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

Yes. Good morning, ladies and gentlemen. Thank you for joining the call this morning. You will have seen the statement that we issued to the market this morning. So I'll just give a brief backdrop to that and some additional commentary, and then we'll leave it open for analysts' questions. So you'll recall when we set out our expectations for the full year at our half year presentation. We were acquiring a sales rate for H2 of 0.5 SPOW rate. The early part of this period, we were seeing sales at or around that level, perhaps just below, but within striking distance of that. What we have seen over recent weeks, particularly the last 6 or 7 weeks, has been declining -- and actually, in recent weeks, quite a significant reduction in sales rates such that we -- around 6 weeks left of the sales potential for this financial year, it's important that we recognize that those sales rates which were achieved in the last 6 or 7 weeks are going to mean that our profit outturn for the year would be significantly lower than market expectations. Additionally, we've incurred further consensus on our Farnham regeneration project in the center of Farnham. And again, that will impact on our full year '23 results. So management is taking a number of actions to both mitigate 2023 and also to put us in a better position for '24 and beyond. First of those, it is around looking at our overall cost structure. We set out a growth strategy in October '21. We're looking to go into 3 divisions. The first of those was in Yorkshire. We still intend to operate our Yorkshire division, albeit at a slower trajectory of growth than we originally set out. The second was in East Anglia, where we set out a new independent business division earlier this year. We are now going to continue to participate in East Anglia, both through our existing Eastern division which, in the future, will operator with revised foundries with the Kent part of that business now moving from our South division. That does leave us the optionality in the future to break out a separate East Anglia division, but that will only happen when market conditions allow. And of course, as you would expect, we will also be looking at our wider overall organizational structure and cost base. We're looking at some bulk sales. And our bulk sales are not as a direct result of this market -- of these market conditions. It has been part of our strategy for some time, and that's something that is a normal course of business, but does offer particularly support for '24 and '25. But just in concluding, I think it's really important to explain that this is a cyclical market. The supply and demand imbalance means that it is a strong sector to be in. And we do expect in time for interest rates to start to move back down again, and we expect to see stronger market conditions as we move through the second half of '24 and into '25. And we're well placed to meet that demand side improvement when that eventually comes. We have been buying some fantastic assets in the earlier part of this year. We've got those into the planning system early. The planning system is slow, relatively dysfunctional, but we've got those assets into the system more timeously, and we'll be in a better position to have those assets available for sale when those market conditions do improve as they inevitably will. So Duncan, anything further before we move on to Q&A?

No. I think, Peter, let's go to Q&A.

Thank you. If we can just move on to Q&A then, please.

[Operator Instructions]

It's Clyde at Peel Hunt. I've got a few questions, if I can. Firstly, have you seen a jump in cancellation rates at all over the last 6 to 8 weeks at all? Because obviously, it's sort of a fairly material sort of change in that SPOW rate. I mean, normally, you would expect a slower period over July and August, it's probably the second period after Christmas in terms of sort of slow sales rates. So I'm sure that wasn't a surprise. So has there been something else, in cancellation rates maybe, that's changed expectations?

It's a bit of both with that one, Clyde. And as you would imagine, if you're looking at just as a percentage, it obviously looks -- it looks worse. But in terms of absolute numbers, it's not extraordinarily high, but when expressed as a percentage of a lower number, it obviously is high on that basis.

Okay. And in terms of sort of pricing? I mean you haven't said anything on pricing in your statements or today. Has that got worse? And if so, can you give us some sort of idea of the quantum?

Yes. We haven't done anything specific. But at the start of the year, I said that I thought that the best case that we were going to get this year is flat pricing, the worst case would probably be minus 5% and that it would be more likely to be volumes that take the strain rather than price. I think you can imply that the overall pricing is somewhere between those 2 numbers and pretty consistent with what you would have seen and heard from our competitors. There's nothing unusual going on in terms of our pricing when compared to the overall market.

Okay. And the last one I had was around write-downs. Is -- your GBP 50 million guidance now, does that include anything for asset write-downs at all? Or is that just very much a lower volume sort of really driving -- along with the Farnham here sort of driving the change?

Clyde, it's Duncan. No, it doesn't include any further provision for any asset write-downs, depending on your view of where you think pricing might go, which is the general determinant for doing that and then obviously build cost movements. The obvious site where you get an immediate drop through is Farnham because it's an NRV site. If anything, actually, we're seeing good pricing performance at Farnham as a scheme individually. And other sites that would have to come -- that would come into the jaws of that would need to see a fairly material pricing deterioration between now and the end of the year, which we don't anticipate. I think the other point I'd just add to build on Peter's point, which I think is worth sort of getting across to everyone at the outset is, back to that point around the SPOW rate and the cancellation rate, it's also -- the reason for announcing today is also as well a function of -- and crystallizing our forecast is also a function of where our year-end falls in the sense that we really only have about another 4 weeks of live operational trading before then a kind of credible 6-week runway that we get customers from reservation exchange, legal completion and in the books at the end of October. And so in some respects, what we're seeing and experiencing in the market at the moment, we don't have the luxury of seeing whether that improves and comes back in later in the year or whether we can get other compensating sales to sort of offset those cancellations in the early autumn and later autumn. And that's why we have to take a view as we've done on the demand environment.

Aynsley Lammin from Investec. Just 3 questions, please. First of all, on the guidance, if you could give a bit more color there in terms of to get to the GBP 50 million of PBT, what you're kind of assuming or expecting on volumes, I mean presumably, it has a quite a bit of margin fall in there as well? But any more color on the volume guidance that underpins that GBP 50 million? Second question, just on the land spends kind of your financial year-to-date. And any kind of moving parts in the cash flow that might be different to what you suggested the kind of results? And then thirdly, just on the overheads with the kind of efficiencies and changes you're making, what would you expect the operating expenses to be for FY '24 post order changes and cost cutting you're making?

If I can just pick up very briefly, the second and third, and then I'll ask Duncan to break down the guidance for you. I mean just in terms of overhead, we haven't given a specific number, but obviously, we're looking quite closely at the overall cost base in the organization, including overhead, and it does go beyond just what we would be doing by not having the separate division in East Anglia and reducing the pace of growth in Yorkshire. I mean to try and be helpful, I think we would be starting looking at an overhead number that's lower than this year and absorbing any inflation within that. I mean on land spend, we haven't given any particular number on that for this year. And we're not going to -- there's nothing new to see in terms of land spend. We already indicated that we had done most of our land buying early in the first half of the financial year and would naturally be tailing off as we went through the year and into 2024. Some of that, of course, still implies land creditor pay down. So cash is not necessarily directly related to activity in the period, but there's nothing new in relation to that. That has already been communicated that we expected less land activity in H2 and less, again, as we went into '24. So Duncan, just on the guidance?

And Aynsley, on the GBP 50 million PBT. Look, I mean I think the lion's share of that bridge down is down to that poorer sales rate that we're referring to in terms of the year-end position. There's naturally a sense of wanting to create some provisions for some further build cost inflation, other items as well in relation to coming through and driving the year-end view and the restructure or the sort of overhead piece that Peter alluded to also needs some -- reflection of some potential cost to change before the end of the year, which is also factored into that.

And then just on -- I think I've got GBP 60 million for operating expenses for FY '23. Is that a good number to look at going forward? So as you say FY '24 low, is that where I should be starting?

Look, I wouldn't want to be drawn on that at this stage in the sense that I think we'll give -- we will aim to give a lot more clarity on that in terms of the detail in the November trading update, which is not far away. But I think I'd go back to the comments we made on our [ feat ] actually at prelims, which was we talked about the cost and the investments necessary to support the growth strategy. But equally, we're very clear with people that if market conditions deteriorated, we would act decisively in recognizing that. And again, it's the declining profit number, which is what we're talking about today. So we will set to that task in the right way and give some further color in November.

[Operator Instructions]

Yes. My name is [ Roger Lewis ] from [ Hermatics ]. I've got a few questions about the -- I have got a question about -- can you hear me? Hello?

Yes. Yes, we can hear you.

I've got a question about the bulk sales. You say that your current sales per outlet down to 0.25 and you expect through '24-'25 to pick up some of the slack with bulk sales, I'm assuming you mean build-to-rent funds. If it's such a high percentage of picking up the slack, do you see any sort of conflict with the residential private brand and such a large number of build-to-rent properties actually on developments that are subject to private sales outlets as it were? Just in terms of the sort of indications that come from...

No. There's no conflict at all, [ Roger ]. And in fact, as I alluded to, it is a normal part of our strategy. We expect to see somewhere around 20% of our normal volume coming through bulk. We select the right trading partners who produce a quality environment for professional buy-to-let. They tend to be on larger sites where the buy-to-let element is not -- it doesn't dominate disproportionate the sites, and there is that mixed community that we would expect. But we're not looking at 0.25 as being a normal sales rate. That is the sales rate that we're seeing at the moment in difficult market conditions during the summer, which is historically quite low. So I wouldn't do a straight read across and saying, well, slack will be taken up by bulk sales. That's just part of our strategy as we go into '24 and '25.

Okay. As a follow-up on that. You gave a guide of the worst-case scenario, perhaps being a 5% coming off the top of the headline price as it were. Incentives also have come into the market, they're running at about 5%. For an enhanced level of bulk sales during the period of market difficulty, would you expect to be -- the statement, just as it said the commercial level of -- if that commercial level significantly above, say, a 10% worst-case scenario for the private sale discount, as it were?

Look, I'll try and be helpful here. The comment around 0% to 5% being the range on private sales, that's the net price. That's not a grossed up price, less incentives. That is of the net realizable price. In terms of bulk, I'd reiterate what we've told people before, but we think that the typical range of discount tends to be in the 7% to 10% of the gross price. And I don't think that, that has changed very much. It might be towards the higher end of that range rather than the lower end. But that seems to be the sensible sort of range that people engage at.

This is Chris Millington at Numis. Can I ask a couple, please?

Sure.

Sorry, I didn't know if I was on mute or not. So first one is just about, can you give us a comp for the sales rate at 0.25? Sorry, if you've said out and I missed it. And perhaps you could just mention also kind of where the exit rate was because you talk about progressively deteriorating trend? That's number one. Just wonder if you could give us a bit of a feel where you think build cost inflation is trending at the moment? And I also -- the line was a bit poor before, but I didn't pick up, Duncan, if you said you're changing your kind of net cash guide for the end of this year. I just wonder if there's lower land spend, but lower profits kind of broadly offset one another?

Yes. If Duncan picks up the third one. I mean in terms of the sales rate, if you look at trends historically, you would see that there is typically a tail-off between the spring. You get somewhere around the sort of 10% to 15% reduction in sales rate during the summer. It picks up again in the autumn and you get very little sales, if you get, just before Christmas and in the early part of January. That seasonality had gone away over the last 2 or 3 years because there were special factors with lockdowns, coming out of lockdowns, et cetera, which impacted those normal sales rate. But you expect to see lower sales rates during the summer. So that sales rate that we talked about at 0.25 is still far lower than a normal summer where you might typically see, in decent market conditions, perhaps double that. We're not -- we haven't broken that down specifically week by week other than to say that it's been on a reducing trend across the period. In terms of build cost inflation, I mean general build cost inflation, I think we're actually starting to see that more or less level off. Doesn't mean to say there aren't always going to be the odd cost movements on sites. That could be related to preliminaries. It could be related to design changes, things go wrong, specifications, upsides and downsides. So there's always going to be some build cost movements. But in terms of true build cost inflation, I think we've actually started to see that level off now. Duncan, on cash?

Chris, yes, I didn't say anything on the net cash unless you were leading me into the question, which is fine anyway. Look, all things being equal, of course, at the end of this year, given that cash receipts component inflow that relates to the SPOW rate, all things being equal, we will be at a lower level of net cash at the end of this year. We might have a little bit of upside on our original thinking versus the timing of some of our [ fire ] remediation cash outflows. But ultimately, they've still got to go out and would be -- would go out in '24 instead. And in part, that's why we're also making -- I make the point around the land buying as well because as we look into next year and we start [Audio Gap] So -- but all things being equal at the end of the year, it will be lower.

And sorry, just a quick follow-up, Duncan, we'll be going [ sub-100 ] this year? And then maybe just aligned to that, is it still the right thing to be holding the divi just in light of those comments you've talked about?

Well, -- so 2 parts to that, Chris. It's a challenge. I think, yes, I think as we sit here today, [ sub-100 ] that's right, sorry, the line is a bit crackly, would be a sensible place. The actual cash difference between that and applying 2.5x cover on the divi for the end of this year is not material or discernible. Ultimately in our view, I think we've made that commitment. And also, I think back to Peter's point, we look out into '24 and '25 and still have lots of causes for optimism around the market recovery and also us having strong assets in place. So I think the sort of commitment on that is felt like a sensible and proportionate thing to do.

Jon Bell at Deutsche Bank. Can I ask a question?

Yes. Sure, Jon. Go ahead. Thank you.

A couple for me. When you look at sales rates across your various divisions, are there any -- is the fall pretty broad-based, pretty uniform across the piece? Or are there any themes you can pick out in terms of location? And the second one is just on part exchange. Could you just update us on the extent to which you have used it in this period?

Yes. On the first one. I mean, obviously, with 5 divisions that are actively selling and 4 of them in the South and 1 in the Midlands, it doesn't really create a trend. But certainly, the South is tougher because average selling prices are so much higher. On PX, this is something we manage very, very carefully because what we don't want to do is to take a load of sales on new homes and then find that we have a balance sheet problem or a lot of PX properties that we then can't sell. So that's managed very tightly, and there is nothing new going on as far as PX is concerned. We make sure that we are continuing to turn everything that we take in.

Are there any more questions? [Operator Instructions] I think we can wrap the call up.

Okay.

Okay. Thank you very much. And if you have any follow-up questions, please contact me. Thank you.