispose of land to third parties but this will only be the case when it's strategically the right thing to do. The operational efficiencies, I'll come on to, also enable us to be more competitive in the land market and to drive much stronger margins than was previously the case and based upon more robust underlying assumptions. In the year, we approved the purchase of over 1,800 plots and a gross margin of just over 28.7%, just over 21% at an EBIT level. This new higher-margin land coming through is an important part of our margin rebuild plan. And we're actively reviewing our non-core assets such as commercial properties, and we will seek to convert these into cash when the timing is right to do so. As I've already mentioned, our main operational focus going forward is our margin rebuild and bringing these back to at least sector normal levels. Part of this plan will be around bringing newer, higher-margin land through. Larger part of the plan is self-help, centered on operational efficiency. This will, of course, also encapsulate our existing assets. We've made great strides forward during the year across all areas of our cost base. And I really would like to give credit to Tom and his team of the strong progress made. So let me start with overheads, so a significant reduction of GBP 15 million year-on-year with around 1/3 of all roles having been removed, including both directly employed staff and also a large number of long-term temporary roles. We now have an appropriately sized and robust overhead structure capable of comfortably delivering 3,250 dwellings per annum. Accordingly, as volumes grow, we're well placed to achieve our target of 5% of overheads as a percentage of our revenue. We've also seen a large fall in our sales and marketing costs, reduced by around 1/3, mostly through better buying and more targeted advertising spend. And this cost line can be maintained at a range of between 2% to 2.5% of revenue going forward. Our new standard house type range has been rolled out across the business with a large number of these homes now under construction and a total of 5,500 REIT planed so far. Our full year '22, 80% of all of our private housing completions are expected to come from this more efficient and cost-effective range. Our standard specification was something that we really did go after right from the outset. And so far, around GBP 30 million of savings have been embedded across the portfolio and are now starting to come through to the bottom line. This pull-through will continue to increase year-on-year. This new specification, which is stronger than our previous one but more cost-effective due to a concentration in our buying power has also gone down very well with our customers. I've mentioned the 5,500 plus replan so far, around GBP 40 million of margin improvement has been identified as a result of this, and I'll provide some examples shortly. What is equally important is that going forward, we will continuously review our schemes in order to drive more value from our assets. Here are just a few examples of the changes that we've introduced around specification. Kitchen, sanitary wear, internal doors, appliances. These 4 items in isolation demonstrate a near GBP 3,000 saving on a typical free bedroom home through new solar supply arrangements. Through these relationships, we're able to access high-quality materials and also achieve our objectives around greater simplicity, which ultimately reduces our build times, reduces work in progress levels and enhances our build quality. This table shows a small selection of the replans that have been approved so far, a range of site sizes and locations and always adding value to the bottom line. As I've said, this will be an ongoing process as part of the drive to focus on improving our margins. I will, however, just pick out one of the examples here shown, which is a Curbridge, Fareham. Although, the margin improvement is the obvious highlight, notwithstanding the increased numbers of dwelling through more efficient land use, in this case, by reducing the modes on the scheme, we've also been able to increase the open space areas for the benefit of the residents. I'm incredibly pleased that we've returned to being a 5-star housebuilder. This really was [indiscernible] given the COVID-19 disruption and the level of change taking place in the business. We've adopted a get it right first-time approach and the standardized product and specification will also help the same. We've also introduced new processes and procedures, which now put the site teams at the heart of delivering customer service, with the office-based staff now dealing solely with aftercare. Pleasingly, we continue to track higher scores than last year, and this focus will be maintained. During the year, we consolidated our Partnerships and Strategic Land teams to create Crest Nicholson Partnerships and Strategic Land led by Kieran Daya, who's smiling face, you can see there on the right-hand side of the slide. This move better enables us to coordinate our multichannel approach to both buying land and selling homes into different market sectors. Going forward, so it will be a stronger joined up approach to developing our major projects. Kieran's team will provide the expertise in key areas such as the PRS and affordable homes markets and will also maintain the key relationships with these market participants as well as important land partners such as Homes England, and the defense infrastructure organization. There's a facilitation and coordinating role with the business divisions building the homes and continuing to be responsible for selling the individual houses to individual buyers. We're already starting to see that this enhanced concentration of expertise is creating better outcomes for ourselves and our partners. During the year, we've been able to divest out of a large number of apartments which remained attractive to the rental sector but are less attractive to the private sales market. We are starting to see increasing demand for single-family homes in the private rental sector, and there is huge potential for us here. We're engaging much earlier now with our partners in order to provide the right product, the right quantities and in the right locations, and this will drive stronger outcomes for both parties. Recognizing the importance of this vital strand of our strategy, Kieran Daya who will continue to lead Partnerships and Strategic Land on a day-to-day basis as now joined the executive leadership team effective from this month. Turning now to our foundations. Our human resources are vital in enabling Crest Nicholson to achieve its strategic goals. Again, in recognizing this, Jane Cookson, our HR Director, has also joined the executive leadership team in January and that's Jane that you can see on the right-hand side in the photograph. We launched agile working prior to the pandemic, and it's really stood up to scrutiny. Our teams have been able to work from home effectively during the various lockdowns. We do believe, though, that we will be at our most productive with a combination of office homeworking, and I see this as being our normal way of working in the future. The benefits of this, in addition to increased productivity, will be around well-being, diversity and lower costs. Our diversity and inclusion forum has now been established and which is something that I chair. This has been an incredibly open and rewarding process, which is already starting to produce a range of ideas that will make us a more diverse and a better organization in the future. We have, of course, undertaken 2 organizational restructures in the period. And in many ways, it has been a tough year for some of our colleagues. And I would just like to take this opportunity to thank those who have left the business as a result of these changes for their contributions to Crest Nicholson during their time with us. We do have some great talent coming through in Crest Nicholson, and Jane will be focusing upon developing this vital human resource. They are, after all, our future. Well, let me just finish this section on the strength of the leadership team that we now have in place. It's vital that when we do recruit, that we do this very well and that we attract the right individuals who fully understand and buy into our plan. All of our divisional lenders are new to the business as well as the vast majority of the executive leadership team. We have an incredibly experienced team with widespread sector knowledge. And I'd rate this the strongest team that I've worked with in my career to date. Another area of focus for us in the period ahead is sustainability and the wider social value agenda. This is why in the last year, we set up a sustainability committee, which again I chair. We've developed and now set out some very strict targets for the period to 2025 based upon reductions from full year 2019. We aim to reduce our scope 1 and 2 carbon emissions by 25%, reduce our waste intensity by 15% and to purchase 100% of our electricity from renewable sources by this date. We remain committed to placemaking, as previously mentioned, and also to the biodiversity agenda. For example, this year, we rolled out hedgehog tunnels across our developments. And that little fellow in the photograph seems to be very pleased with that decision. I'll take this opportunity here to mention that I'm very proud of the way our team has responded to the pandemic. There are countless examples of colleagues volunteering for or supporting community efforts. Safety health and environment remains our top priority. We simply will not compromise on safety. Our all injury incident rate remained stable during this challenging year, which is pleasing but we will always be striving for improvement in this area. Our site teams have handled the challenges around COVID-19 remarkably well, quickly identifying and implementing new ways of working. We introduced new signage, additional facilities on-site and new protective measures were introduced for both our site and sales teams, all in line with government and industry guidelines. In terms of the wider health and safety agenda, updated processes were introduced during the year are built on our existing policies. These changes ranging from the rolling out our performance tracking software through to additional director visits will enable stronger benchmarking to enhance outcomes. The strategic priorities and foundations underpin them will lead to a stronger and more consistent financial performance for Crest Nicholson. The challenges brought about by the pandemic nonetheless have delayed the stronger outturn. As the year unfolded, we quickly recognized the potential impact that the pandemic would have on us as an organization, and we put in place policies to mitigate the situation, and we then acted upon them rapidly. Our response was multifaceted but with a focus on conserving cash. Firstly, we went deeper with and accelerated our restructure plans and took other actions to reduce our wider cost base. Secondly, having a laser-like focus on our balance sheet, we quickly reevaluated and prioritized our land expenditure and reduced our work in progress commitments. This focus on cash was also the context of the cancellation of the planned final dividend in April. From the summer, we concentrated on the divestment of weaker assets, such as apartments. Now although most of our attention going forward will turn to our margin rebuild plan. There's no reason whatsoever why we should not have sustainable margins at least in line with our peer group. As we've already announced, we have suitable confidence in our prospects and outlook to our reinstatement of dividend on a 2.5x cover basis from half year '21. And finally, in this financial section, although we're currently tracking our expectations and have secured around 55% of this year's revenue already. We just feel that it's sensible to delay setting out our financial targets for this year and beyond until we have visibility around the end of the current lockdown restrictions. As you can see, we have made really strong progress against our strategic priorities in the last year. And despite the unforeseen challenges around the pandemic, we have not let up the pace of our change agenda, particularly around our balance sheet and our cost base. This focus has left us at the period end with a balance sheet that has been transformed. We're far more resilient business now. I've always believed that our balance sheet was inefficient rather than weak, and this has been demonstrated by our strong cash generation last year. The team that has been assembled around me is increasingly strong and very focused on the target and at the task in hand. I honestly could not want for a better group of people to take with me on this journey over the next few years to restore Crest Nicholson to its rightful place amongst the U.K.'s leading housebuilders. Also I'll acknowledge that there will doubtless be a short period of uncertainty ahead as the last month of the pandemic playout, I'm extremely encouraged by the resilience of the housing market over the last year despite all of the negative news flow and the disruptions to people's lives and their livelihoods. Since the start of the new financial year, we've achieved good rates of sale, very slightly ahead of the equivalent period last year. And this gives us a solid base for the current year alongside the enhanced order book that we came into the year carrying. The platform that we've established with Partnerships and Strategic Land offers us additional opportunities to achieve further sales through our multichannel approach. As I've stated, key strategic priority now is the rebuild our margins back up to sector standard levels as a minimum in the medium term. Although, progress will be more limited this year for the reasons outlined, as we go into 2022 and beyond, the benefits of the actions that we've taken to transform the business with our standardized product and processes, our improved land buying, our lean cost base overheads and selling expenses will flow through to our margins and to our wider financial performance. So now we'll have the opportunity to move on to Q&A. And we just -- bear with us for a second as our facilitator organizes this?

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

Three, please, if I could. The first was -- I think they're all fairly technical, actually, but the first was just reflecting on gross margins for the year finished. Do you have an idea in mind of the extent to which COVID factors, be it lockdown effects or added costs, cost recovery, all that kind of stuff, weighed on the margin? Is there any kind of number you might be able to put around that? And or maybe, it's more easy perhaps to focus on the second half margin that I think was about 16.5% at the gross level, which perhaps was more free of any of that effect? But I guess what I'm going to try to get to is appreciate progress in 2021. So it will be more limited compared to where you can get in the future. But should we think that actually that second half base of 16.5% is something that you could still look to build slightly on given that change in mix? The second one then was around sales rates. And obviously, the numbers moved around a lot in the last couple of years for various reasons. But do you have a kind of later snapshot of what you think the optimal rate for the business is, particularly as you try and prioritize the margin improvement? And within that, is there a private bulk split that you might to give me a point to as to how you get to the overall number? And then I'll try it, but you may not buy it, but just in terms of volumes for 2021. If we were to assume a steady sales market compared to what you've seen, minimal bill disruption from here forward around lockdowns. Do you have a broad view as to what level of output you might be able to achieve?

Thanks, Will. Duncan will answer the first question. Tom will pick up on the sales rates. And then I'll try and say something on volume trajectory, if you like, trying to be helpful.

Yes. I will -- I mean, yes, I mean, on your first question on gross margin in terms of the impact of COVID. Without a doubt, the overwhelming impact in relation to both volume -- and I think I've outlined the other building blocks that sit within that in terms of the bridge this year. About GBP 20 million less land and commercial contribution as well year-on-year, offset by the GBP 18 million actually improvement in sales and marketing costs and overheads coming down, obviously, from the GBP 65 down to GBP 50 million. So that's obviously a meaningful contribution to the overall net position. Things that are in there in the mix. I think there's -- we've recorded a freehold reversion markdown charge of GBP 2.9 million. And we've got some other old site costs and provisions, which go into underlying margin. But overwhelmingly, it's COVID related.

The sales rate, as Peter said, we've been pleased with the robustness of the market has continued year-to-date in the new year at 0.6 and really, we're -- we can see that continuing. That's in line with our expectation. So I think we'll be using that to continue through the market dynamics that we got at the moment?

Yes. I think depending on the quantity of bulk in any 1 year, you'd probably be looking at a range of sort of 0.5 to 0.7 as being the tram lines really for us. In terms of the volumes, we're not going to be too specific, but just to be helpful. We've, obviously, got an overhead capacity to do up to 3,250. Last year, we did 2,246. And in 2019, we did 2,900 a bit. So we would expect to get back to that sort of level within 2 to 3 years, depending on the strength of the market. We certainly would expect volumes to be better in '21 than '20 but I wouldn't expect them to get all the way back to where we were in '19. I think it will be in stages 2 to 3 years, just depending on the sort of strength that we had -- that we have. But let's also remember that because of that capacity, if the market does pick up, we do have the land and the operational ability to be able to do a bit more.

Great. And sorry, just coming back to the first one, if possible, just -- and perhaps I'm splitting out slightly, but if you look at second half gross margin that was usefully better than the first half. Is that something we -- you could maybe key up as a modest improvement in 2021? Or would you just point us to the 2020 average because it did -- I think it was about 150 basis points second half on the first?

Yes. Well, sorry, I wasn't being -- seem to be unhelpful that. I don't think taking the second half of gross margin as a baseline going forward is an unreasonable position to take.

Our next question comes from Jon Bell from Deutsche Bank.

I think I've got Three, if I may. The first 1 is on average WIP levels. Clearly, we can see those falling over the last 2 or 3 years, should we expect that to continue once the 4 impaired schemes have passed through? The second one is on your gross margins, your -- on acquisitions, new land acquisitions, 28.7%. That's clearly a very high number. Is that a gross margin as defined in P&L terms? Or is there anything that comes off below that number? And perhaps you could just comment on what would the equivalent be for the previous 1 or 2 years, just so we can see the trajectory. And then final question for me is on how to buy 2. Anything you can tell us on take up levels since it opened on deck 16?

Okay. So Tom, if you wouldn't mind just picking up the WIP level, and then I'll pick up the gross margin and back to Tom for the Help to Buy.

So in terms of WIP, you're right, as Duncan highlighted on the slide, we've got a couple of a number of legacy sites, which are what I'd call WIP hungry. Pleasingly, the strategy was to secure the forward sale position on those. So we've got certainty in terms of receipt once we built out. The main focus, obviously, on the teams has been to driving efficiency in terms of build programs and how we just manage everything that we do on site. And then with efficiency what we'll continue through as we replace the more complex weight here flattish schemes with our traditional low-rise housing in apartment scheme. So that's how we'll continue to see that trajectory going forward.

And on Help to Buy?

And on Help to Buy, there has been a good take up. Certainly, the Help to Buy 2, which is obviously, I think, just the first time fire market. We've been able to see a strong take up, particularly, in our core sites in the southern part of England so it's been positive.

And just on the gross margin, John, the gross margin expressed here and the 28.7% is before deducting saying expenses overhead. So the implied margin would be in excess of 21%. It's probably about 200 bps better than it would have been in recent years. I mean, overall, we would expect to see ordinary open market land being bought at implied margin of that sort of 18% to 20%, which is the sector normal. But an awful lot of our land is strategic, where I would expect to get better margins from that.

Our next question comes from Chris Millington from Numis Securities.

A few, please, for me. At the start, Peter, you mentioned about some disruption from the current lockdown. I just wonder if you could kind of expand on that. Is that an absentee as an issue or what may it be? So that's number one. The second 1 I wanted to ask was the slides you did, Duncan, relating to the margin categories. And it's very helpful to see the roll-off of some of those legacy sites. But the category, which you say is over 15% is -- it's clearly quite a wide category. I just wonder if you could give us any more detail on what you feel the average margin embedded in that superior fund at land is? And then just a final 1 for me, just what you expect your outlet numbers to do in the current year?

Okay. I'll let Tom pick up on outlets. Just in terms of the current disruption. Yes. What I'm trying to reference here is that it's nowhere there disruptive as it was during the earlier lockdown. But by the autumn, we had pretty much got back to normalized levels. There is a little bit of inefficiency, I think, that's just getting people back to work at the after Christmas, a few of the people coming back from Europe. That's a little bit slower. I think government were very generously paying people to not do anything, stay at home for a little while. But -- so it's not 100% efficient, but I'm really trying to signal that. It's nowhere near as bad as it was during the first lockdown and it's perfectly manageable. Duncan, the margin?

Yes. Chris, I thought of someone answer this before you give this segmentation -- you want more of the segmentation and the detail. I'm not going to give more on it. I would say a couple of things. I think, firstly, if you look at the overall blended gross margin we've given on the portfolio and you back solve it, just on the mental math on the picture of those other sites, by definition, the balance of the portfolio as I think I said at the half year and at the prelims last year looks more like what you would expect to see in our peers. And I think in addition to that, obviously, in those outer years, as we've also referenced, just the continuing accretive benefit starting to come in the operational efficiency benefits. Peter referenced in his presentation, the GBP 30 million spec savings and Tom may wish to expand on that. That's now embedded in that portfolio, GM. We've got further line of sight GV and portfolio savings -- sorry, the replan savings of GBP 40 million, and that's to be laid as well. So I would -- I guess I would say that, that upper portion of the portfolio is only going to get stronger with the operational efficiency benefits coming in and the reloading of the pipeline with the land at the kind of levels we've just talked about.

I mean there's no reason whatsoever why we shouldn't have margins that are released in line with our peers. It will take a little while to get there. I mean, this year, we held back, as we've mentioned before, by just a drag on some of the lower margin sites. But once we get out of that, we should see some good progress on margin.

And Tom, just on the outlook, as Peter said, that we were averaging about 63% throughout '20. There'll be a -- we'll see a slight increase on that as an average. This year, we've got a number of sites being open, which are all on program. So slight increase on that number this year and set to grow a little bit more as we carry on.

The land is in our control on the outlets. The only thing that could hold us back is just the administration of the planning. It's not at the moment, but that's the only thing that could cause a problem with the openings.

Our next question comes from Charlie Campbell from Liberum.

A couple of questions from me, please. Yes, so first one is really to get an idea. We hear in the press a lot about sort of cliff edges at the end of March around sort of Help to Buy and stamp duty. Clearly, your forward order book kind of extends beyond the end of March. So I just wonder what sort of customers are saying to you and whether people are happy to take houses for delivery beyond March? Obviously, without stamp duty, whether you have to adjust incentives, whether people are happy to pay the old rate? And also just on Help to Buy. I mean, clearly, Help to Buy movers were quite important for you under the old scheme. Are those buyers still there and using -- finding other ways to fund? What do you think is happening there on the ground? And then second detailed question. You sort of said, I think, new house types would be 80% of output in 2022. I just wonder what that number might be in '21. I imagine it sort of starts a bit more slowly than that. But just to get an idea on that would be very helpful.

Okay. So just on the house types, I wouldn't be specific, but the -- it was 0 in full year '20 and it's not going to be 80%, but there is quite a big step-up in full year '22. So it wouldn't be halfway either, but maybe somewhere in the 30%. I mean on the market, I'll give a sort of more general answer, and then I'll ask Tom to give a bit more color on it. But as you can see, we've got a selling rate, which is pretty good compared to last year. And that does extend to beyond the period with the stamp duty holiday and also moving into the new Help to Buy. So we're not seeing anything but I'll just ask Tom to give a little bit more color from what you're seeing on a more granular basis.

Yes. So you're quite right, Charlie. The Help to Buy has been hugely a big take-up from customers beyond first-time buyers. So the trade-up customers have now gone back to using sort of the core enablers such as part-exchange which, of course, you couldn't use in conjunction with Help to Buy previously. So they look to utilize that enabler. And the first-time buyers obviously still benefit from the Help to Buy products. So we continue to see a continuation of demand on that basis.

Yes. We're certainly taking reservations beyond the but beyond the end of March. And I guess that these changes have been flagged for quite some time, and people are just dealing with it. They want to buy a house. This is how you do it beyond that period. So we have all been slightly cautious about what the market would look like beyond March. But actually, so far, I think we're pleasantly surprised.

Our next question comes from Glynis Johnson from Jefferies.

I have 3 topics, I'm in phrasing because there's a couple of parts here and a couple of them. First one, just in terms of the land bank, the margin of intake. I just wondering if you can just clarify what are your assumptions in terms of how you sell that land? Is there assumption that you do sell a part of it in bulk? Has that been taken to account in terms of that land bank intake margin? Also the return on capital employed. I wonder if you can maybe give a snap for the land that you bought in the most recent period? Then in terms of the standard housing types, you think -- I think you said 80% [indiscernible]. I'm just wondering, again, as a proportion of total group given the affordable and the bulk element. And just then the replan, you talk about 5,500 have been replanned in short-term land banks of 14,000. Are the plans for the rest then to be replanned or the reasons why it's not suitable for part of your current land bank? And then just lastly, in terms of -- others have been -- are willing to give us a build rate per week. I wonder if you're willing to give us that sort of number?

Yes. Okay. So I'll try and pick up 1 of those, and then I'll move to Duncan on that margin and Tom on the build rate. So the 5,500 replanned. We've obviously gone after the product and the sites that are the here and now. And that's not the maximum number that we can really -- there will still be later phases on some of our bigger sites. But as you rightly mentioned, there are also a lot of sites, particularly some of the more complex legacy ones, where they just want to see replan because they're apartments or they're very specialist one-off housing types. The 80% that we mentioned is private. And on top of that, we are developing a standardized affordable housing range some of those will also be developed next year. But of course, that will follow, won't be as much as 80%. And the PRS will be a combination of those 80% that we talked about, whether private and on some occasions, there will be older legacy sites that have not been standard house types. So we've been very specific. It's 80% of the private housing market, but the well on top of that be things like the apartments and the affordable. But of course, we are standardizing the affordable range. Tom, just on build rate and then Duncan on that margin?

So the average build rate that we're seeing coming through the -- our new standard halftime ranges significantly reduced to what was previously done. A combination of just better management happening on-site as well as the better -- the easier engineering and construction of the houses that we're now producing. So we're seeing improvements. Average build week of in excess of 30, 32, 34 weeks, is coming down to around about 20 -- about 20 weeks. So that's where we're driving a huge amount of efficiency as well.

And in terms of the total build that we have out there. We are now absolutely matching the build rates to the sales rate. So that 0.6 you're seeing, you would expect us to be building at around the same rate. And Duncan?

Yes, Glenn, so where we have any land gross margin, obviously, would be at a level where it would include or reflect any assumed bulk activity in the deal done there. And obviously, you can draw your own conclusions at that level versus what's it seemed in there. That's, of course, not to say that we on anything we choose to purchase, we wouldn't then further down a line seem a -- to do it through a bulk deal if we thought it was the right thing to do. But I think as Peter has talked about, very clearly have strict criteria around capital efficiency associated with that decision. I don't want to get into giving ROCE on our land approvals because both we need to be in that level of detail at this stage. But I think we're -- we would always assume and reflect any bulk delivery in the number. Yes.

Thanks, Dan. I mean we obviously have given a range of margin. Industry levels, which obviously has been that 18% to 20% at an EBIT level. But each individual decision that we take is always going to be a reflection of margin risk and return on capital.

Okay. And just in terms of that build rate, so if I do 0.6 times your 63 sites and then adding a portion for our affordable in your bulk. So you're building about 50 units a week?

I mean that wouldn't be far away. It will always be slightly lumpy depending on where you are in the year and on project by project. But broadly, that's about right.

Our next question comes from Gavin Jago from Barclays.

Again, a few if I could, please. The first one's on Help to Buy. Just if you could please give us the number of units that were sold in FY '20 on the open market price. And maybe within that, what proportion of the first-time buyers? The second one is just a point of clarity around the order book in that 55%. I think you said, of revenues being covered for FY '21. Have you got a split of maybe what proportion of private and affordable is covered within that? The third one is just around the commercial outlook, obviously, a drop-off in returns in FY '20. Is this kind of a new normal now or you expect that to be picking up going forward? And then the final one is just, Pete, if you could maybe say what you think the average sector margin is at the moment or where you'd be likely to get to over the medium term?

Okay. Gavin, I think Duncan picked it up, but I didn't pick up the third question. I believe -- just repeat that one again, please.

Just on commercial, just kind of the, I guess, the lower levels of activity and -- or commercial and land sales, because I think there's a GBP 20 million lower contribution in FY '20, are we now at kind of a new normal level? Would you expect it to pick back up again going forward?

Okay. Let me pick up a couple of those myself. I think on the Help to Buy, I'll just give someone to answer that other 3. In terms of average sector margins, I think I've mentioned this a number of times. I see that as being the 18% to 20% at an EBIT level. I think that's sort of range that we see as being the range that we're trying to get to. Commercial and land sales. I mean, it's not going to be that we'll never do land sales, but it's just further down our priority list on each site after we'd looked at additional outlets and bulk sales. So I don't think that we want to give a specific number because it is going to be lumpy. And that's the same as commercial. Most of the schemes that we take on in the future will be simplified projects. So we won't have as much commercial but we still do, nonetheless, have some commercial properties in the portfolio. And as I alluded to, if the opportunity is there to convert those to cash. The timing is right, we will certainly do so. We're not splitting out the -- that order book the 55%. I mean, it is a combination, as you would imagine, of private, bulk and affordable. We're not giving a specific, but we've given some helpful guidance in terms of about 55%. And Duncan, just on?

Yes, Gavin, on the Help to Buy on the open market private element. So I think we've said historically in the mid-30s percentage participation. We have seen that nudge up a bit into the 40s and we're not surprised by that given the, obviously, the -- some of the features in the scheme, and it's obviously noisy as you then move into the changeover of the schemes as well. First-time buyer has been, again, sort of consistent with what we've said previously around the low 40s.

[Operator Instructions] We have no further questions. So if you'd like to continue.

Okay. Thanks, Paul. If I can just take the opportunity to thank everyone for your attendance this morning. And we'll be dialing off now, but of course, some -- always available for anything, any additional questions that anybody might have. Okay. Thanks very much. On behalf of self, Duncan, Tom. The rest of the Crest Nicholson team. Thanks for your attendance this morning.

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