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

Good morning, and welcome to the Crest Nicholson Full-Year Results for 2022. [Operator Instructions] It is now my pleasure to hand over to Peter Truscott, Chief Executive to begin. Mr. Truscott, please go ahead.

Thank you. Good morning, ladies and gentlemen, and welcome to our results presentation for our recently completed 2022 financial year. I'm Peter Truscott, Group Chief Executive, and I'm joined this morning by Duncan Cooper, our Group Finance Director. Well, another very interesting year for the company and for the sector. I was just thinking, actually, it would be really nice to have a quiet, boring year. I'm not entirely sure 2023 is going to be that year though. So turning to the agenda for this morning. I'll start off with a brief introduction before handing over to Duncan to present his financial review for the year. There is quite a bit to cover later. So, I'm going to be quite light touch on this first part of the presentation. Once Duncan has completed his section, I'll return and provide some market context and update you on our strategy and outlook and then finally, we'll take some questions from the floor. There's obviously plenty going on out there, so I would allow a lot of time for the Q&A. And also I'm joined this morning by David Brown, Alex Stark from the Executive Team who can offer further granularity perhaps during the [ breaking ]. So starting with the introduction. Once again, I'm pleased to be reporting on a strong set of numbers for 2022. You'll recall that following the first half, we upgraded our guidance for full year, adjusted profit to a range of GBP 135 million to GBP 140 million. And I'm delighted to report results that are solidly within this range. A key part of our strategy has been to rebuild margins back to industry standard levels over time, and further progress has been made with an adjusted operating margin of 15.4%. The underlying progress was actually a little stronger than this, and Duncan will break this number out for you. All of our other key financial metrics were also met with improvements, and I particularly highlight the return on capital employed number of 22.4%, and the net cash balance at the year end of in excess of GBP 276 million. I think that all of these numbers talk to a growing efficiency in our operations and also importantly, a strong use of capital as well as financial discipline as we recover. Good progress has been made with our geographical expansion too. Yorkshire is now an operational office, with a team setup and we've chosen to concentrate on organic growth with a pipeline of 5 sites and these will start providing financial contribution from 2024. East Anglia is now ready to go with a business leader in place and office identified and a couple of sites being progressed. I did touch upon the balance sheet just now, but I'd reinforce the importance of this and the discipline already demonstrated around our finances as we enter tougher market conditions and also as we grow our footprint. We will not be compromising on this level of discipline as we move forward. So let me now hand over to Duncan for his financial review.

Thank you, Peter. Good morning, everyone. So, I'm going to take you through the financial highlights for the year. And I'm pleased to say in spite a tough year of trading, especially in the second half and in the run into our year end, we have landed where we wanted to and report improvements across all key financial metrics. So coming first to the income statement and moving down the face of it, revenue of GBP 913.6 million, up 16.1% on full-year '21. And that principally drives the increase in adjusted gross profit, up 16.6%. Adjusted gross profit margin is in line with prior year, and that's also in line with the guidance I gave this time last year. If you remember, I outlined a couple of zero-margin schemes of Vinyl, Hayes, and Sherborne Wharf, Birmingham, had completion slipping from full-year '21 into full-year '22, which flattered prior year slightly and weighed on this year. Hence, gross margin would crept sideways as it has done. Administrative expenses of GBP 51.1 million, again, in line with prior year. And today, we are also guiding to full-year '23 overheads being over 10% higher than this number. And given the economic context, I want to spend a bit of time putting this increase into perspective and also outlining its drivers. So back in full-year '19, we reported admin expenses of GBP 65.5 million for the year, in a year where we paid no material bonus. The following year, driven certainly by conviction that was indefensible for business in our position, but undoubtedly also hurried along by COVID-19, we delivered a significant and wide-ranging restructure of the group, with central costs and headcount reduced by nearly 25% and shrinking the organization by 215 permanent roles. We carried that overhead level through full-year '21, and it's been an appropriate cost base for us to deliver the turnaround in performance. But for full-year '22, it starts to become flattered. Firstly, remember there is a GBP 2.5 million JRS repayment in the full-year '21 comparatively. Secondly, in line with many others in this sector, we've run with a high labor turnover and vacancy rate during the year. And that's on top of what is already a very lean organizational structure. The past 2 years of strong trading conditions for all housebuilders and demand for construction activity generally has seen a war for talent. However, as we look forward to full-year '23, we expect a tougher economic environment to be much lower levels of labor turnover, and we're already seeing signs of that being the case this year. In addition to labor mobility, there are other areas of the business where we are making conscious decisions to invest in the future. There are, of course, the investments we're making into the opening of Yorkshire and East Anglia as previously outlined. We're also recruiting more resources into customer service and quality roles, and readying ourselves for the changes that arise from the introduction of the New Homes Quality Code. And Peter will talk about this in more detail later. We're also needing to invest in other areas of unavoidable regulatory changes, such as the proposed audit reforms from BEIS and the additional administrative burden of the combustibles remediation program, also requires additional resource and focus. Finally, and of course most obviously, against the backdrop of cost of living crisis, we want to reward our people as generously as we can. And this has seen us award an average pay increase of at least 5% across the group for 2023. So hopefully, the guidance for full-year '23 is seen in the context of still being well below our full-year '19 baseline and yet supports a host of additional and intensive activities within a more inflationary environment. Now everything I've said does not preclude us from taking more decisive action, again, if trading conditions do not improve or become tougher, then those Peter will outline in due course. There are roles and activities within our group that are directly variable to our outlook. And many of you will have seen what a significant recalibration and a housebuilder can look like in a period such as the GFC. But let me just outline the challenges we face in finding and holding onto brilliant people in this sector. We are taking a considered view at this stage in the belief that trading conditions are tracking more in line with our own view rather than perhaps a more pessimistic consensus. If that doesn't remain the case, then we can and we will revisit that position in quarter 1 of this calendar year. The GBP 2.3 million of net impairment losses relates to the divestment of the London Chest Hospital, which we outlined at the half year. It was held in a joint venture with an intercompany loan and hence, why it's presented in this way. That brings us down to the adjusted operating profit of GBP 140.9 million, up 22.9% on prior year and adjusted operating profit margin of 15.4%. And if you discount the one-off effect of the London Chest Hospital disposal, the merits of which I won't go over again, that would be a margin of 15.7%. If you go back to the Capital Markets Day presentation we gave in October 2021 and the medium-term guidance of reaching operating margins of 18% to 20% by full-year '24, you can see that we're firmly on track with that recovery plan, i.e., to move in line with the range of our other listed peers. Now of course, the sector is viewed differently now than it was back in October 2021, and the market is continuing to evolve its view on whether housebuilders will be making 18% to 20% margins in full-year '24. But the principal objective that we were seeking to convey with that guidance was there was nothing structurally preventing Crest Nicholson moving back into line with its peer group. And Peter and I would reiterate that point again today. And we would also reiterate that in normal trading conditions given what we're acquiring new land at, we still think that 18% to 20% operating margins are achievable for us and the rest of the sector. Coming next to adjusted net finance expense of GBP 7.1 million and then share of JVs at GBP 4 million. And that brings us down to an adjusted operating profit before tax of GBP 137.8 million, pleasingly in the middle of the GBP 135 million to GBP 140 million range we guided to at the half year. Adjusted income tax was GBP 28.8 million at an effective rate of 20.9%. And that now includes a part rate effect from the 4% of Residential Property Developer Tax. Exceptionals, net of tax, was GBP 82.6 million, and I'll come on to cover that in more detail later, which brings us down to a profit after tax of GBP 26.4 million and adjusted basic EPS of 42.5 p and a dividend per share of 17 p, including a final proposed dividend of 11.5 p per share. And I'll close on this slide, with arguably the most pleasing metric being our improvement in return on capital employed, such as central and important measure for our sector and reflective of the progress that we've made not only with earnings but also the balance sheet, up from 17.2% in prior year to 22.4% this year. The next slide covers the usual sales metrics we provide. Starting with average outlets at 54, down from 59 in prior year. And we would expect full-year '23 average outlets to be slightly lower again. And that's a function of the planning environment and the approvals processed. And again, Peter will talk about that in more detail later on. SPOW rate of 0.60 down from last year's very strong market backdrop of 0.80, and a total unit completion number of 2,734, up 13.6% on prior year comprising 1,775 private units, 522 and 437 bulk. Unsurprisingly, average selling prices were up across all types with strong levels of HPI generally in the market, but that was tempered to some extent by the increasing participation of standard house types and the geographic shift of where we sell in our mix. And finally, forward sales at the 13 of January 2023 were 2,018 units at GBP 510.8 million GDV. And this presents a strong forward order book position for us as we start 2023. Coming on to the next slide and the exceptional charges for the year. At the half year, we reported a charge of GBP 105 million, predominantly in response to having signed the Building Safety Pledge in April 2022. The total charge at the full year is in line with that same number, but I should point out that is coincidence. And since the half year, we have seen some build cost inflation coming through on some scheme estimates, but at the same time, this has been offset by some downward revisions in initial estimates as well. These offsetting movements are not material, and so I won't add any further comment. As I've said at the half year, given the nature of this provision, we will continue to see moving parts in this area. An example of which is that we received a GBP 10 million recovery settlement from a third-party in January 2023. And that amount will be recognized in full-year '23 as an exceptional credit. The overall provision related to combustibles at year end was GBP 140.8 million, of which we spent GBP 5.3 million in the year. And we expect to spend around half of the remaining provision within the next financial year. I think it's a reasonable challenge to ask, given that historic run rate how confident are we that we will spend around GBP 70 million in the next 12 months. And that's largely driven by an expectation that the buildings already remedied in the Building Safety Fund are swiftly settled upon signing any long-form agreement. Other items in the table include GBP 1 million of imputed interest related to the discount effect on the provision, and a GBP 1.5 million loss in a joint venture which has recorded a combustible materials charge in respect of the building it holds. Coming on to the next slide, the balance sheet. We closed the year with net cash of GBP 276.5 million, with net cash and land creditors at GBP 77.8 million and an average net cash of GBP 102 million for the year. In October, we renewed our revolving credit facility and signed a new GBP 250 million Sustainability-Linked loan, which expires in October 2026. That loan benefits from a lower interest charge if the Group meets or exceeds 4 Sustainability-Linked targets and our progress against these will be detailed in future annual reports. And within that GBP 276.5 million of net cash is GBP 100 million of senior loan notes that mature between 2024 and 2029, meaning at year end we had GBP 374 million of cash at bank. That liquidity position gives us confidence heading into a market downturn, whether short, shallow or deep and protracted. It funds our combustibles obligations and supports our current dividend policy of 2.5x cover. But it is also enabling us to remain active yet selective in the land market. We're going to continue to make these investments, albeit at more demanding hurdle rates and remain committed to a strategy of growth but on a more moderated basis than that which we outlined at the end of 2021. Finally, the pension surplus on an IAS 19 basis moved from GBP 16.7 million to GBP 11.1 million, principally due to a movement in the year-on-year discount rate. On the next slide, I outline the land portfolio movements for the year. We closed the portfolio with 36,700 plots with a GDV of GBP 12.1 billion and an ASP of GBP 333,000. During the year, we added 3,094 plots to the portfolio across all divisions, including for color 439 at Perrybrook, Gloucester, 558 plots at Steffen Way, Daventry, and we added our first site in Yorkshire at Melton Road, Sprotbrough. Within that year-on-year movement -- JV movement is the disposal of 291 units of the London Chest Hospital, and 71.3% of the portfolio is owned versus controlled, down slightly from prior year. Finally, as I outlined earlier, we're remaining active in the land market. And Peter will touch on this in more detail later. Also, the market remains competitive, we are seeing numerous examples but where uncertainty and unwillingness to commit to new acquisitions from other developers has opened the door to Crest. And in particular, enable us to benefit by virtue of our relative size and scale in completing our due diligence and getting deal terms agreed quickly. Consequently, we've been able to add some fantastic sites in great locations in recent months, which brings me to my final summary slide. Another year of delivering on guidance as our operating margins track back to [ stable ]. Good progress in completing schemes like Old Vinyl, Hayes, and Sherborne Wharf, Birmingham and divesting London Chest Hospital. The portfolio is so much stronger and more resilient than in previous years. We start 2023 with the forward order book of 2,018 units at GBP 510.8 million GDV. The balance sheet has been further strengthened following the good work and progress delivered over the past 3 years, ROCE up to 22.4% and net cash of GBP 276.5 million, with an extended RCF illustrates how robust that is. And finally, we remain committed to a strategy of growth, albeit one that's now been tailored to the current market conditions. We will remain active in the land market because our confidence in the long-term resilience and fundamentals of the housing market remains. And with that, I'll hand you back to Peter.

Thank you very much, Duncan. So now if I can turn to market context and what is an uncertain outlook as we look into 2023. I was actually going to tone down some of the superlatives in the script this morning, but I don't think there was anything getting away from it. In terms of the global, domestic, economic and political environment, I think 2022 truly was an extraordinary year and it all started off so well. As we came into the year, the market still retained its strong momentum and some house price inflation is still coming through. But the worst signs of wider inflationary pressures in the economy is starting to come through from the outset. And specifically, in terms of the sector, we had Michael Gove's intervention with cladding and combustibles. And I'll come on to what this means for us as a whole. But needless to say, this has taken a lot of our attention and focus this last year. In February, of course, we also had the start of the Ukraine war, and it's fair to say that the impacts of this would gradually felt at first in terms of the implications for energy and inflation. But by the summer, what was more widely narrated as a cost of living crisis was recognized and started to have an impact on consumer confidence. And this coupled with rising interest rates was slowly squeezing demand for houses. The fallout from the short-lived trust government, however, brought a step change in this negative backdrop. With rapidly rising levels of inflation and interest rates, the market did take fright and sales rates slowed further. I'd reiterate though that there still was a market even then and the lead indicators were pretty good. But cancellations increased and reservations were harder to come by. The market remained very nervous in the run-up to Christmas. Buyers were being fed with a stream of commentary around potential price falls and unsurprisingly, have been prepared to sit out of the market and wait and see. Actually, in reality, pricing has held up well so far, reinforced by very few distressed sellers. The scenario playing out so far is broadly as we expected, with pricing being quite resilient, but volumes coming under pressure. What we do have now, domestically, is the beginning of stability. It stopped getting worse, and there are now early signs of economic confidence returning, which is probably slightly better, slightly earlier than expected. Similarly, the mortgage market was very volatile for a time, but there is increasing evidence that mortgage rates may have peaked in the cycle and are now starting to come down. Because of some of the political and economic issues already mentioned, our supply chains both in terms of labor and materials were impacted last year. Increasingly, though, material availability improved, but cost pressures remain throughout the period. Labor availability, including site management and office-based roles were also squeezed in the year. There was a lot of competition for people and inevitably, this pushed up costs for these resources and also created build disruption and delays. There are now early signs that these pressures are reducing and actually in some labor categories are beginning to reverse as the outlook for industry volume softens. I think this is very encouraging. Although we have been successful in the land market, there were certainly signs of overheating by the late summer of 2022. These pressures, of course, have now reduced with many competitors having exited the market. Converting land identified through the planning system into active outlets has been torturous in recent years. Endless delays in getting reserve matters approved through under resourced sometimes over [ FASI ] and certainly highly politicized local authorities has led to an industry-wide problem with outlets, and we've been no exception to this trend. On top of this, the more widely discussed issues around nutrients and water neutrality have not yet been resolved despite government rhetoric around tackling this. And this matter alone is responsible for 4 or 5 pure outlets for us than we would have expected at this stage. The government's decision to see housing targets as guidance going forwards will inevitably reduce releases of land and with it, industry completions over time. On this, I've got no doubt whatsoever. This reduction in housing delivery going forwards and with the shortfalls already cumulatively built up over decades, the challenged supply side in England, in particular, the south of England will continue for many years ahead. The population will continue to grow, the desire for homeownership and occupation will not wane and accordingly, the supply-demand imbalance will continue to offer support for participants such as us in the medium to long-term regardless of short-term market sentiment. That resilience has continued to be demonstrated in the sector, notwithstanding the major shocks to the economy in recent times such as Brexit and the pandemic. So let me now update you on progress against our strategy that we set out in October 2021. Clearly, short-term market conditions warrant a review of and some adaptation to our strategy. However, for the reasons set out at the time and given the likelihood of a further squeeze on land supply in the south, we remain convinced that the wider geographical footprint is in our best interest in the longer term. We remain committed to quality of earnings expressed through strong margins. With the market slowing down since summer, we've sought to protect margins and price as sales rates have softened. And this will remain our priority. The spring selling season will be important, but there is always going to be a balance between price and volume. But for us, the weighting will be towards margin protection. Although we've kept a firm grip on overheads in recent years, the inflationary pressures that were around in H2 of 2022 will be more strongly felt in 2023's numbers. Cost of living pressures and the competition for skilled resources will remain. Additionally, regulation changes mean that more roles will be required as we invest in our people in critical infrastructure to deal with these changes as well as, of course, additional capacity in our new divisions. Until we better understand volumes going forward, our inclination will be to retain our highly skilled people and to take some overhead deleverage if necessary, at least in the short term. As I've mentioned, we believe that growth in volumes over the longer term and in particular, our geographical footprint is going to be a necessary and key part in maximizing our value for our stakeholders. We've made good progress in Yorkshire, which I'll come on to shortly, and we've also now made progress in East Anglia. We have, however, deferred the opening of a third division to better visibility around the macro environment and what that means for our sector becomes clearer. I've touched upon the land market. Assets began to overheat in the second half of last year. Our participation reduced. We remain disciplined around our margins, and that's when we've been able to continue to be participants on a highly selective basis as some interesting opportunities presented themselves towards the end of the calendar year. Our strong balance sheet has enabled us to retain these choices as we move forwards. It remains the case that the supply of quality sites in Southern England will be very constrained for some years ahead. Furthermore, going forwards, we wish to minimize our participation in what might become a scramble for assets when better market conditions become more visible. As you know, Michael Gove got involved in the combustible situation in January of last year. So whatever our personal views about this intervention, things have moved forward since then. We signed the Pledge in April. In fact, I think we will probably be the first to publicly commit to this. And we provide it for our liabilities as we sort things and frankly, have just been getting on with the task, a task that is actually quite a major undertaking to be completed over a number of years. We have a central team set up to coordinate matters, and they're assisted by divisional teams who have the local expertise. Some of this resource is, of course, central and is provided for, but there is additional work for the normal positional teams given their oversight. In addition to undertaking the works on building that we constructed over a 30-year lookback period, and regardless of whether fire-related upgrades are necessary due to falls or simply due to changing regulations and changing attitudes, we and the wider sector are also now having to incur an additional 4% taxation rate, known as RPDT in order to deal with so-called orphaned buildings over 18 meters. And this has been accepted by the wider industry. What is also now proposed that, in our opinion, is manifestly unreasonable is to pay to a further fund of around GBP 3 billion to be collected over 10 years probably on a roof tax basis to fund orphaned buildings between 11 and 18 meters. In our view, this should be funded through a combination of wider taxation and other market participants such as material suppliers. It's been a challenging year in terms of build programs in 2022 and delays build adversely affected from some of our customers, which has been regretted. Quickly returning to being a 5-star rated housebuilder remains a strategic priority for us going forward. Sadly, we have fallen marginally short of this threshold in 2022. The labor and materials issues were the primary reason, but also one of our divisions was impacted more heavily. And this, in turn, affected our collective score. As part of our investment in overheads going forwards, we've recruited additional people in the area of customer service, more managers in each division and a new quality assurance team. More training and support will also be provided across the organization. Shortly, we would be moving on to the New Homes Quality Code on all of our sites. We're strongly committed to the principles of the Code, and have enhanced training and processes in preparation to this change. These will be implemented on all of our sites by February of this year. I've referenced our new Yorkshire division. Just a little more granularity on this. As you can see on the slide, with the team now in place led by Guy Evans, the division's Managing Director. The team have an office located at Thorpe Park on the outskirts of Leeds and are progressing 5 sites. Some of these contracted and others in solicitor's hands. Planning applications are now running on the first of these sites, with starts due later this year. The first financial contributions come through from 2024. We continue to focus on our multi-channel approach to selling homes and acquire land. More difficult market conditions at present and the likelihood of lower land releases in the future reinforces the need to have a wide range of partners and counterparties. In partnerships in 2022, we delivered a number of properties agreed for sale in the prior year, and many of these will also contribute in 2023. We are retaining strong relationships with ERP and the PRS sectors, and new deals have been agreed or are in the procurement process. We did see throughout 2022, a shrinking discount to the open market price for PRS property, driven by strong rental growth and competition for product. And there does remain an appetite for these units, notwithstanding wider market uncertainty. Our focus remains on private and affordable package deals, and our strategy does not include purely contracting work, which we see as higher risk. We've had a good year in respect of strategic land, with a number of quality sites added to the portfolio and good progress made in respect of new planning allocations on existing assets with progress made on over 3,000 plots. Now, I am very pleased with the strong progress made in the area of sustainability and social value. Against the target set out for the period to 2025, we will reduce carbon emissions by a very impressive 43%, well ahead of our 25% target by 2025. On renewable electricity, we have now reached 70% utilization against our 100% target by 2025. And in respect of waste, where we have a 15% target by the same year, we've reduced this by 10% in 2022. But we are committed to going much further and have set out net zero science-based targets earlier in the year, and these have now been validated. We aim to reach GHG net zero by 2045. Some of 2022's progress has been driven by the widespread use of biodiesel. Also in the area of sustainability, we've developed a toolkit for our division teams to use in order to measure biodiversity net gain. We are progressing with our response to the impact of Future Homes. The cost impacts of these are included in our viability for new land purchase. We were early adopters of the TCFD disclosure and have signed up to new sustainability-linked -- a new Sustainability-Linked Revolving Credit Facility with targets linked to our strategy. And finally, the targets that we have in the sustainability arena are also linked to our remuneration policies. So to summarize, it's obviously been a very quiet year where not a lot has happened. Seriously, though, it's been a very challenging year to navigate across multiple fronts, and I'm immensely proud of the team's achievements against this backdrop. We put together a strong financial performance, including further margin accretion and a strong return on capital employed. Our recovery plan is well on track. Most aspects of our strategy are ahead of, or on plan and the progress with our Yorkshire division is pleasing. And East Anglia will now follow [ this trend ]. We have work to do with our customer service score, but have a plan in place and are confident of a recovery there. In terms of the outlook, well, another quite uneventful year ahead, I'm sure. Although the economic outlook and read across for the housing market looks challenging, we have great experience within our management team and the strength of our balance sheet to provide resilience and also importantly, to enable us to evaluate the situation first and then to react appropriately. We'll prioritize margins and the retention of that. We expect to see a gradual pickup in sales rates during the spring, and we'll participate selectively in the land market. If conditions differ from those anticipated, we will react accordingly, again with policies prioritizing value retention, the cash flow and as Duncan mentioned, if necessary, a review of our cost base. We remain confident about market fundamentals and the longer-term ability to create value for our shareholders. We remain convinced that this will be best expressed through growth, and this will be measured and disciplined. Our new businesses in Yorkshire and East Anglia strengthen our footprint and better leverages growth when improving market conditions return as they inevitably were. Fundamentally, we believe that our business with its great land assets held in the areas of highest demand with a greater shortage of supply, together with a strong balance sheet and highly experienced management will enable us to prosper in most economic circumstances. Broadly speaking, we think that the market conditions that we're currently seeing, with pricing generally holding up, volumes reducing, but a better outlook as we move into 2023 are playing out broadly as we expected. It's early days, but it looks as if things are going as we expected so far. Thank you. So, we'll turn to Q&A now.

Chris Millington, Numis. You've obviously alluded to your expectations [Technical Difficulty] spread, I guess from what you've seen on draught so far this year. What gives you that confidence? So that's number one. Second one just a detail around the order book, if possible, please. Perhaps just give us a feel [Technical Difficulty] for '23 [indiscernible]? And then finally, just on dividends. [Technical Difficulty]

Yes. I'll let Duncan pick up to the extent that we can't say anything. But I mean, on dividends, we've got a policy of 2.5 cover. That is our policy. I think that balance sheet we've got, I think we have some reason to be confident around that, particularly related back to the earnings. I mean, in terms of what we're seeing so far, probably broadly similar to those who reported last week and that there was -- there remained a lot of interest in terms of web traffic, all the way through the back end of last year, but that wasn't necessarily converting into site visits and it wasn't necessarily converting into reservations. We also saw elevated levels of cancellations. We saw a further pickup, as you would expect over the Christmas period. And I think I've just described this as quite an encouraging start as we move into the first week in January, there's certainly been a pickup again in web traffic. But also, we're seeing more of that now starting to convert into interactions with us and business as well. So, yes, we're quietly confident. Duncan?

Chris, yes, I'm now going to give sort of a sense on the revenue for this year, I have done in previous years, but obviously, it's so difficult to forecast for new years. I'm not sure if that's definitely helpful. And I'm not going to get into breakout split. I'll try and be helpful and say, there's nothing remarkable in that competition. That's discernibly different, as you need expect us to report a very large [ bond ] component at half year versus otherwise. And it's unremarkable than its comparison.

Thank you very much. I think we've got a couple on the second row there. Chris [indiscernible].

Yes. I've got 3, please. Just first on the [Technical Difficulty] you got recently and just in the current environment, interest rates, we are still seeing little interest [Technical Difficulty]. And then lastly, just on the gross margin. Obviously, you've increased by 10 bps. If we took up the legacy site, is it 30 bps [Technical Difficulty].

Duncan, perhaps [indiscernible].

Yes. So yes, the underlying gross margin change has been on an improving track for the last couple of years as we've taken out some of those sites we referred to. Maybe best reference to a kind of cost and market conditions basis, on the basis -- you will probably have a view around build cost inflation outstripping selling price inflation in the next year to come. But if you were to take a constant basis for this year and next year, we would continue to see gross margin rate accretion on a constant basis from last year into this year, as well as we continue to work through and unwind those poorer sites in the portfolio. London Chest Hospital didn't feature in the match to the P&L in the year gone. Well, that is a, say, foregoing -- it's a foregoing, a further margin dilution that would have started to come into the P&L from '24, '25 and '26. That is specifically a one-off here as we've taken the loss on the sale is what I was trying to explain is the 15.4%, all things being equal, having not made that sale would have been 15.7%. However, you've had losses coming further down the line on that side. So look, the portfolio continues to improve as we continue to wash out these sites. And as I've said previously, unfortunately, we're still present in '24 as a drag, but it is a much cleaner position. On build cost inflation, look, I think we comment similar to others and trying to be helpful and give some insights. I think we're starting to see early indicators coming through, perhaps more evidently in the subcontractor behavior, particularly groundworks, super structure tendering, there is more appetite to come back and sharpen the pencil on the second go and expand on the realization expectation that things are going to be tougher. In some areas, materials, definitely starting to see signs of that stabilizing. And I think, well, on the trajectory in H2 of this year starting to come down on the side of it in other areas of materials, as you'd expect, given sort of high single-digit figure inflation expectations. We're still getting increases coming through. But there are definitely signs -- early signs starting to emerge of some normalizing of that. I think we are quietly optimistic that as we head into the second half of the year, that becomes a lesser pressure that it's been historically.

I think if you think about it, the way that it has been playing out and others reported similar to us in the sense of pricing holding up and that's how we've taken the strain. Logically, that has to have an impact eventually on the supply chain, particularly the labor market, which is more discretionary than saving the materials market. So, we would expect back to at the very least take off. I think it goes through throughout the year. Just in terms of both PRS, and we don't break out the bulk number specifically, but just to be helpful. There's nothing unusual to think about in terms of the numbers [Technical Difficulty] going forward. The PRS market, yes, there definitely is still an appetite out there. We've got multiple counterparties that are still really interested in looking at product and that discount to open market value had narrowed almost to nothing. And in terms of the [Technical Difficulty] in 2022, I would expect to see a little bit of discount there as we move forward, but certainly not at the historic level of maybe sort of 10%, 15%, I would expect it to be lower than that.

Emily Biddulph from Barclays. I've got 2 questions please. The first one has got 2 parts on land. Land commitments were making the most. And firstly, can you give us [Technical Difficulty] areas where you have less demand or compelling smaller sites, et cetera. And then for the year, how much would you -- if the market plays out as expected, how much would you simply be comfortable [Technical Difficulty] And of that, what could the range present in terms of cash that spend to increase? And then secondly, what you said [Technical Difficulty].

Yes. Duncan can pick up the cash spend, perhaps also just in terms of the pricing trends as well and I'll tackle the question around [Technical Difficulty].

Yes. I mean, we don't have a particularly deeper wide range of incentives component in there, Emily. I think pricing remained, say, pretty stable. There's not really a lot more to add. I mean, I think I've seen the color. Obviously, some of our competitors have given on that. I just don't think we've got that detail to necessarily go into. Look, on the land cash, I'm not going to go into a specific number. What I will say is, if I look at the wish list of all of the divisions that have sent in what they've got to spend on that, I can guarantee you, we would end up spending all of it this year. That's one promise that we'll make you. But what I tried to say is to be helpful is in terms of thinking about a world of modeling lower receipts from a sales value perspective, we'll inevitably have to -- they are going to have to be more considered in relation to our buildup of WIP, on our build spend as well. Our land spend is the other component part in that bridge. We will be aspiring to and we will make sure we deliver still a very healthy net cash position at the end of this time starting next year. So we're not -- just to try and contextualize, we're talking about some considered and selective cracking sites. I'm sort of starting to move on to his patch that we're looking to do. We're not talking about a massive, a lot more contrarian position to the market generally.

Yes. Let me just point out the whole land base because I'm sure it's something that people more widely will want to explore with us. I mean, we're not going to give a specific number of plots, but in the period, it would be less than in a normalized market would held. We are talking about being selectively in the market, not all-in normalized land spend. In terms of locations, some of the high-quality locations in Southern England, where it's always going to be difficult to acquire land and where the robustness of price is more likely to be found, the sort of answer that I have with that. If we think about the market as a whole, a number of competitors have expressed that they are not only out of the market, but also withdrew from a large number of sites at the back end of last year. We didn't withdraw from sites. We did actually take the opportunity to renegotiate. And of course, in the febrile market that we were in at the back end of last year, you might imagine that most counterparties would be preparing now to have a conversation around either pricing or terms and towards the back end of the year. And just some of the largest housebuilders talking about exiting sites, 50, 60, 70 sites. Some of those were distressed sellers. Some of those were looking for a home for those planned assets. We've also got to think in terms of, yes, there is a risk in timing of when you buy land. Obviously, we're buying at better margins and to try and be helpful rather than express in terms of margin, perfectly reasonable to an expected, somewhere in the 10% to 15% discount of the land price and better deferred terms as well for those sorts of sites. But it's not that there is no risk exiting the market or being in the market. There is some risk in [ either tactic ] because there will come a time when the market starts to improve, there's wider visibility, people need to buy land again, there's going to be a mighty scramble for that land. And there is only one thing that will happen and that will be is that margins, they will be squeezed. And a lot of the land sellers who were around at the time of those withdrawals are taking a longer view. Not all were distressed sellers and nor were they taking a long-term view and saying the demand for housing and sites in the South is going to be strong in the medium term, we will just wait. Relationships are also so important in this sector. As an ex-land buyer myself, I know that's the case. And just anecdotally, there was one very large land seller in the South England who sells multiple sites each year, who were chosen to run with one of the larger housebuilders in the U.K. on the promise of a handshake from a member of their exec team who withdrew at the last minute. That landowner said to us, we will never deal with that company again and I can believe that convention. So it's not that there are no consequences for being in the market or out of the market, but we are doing it selectively, being sensible about it. It's not all it. It is selective in terms of location, quality of assets, quality of the units.

I think to build on the point what you're asking is we're just -- we're not taking the stuff that was a more complex nature than we've done in the past. These are all, in our view, a strategy of knowing risks, sites in great locations.

Sorry. Charlie?

Just a question on first-time buyer. And just wonder if you could remind us your exposure to that segment and what you're seeing there? And also kind of, I suppose, sort of hoped for some higher LTV marketing deposit unlock perhaps progress on that front?

Yes, Charles, I'll try and cover that point quickly about that quarter of completions in prior year and deposit unlock does not feature significantly -- very limited for us, I'll put it that way. It's not a big feature at all. So you're right during recession, you start to see improvements as we saw this morning. I think Yorkshire already announced, they've lowered their rents on their 95%, start to see further improvements of that and others follow, that will definitely help.

I think a functioning incentive scheme for first-time buyers would help the market quite well. There is no visibility of anything the government is currently doing. But it would be helpful because deposit unlock should be a good incentive. But the pricing around that doesn't make it an attractive form of buying. But it is encouraging notwithstanding than to see today, Yorkshire just reducing it starting with a form and it's going in the right direction.

And just as a follow up. One of the announcements reported last week are the completed comment of the first-time buyer being more difficult. Has that been your experience? Is the first-time buyers [Technical Difficulty] mortgage cost? Or is it more than that? [Technical Difficulty]

No, I think it's more of a cost thing certainty. I think what we've got to remember is that although there is a lot of uncertainty out there, the employment market is still very strong. Wage growth, just out today, the numbers are still strong. There are a lot of people doing well. And if they can get their head around confidence in the asset value remaining strong, we'll gradually start to participate. That's been our central leases all involved. There are a few distressed sellers than there have been historically. People will initially sit on their hands and gradually confidence will return once people see that the gas prices are not about crashing. That so far has been [Technical Difficulty]

[ John ]?

Three if I may. First one, in your cost, the admin expenses. Are there any mitigating factors such as perhaps more stabilization to come? Any other initiatives you are pushing through to minimize that admin increase. That's #1. Then secondly, on [indiscernible]. I understand it's pretty intense down on the South Coast into one of your core areas. Perhaps you can just update on that, Peter. Is that driving perhaps some of the land that you're securing to give sort of a supply there to combat that? And I'll come back to the third.

Okay. Duncan, just on...

Yes. John, just breaking in 2 parts out. So, yes, I think elements of what you're referring to is the standardization that we put in the ground is in our build costs and obviously, you are referring to our gross margin. Yes, in terms of moving away from some of the kind of more complex stuff is that washes out of the portfolio. David will prefer to be building sites unlike rather than going forward, I'm sure, and that will actually get a benefit of that coming through. We'll get some benefit coming down the other side of the build cost inflation curve. On the admin expenses in terms of our central overheads, in terms of litigations or standardization, in all honesty, probably not a huge amount, we are still culturally and all things otherwise, very, very lean and [indiscernible] on managing costs generally. And so I think, therefore, were we in a position? And I referenced in my section that we needed to take action on that. That is almost certainly because we are -- we've seen no -- we've not seen a pickup in the market or worse still. We've seen a significant further deterioration. And I think you are then into having to say match -- ultimately match the organization size and scale to your output and start taking out directly variable roles. There's not a lot of other discretionary areas that have expenses I could foresee that we would be able to take out. And hence why we've given the guidance we have.

While nutrients come in 2 parts, there is nitrates and phosphates. Nitrates tend to be the issue around solvents and phosphates. If you go further west and certainly into Southwest, both impact of the sites that we have. And then there's water neutrality, which is a separate issue, and that's focused predominantly in West Sussex. That is quite impactful for us because we've got number of sites in the [ water crawling ] area, which are impacted by that. Water neutrality, I think has probably got a better line of sight for correcting that. So, we would expect to see that become less of a problem perhaps in a shorter time scale a year or 18 months than say the nutrients. The nutrients, there are various schemes being set up, but they're local authority by local authority area, where you're effectively buying credits. They're expensive, they're difficult to get and gradually the impact lessens. But government's inability to find a wide ranging solution has been quite frustrating. And it's a sector-wide issue, but it does impact us as well. As I said, around 4 to 5 sites of ours are caught up in this space.

So that drives acceleration in those locations [Technical Difficulty].

Well, all that, of course, is impacted in the same way. So it actually is just blocking development in some of those areas. Land supplies are [Technical Difficulty]. You need quite a lot in at the one end of the hopper to get out a little bit at the bottom. That's all the consents needed. And the way you've got the nitrates issue, the blockage is even tighter.

The third was on East Anglia and the Yorkshire. So it's going to be contributing in '24. Can we expect [Technical Difficulty]? Correct me, 4 or 5.

I think you'd be looking at about a year behind Yorkshire in terms of they need to sell is gestation.

Just a quick clarification [Technical Difficulty]. The order book, private selling price on the order book at least. Second of all, what are the cash from that, that we know about so far? [indiscernible] And then 2 sort of [Technical Difficulty] questions. First of all, just in terms of interaction from the government, particularly [Technical Difficulty] is still [indiscernible] at this point in time. [Technical Difficulty] And then lastly [Technical Difficulty]. How do you think about how you manage your cost to sales [Technical Difficulty]? Is it that if private completions start to drop down, you could actually see some -- could the private be linked to that division? Or actually is in terms of the site opening, therefore, private completions come down? [Technical Difficulty]

Okay. I'll pick up the second 2, and if Duncan answers on the....

Yes. Just pointing on the first one, I was hoping to give you a number. But what I would say is back to the comment about pricing holding up, you can track that back in terms of that's -- that's not been a recent phenomenon. We haven't been -- we haven't seen an [indiscernible] discount or anything that's particularly remarkable in the current forward order book composition. And to my comment, Chris, earlier on in its mix as well in terms of the various different tender types. And again, a cash out land, we'll give that number at the half year in relation to the approvals. But needless to say, in that total cash outflow for this year, there's still a very significant and sizable element that is ultimately discretionary. And I say that more from a defensive mindset around, we have to not do that because the market turns down much more acutely than that will be the case. And to my earlier comment as well, not everything we've got on our pad that we would like to do this year will inevitably come off some handovers [indiscernible] time to be selling or will conclude. We just can't -- we can't get the terms. We want to be safe. So in reality, based on the number that I have on my pad at the moment and making the statement or comment of us being still being in a very healthy net cash position by the end of next year based on half year how the market plays out, that number is only going to be less in my view. It certainly won't be more, if that makes sense, based on some of those factors.

I will try and be quite helpful on the long form growth and the Pledge. It's been a bit of a roller-coaster. We've predominantly negotiated as part of a wider HBF discussion. One or 2 of our competitors have also had very direct discussions with government, because not everyone is created equally here. Some have different problems with different aspects of the Pledge or a long-form agreement. It's been a roller-coaster during the summer. Initially, I think some of the proposals went -- will be on what we thought we signed up to with the Pledge. We had the 2 Clarkes who had turned up at DLUHC briefly, very briefly, who were more conciliatory and had agreed to a more reasonable position. And then we had Mr. Gove returned. Mr. Gove was, should we say less reasonable and basically told us that take it or leave it that everybody said. We'll leave at that. So, there have been more constructive discussions. And actually, truthfully, in the last 4 or 6 weeks, the discussions have been quite constructive. And those final discussions and negotiations are underway. And whether or not it's an acceptable agreement or not, will just really depend on some of those clauses that are under negotiation at the moment. But it's more constructive at the moment. And I think that both sides are trying to be reasonable. And I would expect this to play out perhaps over the next 2 to 3 weeks. On bulk, as we've said numerous times over the last few years, PRS is a fundamental part of our business in good times and bad. We think that proportion of our sales will give us security over the longer term. And when we buy larger sites, we do begin discussions with counterparties from the PRS side. At that time, some of those work out, we get prices that we want, some don't. But it's not a knee-jerk reaction that is related to market conditions. Now, we have those discussions all the time on all of our larger sites that are suitable for the PRS market. And that actually is continuing to happen now, as you would expect.

I think probably got a couple of follow-ups. One for Duncan and one for you. Maybe you indicated that sites are going to be slightly lower this year. Is that on an average basis or average annual basis for the year? And closing and opening as well as you think, or do you think actually yields will trough and then start to....

Yes. I think it will have more of a trough with a better exit rate, but I wouldn't get into breaking out that detail. I'll just take the average.

What was the average cash last year?

We gave it last year. [Technical Difficulty]

And then the second one -- the third one was on the cancellation rate. You're going to keep it obviously sort of start of the year. Have you seen a sort of drop-off in cancellation rates? And have you seen -- following up on Charles' point around the first-time buyers issue, have you seen sort of a little sort of shift in that mix with stronger demand from second or third-time buyers and the confidence levels?

Yes. On cancellations, I don't give specific numbers. But in terms of direction pattern, just after the [ barter ] with the trust covenants, yes, there was a spike in cancellations. But it has gradually tailed off such that [Technical Difficulty] at that time. Sorry, the second question?

Second was around -- again [indiscernible] last year versus at the start of the year, [indiscernible] stronger and then we will have more confidence.

What I'd say in terms of interest expressed by clicks on the website is pretty unchanged. There's a lot of interest from both, ability to execute in probably second or third time purchases rather than first time purchases predominantly.

Yes. I've got, I think 3 also. But the first one is kind of related to your comments around pricing and volume. And where is the [indiscernible] volume in terms of how much more decline you will be willing to let going to see to maintain rates? And then on pricing, in terms of the land, [Technical Difficulty] it probably sort of a lower margin [indiscernible]. And then on the build cost inflation in the provision, what were you assuming? And is that coming on a later side? [Technical Difficulty].

Do you want to back up on the second on the potential write-downs?

Yes. I mean, going back a couple of years ago, gross margin evolution, generally, it's the other side of that coin. I mean, in a world where -- and this is a really dangerous sort of thing to try and get into doing the math and have a go to try to help because in a world where you start moving down the curve of 5%, 10%, 15%, 20% repayment, corporate's behavior in our situation, it doesn't move in a linear fashion at that point. Undoubtedly, you start to see a dramatic sort of a 20% price crash. And you find tomorrow, you see a very different set of behaviors clearly. But look, assume it's a [ 3% to 5% ] price reduction on the portfolio as we sit here today, we're talking about a couple of schemes needing to be potentially addressed through a further extension of an NRV provision, of which 99% of the magnitude of that provision relate to simply taking further below the water line, right, at 10% an asset. So that's probably GBP 1 million to GBP 2 million worth of total impairment and moving up the scale to sort of 10%, that probably brings 3 schemes into the draws at that sort of level. And again, 90% of that would be, again, taking it further down the water line. The point being, we are -- and that portfolio is --the portfolio is in much, much better shape. And interestingly, had we not divested the London Chest Hospital, probably back to that 5% range, that would have been in at the same money as Farnham just to put it into context in terms of how to deal with that as well because of where it's at from the large recognition perspective. So again, in good shape. So, I guess summary take out for that to be in a sort of sensible non-GFC type of pricing downward pressure environment, we don't anticipate it being a material impact to P&L and the portfolio. I think just modeling your build cost inflation piece on that.

[indiscernible] provision. It was too low. I'm just wondering whether that's material or labor.

Look, it's a bit of both. It's not being material. The sort of provision, again, as an extension of the point Peter was making earlier on around long form, remain comfortable with where the provision is struck at the moment. Things that could cause that to go up, as we said at the half year, build cost inflation coming in or [indiscernible] of new buildings that are undiscovered. We're getting some small-scale build cost inflation coming through the Pledge. I think it's reasonable to assume that or carry on. Are we seeing a lot of new buildings coming in? No, we've seen a few, but it's not been material because [indiscernible] gone through previously. Those other buildings have found ways to be identified. Against that, you've got opportunity of some VAT recovery. There's opportunities on other recoveries generally versus the GBP 10 million. And just for color, we've got 26 buildings and the buildings [indiscernible], which we now have control of 25 of those 26 buildings. And if you remember as well, that was also part of the construct around, if we can get control of those buildings, that's much greater than level of control oversight we have around managing the cost exposure on those. So, look, on the provision, generally, I can't sit here and say that provision won't meet until the longform is fully inked and done. The direction we remain comfortable, it is in the right place.

Just on the pricing volume, it is a bit of a sort of certain argument and to some extent, you can do your own numbers. But of course, we've got fixed costs. We've got to generate cash in the long term. And we have to have a certain scale of volume. So, we would protect and hold margin to the extent that we have to retain a scale. But I wouldn't give a specific number on that. But also, you've got to bear in mind that in an environment where volumes were even more squeezed and pricing was even more difficult, the build cost inflation would also come under severe pressure the other way, which would at least help to mitigate that. But there are other things that you do in terms of cash flow, specifically overheads would be lower. The build spend would become marginal build spend. You'd start concentrating on where you can recover cash on build. And of course, you can eliminate pretty much all that expenditure if you have to. So, there are a number of tactics that could be adopted. But so far, we're seeing, I think, volumes that are manageable.

And just to add to [Sam's] question really, what's the fixed cost in the business? And just if you could give us central cash flows as well?

What's the second part of the question?

Central cash flows.

Well, I'm not going to break out the fixed cost in the business, but I think it's -- I think it's unhelpful. The disclosure will get you help in the future. It would be needless to say. That's my only comment. We can make further variable cost reduction if we need to in a world that's tougher at the moment. And kind of the cash flows [indiscernible] historically, needless to be honest. [Technical Difficulty]

Yes. I mean, just in terms of quantity of fixed costs, you only need to look back to the COVID period where across the sector, much people couldn't generate cash with very, very little revenue coming in. So the liquidity position is very strong. Basically, if we could deal with a challenge not just pandemic, then with softening market conditions. I think that's probably it. So assuming, there are no more questions, feel free to grab a coffee and a cake and have a chat. Thank you. Sorry, you now have questions. I'll conclude the questions from the room. So it doesn't sound like there are any further questions from outside the room. So as I say, please grab yourselves a coffee and a cake. And thank you so much for your attendance this morning.

Thanks a lot.