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

Hello, and welcome to Crest Nicholson's preliminary results for the year ending 31st of October 2021. My name is Emily, and I will be coordinating the call today. [Operator Instructions] I will now hand the call over to our host, Peter Truscott, Chief Executive. Please go ahead.

Thank you. False start. Take two. Good morning, ladies and gentlemen, and welcome to our full year results presentation for the financial year ending 31st of October 2021. I'm Peter Truscott, Group Chief Executive; and I've been joined this morning by Duncan Cooper, Group Finance Director. Starting with the agenda for this morning. I'll begin with a brief introduction before handing over shortly to Duncan, who will go through the numbers for you in some detail. I'll then return and walk you through my summary of the last year, provide some market context and an early update on progress against the strategy that we set out a few months ago. There will, of course, be the opportunity to ask questions at to the end of the session where Duncan and I will be joined by Tom Nicholson, our Chief Operating Officer. So starting with the introduction. The operational turnaround of the business is now complete. The business has been completely restructured over the last 2 years. New processes are embedded resulting in a robust operating platform. Selling costs and overheads have been significantly reduced, and the balance sheet has been transformed. The new house-type range is being rapidly deployed across our sites, and we're very active in the land market. All of this has resulted in a strong financial performance in 2021 but also importantly, with the promise of more to come in the following years as we grow our business and rebuild our margins back to industry normal levels of 18% to 20%. Overall, we've made excellent progress against our strategy. We're well on track to deliver what we've promised. We held the Capital Markets Day in October 2021, at which we set out our exciting growth plans for the period to 2026, including moving into new geographies. We've made good early progress with this over the last few months, which I will come on to. So overall, a very good year for Crest Nicholson and solid foundations laid for the future. So let me now hand over to Duncan.

Thanks, Peter. Good morning, everyone, and thanks for dialing in to our preliminary results for 2021. I'll start with the income statement as normal, but before I do, a few words about the year and summary from my perspective. We've delivered a great step on this year, leaving the last 2 years of disruption, both internally driven and externally created, behind us. You can now see the effects of our strategy starting to translate into improved financial performance. And that gives us confidence in delivering against our guidance for this year and beyond. So starting with the P&L. Revenue of GBP 786.6 million, up 16% on prior year with adjusted gross profit up strongly to GBP 166.7 million, up 54.8% on prior year. Clearly, 2020 was far more heavily impacted by COVID-19 disruption but we've also seen a much stronger sales rate, which I'll come on to, delivered with consistency throughout the year and across all divisions. We've delivered further efficiencies by way of lower sales and marketing costs. And the proportion of low-margin legacy sites and their impact on the P&L continues to recede as the new land with the new house types starts to feed into the mix. Within gross margin there is also the contribution from the Longcross Film Studio sale, which I previously guided to be in excess of GBP 10 million, and that ended up being GBP 16 million at completion. Gross margin rate at 21.2% is higher than the 19% I guided to at the half year and, that's because we have build delays on 2 schemes, which will now complete in full year '22. They were both NRV schemes, which has the effect of depressing unit completions against expectations in full year '21 and elevating gross margin rate because of their dilutive effect. And I'll break this out in more detail later on. Administrative expenses of GBP 51.1 million, and that includes repaying the GBP 2.5 million JRS income received in full year '20 and of course, a higher year-on-year bonus accrual, reflecting the group performing well against most of its listed targets. By inference, therefore, further efficiencies have been delivered into this year and consolidated into our underlying overhead position. We then come down to adjusted operating profit before tax of GBP 107.2 million, up from GBP 45.9 million last year, and that compares to our published consensus for full year '21 of GBP 105.4 million. Adjusted effective tax rate of 18.6% and an exceptionals charge, net of tax, of GBP 16.4 million. And I'll come on to talking about exceptionals in more detail later on. That brings us down to a strong recovery in statutory profit after tax of GBP 70.9 million versus the GBP 10.7 million loss in the prior year. Adjusted basic EPS of 34p per share and a final proposed dividend of 9.5p per share to go with the interim 4.1p per share paid to make 13.6p per share for the year. Over now on to the usual sales metrics disclosure we give you. And as you can see, a significantly improved full year SPOW rate of 0.8 versus 0.59 in prior year. And as I've already mentioned, we saw a solid consistent sales rate throughout the year across all divisions, and that's extended into the first few months of full year '22, giving us confidence that the changes we've made to our processes, and increasingly to our product type and price point, are resonating with customers. Outlets down slightly to 59. And as many of our peers have cited, we continue to experience some disruption in the regulatory and planning process, which is playing its part, and we would expect a similar level of outlets for this year as well. A brief reminder of the two methodology changes we referred to at the half year, namely moving to an equivalent unit basis for legal completions and also we now include joint venture completions at full unit count rather than just our share. And we've provided the joint venture unit completions as a memo item on the slide. These changes are all clearly footnoted below. I referenced that we had delays on 2 schemes compared to our own expectations, both our NRV schemes we have highlighted before, so 81 units Old Vinyl, Hayes and 30 units at Sherborne Wharf, Birmingham. Both of those schemes are subject to agreed ring-fenced bulk deals and will now complete in this year. The effect of those delays has been to depress full year '21 completions by 111 units. Private open market sales prices continue to reduce, and that's down to a common narrative I've been sharing for the past couple of years now, of changing product type with the new house types and replacement of the legacy London portfolio with more completions in the Midlands and other lower-priced geographies. In fact, we only had one full sale legacy London unit left in the portfolio at year-end. Finally, reflecting the solid sales momentum into full year '22, I've already referenced, we had forward sales as of the 14th of January 2022, of 2,702 units with a GDV of GBP 719 million. And that represents coverage of approximately 63% of full year '22 revenue. So coming on to the next slide and exceptional items. The first item is the GBP 8 million exceptional credit from the release of the remaining 7.5% unutilized NRV provision we took in the prior year. Of the remaining GBP 20.7 million provision, we would expect over 3/4 of our provision to be utilized in full year '22. And that, of course, now recognizes the matching of the Sherborne Wharf and Old Vinyl completions that have moved into full year '22. Those 2 schemes, combined with Farnham, account for the vast majority of that unwind in full year '22. And thereafter, in full year '23 and full year '24, the provision will really only relate to Farnham. The GBP 0.5 million shared equity loan credit is simply an extension of the same logic on that portfolio. The next slide relates to a further net combustible materials charge of GBP 28.8 million. And that can be broken out as a GBP 31.2 million charge, offset by GBP 2.4 million of recoveries recognized in the year. We spent GBP 3.4 million in full year '21 on remediation works and are left with the remaining provision, including the effect of this year's net charge of GBP 42.6 million at the end of the year. And the expected utilization of that provision is detailed in Note 23 of the accounts with approximately 1/3 expected to be spent this year and the balance thereafter. On the next slide, I want to give some more detail on the processes and governance we have gone through to calculate this charge and indeed have had in place since the outset of this leadership team joining Crest. The first thing I'd say is that we take this issue incredibly seriously. We recognize the moral and legal responsibility to act if we own something or have constructed something which represents a potential danger to residents. But that responsibility we are seeking to discharge is being done so in an ever-changing regulatory environment, which makes ascertaining whether something has always been compliant or not, or only recently has been deemed to be noncompliant, or indeed was once compliant, then not compliant, and is perhaps about to be deemed compliant again, a very difficult judgment to form. On arrival in the business in 2019, with limited time and information to form a view, we recorded a net charge of GBP 18.4 million for combustible materials, the first such charge Crest Nicholson has made in respect to these obligations. And that was followed by a GBP 0.6 million net charge in 2020 and today's GBP 28.8 million net charge. That chart is broken out in more detail on the table on the left of the slide. And the main driver for the increase in the year has been the September 2021 deadline for freeholders and managing agents to apply for the government's Building Safety fund. That deadline has capitalized an increase in the number of intrusive surveys being conducted on all buildings that are potentially at risk. And that has led to an increase in the number of claims we have received, predominantly on buildings where we are no longer the freeholder. Cutting this charge in a different way. About 1/3 of the charge relates to upward revisions of costs on previously assessed buildings, and 2/3 on newly identified buildings. To support this year's assessment, we now have a detailed analysis of all buildings we have built in the last 15 years, and that could be in scope at the latest guidance. And of that unit population, around 85% is now either covered by provision to reflect an identified issue or [ a poll ] or estimate of that being an issue, which will need remediation, or where no issue has been identified and/or the building is considered low risk by us, for example, its low-rise construction or entirely brick built. By inference, the remaining 15% is where we are still carefully working through with a range of stakeholders to ascertain whether an issue exists. And specifically, whether Crest has a constructive obligation to fix it. And in these examples, it is neither appropriate nor permissible to simply book a provision if the liability is only a possibility until that risk can be investigated more thoroughly. In full year '21, we spent GBP 3.4 million on remedial works, which included replacing balconies on 23 buildings for which we are still the freeholder. We also prepared external walls for remedies to be installed this year on 19 buildings and conducted intrusive works on around 30 other buildings to investigate any risks. We hold a thorough periodic review meeting, which is chaired by Peter, the CEO, attended by myself and David Marchant, our Group Production Director, in which we reveal in detail every scheme on our register. We consider correspondence from a wide array of stakeholders, which can include residents, management companies, freeholders, subcontractors, architects, mortgage lenders, building control and independent fire engineers. We also review the progress of remediation works, which can often be slower than anyone would like because of the near term and recent increase in demand on a limited pool of specialist and qualified contractors to carry out these works. Finally, this review process has been naturally checked and challenged by the Board on a regular basis. I remain confident that we have adequate and robust governance in this area, and we will continue to work through the challenges as quickly as we can, recognizing our responsibilities to do so. Moving on to the next slide and gross margin delivery. I wanted to close out full year '21 performance and provide some guidance into next. If you look at the waterfall chart, I said at the half year that I expect the gross margin rate to be around 19% for the full year. And we've obviously delivered well in excess of that at 21.2%. The first uplift comes from Longcross being GBP 16 million versus GBP 10 million, and that's simply a function of completion accounting on that transaction. The second block relates to the delays at Sherborne Wharf and Old Vinyl, which have a rate accretive effect in full '21, and by extension, a rate dilutive effect into full year '22. And then the final block is underlying improvement since the half year such as the benefit of further efficiencies dropping through and sales price inflation. As such, we would expect gross margin rate for full year '22 to be in line with or slightly ahead of full year '21. As I alluded to at the Capital Markets Day in October last year, I'm now going to move away from this level of gross margin detail in future because it is subject to moving parts like these. Hopefully, what we have been able to do in the past couple of years is build trust that the operational efficiency initiatives we've introduced, coupled with the identification and ring-fencing of the lower-margin legacy schemes, has now put this line back on a recovery pathway. And as the group's contribution from joint venture starts to mature, we will instead be referring to an operating margin evolution instead. Moving on to the balance sheet next. And we've continued to make excellent progress in transforming the balance sheet. Full year '21 net cash of GBP 252.8 million and net cash and line creditors of GBP 29.9 million. We operated throughout the year on an average net cash of GBP 78.4 million. And in September, we received the GBP 46 million cash proceeds from the sale of the Longcross Film Studio. The pension scheme on an IAS 19 basis moved to a surplus of GBP 16.7 million from the deficit of GBP 13.8 million last year. And that's predominantly down to the change in discount rate than it has on asset returns and the group's cash contributions. We're currently in dialogue with the trustees about the latest triennial valuation, and I will hopefully be able to provide an update on future cash contributions agreed with the trustees at the half year. Overall then, the balance sheet is in great shape. It gives fuel for growth, supports our 2.5x dividend cover policy and provides the resilience we need for tougher times should they emerge, which has not always been the case in recent years. The usual land portfolio detail follows on the next slide with a couple of new items of disclosure. We had 36,985 plots in the portfolio at the year-end with a GDV of GBP 11.8 billion and an ASP of GBP 326,000. We added 1,510 plots in the year to the short-term portfolio, notably 491 at Moortown Lane, Ringwood and 360 at [indiscernible]. We've obviously called out a much higher number of approvals over the past 12 months, and to provide some comfort as to how that is translating into physical additions into the land portfolio, we've also added over 1,500 plots to the short-term portfolio since the year-end. Finally, at the year-end, 74.2% of the short-term land portfolio was owned versus controlled, up from 62.5% the year before. The GDV and ASP are both up on prior year because of the effect of the NRV reversal, underlying sales price inflation being reflected in the latest valuation, offset by the fact, of course, the completions significantly outweighed additions at the year-end. And finally, don't forget to consider the JV plots being at 100% this year versus 50% last year. The next slide covers the updated financial guidance we outlined at the Capital Markets Day of October last year. I'm not going to go through this slide again as I think it's well trailed now, but we have updated the comparatives against full year '21 and the two that stand out for me are the strong rebounds in both operating margin and ROCE, which give us a strong base on which to now build from. So to summarize. A strong rebound in performance post the worst effects of COVID-19, the low-margin legacy sites we've identified in the past 18 months have largely been addressed, we have to close our Old Vinyl and Sherborne Wharf, but they are catered for by agreed bulk deals. Hopefully, you can see from the improvement in both the gross margin and admin expenses ratios that our operational efficiencies are now embedded in the base and represent a sustainable, more efficient operation. We were pleased to reinstate medium-term guidance in October and are firmly on track with all those targets. We've started this year strongly and as of 14th of January 2022, had a forward order book of 2,702 units with approximately 63% of full year '22 revenue covered. Finally, the balance sheet is being transformed. In every business I've worked in, I've wanted to fix the roof when the sun is shining, and rarely do you get that opportunity or achieve that outcome. But this now gives us the resources to stand behind the plan we outlined in October, our plan to deliver growth, pay a healthy but sustainable dividend and also provide resilience for if it does start raining. And with that, I'll hand you back to Peter.

Thank you very much, Duncan. And as you can see, we are in good shape. And now we can start looking forward towards a period of growth. The market itself is robust. But I thought it might be useful to share with you some market context, some wider thoughts on the landscape that we're seeing out there and also to give some commentary on some of the challenges that we still face. The political and economic environment we're operating in remains volatile and at times, is challenging. It's also unpredictable. Over the last year, we've seen the change in the Secretary of State covering housing, and indeed, a change in the departmental name and in all likelihood, its focus, too. One thing remains certain, though, the U.K. does need more homes. The challenge remains how best to achieve this. And we intend to play a positive and active role in this as the market evolves. I would say it's pretty clear that the governments are highly likely to pull back from significant land releases in Southern England. Whilst this is politically logical, it does still create a problem for the supply side in the area with the greatest demand. This will, in all likelihood, drive prices higher and is something that the government will have to tackle one way or another. We see it as being more likely now that the government's focus will be upon more house building in the north. And for this to be effective, it will be necessary to have a wider economic stimulus in order to move some of that demand side for housing from the south to the north. This is probably a rational strategy longer term and does play to the leveling up agenda, but the transition period will be the challenge. Operationally, there's been considerable disruption to our supply chain over the last 6 to 9 months and the Plan B restrictions at the moment are unlikely to be helpful. That said, any impact should be lower than last year. And if, as it looks likely now, the Omicron wave does pass through very quickly, then in all likelihood, I think we can look through this. There is some structural inflation now, but also some opportunistic pricing, which is probably more shorter term. Labor cost inflation has been more modest, but we can see a situation where this may start to accelerate if the wider cost of living situation worsens. What needs to be avoided though is a spiraling wage inflation cycle, which could then possibly see a sharper trajectory of interest rate rises. An issue which needs attention from government is the delays being experienced in the planning and regulatory environment. The planning and regulatory processes are currently far less effective than they need to be. Added to this is the growing problem around matters such as nitrates, nutrients, water neutrality, which is starting to more widely impact side starts and sales. This needs to be an area of urgent focus for government if it wishes to meet its stated housing targets. One area of encouragement though is the continued support from mortgage providers. There is, of course, a backdrop of interest rates potentially rising. But similarly, there may well be some easing of regulatory requirements in this area. The land market is as competitive as it has been for a decade. The supply side hasn't yet picked up, partly as a result of planning delays and the other factors that I've already mentioned, and of course, the demand side is high. Firstly, because market conditions are so favorable, but also because delays to housebuilders' outlets, again, due to the slower planning and regulatory environment, has meant that there's an urgency to obtain additional sites, especially smaller up and ready ones. There remained better value in larger sites. Pleasingly, there has remained discipline from participants around margin. Our action toward these challenges has been to focus strongly on our new house sideline, which is helping us to reduce or mitigate cost pressures. We'll continue to take a sensible and proportionate approach to our land buy. We are highly competitive when we go for smaller sites, albeit, of course, hit rates are lower. But we're also acquiring some larger sites where more value can be found on drawing down from our strategic land portfolio. Where we buy larger sites, we have a clear plan to drive greater volumes from these through a multichannel approach. So of course, there are challenges, as I've outlined, but equally, market conditions are robust and positive. In January 2020, we set out our plan to restore Crest Nicholson to its position as one of the U.K.'s leading housebuilders. This turnaround is now complete. We've undertaken the operational changes that were needed. We now have an efficient and scalable operating platform, a robust balance sheet and the resources to grow, experienced leadership team is in place and our new house-side range roll out is fully on track. We aim to have around 80% of our housing production from this range over time, and we will be approaching this target this year. Our build times have reduced by an average of 7 weeks with the potential for more. And now 6,800 plots in our land bank being replanned with these homes, up around 25% from the equivalent period last year. We've made great progress in trading out of our low-margin legacy sites and continue to be a 5-star customer service-rated house builder. So now to the agenda for the next stage of our strategy as we start to deliver growth. We will retain our operational efficiencies and principles as we grow. We'll accelerate our operating margin recovery whilst continue to be disciplined as we acquire the land to fuel our growth. And our geographical expansion will begin. Our multichannel capability will continue to provide us with a strong order book. And alongside our growth strategy, we'll deliver upon our ambitious sustainability targets that we've set out, continue to deal appropriately and responsibly with the remediation of buildings, whether planning or other combustible materials-related issues. This is an important matter for us and our wider stakeholders, and we continue to step up to the plate in this area. We have 2 clear stages of our margin and volume growth strategy. Phase 1, we'll see our margins rebuild to industry standard levels of at least 18% by 2024, and volume will be largely driven by utilizing the spare capacity within our existing divisions. These can accommodate up to 3,250 dwellings per year. We've also set up 2 new divisions in 2022, a third in 2023. From 2024, margin growth will be slower with an ambition for a 20% operating margin. The volumes will accelerate as the new division start to make a more meaningful contribution. We're targeting volumes of 4,200 per annum by [ 2020 ]. We've been actively involved in the land market during 2021 as we acquire sites to enable our existing divisions to reach volume maturity by 2024. However, as explained earlier, competition for sites, especially smaller ones, is increasing. It's not unusual to have 15 to 20 bps for the best sites that are ready to go. Our very efficient operating platform is enabling us to be highly competitive without compromising our margins. Overall, we've approved the purchase of 4,332 lots per year and an average gross margin of 26.7% after sales and marketing costs, which aligns with our longer-term margin aspiration of 18% to 20% operating margins. There'll always be a timing difference between land approvals and these plots coming through into our land portfolio. We have spent more than GBP 100 million on land since the year-end, which is the timing difference between exchange of contracts and legal completion on a number of sites. The land is coming through. Overall, our short-term portfolio is around 5 years, which we see as being appropriate for our business at this time. During the year, we've continued to convert sites from the strategic portfolio -- And where we did this, we typically added 100 to 200 basis points to our margins. As outlined at our Capital Markets Day in October, our multichannel and partnering approach remains a core part of our strategy, selling homes in bulk primarily to PRS market is complementary to our open market delivery and also offers a lower risk profile with an enhanced return on capital employed. It also enables us to acquire larger sites without compromising on economic metrics. During the year, we've seen reduced discounts to open market value, which alongside savings and selling costs, is also increasing the economic value on these sales. However, just to be clear, we will not participate in low-margin purely contracting work given the heightened risk profile of this type of activity. 2021 saw a successful divestment from a number of our legacy apartment schemes. One deal that I referenced is the GBP 120 million sale, 403 apartments across 3 sites. Brightwells Yard, Farnham; Centenary Quay, Southampton; Walton Court, Walton-on-Thames moving to Oaktree Capital. Deals such as this one to Oaktree and others to partners such as Man Group and Angelo Gordon are helping us to establish a strong reputation as a trusted partner in this space. We're pleased to continue to be a strong 5-star customer satisfaction-rated housebuilder. Customers are giving us good feedback on our new house-type range. And we have a consistent brand messaging and our guidelines are being utilized by our teams. An enhanced CRS system -- CRM system has been implemented, and this has led to increased lead generation and conversion rates. Overall, as an organization, we're growing our digital marketing capability and assets, and this continues to help us generate strong sales rates for the group as evidenced in these results. In the year that COP26 was held in the United Kingdom, we're increasingly aware of our environmental responsibilities and continue to make strong progress against the targets set out last year for the period to 2025. Against our targets to reduce carbon emissions by 25%, we achieved a very strong 21% reduction in the first year. We set out an absolute target to use 100% of our electricity from renewable sources by 2025. And last year, we achieved 62%. And against our waste reduction target of 15% in the first year, this was reduced by 4%. But we recognize that we must do more, we must go further. So we have now signed up to the Race to Zero. We will seek to achieve zero net emissions by 2050 and new science-based targets will be set out in 2022. We're very well placed to deal with the impact of future homes. Our house-type range has been designed to complement our [indiscernible] first approach. We have a research and development program in place. And we are providing to the stated cost of future homes in our land acquisition assumptions. Around sustainability, we also have strong governance processes in place. We have a dedicated sustainability committee, which oversees progress and remuneration targets are set to reflect our ambition in this area. All of the work that we've done over the last 2 years, establishing strong operating platform, strengthening the balance sheet and hiring a highly experienced team, has meant that we can start looking to the future with growing confidence. As we explained at our Capital Markets Day, we are now set for growth. But in growing, we will maintain our discipline. We will build upon our positive legacy around brand, place-making, customer service and quality, and add to our well-located and valuable land portfolio, and we will be leveraging our scalable model with its standard operating processes. We'll continue to utilize our new house-type range and to continue with our multichannel approach. Critically, we will not compromise on our margin expectations or on the return on capital employed that we are targeting. Operational efficiency remains one of the keys to our success as we grow. So let me update you now on our plans to establish new businesses in Yorkshire and in East Anglia. I'm pleased to report that we've recruited a new divisional leader for Yorkshire, Guy Evans, previously Land Director of [indiscernible] Yorkshire joined us on the 4th of January 2022. Guy is now actively setting up his new office in Leeds, recruiting further personnel and seeking out land opportunities. We're in the market for a similar division leader for East Anglia. However, I'm pleased to report that we have now also agreed to acquire our first site in this new territory. We believe that these new market locations and the opportunities that they bring are compelling as we seek to grow our volumes and profitability over time, and I'll share further updates with you on progress in our half year in June. So to summarize. The business turnaround is now complete. We delivered a strong performance in 2021, delivering ahead of initial expectations. Our operating efficiencies, and they are taking over as our lower-margin legacy sites traded through. We enter into 2022 in very good shape. Strong order book, 2,702 units with a GDV of GBP 719 million. This is a significant platform to build from, 63% covered for this year. Financial position is robust, as is our strengthened balance sheet, which enables us to grow the business with confidence. This is a very exciting year for Crest Nicholson and we continue to grow our volumes and our profitability alongside exciting geographical expansion. Thank you. So happy now to take questions from the floor. As mentioned earlier, I'm joined by Duncan and Tom.

[Operator Instructions] Our first question comes from Aynsley Lammin from Investec.

Just two questions from me, please. I wondered if you could just give a bit more kind of color on your expectations for build cost inflation. So what you'll see in that currently run at? And would you say on a kind of 12-month view still expect HPI to cover off any build cost inflation? And second just a point of clarification on the gross margins. I think the 21.2% that you just delivered, that includes the Longcross sell profit, I think. And what you're saying is that you'll deliver at least that in FY '22. So at least to 21%, obviously, without the Longcross profit in there. I just wanted to clarify my understanding there.

Thanks, Aynsley. Just back on that second one. Yes, your understanding is correct. The 21.2% does include Longcross. And our expectations for this year are at least at or slightly more. On the second one, I'm just going to pass that one over to Tom on the operational side to just answer on the inflationary point.

So sales inflation and demand remains robust. So we continue to see sales inflation gain across all our sites. With regards to build, we are seeing build inflation. I think towards the end of last year, calendar year, it was more material-led. And we'll probably see that look to tail off during this year. But labor, certainly, at the beginning, this first calendar quarter is probably where we see the inflationary pressures. We're confident that we'll continue to manage that throughout the period, and we'll continue to offset that build inflation through our operational efficiency and sales gain.

Yes. So certainly, Aynsley, at the moment, I'd say that the house price inflation is more than offsetting the cost pressures. But obviously, that's fixed now.

Our next question comes from the line of Chris Millington from Numis Securities.

Just wondering about the working capital moves as we go into '22. You've alluded to quite a big cash outflow on land so far. I was just wondering if you could just give us a slightly follow picture for the year, including when? The second one I've got really is, are we likely to see any change in the timing of completions this year, i.e., the H1, H2 profile? And maybe you could just comment within that whether or not there's any Q4 skew within the numbers? And then the final one, sorry, I wasn't there at the Capital Markets Day, but did you allude to what outlets you would like to see in situ to deliver that 3,000 target? And if so, can you just remind me about how that trajectory is expected to evolve?

Yes. Thanks very much, Chris. I'll ask Duncan in a minute, just pick up the one on work in progress. Just to clarify, the H1, H2 split and the Q4, are you talking about the year that's just done '21 or are you asking...

Yes, in respect to this -- yes, sorry '22.

Yes, I think in most years, you'd expect that H1, H2 to be somewhere in the 40% to 45% range and 55% to 60%. And I would expect that to be something similar this year. So not expecting anything unusual in that regard. On the outlets. It's always going to be pretty lumpy. I think that for the year that currently in, '22, we'd expect outlets to be sort of broadly similar to where we are at the back end of '21, averaging around that sort of 59%, 60%. But as we start opening new divisions, as we start acquiring land, you've seen the trajectory of the land coming through, I think we'll start to see pretty strong outlet growth over the next couple of years. Just...

Yes, Chris, I'll just talk directionally on the working capital. I mean obviously, very, very strong year-end net cash position this year. As you referenced, obviously, you saw it posted GBP 100 million going out on land since the year-end. And there'll be a further cash spend in the year on land anyway, just recognizing where we are in the growth phase versus last year. You'd expect in line with consensus expectations receipts to go up accordingly, dividend to go up accordingly, the tax will go up as well, reflecting some of that rate. And so to try and be helpful, I would expect -- and we won't repeat the GBP 46 million coming in from the Longcross Film Studio sales. So I would expect net cash at the end of next year to be lower than it was at the end of the year just gone, but still in a very, very healthy position.

Yes. Just the other thing on outlets, Chris, to try and be helpful on that. I mean some of it really is around that regulatory environment, the planning environment that we're talking about and the rate of sale that we can get. I mean at the moment, outlets are down, but of course, sales rates are very good. I would expect to see some easing of those pressures on planning and other approvals as we work through COVID and the local authority staff working from the office more meaningfully. I think that, that will just help ease some of those pressures. But at the moment, we're getting the volumes because sales rates are a little bit higher, albeit outlets are a little bit lower than we would have expected. And I think that's probably an industry trend, not something that is just down to us.

Absolutely. And Duncan, can I just quickly check. Do you think you'll still be in an average month end net cash position through '22?

It's hard to predict there because at the end of the day, the -- what won't be a restriction on that is giving Tom permission to go and spend money on land. So we would -- I think we would certainly be in a place where we see that as being -- we're less cautious on that for obvious reasons than we were the year before. So I wouldn't want to be drawn on that as a firm commitment. But I think if you look at our cash balance today, we'll be trading through with a very healthy profile in comparison to, for example, 2019 or 2020. But if the opportunities are there to acquire sites, we wouldn't see that as -- we would not have an aspiration to trade on net cash, put it that way, throughout the year, if the sites are the right sites to buy.

Our next question comes from the line of Will Jones from Redburn.

If I could have 3, please? Fairly general, I think, first, just around sales rates and just tying up that, I think, 0.8 for the year finished. Just to check, is that comparable to the just under 0.7? I think 0.69, you talked about in the first half. So give or take, 0.9 in the second? And does that higher recent level change your view of either what is achievable in '22? Or what might be optimal because it seems like quite a big lift there? The second is just if you could talk more generally around WIP levels in the business, build rates week-to-week, I guess that production side of things would be great. And then the last one was just a few references again to added land market competition over the last year. No big surprises there. But when we look at your land intake, I don't think you've ever had a better gross margin intake than the one you're telling about for the year finished. Just how would you marry up that -- the apparent conflict between those 2 things? And just to check with you. I think you're making your first forays into the new regions. Do all the same hurdles apply in the new regions as would for the core business? Or would you be willing to be a tad more flexible?

Okay. If I take those in some order. On the sales rates, yes, they are like-for-like. And just in relation to '22, we're not providing any specific guidance on those at the moment. As far as the land market is concerned, yes, it is very tight. Our success in the market, I think, is down, too. And I would go as far as to say we are ruthlessly efficient in terms of what we're trying to do with our stock range, our cost control, the plotting ability of that house type range as well as its attractiveness to customers. And we're also being very selective. We are losing a lot as well as gaining a lot. And as we go into new territories, no, we won't be compromising on our margins. I see no reason why we should not be as competitive as anybody. And as we enter into those markets, we should be able to pick up our share of land and the trajectory for growing those divisions is relatively modest at first anyway, so we'll build them up organically. So just on the work in progress levels and build rates?

I'll just -- if I just pick up on the build rates, Peter. We'll say that we're consistent -- the profiling of delivery for this full year is consistent. There are ongoing challenges in terms of material supply reliability and elements of labor. We certainly haven't seen it get any worse from last year. So we're seeing that we're able to manage that -- those challenges and maintain the delivery profile. So I think it's going to be a consistency, as Peter referenced, in terms of the split for the first half, second year previously, and we'll be maintaining that regularity throughout the trading months.

Yes. I mean it's quite easy for us here to be somewhat dismissive of the challenges. I mean we can get there, and we do get there. But I wouldn't underplay just how difficult it is on a day-to-day basis for our site teams to manage this, but manage it, they do. And we do get the homes built and hand it over, had the right quality as demonstrated by customer service scores that we achieve. Thanks, Will.

Our next question comes from Charlie Campbell from Liberum Capital.

Sorry. Apologies. I was on mute. Sorry, it's Charlie Campbell here. I've got 3 questions, please. First of all, you've given us a forward order position of 2,700 homes. How much of that falls into the FY '22? Just to get an idea of that. Secondly, I think you've said you wouldn't really give any indications of trading and how that's gone in '22 so far. But just wondered if you could give us some sort of color around sort of views in the spring selling season? Maybe visitor levels, inquiry levels? Just how -- just something to sort of, I suppose, kind of underlying your confidence you've given for the year ahead? And last one, a bit of a detailed question, but just wondering how the electric vehicle charging points play out in this year? Obviously, you've given us margin guidance, and that's inclusive of that, but just wonder how that plays out on the ground in your '22 financial year.

Yes. Thanks, Charlie. On the third one, yes, we've got that factored in where they're required. So there's nothing that will be impacting any of the financial guidance in that respect. Look, I'm not going to go too far in terms of any sort of commentary on the spring market. We're not actually in the spring market yet. I generally say that, that starts sometime in February. All I would say is, as Tom has already mentioned, trading conditions are robust. We're confident. We're seeing conditions that we are happy with, and we're confident at the moment. And in terms of the order book. We're not specific about the -- how many of those 2,702 are for this year. But as you can see in terms of the revenue cover at around 63%, we're in good shape. At this point of the year, 63% cover, we're in good shape.

Our next question comes from Glynis Johnson from Jefferies.

Two, if I may. The first one is just in terms of your -- the completions profile. I know you split out -- you've given us great transparency in terms of the sites which you've taken provision and how they trade out. But I wonder if you can put in perspective how many or portion of the completions '22, '23 will come from the land that you bought since you guys have been in, relative to what was award in the land bank and how much is some of the older stuff that you still need to work through? And then the second question, just in terms of the housing types. You talked about competition on land market and being ruthlessly efficient in terms of your build and everything else. I'm wondering, are you putting through evolution, in terms of those housing types? Are you continuing to change them to reflect greater efficiencies that you might be finding? And does that have any influence in terms of the margins that they may be bringing you in?

Yes. Let me just pick those up. In terms of the completion profile, we're not able to give you the breakdown of, if you like, the newer sites that have been acquired, and when those ones come through. It's not actually data that we've currently captured. We don't capture in that way. What we can do, of course, is to give you more information about the legacy as that comes through. And I think that Duncan has already done that to some extent. And I'm happy for Duncan to just expand upon that if necessary. I mean on the house starts point, Glynis, yes, for sure, we absolutely are continuing to update those. We will anyway, in respect to future homes. But we also learn on the ground which ones are working best for us, which are most attractive to customers. We get a much better sense of the pricing differential between one type and another, which then informs our plotting. And as I've said a number of times, replans are never finished. We're always replanning, replanning, replanning and seeking to just squeeze a little bit more. And even on the sites that we've acquired on the basis of robust assumptions, we're still managing to get a little bit more from those and we continue to expect to do so. Anything to add on that, Tom?

No, Peter, everything you said is absolutely right. Yes.

Thank you. And Duncan, just on the legacy sites?

No, Glynis, just at a high level. We talked about this being a migration over a period of time. We've still got some of the legacy sites, obviously, as Peter alluded to work through this year into '23. You start to get into extensively clean air with the new stuff in '24. And maybe the other way to refer to is, as referenced in the number -- in the new house types being utilized as a proportion of the completions. That's obviously -- that's increased this year, and we'd expect 80% of the private open market houses using those house types this year. So it was always going to be a migration over a period of time. And hence, why tried to be quite specific in the gross margin guidance this year in terms of it being similar or slightly ahead, we'll then get a further inflection into '23.

Hopefully that answered the questions, Glynis.

Our next question comes from the line of Gregor Kuglitsch from UBS.

Yes. A couple of questions or maybe 3, actually. So can you just maybe lay out a little bit for us what your volume completion expectations are for this year? I appreciate this is sort of some bulk deals and stuff like that and some legacy clearing out happening. But if you just sort of perhaps give us a range to help us there. And similarly, on ASP, I note that in your land bank, you're actually tracking roughly in line with what you just delivered. So I wonder if we should bear anything in mind for the short term? I appreciate in the long term, perhaps as you sort of ramp up new divisions in Yorkshire, et cetera, perhaps the ASP falls. But in the short term, are you sort of tracking in line with the land bank ASP as a sort of rule of thumb? And then just coming back to cladding, and just to be crystal clear what your position is. And correct me if I'm wrong, but as far as I can judge, you're essentially responding to any increase you're getting on any legacy buildings? And then you're checking whether there's essentially a fault of some sort that can be attributed to yourself and those are the buildings are fixing? Or are you also essentially taking care of any buildings for the potentially a complaint coming in, irrespective of whether there was actually a fault of some sort or [indiscernible] -- rather building rates at the time?

Yes. Thanks very much for that, Gregor. I mean on volume expectations. That's not a number that we're actually giving out to the market. But to try and be just a little bit helpful, we've obviously set out a target of 3,000 by 2024. It was 2,407 last year. You'll be aware that there was a little bit of slippage Duncan referenced 111 units, which moved from '21 that will go into '22. So that will just give you a sense of -- we're expecting to obviously see volumes higher year-on-year as a trajectory with a little bit of movement from '21 into '22 as well. I'll ask Duncan to just pick up on the ASP point in a minute. On cladding. It's obviously a really complex issue because as you've rightly mentioned, that we -- and it's not just cladding. Cladding is the phrase that is usually used, but it's a lot wider than that because it is cladding, it is other external wall systems. It's fire stopping, it's balconies. There are a multitude of areas which are covered by this. And some of these buildings, it is as a result of defects that will -- the responsibility of us at the time that they were constructed. And others, it's quite simply where the building regulations have changed over time. I mean we do try to take a pretty pragmatic approach to it. It's not a case of -- we would never fix something that wasn't, strictly speaking, a fault. We look at each case on its merits and try to come to a sensible, realistic solution with the building owners. I mean obviously, if there is any sense that there's a defect, then we're responsible and then we will get on and fix that. But often, we are also helping people where it wasn't necessarily a defect. It very much depends on individual circumstances. So let me just ask Duncan to...

Yes, Gregor, just to build on Peter's point there and just be crystal clear on your point around, are we taking an entirely reactive approach. No, where we are freeholder, we are -- we have actively risk assessed that legacy portfolio indiscriminate of heights, whether it's above or below 18 meters, and risk assessed all of those buildings and where we believe action needs to be taken, as Peter has alluded to, we are doing so. We've also sought to do the same in the leasehold portfolio going back over a 15-year period, too. And again, where we are able to identify working with the freeholder or because they've notified us or we've been able to identify ourselves, we're remedying those. But as you allude to, there is also an element of that population where you are dependent on the freeholder wanting to let you access that building and potentially perform surveys or not. And so therefore, there is an element of reactivity, too. So it just puts into some perspective where we're being proactive and acting in that way versus the balance of being entirely reactionary, which wouldn't be a fair characterization. On the ASP's point, look, I think on the -- on that, we've talked about this previously. We will continue to see a further drift downwards on the private element. And again, we've obviously got a proportion of the London portfolio, as I talked about, which holds up the ASP unwinding into -- in the P&L in '21, which won't be repeated in '22. I referred to there being any one legacy for sale on the unit left. Midlands division is growing, that pulls that mix down. So nothing really a feature or note to regard on that. And then the improvement in the bulk price is, again, consistent with what we've said at the CMD, a continuing reduction in the discount we're taking to open market prices on the bulk builds we're doing. So nothing really more I'd add on that.

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

Three for me, please. So the first one is on the margins. Just to explore a little, how much more self-help is to come through in procurement, operational efficiencies that we haven't seen in the '21 operating margin? So that's the first one. And then how that margin profile evolves, the 18% to 20% corridor, same for '24, '26? So are you prepared to elaborate how the new divisions, as they mature -- is it the case that, that corridor might go from low end to top end as they mature? And perhaps once they're fully mature, is there further potential beyond the top end? That's the second question. The final question on land. The 5 years, Peter, you said, that's the appropriate length. I appreciate with the planning delays, that gives you optionality. Perhaps as that eases with planners getting back into the office, perhaps that's the top end of what you consider is the appropriate level and perhaps that can come down in the core divisions that exist at the moment.

Thanks, John. On the land point, I think there always is a range for the reason that you've set out. So I think that's somewhere in the 4.5 to 5 years, and you're probably closer to the top end of that range at the moment because of the delays. The other thing is also just about the profile of individual sites. So if you're buying predominantly larger sites and therefore have fewer outlets, then you've got to be driving more volume from them. We recognize that, that can just have some impact on the overall size and rent of the land bank. But 4.5 to 5 years is the sort of range that I think would be sensible over a planned period. I mean on the exploration of margin, we're not going to give guidance over about what's already in the market. You'll understand that. But I think you'll equally understand that it is an area of real focus for us and something that we take some great pride in, in seeking to address as early as possible. And some of that will be operational efficiency. We expect to continue to drive operational efficiency. Our costs actually reduced overall last year, although I think we've captured that now. And we expect to see costs actually increasing more in line with overall inflation going forward. But we'll make operational efficiencies as well. And we'll also continue to buy sites at good accretion levels. So I think you'd probably get a sense that we're impatient on margin recovery. In terms of the '24 to '26, yes, there is some dilutive effect on overhead as you build up in new regions. I answered the question earlier in that we're not going to be buying land at lower margins in those new territories. And that dilutive impact on overhead is relatively modest. So I wouldn't overplay that either.

Okay. Just one follow-up, if I may. With the land bank, how much is the nutrient neutrality issue? How much of a nuisance is that for you? And obviously, it hasn't held you back. You've got various optionality on land, but just an update on that factor, please?

Yes. Sure, John. It is an irritant, I think, for the wider market. I think the impact is more about the land supply coming through rather than necessarily the portfolio that we have. We've got the odd site that's impacted, but probably not in the here and now. It's a little bit further out. So I think it's something more for the future, and that's why I'm flagging something the government needs to be looking at now because it is going to impact the land supply situation in the South. The flip side of that, of course, is that if fewer homes are being built, it's going to continue to support pricing in the south.

Our next question comes from the line of Gavin Jago from Barclays.

Three for me as well, please. The first one was just if you could maybe give us some information on Help to Buy reservations through the second half, and I guess as a proportion of private renovations, if you've got that. Second one, I guess just pushing a little bit more on year-to-date trading. Obviously, the second half was coming at 8.9. I think this time last year, you said that year-to-date trading has been 0.6. Can you give us a sense whether we kind of still within that range given you getting to the end of the first quarter? And then the final one is just about thinking about mix for FY '22 just in terms of your private bulk and social, where we should be thinking about that being framed.

Sure. Sure, Gavin. I think on Help to Buy, clearly, it's a reducing trajectory. I haven't got the specific number in H2 versus H1. We're not -- but if you look at the overall market conditions, it's not having an impact on our reservation rate. Our reservation rates in H2 were very strong, and that included a period where there were changes to the Help to Buy environment. We've also got the Deposit Unlock scheme, which is being utilized on some of our sites. And we are taking sales beyond the period of -- continuing to take sales last year beyond the period when Help to Buy was going to change and that didn't have an impact then. So I think that it's something that we will look through. Year-to-date sales rates, I'm not going to give any specific information. Again, I referred to this earlier. We're happy with the way that the market has been, but I'm not going to give a specific sales rate in a year-to-date basis. And the mix full year '22, similarly, I'm going to have to disappoint you in not being able to break that out in detail. You know what our strategy is in terms of the mix that we aspire to. Wouldn't expect to see any significant deviation from that. And Duncan has given you some color on where we see ASPs. Sorry, I can't be too helpful, Gavin.

Our next question comes from Sam Cullen from Peel Hunt.

Just one for me, actually. Just on the cladding stuff. You've -- on Slide 10, you say you've gone back 10 years. And I think, Duncan, you've mentioned a couple of times going back 15 years. Can you talk around the risk of you having to go back further than that potentially in the coming years? And what do you think that might possibly mean for the business?

Well, Sam, so back to Peter's point, and I don't mean to chastise people on the use of the word cladding. And it's just -- it's bringing into context. The cladding of the nature on the side of a tower of Grenfell is not the nature of the challenge that we are dealing through -- dealing with and working with. And indeed, the sector has had to sort of morphed to deal with. What we're characterizing as a combustible materials challenge, very often balconies, fire-stopping cavity barriers, et cetera. And I just want to contextualize that so people are clear of the nature of the challenge or the problem we're trying to address. And indeed, has moved on to another level, probably one that would be more characterized as building, safety and integrity generally for the whole sector. But look, the point that we give a very detailed disclosure in Note 26 in our contingent liability note around what we've -- how we see the possible risk of the universe of that problem expanding in the future. And we don't have -- or claim to have a clearer view of going beyond 15 to 30 years. I would question and challenge whether many organizations in any sector will be able to put their hands on really detailed records going back beyond that period of time. And so we'll have to reflect on that as and when that becomes clear. So there are -- we've been very clear and open that there is the prospect if further legislative change comes through that, that population could increase. But I think I've given a very transparent disclosure on the size and challenge that we're wrestling with today.

Yes. Let me just add to that because there are a couple of other takes on it. One is that all freeholders have been required, over the last year or so, to assess their building. So -- and particularly that and also the catalyst of the building safety bundle, though that doesn't go back the same period, has meant that builders -- that building owners have tended to approach us if they think that there's a problem. But the other thing about the older buildings is that the trajectory is not similar to, say, the 15 year piece because the propensity for housebuilders, such as ourselves, to get involved in this mid- and high-rise building trend started after PPG3, which is in the early 2000s. I think if you went back before that, it's not that we would never have built a building over 11 meters, but us and the major housebuilders generally, were constructing predominantly 2- and 3-story domestic dwellings at the time. And it's only really in that period since the early 2000s that it has been more common for the major housebuilders to participate in this market. So it would, in any case, be a taper downwards.

We have reached the end of today's question, so I will now hand back to Chief Executive, Peter Truscott, for any final remarks.

Thank you once again for participating in the questions and answers and for your interest today. And if anybody has any further questions, of course, feel free to contact us, and we'll try to answer where we can. Thank you, again, and good morning.

Thank you.