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

Ladies and gentlemen, hello, and welcome to the Crest Nicholson Interim Results Presentation for the 6 Months Ending 30th of April 2021. 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; and Duncan Cooper, Group Finance Director, to begin. Please go ahead when you're ready.

Thank you, Maxine. Good morning, ladies and gentlemen, and welcome to our half year results presentation for the period ending 30th of April 2021. I'm Peter Truscott, Group Chief Executive, and I'll be presenting alongside Duncan Cooper, Group Finance Director. We'll be joined later on by Tom Nicholson, Chief Operating Officer, for the questions-and-answers session. And I do very much hope that this will be the last time that we'll have to be presenting remotely, and that come January next year, we'll be presenting to you once again in person. Photograph on the front cover is out of our scheme at Horly and Surrey. These homes are taken for our new house type and represent the type of scheme with low-rise houses that we're focusing upon going forward. And I'm very pleased to report that this is also a profitable scheme for us. So turning to this morning's agenda. I'll run through the summary for the half year and the market overview, and Duncan will then present the more detailed financial review. I will update you on progress against our strategy and give you a summary around the forward outlook. Finally, we'll have plenty of time at the end for Q&A. So the half year summary. We've enjoyed a very strong first half performance across all of our key metrics. Our adjusted profit before tax is up to GBP 36.1 million. Net cash was over GBP 130 million, a swing of more than GBP 200 million versus this time last year and also with reduced land creditors. This was a real underlying performance improvement in every sense and built upon the strong full year '20 cash performance. Our order book at 93% cover for this full year really does give us plenty of visibility and security as we go into these final months of the financial year. Strong forward sales position reflects the market in which we're operating at present, taken together with the strategies that we've used to capitalize upon these conditions. Pleasingly, there remains plenty of appetite for properties completing beyond the September Stamp Duty Holiday deadline. As already mentioned, we've made excellent progress against all of our strategic priorities, and I'll talk through the detail of this later on in the presentation. Also, as you all no doubt have seen, we've agreed to sell our share in the Longcross Film Studio to our joint venture partner, Aviva, for a consideration in excess of GBP 45 million. This is expected to complete later in the summer. Transaction demonstrates sound asset management as we trade out of a noncore asset in order to leave further firepower to invest in our core business. And of course, we do retain the rights to at least our share, the 1,700 housing units on the balance of the site in what is arguably one of the best residential development locations in England. As you can see, we've been very active in the land market in the period with 2,682 plots approved for purchase. These being both drawdowns from our strategic land portfolio as well as activity in the open market. The house type range and cost base are making us increasingly competitive in what has been a slightly tougher land market but importantly not at the expense of margin. 26.5% gross after deducting for sales marketing expenses. Like for like, this is just ahead of our full year '20 land acquisition margin, when implied overheads taken off demonstrates an operating margin of around 21% on these purchases. So if we just pause and reflect for a moment, just under 2 years ago when we as the leadership team joined Crest Nicholson. The business was losing altitude rapidly. Cost base was too high, as was its overheads and selling expenses, almost all of the products bespoke and generally it had lost direction operationally. The external perception was one of a challenged balance sheet. These shortcomings have now all been addressed. A standard house type range is being developed and these homes are being rapidly deployed across our sites backed up by high quality and consistent specification. Overheads and selling costs have been reduced dramatically and are now fit for purpose. With the strongest leadership team running our operations that I have ever worked with, strengthened again in the functional director roles in our division in this period. And finally, as others point out, at the outset of my tenure, it was simply an inefficient balance sheet that we inherited, not a weak one. No one today would see this as an impediment to our future prospects. Now that I am confident Phase 1 of the turnaround plan is being completed, we can start to look forward towards the future and build upon the positive legacy that Crest Nicholson has always enjoyed. All in all with the strength of the balance sheet and a highly efficient operating platform which is giving us competitive edge in the land market together with the benefit of good market conditions, we are very well set up for and have a clear trajectory and ambition for growth. We've operated in a good trading environment in the period. The government's decision to keep the housing market open and its support in the form of the Stamp Duty Holiday and its help to buy product has offered a strong underpin to these overall conditions. But beyond that, the dominant factor is the lifestyle choice that people are taking. Buyers are choosing homes suitable for home working and with garden space, towns and villages outside of or close to the major [ locations ]. This is against the backdrop of strong lending environment with additional mortgage products coming through all of the time, including, importantly, some now suitable for first-time buyers. Notwithstanding these positive factors, there have been some short-term challenges on the operational side in the period, particularly around the availability and pricing of some materials. This has gradually become more acute, but overall has been managed well by our teams. At times, it has been a battle, and we expect it to remain so for the next 6 months or so but we are invariably finding the answers and in relation to any commercial impact covering additional costs through gains in other areas, including some modest house price inflation. Land availability, particularly for smaller up and ready sites has tightened a little in the period. Not surprisingly, as housebuilders, who paused last year, are now playing catch up, mainly around outlet numbers and mix in the context of the strong market conditions that I've described. Overall, though, there's been a good degree of discipline amongst market participants where Crest Nicholson have acquired what land we need at solid margins and underpinned by robust assumptions. Further challenge has been around combustible materials. As you know, we jumped on to this issue very early on and took a rigorous review and -- undertook a rigorous review of our potential liabilities. We have had from the outset a very detailed review process that Duncan and I are involved in on a monthly basis. The latest information available to us has meant that our liabilities within our provision had to be revised upwards. We are, of course, getting through the work to resolve these buildings of concern and do have a good line of sight towards our final position. But to finish up before handing over to Duncan, the fundamentals for us remain very strong. There has been for some time and remains strong political support for the sector to build more homes. At present, we believe for the foreseeable future ahead, the demand side for homes will exceed the supply side. So at this point, let me now hand over to Duncan.

Thanks, Peter. Good morning, everyone. I'm going to run through the usual finance slides today, but also provide some updated guidance on how we see gross margin evolving in the future, something I started back at the prelims in January. I also want to give some clarity on how to think about the accounting for the Longcross Film Studio divestment we announced back in May. But before I do, I would like to echo and build on Peter's point about how we see the business performing. At present, all elements of our strategy are delivering as we expect, and that's translating into a strong rebound in financial results following the disruption of COVID-19 last year. It's also giving us ever increasing confidence about the route back to the margins we should be delivering. And hopefully, I can convey some of our insights today. Slide 1 then on the income statement. Revenue at GBP 324.5 million, up 35.2% on the prior year, and adjusted gross profit margin rate up 450 bps to 19.5%. That improvement in gross margin is clearly really pleasing, and it's been delivered in spite of some of our legacy schemes still weighing on the P&L this year, as I outlined in January, albeit less so than last year, hence, part of the year-on-year improvement. Unfortunately, those schemes will be more impactful in H2 based on when we recognize the revenue and profit on their completion, and I'll come on to outline more detail on this later. The other contributors to this improvement are the benefits being delivered from the specification savings, now embedded across the whole portfolio and also the impact of the replan savings on some schemes starting to now come through. We've also managed to deliver further efficiencies in our sales and marketing costs year-on-year as well. Adjusted administrative expenses down 6.9% to GBP 23.1 million, and that includes repaying the GBP 2.5 million JRS grant in December last year, which then delivers adjusted operating margin up from 4.6% last year to 12.3% this year. Adjusted income tax of GBP 7.3 million, reflecting an effective rate of 20.2%, which delivers an adjusted profit after tax of GBP 28.8 million. We then have a GBP 0.2 million exceptional credit, which comprises a combustible materials charge of GBP 7.9 million, offset by the reversal of the 7.5% sales price reduction assumption that underpinned the NRV provision we booked this time last year and the remaining elements of that provision, which we don't forecast needing to use, generating an GBP 8.1 million credit. Profit after tax of GBP 29 million and an adjusted basic EPS of 11.2p per share. Finally, and in line with our previously announced policy of 2.5x cover, the group has declared an interim dividend of 4.1p per share payable in October this year. Moving on to the next slide. And consistent with the market backdrop, we have delivered a stronger year-on-year SPOW, up to 0.69 for the half and now followed the profile of a good January building throughout the spring selling season into March, and then we have maintained a good selling rate since then. Outlet numbers were down on prior year, and we continue to see COVID-19 affecting time lines on the overall acquisition process and technical and planning approvals of developments. We do expect outlet numbers to build back through the remainder of '21 and into '22 as these impacts recede. We may change how we report unit completions this half and going forward, reporting JV units at 100% of their unit count, not our 50% share and to also present on an equivalent unit basis, which means we allocate the proportion of the unit count for a deal to any element of the deal that generates a land sale. Adopting both these changes aligns us with the commonly adopted approaches across the sector. On to ASPs, and our private ASPs continue to reduce, driven by 2 factors. Firstly, the unwinding of the remaining built-out London portfolio. We now only have 1 unit left to reserve. And so we expect that to be fully unwound by the end of the year, and that would then leave us with our 50% share of the as-yet undeveloped London Chest Hospital 145 units of the 290. Secondly, as our Midlands division continues to mature, it has an increasing geographical effect on the price/mix. Looking forward, we would expect the private ASPs continue to reduce, driven by the location of our schemes and the house types we are building. Both bulk and affordable ASPs are up on the prior half as a result of the change to an equivalent units methodology. And we've also seen a year-on-year improvement in the level of discount given in these bulk deals, i.e., a reduction in this level as the market has strengthened, and we have been able to be selective about which offers to accept. Coming on now to the exceptional items taken in the half. The first item is a net combustible materials charge of GBP 7.9 million. This comprises a GBP 10.3 million charge based on our latest view of the remediation works required across our legacy estate, where we are the owner of the building or where we believe we have a legal obligation to remedy the building. The charge is split approximately 50-50 in terms of additional cost to remedy buildings in the scope of our original charge and then newly identified buildings or component parts of new buildings that have now come into scope. We've also successfully secured GBP 2.4 million of recoveries from third parties in the half and are confident that further recoveries will be made against these new works identified, but cannot forecast these in the provision until they are more certain. The changing nature of the regulations and different risk appetites in appraising noncompliance are making this a complex and challenging area to estimate. However, as Peter has touched on, we continue to operate and have from the outset a rigorous internal review process and in the half, made good progress with completing identified remedies, spending GBP 1.9 million. Given the strong market backdrop and our enhanced trading performance, we've also reassessed our inventory impairment provision at the half. The GBP 43.2 million taken this time last year was within the context of consensus expectation that the housing market would deteriorate significantly because of COVID-19. And clearly, the market has performed strongly since for a variety of reasons. And accordingly, we have revisited the 7.5% residential sales price reduction assumption in our provision. Removing that assumption results in a GBP 7.6 million exceptional credit. However, we have retained this assumption for the London Chest Hospital scheme, given its characteristics, and we've also retained the 32% assumption for commercial units. We expect approximately 50% of the remaining GBP 24.7 million provision to be utilized in the second half. Finally, removing the 7.5% assumption on our shared equity loan portfolio generates a further GBP 0.5 million credit, the GBP 7.6 million and the GBP 0.5 million being the GBP 8.1 million I referenced earlier. I want to now briefly outline the accounting treatment for the Longcross Film Studio divestment. We sold our 50% share to our JV partner, Aviva. And subject to completing the remaining contractual conditions in late summer this year, Crest will receive GBP 45 million of cash consideration and profit in excess of GBP 10 million. The Longcross scheme is held in a joint agreement or entity and is not controlled by either party. So it is proportionately consolidated within our accounts, i.e., turnover will be added to turnover, gross margin added to gross margin, and it will not flow through our JV line. And I outline on the next slide how this transaction impacts gross margin thinking for this year. Given this materiality, we had to announce the transaction at the point of exchange, but obviously under accounting rules, we'll not recognize its impact until legal completion. And as Peter has touched on for the avoidance doubt, we still retain our 50% share of the remaining 195 acres development of Longcross Garden Village, which we expect will deliver around 1,700 homes and is allocated in the Runnymede Borough Council Local Plan. I want to give an update on the gross margin evolution that I started to lay out at the prelims in January. The 2 donut charts reflect the anticipated composition of full year gross margin rate for this year and next. The brown and green segments highlight the continued drag of the weaker legacy schemes we have previously disclosed are having on gross margin rate this year. We will recognize the 2 agreed bulk deals at Sherborne Wharf, Birmingham and or Old Vinyl, Hayes in the second half. And the effect of that and the effect of those 2 schemes will be to dilute full year gross margin from the 19.5% we reported for the first half to around 18.5% for the full year. If you then add on the incremental benefit of the Longcross deal, we anticipate the full year gross margin rate outturn will be around 19%. As we look into next year, we anticipate gross margin rate to increase to a minimum of 21%. So a 250 bps increase on this year's underlying rate of 18.5%. This increase is driven by the working through of the poorer sites as the chart show, and the benefits of new land purchase starting to feed in with our operational efficiency program now overlaid. Back in January, I suggested we would see a inflection in margin rate in full year '21 and then a much stronger inflection again in full year '22. However, because we've not experienced the overall 7.5% price deflation, that margin rerating has happened sooner. That said, we will see further accretion into full year '22 as well, but obviously off a much stronger starting point. An overhead -- an update on overheads next. We exited full year '20 at GBP 50.3 million. And while I'm not going to give explicit guidance for this year's outturn, I will quickly touch on the main building blocks as we look to the full year. If we assume a small level of inflation for costs other than base pay, the other key increases that feed into this year's overhead outturn are the repayment of JRS income and a higher year-on-year bonus and share-based payment cost based on expected performance against targets for the year. But you can see that although these impacts have been offset by the effect of annualized savings from last year coming through and further savings identified this year. Our organizational structure is now fully embedded following last year's review, and we continue to operate tight controls in this area. Before the pandemic arrived, we had already adopted an agile working policy, and we see this approach translating into lower office based costs and business travel, which will endure after restrictions are lifted. As the group delivers its future growth plans, we expect the current level of overhead to -- will scale up more slowly, thereby continuing to lower our overhead as a percent of sales and reflect further efficiency in our operations. On to the next slide, covering cash management. I'm going through this one quite quickly. Cash generated from operations, obviously, significantly impacted by the COVID-19 disruptive half year comparative. Trading profit and inventory movements normalized. The cash contribution to the pension scheme is higher than last year, reflecting the deferment previously guided, and you should still expect the GBP 11.3 million for this year, reverting then back to the GBP 9 million. Income tax cash in line, and then the key movement in the reconciliation being a repayment of the GBP 250 million RCF compared to being fully drawn this time last year. And that obviously translates into lower finance expenses as well. The next slide summarizes the balance sheet metrics. We reported GBP 130.4 million of net cash at the half year versus GBP 93.3 million of net debt and including land creditors, GBP 48.1 million versus GBP 317.2 million. And when you take those 2 comparative swings, you can see why we consider the changes delivered to the balance sheet to be transformational. And of course, both of these metrics are stated before the Longcross cash inflow of GBP 45 million due in the second half. Average net cash in the year was GBP 80.5 million compared to average net debt of GBP 125 million, reflecting the continued discipline and rigor being applied to work in progress management, general overhead expenditure and any land commitments. And under IAS 19, the pension scheme moved from a GBP 8.4 million deficit to an GBP 8.6 million surplus, principally due to a change in the discount rate. Next slide covers the usual land update. We added 760 plots to the short-term land portfolio in the half, including at Nuneaton, Stowmarket and Milton Keynes. The GDV in flex upwards year-on-year principally because of the 7.5% sales price assumption removal. And finally, as Peter has referenced in the half, we approved 2,682 lots for purchase at a gross margin of 26.5% after sales and marketing. And I'll let Peter talk in more detail about our optimism in how that land portfolio is now evolving. So to summarize, a strong first half trading performance with forward sales of 2,771 units and GBP 691.8 million GDV. We've made transformational progress on the balance sheet, leaving us well capitalized for future growth and enabling us to give full year '21 net cash guidance of around GBP 170 million, including the GBP 45 million Longcross cash consideration. And finally, in terms of full year '21 guidance on earnings, our current company compiled and published consensus is GBP 85.2 million, which adjusted for the Longcross contribution guidance becomes GBP 95.2 million. And today, we are pleased to be announcing we are upgrading expectations to be in excess of GBP 100 million. And with that, I hand back to Peter.

Thank you very much, Duncan. And let me now update you on progress against our strategic priorities, which we set out in January last year. And just to remind you of what these are on the wheel, and I'm going to run through each of these more fully over the coming slides. But let me just highlight a few initial points now before I get into the detail. Firstly, we will remain -- we'll maintain a rigorous approach to our operational efficiency. I mean this will continue to underpin everything that we do. Secondly, our margin recovery, this is our #1 financial priority going forward and also our increasing confidence to participate in the land market. Our operating model and balance sheet now enable us to do so and this is the key to growing the business in the coming years. We continue to give a lot of attention and focus on place-making because it's what Crest Nicholson is well known for and what we do really well, and this is going to continue. On the slide are images from our Campbell Wharf scheme alongside the canal in Milton Keynes. Here, we're producing great apartments with outside space in one of Milton Keynes premier central locations. And even in today's market conditions, where buyers are often preferring houses over apartments, schemes like this, which are simply great places to live, remain popular and also profitable for us. As I've mentioned, the sale of our share of the Longcross Film Studio was about managing our assets well. In this case, generating cash future investment in our core business and also pleasingly, achieving a solid profit on the disposal. And we'll continue to focus upon growing our outlets. Disappointingly, the planning system has been slower than we would have liked recently, leading to a fall in outlet numbers in the period, but we are addressing this and being very active in the land market. We expect to convert this activity into outlet growth as we go forward. As already mentioned, there is a little more competition at the moment for smaller sites that are ready for immediate development, but less so for larger sites where we're finding the pricing regime is more stable. We remain focused and disciplined and leveraged both our efficiency, which makes us very competitive and also our relationships. We do have a strong reputation as individuals for doing what we say we will do once terms are agreed. And this remains important to land sellers and their agents. Overall, the newer sites coming through encompass houses rather than apartments. They're in the locations that are most in favor with buyers at the present time, and we'll have an average -- a lower average selling price profile and are suitable for plotting our standard house type range. Our land buying activity in the period has encompassed both drawdowns from our strategic portfolio and also new open market activity. And the margins that we've been able to acquire land at are an important part of our plan to build these margins back to industry level normal -- industry normal levels. As touched on earlier, let me just remind you of some of the work that's already been completed in this area and to pinpoint what is still to come through. The [ Southern ] cost savings and overhead profile is now fully embedded. And you will have seen from Duncan's slides that the overhead number is now well and truly under control and now can be leveraged. Specifications savings -- specification changes and the savings that come with this initiative contribute both to our current portfolio margins and to our future cost base and with it, our competitiveness in the land market, where the benefit will come through in the future. This is also true of plotting efficiency. And as I never tire telling colleagues, this is a task that is never completed. We do, and we'll continue to do, review our schemes time and time again, both in order to extract additional margin, but also, as has been the case more recently, to help mitigate against any impact of cost increases. The new house type range rollout continues to go ahead of pace. There are now numerous completed units across our divisions, and we're very pleased with what has been produced. This year, over 400 of our completions will be from this range, 80% of our private houses next year and 80% of all our houses, including affordable homes will come from this range by full year '23. Here are just a few examples. Those that have been built so far. And these are photographs. Actually, these are not CGIs, these are homes that have been built out in the field. And you can see here the wide variety of elevation or treatments that can be utilized on this house type range. And this does give us great flexibility when seeking to gain planning consent. And is also consistent with the government's approach on more localized design codes going forward. As you will see, overall, the homes are stylish. They're also efficient to plot, simple and cost effective to build. Pleasingly, our 5-star customer service status has been retained and with a significantly improved overall score. Customer-facing experience has been greatly enhanced by the launch of our new website this spring. It is a much easier interface and a contemporary look and feel. And this is dealt with what was a core weakness for us in our sales and marketing offering. Similarly, a new CRM platform is introduced in the period. This gives us powerful insights and aids our reporting. We now have more targeted lead generation with better conversion rates. This platform has contributed to our much improved sales performance in the year-to-date. Our sales teams have a culture of pride in Crest Nicholson, its products and how we conduct our business. The multichannel strategy is about giving us diversified income streams that will be complementary to our private market operations. The risk profile is different, and we get a better return on capital employed. Our offering will be wholly aligned to our placemaking principles, which remain tenure neutral. We have over the period continued to demonstrate an ability to divest out of our existing partner schemes. Additionally, we have further deals agreed and in the pipeline for the second half of this year. Going forward, though, we see stronger demand for single-family homes, in particular, those targeting key worker accommodation. This is the market that our counterparties are gravitating towards. And the number of these potential partners also continues to grow. For example, during the period, we signed our first deal with Man Group for a 192 unit scheme of affordable and PRS homes near to Cambridge. There remains significant interest in this part of the market. And increasingly, we're discussing repeat business across our pipeline and building longer-term relationships. As with subcontract labor, materials and land, there is also strong competition for talent in our sector at the highest levels in our business. In addition to the significant strengthening of the executive team and managing director roles last year, we have now this year recruited some very talented individuals in functional director roles at a divisional level. We continue to focus on diversity and inclusion, introducing a number of new initiatives suggested by our D&I forum. Our succession planning has been strengthened considerably, not least through the quality of the individuals that we've recruited into the business who augment the talented group of people that we already have here in Crest Nicholson. We have visibility around the next generation of leaders, functional director, managing director and executive team level, such that our necessity to recruit from outside the organization for these roles will reduce significantly going forward. Also, over time, of course, we must continue to produce our own talent. We've launched a number of new initiatives this year with government-backed kickstart program aligning into this. Our aim is to bring in up to 50 new entry-level trainees into our team this year. There are only 2 characteristics that we need. One is for the individuals to be very bright and two, them to have a great attitude. Sustainability is now firmly embedded in our business, underpinned by a commitment from us, the business leaders and strong governance. New targets are being set and these are linked to remuneration. We have in the period made progress against our sustainability targets to 2025. These being to reduce scope 1 and 2 intensity by 25% and waste by 15% and to procure 100% of our electricity from renewable sources. Going forward, our focus will be on the future home standard and will input the task force on this. We'll also turn our attention to developing our climate change impact strategy and set out our goals to net zero. Here are some of our initiatives in action. Our new house type range, for example, we have simpler, more efficient designs, which reduce waste and utilize off-site manufactured components where possible. The whole standardized approach is more efficient and sustainable for us across multiple levels. We're reducing our energy usage and with it carbon emissions where possible for avoidance, where this is impossible through reductions and finally, by substitution to more environmentally friendly alternatives, such as biofuels and renewable electricity. And we have strong site-level monitoring tools available to us. And this gives us great visibility through dashboards and creates genuine win-win scenarios in this area. Safety, health and environment will always be our #1 priority. Forefront of this in Crest Nicholson is our culture and our processes. We've revamped our committee structures in this area, increased director tours and inspections on our sites and introduced further site protocols, all of this being enhanced by the development of better reporting tools and remote monitoring. Additionally, our COVID-19 specific measures are also continuing to work effectively. So to summarize, as can be demonstrated by this very pleasing set of results, and as outlined in this presentation, the turnaround of Crest Nicholson business is progressing very well. We've made strong progress against all of our strategic priority areas. We have had suitable confidence in our prospects to have today further upgraded our earnings guidance for full year '21 to at least GBP 100 million. We have growing confidence as we look toward 2022. Our earnings for this year are supported by a strong order book, now over 93% covered, our order book being up over 20% year-on-year, and the margin rebuild is now our main financial focus. This is approaching 13% at an operating level this year. Stronger margins still expected next year as we build back to industry normal levels in the range of 18% to 20% in the medium term. Our activity in the land market is a clear demonstration of our confidence and ambition to grow volumes alongside our margin rebuild. We will be ambitious as we look forward. We believe that we have the operating platform and balance sheet to enable us to grow, and this will include into new geographical areas. And we look forward to setting these ambitions out in detail together with our financial targets at our Capital Markets Day event on the 20th of October 2021. Thank you for listening, and we'll now move on to questions and answers.

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

Peter only, maybe 3, if possible, please. The first one was just around the site numbers and if you could give us a feel of how long do you think it might take to get back to the site of 63 that you were at through FY '20? And I guess, what gives the confidence that the planning system improves from here to allow that? And I guess, maybe wrapping that up as well, just to what extent that issue may have affected your volume expectations this year and next year potentially? The second one was around gross margin. Perhaps you could just put some numbers perhaps around your house price and build cost experience in the first half? How you see it trending? And I guess whether there's any net impact of those issues for the gross margin this year? And then the last one was just on the balance sheet, please. I was quite surprised to see average cash is as high as -- average [ net cash alone ], GBP 80 million in the first half. Because I guess we looked last year and you were GBP 0.10 cash start and finished with average net debt of GBP 100, so quite a big difference in how the average is playing out against the point end. So perhaps you could just explore that a little bit more? And should we now think of Crest as an average cash business going forward?

Thanks very much, Will. And Duncan will pick up some of those. I mean just with regards to the planning system, of course, we, like everybody else, has very, very low expectation of the planning system, but we're used to navigating it. I think there just have been some additional challenges during this COVID pandemic period in just getting things done. And it's not just around planning, it's all of the other regulatory approvals. So you need to be able to get started and get on site and also just some of the other processes around that are outside of planning just in order to get orders placed and materials on site to get a meaningful start. All of that impacts, but it is mainly the planning system. And I think as we move out of the COVID period, things will start to normalize, and that's why we have confidence. Duncan will talk about the evolution of the numbers in just a moment. In terms of inflation, I think house price inflation 2% to 3% is probably what we're seeing. It's very much product and location driven, obviously, less so on apartments, more so on houses, particularly in great locations. Build costs overall, probably around 3%. Not a lot on material -- on subcontract labor. It's mainly around materials. And of course, materials are only about 1/3 of the overall cost equation. And it tends to be -- there is probably quite a few materials where it's been fairly extreme. But there are also a lot of the materials where there's either been no inflation at all or where through the group buying, we've actually been able to get some gains. So we see the headline things around perhaps concrete, steel, timber, but it's not all upwards, but where it is upwards, it can be quite hefty. So overall, about 3% to the cost base and 2% to 3% on selling price. So Duncan, just on balance sheet and evolution of margin.

Yes, just continuing, Pete, on gross margin, first of all. I mean yes, what is happening to the house price inflation on build cost. But obviously, on that improvement, again, year-on-year, obviously, the most sort of overwhelmingly strong driver and component being that we have not needed the 7.5% price deflation assumption that we referenced previously. And as I referenced earlier on that we're seeing less impact from some of those dragging schemes year-on-year as well. So the other benefits we've got that we've talked about that are important, such as with respect to the replans, they all become more impactful going forward, but it's the washout of these poorer sites that are helping contribute to the significant step-up and also why we can give the confidence that we get to the position next year. In relation to the net cash piece, no sort of single item really. It's -- if you look at the cash walk on year-on-year, part of that the ying and yang of where we've got to in terms of some of the P&L -- booking some of the P&L charges and requiring that inventory provision is because we have taken and managed to achieve good levels of bulk deals. We've been disciplined, as Peter has talked about in relation to land spend and build spend and outflows attached to that and all other areas. Should you think of Crest as a net cash business going forward? I mean I think partly why we've referenced the Capital Markets Day in October and laying out plans for growth is we are aware with that cash position that we need to allow out some further thinking on that. And that's very much in our heads. But yes, I think the business and our forecast says, we've got a very, very strong balance sheet for the foreseeable future. Yes.

We always referenced it being inefficient because there was too much work in progress out there in the field. Our WIP turn was really low by industry standards. And whilst we're not publishing what our WIP turn is, it is considerably better as the new house type range gives us the ability to build faster and more efficiently.

Our next question comes from Chris Millington from Numis Securities.

Just first one, just around product availability and build. It's clearly quite a tight situation in both the new and the second home market. I'd just like to understand where you are there. The second one, I just wondered if I could push a little bit harder on Will's past question about volume ambitions as we look forward to FY '22 and whether or not you're kind of getting back to that kind of '19 level is a possibility. And then the final 1 I just want to ask about really is your point on further overhead efficiencies coming through in the admin cost. How low do you think that can go in a normal environment for yourselves?

Yes. I'll let Duncan pick up the volume -- sorry, Chris, the line wasn't great. On the first question, were you asking about build availability product range?

Sorry, Peter, it was product availability and just how build is progressing at the moment?

Yes. I mean -- I think it's manageable. It's very different to say this time last year as a lot of people are ramping up at the same time. It's really about managing it well. Lead times for pretty much all materials have gone out. It does feel to us as if it's going to be something that will correct itself in sort of 3 to 6 months. It is a bit of a lump in the road really as the supply chains have been fractured. I think the social distancing has affected some productivity in some factories. And you also have sort of wider worldwide factors in terms of where materials are going at any point in the time. But some of those we're already seeing at a macro level are starting to correct themselves. So I don't see it as being a long-term issue. I think this is more -- materials aren't in the right place at the right time now. I suppose HGV drivers would be another. But it will be corrected. It will settle down. But I don't think it's ever going to be easy. I don't think it ever has been easy, but it is manageable. Don't pick up the volume. But just on the overhead. I think the overhead is around the right sort of level now and you would expect to see cost of living rises perhaps added to that. There might be ups and downs regarding bonus schemes, LTIP, things like that, depending on what year it is, but the base is about the right level now. And of course, we can leverage that because we have got more capacity in our organization.

Yes. Chris, on your point on volumes. I think what we said last time was we would hope to sort of out turn '21 somewhere in between where we were for '18, '19 prepandemic at 2,900 units and '20 at 2,200 units. So I think somewhere in the middle of that as we build back to that capacity is a sensible expectation for '21. And then you look into '22, I think we would expect a little bit of volume growth. But equally, at the same time, recognize that there are still some challenges in terms of getting that back.

Yes. I think we have to be a little bit cautious on volume growth next year just because of where the market is on materials and labor availability. If that frees up a little bit faster, then perhaps we're being a bit cautious. But at the moment, it is what we're seeing. So we're reflecting that in the way that we're looking at it for next year.

Our next question comes from Aynsley Lammin from Canaccord.

Just 2 questions for me, please. First of all, on the land market. You obviously mentioned a bit more competitive. Just wondered if you could give us a bit more color there. Is that, again, just people coming back in and things should settle down into next year? Or do you see a structural kind of drivers to start to push land prices up from here more sustainably? And then secondly, just interested in your latest thoughts on the kind of development tax that's obviously been under consultation by the government. And what you're hearing in the industry? And what are your expectations and thoughts are around that?

Yes. I'll let Tom pick up the second one because he's been directly involved in those meetings. I doubt that there's a lot more insight that we can add, but we'll at least discuss it. I mean on the land market, the smaller sites that can generate immediate outlets are in more demand than they have been for a little while because last year, a lot of participants in the market exited the land market, outlet numbers fell and therefore, people are trying to build outlets up quickly. So those sites are more competitive than they have been for a little while. At the same time, we are very much more competitive ourselves, so we can participate in that market and acquire what we need at the margins that we need to acquire. I don't think anybody is going crazy out there. So I wouldn't want you to think that margins were being slashed. I think the participants in the market are very disciplined, including ourselves. There is still more value though, in the bigger sites, simply because fewer people can participate in those, and there is better value to be had.

Yes. Aynsley, on the thoughts around development tax piece. So the government is committed to bringing this in to find the GBP 2 billion. And obviously, treasury are committed to finding the formula to bring it in. It will be based on what they see is the profitable house builders. So I think it's fair to say it's not aligned to potentially those who delivered high-rise apartments. It is more about actually those who they believe can afford to contribute to the scheme without impacting volume and growth aspirations of the businesses. So we're still waiting for the detail of the formula they're going to be using, but we're expecting it to be a percentage range in addition to the corporation tax. So that's where we are at the moment, and we're expecting an update in the next month or so.

Our next question comes from Gavin Jago from Barclays.

A few if I could, please. The first one is just following up really on the kind of the site size and the land market. I wonder if you could give us anything to go on in terms of how your site sizes have changed over the last couple of years and I guess, ambitions to move them forward or otherwise over the next few years. Second one is just around government support. Maybe some information around how Help to Buy has been playing a role in reservations over the last few months? And then the final is just around, I guess, the change in presentation around the JVs. Could you just please just help us work through the proportion of volumes that were JVs? And I guess what you'd expect them to be going forward? I think it was circa GBP 13 million of revenue wasn't it? But just to get a feel in terms of how we're going to be modeling this going forward, given there's been a change?

Sure. Duncan will pick up the question on JVs. Tom is obviously on the call [ face ]. So he'll speak to you on the market and the government support schemes. Just in terms of the land market, I don't think our average site is going to be an awful lot different to what it was previously. A proportion of what we're buying are drawdowns from our strategic land portfolio. So those tend to be larger sites. We're also happy to participate in the market for larger sites because we've got a multichannel approach that we can take to ensure that we can work through those sites quite quickly. We don't just hold the assets long term and have an inefficient balance sheet. That's not what we're trying to do. The smallest sites, I'd say those are around sort of 75 to 125 are the most competitive and those with a planning consent that's ready to go. We're getting most success in the sort of, I suppose, 150 to 250 unit site. That's where there might be a sweet spot. And of course, the bigger sites were drawn down from strategic land portfolio. So Tom, just on the market.

Yes. So as Peter referenced, the market continues to be really robust and customer demand strong. Those using -- we've got 2 main government systems, the Stamp Duty Holiday. We're taking reservations beyond the tapering out date. So we don't see that as actually a major concern. The overall consumer demand for wanting to move into better space of their lifestyle postpandemic, I think we see that as continuing to drive and there's obviously good confidence that we see in the long term. The Help to Buy, that transition to Help to Buy 2 worked incredibly well for us. There was no impact to the delivery of the product. Obviously, it came with a couple of restrictions. The difference is the first scheme, which was -- it was only first-time buyer only, and there were obviously the geographical price caps. So we have seen in a number of geographies that Help to Buy 2 scheme not available to our customers, but we are not seeing an impact in the sales rate. But it obviously is a wider piece. It is probably causing a hurdle for a first-time buyer or a customer who's got a low deposit of 5% deposit because in the new homes market, the mortgage products are not available outside of Help to Buy for a 95% loan-to-value mortgage. It's available in the second hand market. So that is a challenge. But I would say the -- it's not a change, which is a concern to us. And certainly, obviously, we've got a number of products, which are -- we're able to offer instead of those such as the shared ownership product, et cetera. So we don't see that -- we don't view the tapering off of these enablers is a major concern for us.

Are you able to give us any figures on what proportion of reservations Help to Buy kind of is versus what it was, I guess, under Help to Buy 2 versus 1?

Yes. Gavin, so we said historically sort of in the mid-30s percent. And I think consistent with the rest of the sector and the HBF data that number is obviously reducing as you'd expect on Help to Buy generally, but I wouldn't get into splitting the 2 schemes per se. And on your point on equivalent units, which you asked, yes, so you're right, the GBP 13 million of joint venture revenue. I wouldn't fixate on the unit equivalent -- sorry, the 100% piece per se in terms of the gross up. We just think that is a more sort of representative and reflective effect of the actual production output of the business. And therefore, obviously, want to state that in the unit count and also the effect that it has been on the -- on any other associated metrics. But more to the point of the question you're asking around how the joint venture builds up. So at just under GBP 1 million or GBP 0.9 million for the half and how to think about that evolving that -- last year, we only had this during the half in the comparative and a reduction from London Chest. This half, we've got Walton, Bristol and Harry Stoke. And I would expect that overall profit contribution for the JVs to sort of steadily double from a profit perspective into '22 and into '23, as those JVs mature and become more contributory towards the P&L. I'll give you the units.

Our next question comes from Charlie Campbell from Liberum.

I have a couple of questions. I think I got a reasonable clue on, but I'd ask anyway. So the first question is on the forward sold. So you've told us you're 93% of the year, just to save me going back and checking this in the past. I'm not sure you've ever really given this number before, but just wondering, in your experience, what a representative number forecast might have been kind of at this point of the year to put that into context for us? And then secondly, you talked about quite a strong market. And I guess, we're aware of that. But I guess also as we're getting into summer, I just wonder what your views are about kind of seasonality. Do we see seasonality again? Or are there still so many people just rethinking their lives and where they want to live, that actually we shouldn't really be thinking about the seasonal lull at all? Yes. Just wondering what your thoughts are on that and maybe you've already seen some of that in visitors, either kind of on the ground or online.

Yes. I'll let Tom add if he likes in the end. But I mean seasonality, there's always been an element of it. And I think we're seeing more normalized conditions coming through. So it feels a little bit more seasonal, but they are not really, really transformational swings one way or the other in the way that there were probably softer seasonality that I'm seeing. And just on that forward sold before, I'll ask Tom to add anything. I don't really want to go into what we didn't used to do. I think we've got a strong forward sold position at this point at 93% for this year. I'm used to that being a metric that would be available and we are where we are. But I don't really -- I wouldn't really know without looking at it historically where this business was or why it didn't necessarily provide that number. So just on -- so anything you would add, Tom, on seasonality?

Just I'd say, I'd agree with Peter that it will be that you'll see, and we are seeing a slight flattening, and that's as expected, but it's certainly not as pronounced as perhaps that traditionally it would have been. And certainly, the forward lead indicators are still remaining very strong. So all our web registrations, web tracking hits our -- what we're seeing in terms of appointment making to our outlets are remaining robust. So I would see that we're in for a pretty steady and solid summer.

Our next question comes from Glynis Johnson from Jefferies.

I have 3, if I may. The first one, just in terms of the gross margin on the intake land. It's come down a little bit. You talked about a more competitive market. But can you just remind us, is there any other deductions that need to come off that gross margin to make it comparable to what we could see come through the P&L in terms of any other site costs? Second of all, in terms of the gross margin on the heritage land, if I phrase it that way. Can you just remind us how much the change of rolling out new housing range might change the profitability of that heritage land? I'm just wondering whether or not perhaps you'll see a new category of above 20% gross margin that will come in your little circular pie chart for the full year '22 and '23, which would be very helpful. And then lastly, just in terms of your bulk/intermediate products, you seem to be talking more about structured agreements, maybe framework agreements within there, how much of that business are you anticipating to become forward funding? And if so how does that change how we should be thinking about what comes through the P&L in terms of that growth potential?

Okay. I'll pick up the first one, which was just about the intake margin on the new land. It hasn't fallen. The 28.2% gross that we talked about in the -- at the full year '20, that was before deducting sales and marketing. The 26.5% is now post sales and marketing. So it's actually slightly higher than the equivalent period at the end of last year. It's just expressed in a slightly different way. And of course, to get down to an operating level, it's only overhead that comes off that. So it's now being presented, if you like, at a contribution level, at the 26.5%. So it has actually marginally improved against the last sort of reported numbers, not decreased. On the bulk and intermediates, we set out our strategy in January last year that we see that being in the sort of 15% to 20% range of our overall volume output. And the margins that we are targeting, that 18% to 20%, takes into account any dilution from that. We think the discounts on this will narrow anyway as we involve counterparties earlier and optimize the sites. But any dilution in earnings is already factored in at land purchase, and we're still targeting the 18% to 20% operating margin in the medium term as a result of that. And just on the heritage margin, Duncan, please?

Some benefit, but it's far more potent going forward. So if you look at what we've got in taking to the P&L this year, we've got the -- we have got a further and significant reduction in sales and marketing costs delivered through efficiencies, which is helping contribute. The specification savings and the common specification template now going across all of our schemes and some benefit on the replan benefit. But it's more as you look forward, it's that -- as you've alluded to, it's that new land coming in, which were [ bids ] -- all these efficiencies are enabling us to bid at more competitive levels to secure land at those rates that starts to become more impactful. But the main feature in the gross margin correction going on is the wash-through of those poorer schemes for this year. And actually, as you look into next year in terms of the rate, that's really only holding for them which we flagged previously as a challenge with -- in respect of that and the remaining provisions. So we will be through the mainstay of those poorer sites and have sort of unleashing effect on gross margin as a result.

Can I just follow up on that bulk/intermediate product. Actually, my question was, where are you going to forward sell that? How you do a contract rather like a partnership model where actually you have frame agreements, you sign a contract or forward sale, in which case you would take payments for land, part payments to build? Or is it still going to be that you will sell it at the point of completion, and there will be no recognition of profit up until that point? It was more about the model that you were going to run because demand looks a bit more like a PRS.

Yes. So sorry, Glynis, I misunderstood the question. Now it will be a combination of those depending on the site and what we decide to do at the time of acquisition. I think generally, we would get better value where we take on the land purchase and then we do a bulk deal afterwards in a competitive situation. So that would be most of that. Sometimes those are forward-funded and sometimes they're payable on legal completion. And also, I suppose with some of the biggest sites you might want to interact or we might want to interact with the counterparties a little bit earlier to offset some of the risk and to increase the cash flow on that particular site. So all of what you're suggesting is what we'll do. It very much depends on what site it is and the size and profile of that site.

Our next question comes from John Fraser-Andrews from HSBC.

2 for me, please. The first one is just following on from the timing of that 18% to 20% margin, Peter. I think that's the first time you've said that. And clearly, there's good visibility. The question is the timing of it, do we have to wait for the new land to come on stream? You indicated you bought at about 21% in the -- or secured land at 21% in the half year. So -- are we looking at a sort of 3-, 4-year time frame to deliver that kind of margin increase without any further price cost variation to that? So that's the first question. And then the second, on the bulk/intermediate sales. I hear you, Peter, that the 15% to 20% that you indicated back in January last year. Might we see that being somewhat less over the next coming years -- with the next couple of years rather with seemingly supply of housing being the main problem rather than demand?

Right. Let me pick up those. The 18% to 20%, I think, I've been reasonably explicit about that that's where we see the industry normal and I suppose, slightly more explicit about this time about and that's what we're targeting. But I think that's where we're getting to. We're saying the medium term, and I'm not going to give a particular time scale. I mean it's partly generated by the new land coming through, of course, it is but also partly around market conditions in the near term. If market conditions remained robust as they are now then I could see us getting there sooner. If market conditions started to produce a drag, then it might take a little bit longer. So we're just saying in the medium term. I mean on the bulk and intermediate, we see this as being a structural part of our business, and it's not just a defensive play when the market is tough. We think that we'll get keener pricing where the market is strong and probably weaker pricing when the market is weaker anyway. So I think it's always going to be partly reflective of that. And that's why there is also a range. It's 15% to 20%. And as you might imagine, if the market is so much stronger, it might be the lower end of that range, but if it's weaker it might be at the higher end. But we see it as being a structural part of our business plan. And I would also reiterate that return on capital employed is a really important metric for us. It's not all about margin. Margin is a great measure of the efficiency of your business. But pure valuation is driven by return on capital employed. And there is a balance to be struck here with both of those metrics. So I've given where -- with Glynis' question where I think we can get to on margin, and that does include any dilutive effect of PRS or intermediates, but we are really focused on return on capital employed as well. And this is a part of how we really build strong return on capital employed in the organization.

Understood. Just a quick follow-up then on the margin point. Duncan, you said is it just Farnham to go then for the wash-through of legacy schemes. So will we be looking at a clean situation from '23? Or is there still a bit more to go possibly in that year?

There will still be a little bit of Farnham in '23, John, given its rollout phase. But in terms of its materiality and impact on the P&L, it will be de minimis. Yes. It's not going to move the dial very much.

And our next question comes from Sam Cullen from Peel Hunt.

Just 1 from me. In terms of your comments around product availability, are you seeing different pressures in the wholly owned units or the JV units? So do you have more for sale in the JV stuff? And how will that evolve do you think kind of next year?

Not quite sure I understand the question actually, Sam.

Well, you're kind of alluding to the fact that the volume growth is going to be constrained a bit by product availability. Do you think material and labor availability is going to increase? Yes.

No. Sorry. I understand the question. No, not really. With the bulk and the JV sales, we tend to have sort of relatively small-scale schemes that signed up on prices, and we make sure that we're confident that we can deliver them with the materials and labor availability. So we're not going to overexpose ourselves in that area. And there's always a balance on where we get utilization of our materials and labor anyway. We are finding enough labor to build out, and we're finding the materials, but it's harder to manage them. There are longer lead periods on some -- you've got some inflation that you wouldn't want, some pricing, which the allocation is quite extreme. But we are getting there. But I understand why you're asking the question because there is an element of volume growth, which has been constrained by that. But it's not that we would just choose to rein in the PRS and bulk because of that or just concentrate on the private because there are contractual obligations. And also, it is, as I've said, an important part, an important strand of our overall strategy.

We have no further questions, so I'll hand it back over to you.

Okay. Well, thanks very much for your time this morning, ladies and gentlemen, and we look forward to seeing you in person, hopefully, in January with the prelims. Thank you very much and enjoy the rest of the morning.

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