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

Good morning or good afternoon. Welcome to the Crest Nicholson Preliminary Results for the Year Ending 31st October 2023. My name is Adam and I'll be your operator for today. [Operator Instructions] It's now my pleasure to hand the call to Iain Ferguson, Chairman of Crest Nicholson for some opening comments. Iain, please go ahead when you are ready.

Well, good morning, everybody and welcome to the Crest Nicholson's results session. As you will see, we issued 2 separate RNS announcements this morning and I want to deal with the post of those, which is about Peter's decision to retire from the company. Peter was appointed as CEO to Crest Nicholson in 2019. I think we can all agree he's chosen one of the toughest 5-year periods to be the CEO of our company. Just thinking about it, you think about COVID, you think about cladding and combustibles, you think about conflict in Ukraine, you think about a CMA inquiry, you think about changing conservative governments and their policies to name just a few of the bigger issues. All of that goes together to create a very complex and challenging environment for any business, especially one where consumer confidence is hugely important and critical. Throughout this period, Peter has led Crest Nicholson with huge commitments, great fortitude and the intuition about the industry and that ability that comes through, but from a lifetime of experience. Peter will leave the business in very good shape. We've made progress in many ways, despite the tough conditions. And he leaves the business well positioned to grow and to prosper into the future. So Peter, a big thank you for all that you have done and we'll have many future chances to say that, opportunities to say that. I'm also very pleased to be able to announce that Martyn Clark will be joining us as Chief Executive later in the year. We've gone through an open recruitment process. We used Russell Reynolds for that. Martyn is currently Chief Commercial Officer of Persimmon plc, where he's been for around 9 years. 38 years -- for 28 years before that he was at [ Bluer Homes ] right across the business there. So Martyn will bring great industry experience to us and this will be of huge importance to Crest Nicholson at this very important time for the group. We look forward to welcoming Martyn when he joins us later this year. And Peter will be around to make sure that there's a smooth handover and in a very orderly way Martyn will take over. Now for what I guess will be the final time, I'd like to hand over to our Chief Executive Peter Truscott. He will take us through the results presentation. Peter is joined this morning by Bill Floydd and as you know he joined us towards the end of last year. As you will see, as we go through the presentation, Bill has already settled in very well and we're very, very pleased to have you with us, Bill. So Peter, if I may, over to you.

Thank you very much, Iain and thank you so much for those kind words. Obviously, my own focus will continue to be on operating the business until the day that I finally leave. Just a few words actually on Martyn, because I don't think everyone in the room will know Martyn, but he's very well-known and very respected in the industry. And I think the company is very lucky to be able to have recruited Martyn. I think that his skill set is absolutely perfect and well aligned with what we need to take this business forward. And I very much look forward to Martyn joining the business and handing over the reign to him later in the year. So on to the more formal events for today. And if I can start with the agenda. Please of course I have full year results for the period ending 31st October 2023, that's introduced by Iain, I'm of course, Peter Truscott, Chief Executive. These are the areas we're going to cover. I'll begin the session by setting out a brief overview of the year before handing over to Bill, who will provide a comprehensive financial review in which amongst other topics, he'll provide some color on the Farnham project. And when Bill is finished, I'll then provide an overview of the market, update you on the progress against our strategy and give you an outlook for the year ahead. And finally, as always, there will be plenty of time at the end for Q&A and we'll try to answer those as fully and candidly as you would expect us to. So starting with the introduction. As you're all aware, 2023 was a challenging environment in which we operate at a macro level, a sector level and indeed progress Nicholson. We came into the year on the back of the ill-fated The Truss/Kwarteng Mini Budget in the autumn and sales were pretty tough in that period. We then saw a period of improvement in the spring, followed by a particularly tough summer when interest rates rose sharply and then we saw a return to some stability again in the autumn. Overall, we expected a tough year and we got one. Even against this backdrop, however, we are disappointed for the poor profit outturn with PBT pre-exceptional GBP 41.4 million, a result driven by both external market factors, as I've already mentioned and also cost overruns. As already mentioned, the market was volatile and our slow rate reflected this. We had 2 quarters of acceptable sales rates and 2 of poor sales rates. Our strategy from the outset was to prioritize protection of sales price over volume. We believe that price falls across the market would be quite limited as they were and we understood that the land market would only get tighter over time and this was also the case. Cost inflation was more persistent than we expected and impacted us to a greater degree, albeit this have moderated towards period end. Similarly, we suffered from cost overruns, particularly at Farnham and this impacted our performance. Given the tougher market conditions and constraints to growth brought about by the planning system, we've chosen to streamline our operations. We've reassessed our geographical expansion, moderated staff levels and resources in all of our divisions and wherever possible, we have sought to reduce costs. During the year, we did invest in land. We believe that land supply in the medium term will be severely restricted by the planning system. And for a limited period in 2023, high-quality sites became available on attractive terms. As I'll set out later when I talk about progress against our strategy, you will see that we're well positioned for future growth when better market conditions return. So let me now hand over to Bill.

Thank you, Peter and good morning, everyone. My name is Bill Floydd and I joined the group in November. By way of background, I trained as a chartered accountant with Pricewaterhouse in the '90s, spent a substantial part of my career in IT services, where I became very familiar with long-term contract accounting. And more recently I was CFO for Experian in the U.K. and Group CFO of the Rank Group and Watson Switzerland. I joined the group despite the market conditions and challenges for the sector because in the medium term, I expect the supply/demand imbalance in the U.K. housing market to continue to drive opportunity for housebuilders and Crest is well placed to benefit from this dynamic. Clearly, the business has some short-term challenges, but I haven't seen anything in the last 2 months to change my view of the medium-term prospects for the group. This morning, I'll take you through a financial summary of the year, give you some more detailed insights into Farnham and take you through the guidance for FY '24. Here you can see the key lines on the income statement. At the back of the presentation is the full income statement as well as the balance sheet and cash flow. Revenue for the year was GBP 657.5 million, down by 28% on FY '22 due to the housing [Technical Difficulty] weakness. Completions for 2020 down 26% and I'll have more sales metrics for you on the next slide. Gross margin fell from 21.2% to 15.3%, emphasizing the challenging conditions with build cost inflation, project overruns and flat sales prices. As a result, adjusted profit before tax fell to GBP 41.4 million, down by 70% from FY '22. Exceptional items were GBP 18.3 million and I'll take you through these on a separate slide. Adjusted basic earnings per share was GBP 0.123, down by 71%. On the dividend, the Board is committed to the proposed final dividend of GBP 0.115 per share, bringing the total for the year to GBP 0.17 per share. Having deviated from policy in FY '23 to maintain the same level of distribution of FY '22, the Board now expects to return to a stated policy of dividend cover of 2.5x adjusted earnings. On sales metrics, average outlets were 57 -- 47, down from 54 in FY '22 with the pace of new outlets being impacted by challenges of obtaining planning and we'd expect the average number of outlets in FY '24 to be between 46 and 50. The open market SPOW rate was 0.52, which was weighted towards H1 and FY '23. Our planning assumption for FY '24 is a SPOW rate of 0.45, which we expect to be lower in H1 and to improve through the year. On completions, we achieved 2,020, of which 215 were the joint venture signs. Our expected range for FY '24 is between 1,800 and 2,000, again including JVs and in a broadly similar mix to FY '23 between open market and affordable. After the seasonal lull in reservations around Christmas and the New Year, we've been encouraged by the volume of inquiries and appointments in recent weeks. Forward sales as of last week were 1,732 with a GDP of just under GBP 435 million. This is around 15% lower than at the same time last year. The details of the exceptional items are as follows: The main changes on the combustible materials provision are an increase of GBP 11.3 million as a result of build cost inflation and scope changes, offset by recoveries of GBP 10 million from the third parties in respect of defective design workmanship. There's also an imputed cost of interest of GBP 4.6 million and a tax credit of GBP 5 million. The group recently received a legal claim in respect of an apartment block built by the group that was damaged by fire in 2021. The building was 1 of 5 of a low-rise bespoke design. The claim is wide-ranging and includes an element of alleged defects in the other 4 buildings. We've made an estimate of our exposure of GBP 13 million based on an early assessment of the claim. This assessment does not include any recovery that the group may make from insurance, subcontractors or subcontractors' insurance, but does include an assessment of areas where we believe the claim is overstated. From a cash flow perspective, if the case goes to court, I would expect a verdict in FY '25 and the timing of a mediated outcome would more likely be in H2 of FY '24. Over the next few slides, I'll give you some more detailed insights into the Brightwells Yard site at Farnham. Peter and I visited the site in my second week and it's fair to say that neither of us were pleased with what we found. Subsequently, we have reviewed progress with the team on a weekly basis and we'll continue to do so. Here, I've set out the scope of works we are undertaking. In terms of our progress, 9 buildings have been completed internally and externally. And the remaining 4, 2 are apartment blocks with the bulk of the works remaining being internal fit-out. A third building requires modest external completion only. And the last one is a grade more listed commercial building that requires internal fit-outs. Externally though, plans taking to complete and a pedestrian bridge to install on the exit side. Over the next few slides, I'll show you some pictures of the sites, which were taken 10 days ago. Picture here gives you a view of the area and we've put a dotted line around our development. As you can see, this somewhat differs from our stated house building strategy. The picture on this slide shows some of the completed areas of the site. These pictures also give you an idea of some of the complexity in the build, particularly on the roof line in the top left and the center bottom photos. And the complexity of the exterior is again in the top left picture and on the right-hand side. A 165 of the 239 apartments on the sites have already been sold and the vast majority of those are occupied. In terms of external works to complete. There is still a lot of scaffolding in place to complete rendering that has been missed in previous low packages, effectively a scope down. These are relevant scaffolding removed by February. You can also see here the temporary bridge that we used to access the site, which will be removed and replaced with a pedestrian bridge, which is not part of our core skill set and so is an area of modest risk. Moving to the internal to the apartment blocks to complete. These are 3-story buildings, which we complete the floor at the time with the ground floor on this block completed on the left and internal works progressing on the floor above. We expect to have one of the remaining apartment blocks completed by May and the second by July. And finally, this is the grade 1 listed building looking splendid on the outside, but as you can see, a substantial amount of work to be completed internally for which we are appointing specialist contractors. This is the riskiest element left to complete, but we believe we have sensible estimates to complete the work. Financially, the site is 94% complete with just over GBP 7 million left to spend, representing our best estimate of the cost to go with the main areas being the roof -- of risk being the fit-out of the grade 1 listed building and the replacement to the bridge. From a sales perspective, all the commercial units have been presold. A 165 apartments have been sold with 74 open market sales remaining across FY '24 to FY '26. We expect to be on site for the duration of FY '24. Here, I'll set out for you the detail of the cost overruns from our year-end review split between Farnham and the other sites, where a further 10 sites had additional costs to be recognized. For context, we reviewed all active sites in December and early January, focusing on the more complex and both with a low margin and those that are loss-making. Where a site is loss-making, the entire overrun is accounted for in FY '23, where the sites are profitable and the cost is spread over the remaining life of the site. The main areas where we found problems is being overoptimistic in how we've provided for commercial negotiation. There have been scope gaps on the more complex sites where one has been undertaken and the contractor then needs to return to undertake further works that were not in the original work package. Timing delays reflect where the team will need to be on site longer than previously anticipated. And the largest component of the other category is rework to damaged areas and replacement of broken items. On the balance sheet now and the key points to note are the WIP increase in FY '23 of GBP 175 million, reflecting the low level of inventory at the beginning of FY '23 and the need to rebuild to more normal levels. I expect a further increase in WIP in readiness for better market conditions in FY '25 if we have confidence later in the year that the market will return. The group's land creditors at the end of the year are GBP 205.5 million, of which approximately 80% will be spent in FY '24. As a result, for the majority of FY '24, the group will move into a net debt position and I expect the year-end net debt to be between GBP 75 million and GBP 125 million. As a reminder, the group's committed debt facilities are an RCF of GBP 250 million that matures in 2026 and a GBP 100 million private placement with GBP 58 million being repaid in FY '24 and the balance in tranches out to FY '28. I am comfortable with the group's balance sheet and the available liquidity. At the beginning of the year, net cash was GBP 276.5 million, which allowed the group to remain active in the land market during FY '23 with GBP 252 million being spent on land when the group was able to acquire high-quality with competitive prices. And as outlined on the previous slide, the group invested in WIP to restore a more normal level of inventory to meet the margin. Dividends in the year were GBP 43.6 million. The cash interest cost was GBP 5.6 million and the cash outflow on taxation was GBP 14.3 million. Finally, turning to our guidance for FY '24. And here, I've given you our high-level planning assumptions. We expect sales volumes to continue to be impacted by the level of [indiscernible], but we saw modest improvements in demand as the year progresses. I do not expect to have much benefit from sales prices, but some modest improvement in demand as the year progresses. I do not expect to have much benefit from sales prices, but the build costs are now stable and with some areas of opportunity to drive better deals with subcontractors. On profitability, the key moving parts will be that the mix of site margins will be in line with or slightly better than FY '23 and we should get a benefit in gross margin from reducing the level of project overruns. I would also expect a circa GBP 3 million reduction in overheads from the restructuring activity undertaken at the tail end of FY '23. The benefits to EBIT will, however, be offset by higher interest charges as we move into a net debt position for the financial year. The phasing of profitability will be weighted towards the second half of the year, given that market conditions in FY '23 results in a weaker entry point to FY '24 and that we anticipate a gradual recovery in the market during the year. On cash, as I said previously, I'm expecting net debt position in the range of GBP 75 million to GBP 125 million, with the key assumptions being committed land creditor payments of around GBP 160 million and some modest allowance for uncommitted land spend. Investments in WIP so that we are ready for a potential return to better market conditions in FY '25. Good progress on delivering the combustibles remediation program and a high level of interest payments being offset by lower tax payments and a return to the group's stated dividend cover of 2.5x adjusted earnings. With that, I'll hand it back to Peter.

All right. Thank you very much, Bill. Let me now turn to the overall operating environment. It has been, as I mentioned, a difficult year for us to have navigated. Broadly speaking though, our assumption that there would not be a significant price reaction has been well founded. Buyers and sellers have largely exited the market and settled sidelines. Volumes therefore have been weak. There have been times in the financial year that were particularly unnerving. For example, in the autumn of 2022 and the summer of 2023 when rapidly rising interest rates, together with seasonal factors has severe impact on sales rates. More stable time with us in spring of '23 and the autumn when the political environment was more benign. It has been a case of holding our nerve in 2023. As we move into 2024, there are reasons to be more positive. The economy is set for a soft landing, inflation is falling and with it mortgage rates. The narrative from the market and the press has been encouraging. Government are discussing support for first-time buyers. This is a more positive environment. And has manifested itself in a lot more buyer interest. All of our lead indicators are up on a year ago. It's too early to call the market though just yet, but we are encouraged. Certainly, if as expected the base rate starts to come down, then we would expect a continuation of this improving background. We do remain cognizant of external risk factors, however and these can impact inflation data and slow any reduction in the back of England rate and these risks are real and cannot be entirely discounted. Overall, though, we feel that it's more likely than not that the market will be positive in 2024 and have good momentum going into 2025. Given the factors that influence underlying inflation, we're confident that the base rate has now peaked. And we'll see a more stable mortgage environment. Sub-4% rates on 5-year fixed deals are available for lower loan-to-value buyers and these are our target customers. Availability of these mortgage products is also plentiful, certainly lower borrowing costs and increasing real wages of bringing affordability back into focus gradually. The other factor is confidence. Buyers are understanding that a major price correction is unlikely, provided that the economy remains benign and with a strong jobs market, confidence will return. One of the main reasons for prioritize price over volume in 2023 is that looking over the horizon, we could foresee a reduction in land coming forwards. This is mostly a result of the top-down targets being scrapped, but also the planning environment has become even more difficult. The land supply situation, of course, has been well rehearsed and it's difficult to see any short-term measure that will make a difference from either of the main political parties. It is the classic turning of the oil tanker analogy. Other planning problems have crept up upon us, nutrients and environmental constraints, no short-term fix is available here, increasing complexity in the system and a shortage of planning offices, too. Added to which there are simply no consequences for poor performance or slow decision-making. The supply situation will not improve anytime soon. Industry outlets are likely to gradually decline just as demand picks up. Hence our decision last year to continue with land investment, acquiring some high-quality assets, was not just the availability of these assets that motivated us, but also the opportunity to get into the planning system earlier to have more outlets open in '25 and '26 when we believe market conditions will be better. [indiscernible] in the long-term with households forming, all at the same time limited. And this has, of course, been demonstrated in recent years, both in the post-COVID environment and then during the cost of living crisis last year. There was an economic rationale of prices to fall in each case, but the supply/demand imbalance provided resilience to pricing, albeit at the expense of transaction volumes in the short term. Turning to the priorities for 2024. We have a number of these priorities for the financial year, which I'll take you through. I'll start with margins. These need to be rebuilt. Some of this comes through naturally as we transition our older, lower margin sites and into newer higher-margin sites plotted with standard house types. But the pace of this will depend on our ability to get these sites fully operational. In other words, we need to get planning in some instances. A further benefit comes from volume leverage. Even with the reductions that we've made in our overhead base, we do have the capacity to deliver more volume without significant further investment. Regrowing volumes will be prioritized over capturing price gain at least initially. Although we were disappointed once again to retain 4-star status in 2023 rather than 5-star, which we aspire to, this was largely due to a poor start with late completions in 2022 impacting our score. From February onwards, though, we were tracking over 90% and in the early part of new survey year, we were also well into the 90%. And this turnaround is as a result of a renewed focus on processes. The introduction of the new homes quality code also acted as lever for us to review our quality and customer service offerings. Ever since joining the business in 2019, I've emphasized the need for a strong balance sheet. Strong balance sheet gives you time to make decisions and provide strategic options. We will have continued to have a resilient balance sheet. The cash position at the end of 2022 did give us these options. We are underinvested in work-in-progress and last year took the opportunity to get build back into a sensible place. This leaves us with some ability to deliver more volume in conditions through this year. We're also able to commit to some high-quality land purchases last year. This will help us to grow in the years ahead and also importantly, minimize the land acquisition needed in the period when we consider the competitive environment will be particularly strong given the reduced supply. Whilst we expect the full year 2024 to show some debt as we pay down land creditors and continue to invest in the business, we expect our cash generation to grow as the market improves and our net and WIP spend more closely matches realizations going forward. And perhaps the biggest and toughest of our priorities this year is converting our land position into implementable planning consents with all technical approvals in place. This will, of course, be a challenge, but we started early, which, as I mentioned, was one rationale for remaining active in the land market. We have the expertise to manage this process well and we'll be very tactical in our approach. The challenging opportunity will be illustrated better when I come on to the slides covering our land portfolio shortly. Building safety and remediation process is once again an important priority. The groundwork has been done. We've got a lot of visibility around the task and the resources allocated. This work will be done professionally in a partnership with the building owners and occupiers. And of course, not just in the area of building safety for all the areas of our operations, being safe and protecting the public and our workforce will remain and always will be our number 1 priority. Whilst quite frankly, there's been a lot of focus on our operating performance over the past 12 months, it's worth providing greater visibility around our land assets and demonstrate why we believe in a more stable operating environment and utilizing our standard products and simplified processes, strong growth and quality returns can be provided for shareholders. And I'll break out some detail on both the short-term and strategic land portfolios and provide some case studies by way of examples. Our short-term land portfolio at the end of October '23 comprised 14,922 plots. And at the same time, 18,830 plots were in our strategic portfolio. The graph on the right gives more October '23 comprised 14,922 plots. And at the same time, 18,830 plots were in our strategic portfolio. The graph on the right gives more color around the embedded gross margin in the land portfolio as at full year '23 year-end. You can see how the older lower-margin plots, i.e., those below 10% and below 15% have become a much smaller part of the equation. Over 50% of the plots have an embedded margin in excess of 25%. Of course, a number of these were acquired in 2023 and 79% of a margin in excess of 20%. The overall gross margin in the portfolio was around 23%. Given that we're probably in the trough of the evolution of the market, this is encouraging when looking ahead. As I mentioned, we have around 15,000 plots in our short-term portfolio including new land added in 2023. We were active in the year just gone, proving over 3,800 plots in total, good land and quality locations such as in the Windsor and Oxford markets amongst others. But the main takeaway from this slide is the graph on the right, which shows an outline of our growth potential over the next 4 years with the status of land colored. First thing to look at is the red and it shows a relatively small amount of land that is not yet controlled that needs to be identified and acquired. Very modest levels overall and most of what is needed is towards the back end of the period. At least half of this is linked to growing our Yorkshire mission. This means that in most areas, we will avoid having to compete in what will be a highly competitive spot market for land in the next few years. Of course, you'll see our sites in production, these start to tail off and are replaced by and augmented by the amber and pale blue sites. The amber are owned without detailed planning generally speaking and most of these are at outline stage and these come through over time. The pale blue, these are largely allocated strategic sites controlled, but not yet consented. And these are also larger sites that are unpriced, will be bought at a discount and will also go into years beyond 2027. What is also helpful is that our portfolio has good spread geographically. I don't underestimate the challenge around getting planning consent as I outlined earlier. But a strong pipeline of land is there and is clearly visible and this gives us confidence around volume and outlet growth potential. And for 2024, with most of the land consented with some affordable golden brick sites to achieve planning. Even if these are delayed, we do have some volume on existing sites on operational sites that can act as cover, if needed and if sales conditions align. Now let me focus on our strategic land and this comprises just under 19,000 potential plots and is a huge source of future value for the business that is misunderstood by commentators. And I'll start you by pointing to the graph. And this is important, not just underlines the scale, but it's planning provenance. Almost 40% of the near 19,000 plots are already subject to an allocation for housing. This plan has substance and is making its way through the planning system, managed by a specialist team who are amongst the best in the sector. And if you cast your mind back to the previous graph, this is largely the pale blue land that comes through to production in the next 3 to 4 years and then beyond. The benefits of strategic land are twofold. Firstly, it's very light on the balance sheet. These near 19,000 plots are mostly held under auction and the total book cost on our balance sheet is very modest. The allocated land showed in the pale blue segment on the graph as average discount 16.8%. Of course, when these sites are acquired, they negotiate on a one-to-one basis, they are not competitively tendered. In the past, our bespoke model has not always enabled us to maximize the value and returns on our strategic portfolio, but a more efficient standardized business will do so. So turning to the case studies and I'll start with Longcross. And this is a site of course that you all know, but I think it reinforces the strength of our assets. Longcross is new Garden suburb, 1,700 dwellings, which is allocated in the adopted [indiscernible] local plan. Location is close to Virginia Water at the junction of the M25 and the M3. It's amongst the best sites in England. We hold the land outright in partnership with our joint venture partner, a financial institution, with Crest having a 50% equity share. Importantly, we have the right to draw down all of the land with half in effect at our input cost discount and the half at open market value. We are in discussions with our partner around acquiring their share. Our planning application is currently under consideration with a committee date targeted for this spring and this should enable a site start in 2025. And given the scale of the project, there is an opportunity for us to work here with multi-tenures. The second case study relates to a site at Harpenden, half held under option, itself a highly desirable location, but also close to St. Albans, the M25 and the M1. It has a draft allocation for housing with a capacity of around 1,000 dwellings. This site has a discount to open market value, 23.7% and once again has scope full development with multi-tenures. It's not as advanced as Longcross, but its value to the group is obvious and we would be hoping to start on this one in 2026. Now let me turn to product. Sadly, in our sector, we don't have complete control over what we offer to our customers. It's highly regulated. And in this vein, the 2021 Part L first stage of future home standards being fully embedded with the costs in line with our initial assumptions. The second phase of the future home standard is beyond 2025 when heating must be off the carbon grid and must utilize heat pumps instead. These requirements are well understood and the industry as a whole, Crest Nicholson included is fully up to speed for the events. It, of course, remains to be seen as to whether the regulatory processes and the electricity networks will be as advanced, but as a sector we can only do what is asked of us. When fully implemented, these standards will ensure high-quality, sustainable energy-efficient homes are available for our customers. And this will provide a clear differentiation between the new homes providers and secondhand market. To respond to these changes, our new 2023 range has been rolled out across new sites, providing attractive enhancement to our buyers, such as EV chargers and solar panels. Our future progress as we move to the next stage of future homes and beyond will involve significant collaboration across the industry and the wider supply chain. We will be designing a new generation of house types to ensure that the technology enhancements and living spaces are fully compatible and do not involve compromise. As highlighted in June last year, the growth trajectory will need to be revised in line with the wider land availability position and market dynamics. Accordingly, we're continuing to grow into Yorkshire via our new division, which is fully operational. We're now seeking to grow into East Anglia via our existing divisional network, the boundaries of our Eastern division being revised to reflect this change in the fact we moved Kent, which was part of the Eastern division into our South division, pushing Eastern North into East Anglia. Our overheads have been reviewed and are now both lean for the current trading environment, but do retain scope for leverage as we grow. Our leadership team has been simplified too. Kieran Daya has been promoted to Chief Operating Officer, with responsibility for managing the divisions whilst forming part of a multi-skilled executive team. The new structure reintroducing the COO role will help us address some of the cost control issues experienced in 2023. And of course, later in the year, our new Chief Executive, Martyn Clark, will lead this team. We remain fully focused upon our multichannel approach to selling homes and acquiring land. It's a key part of our strategy. As we've already outlined, we have a strong and well-managed strategic land portfolio, which last year, we continue to invest in for the future, adding further quality assets. Additionally, the team supported the division in establishing new joint venture land opportunities, such as Brackley in Northamptonshire. We sold 273 units to the PRS market in the year with further sales delivering across [indiscernible]. It's important to stress though that we only select the very best deals that are put to us which provide the right value and the right returns to the group. This is not about volume for its own sake. It's about sensible value-driven deals with the staffing partners. The average discount to open market value in the year just gone was around 10%. As you would imagine, our dedicated specialist team continues to work on the future pipeline of sales. As I've highlighted, returning to 5-star customer service status is a strategic priority. We made a significant investment in people and processes in 2023 and this is now bearing fruit with a strong trajectory of return over 90% since February and into the new customer service year in 2024. The new homes quality code has been fully implemented and this initiative which we've always supported will drive further quality to our product and service as we go forwards. And our next focus is on our database. The implementation of the COINS industry standard ERP system across the business over the past 2 years has now also been enabled in the customer service arena. And we continue to make good progress against our sustainability targets that we set out for 2025. We're well ahead in relation to Scope 1 and 2 emissions. We'll be able to achieve our targets around renewable electricity usage in advance of the target and have initiatives in progress to ensure that we also meet our waste target by 2025. Also in the area of sustainability, we've introduced a toolkit called the [ MOVE 2 ] Biodiversity Net Gain and governance around sustainability and ESG in general is strong in the organization and is widely supported by our Board, our colleagues and our customers. So to summarize and to set out our future recommendations. 2023 was, of course, a challenging year. I think that we all came into the year expecting just that. The market did perform as expected with pricing holding up and volumes taking strain. It did look as if perhaps conditions might be better than we hoped for during the spring, but the interest rate hikes in the summer reintroduced the difficulties that we saw in the previous autumn. However, as inflation started to reduce in a meaningful way towards the end of the year, the prospect of a soft landing has returned. We remain profitable in the year, albeit at a level that was lower than had hoped for and we ended the year with a good cash balance, notwithstanding the significant reduced revenue and our continued investment in the business. And by the year-end, our operating platform was sufficiently streamlined to align the lower volumes in the short term whilst retaining capacity for future growth. And we can look to 2024 and beyond with a clear plan and focus and we've grown in confidence that the worst is behind us. Our balance sheet provides resilience. Much of the heavy lifting has been done in terms of investment and we expect to once again be cash generative beyond 2024. And most importantly, as I highlighted earlier, our high-quality land portfolio provides a very visible and attractive platform for growth as market conditions improve in 2024 and beyond. As I've outlined, as I've already outlined, we have a team of experienced and dedicated housebuilding professionals in place to execute our strategy and with clear and defined structures and responsibilities. Of course, I'll deliver in the first half of this year and beyond that, we'll be handing over to Martyn Clark, who will lead this team and deliver the remaining part of our strategy. And finally, with good levels of buyer interest and a more positive narrative around the market in general, we can look forward with greater confidence to our prospects in 2024. Thank you. So I think we'll now take questions from the floor.

Glynis Johnson, Jefferies. [indiscernible]. I wonder if you could just talk about what all the -- were you were searching for a new CEO, what were the priorities that you were really trying to pin a name and give impressions? And question 2, just in terms of from WIP to sales, you obviously talked about the increase in the work-in-progress, but that's land [indiscernible] because you talked about the need to put more work-in-progress on the ground in 2024 [indiscernible]. And thirdly, in 10 sites that you take the charges on. Can you possibly talk -- is it the 8% of the portfolio, which is at below 15% or should we continue 10 sites [indiscernible] 20%? And then just lastly, in terms of the -- just coming around the [ land line], the lower land lines or land approvals in the second half of the year where perhaps you were less exuberant about the opportunities, I think it was the strategic fall through. But maybe there's a couple of big sites that came through and that's why the numbers are [indiscernible], any color around that would be very helpful.

Okay. So a number of questions. Perhaps Iain, if you kindly answer the first one.

Yes. Thank you for the question, Glynis. Yes, I think we -- Peter told us that he was thinking about retiring, so he gave us good time to conduct a proper search. And you're right, the first thing we as a Board did was to consider what were the characteristics we were really looking for. So we want someone who really understands the industry and who understands excellence in execution, is really good at getting the business performing, will get us back to 5-star rating, as Peter has described and we'll be in a good position to make the most of that [indiscernible]. And very strong on execution, good geographic experience across the country and good connections within the industry. As Peter has described, Martyn is probably not so well-known to the listed sector, but he's very well-known in the industry. He's been around in the industry for 37 years. And everybody who knows Bluer Homes will know that's a pretty tough school to be brought up in. So he's there for 28 years. So he's well skilled in that. And 9 years with Persimmon to see something of the listed environment. So that was our real [ remit ] was to find excellence in execution from somebody who really knows the industry well.

Thank you, Glynis. So there is 3 other questions. I'll ask Bill to do the breakdown on the 10 sites. I mean, just on the land where I'll talk philosophically about and then Bill might add some numbers to it. So we came into 2023, we've built where we actually depleted an awful lot of the build from the previous year. We've struggled building, we talk about this in -- at this time last year, we struggled to build in the summer of 2022. So we did need to rebuild inventories, start new sites, some of which were we're intensive and get ourselves back into a sensible position to take advantage of the labor materials that became available in the early part of 2023. Costs, of course, was a little bit higher than we expected and didn't quite unwind as quickly as we thought. In the land, I think we put the number up already in terms of what we spent and that was land spend and [indiscernible] creditors the prior year. So just in terms of land approval, some of that is just timing and some, as you suggested, as larger sites [indiscernible]. So the approval is when we technically signed that off as an agreed deal, not when we make the offer. So the gestation on a lot of these were many, many months before. So these were almost all deals that we were looking at doing in the first half of the year, but actually came through to approve in the early part of H2. Bill?

Yes, Glynis on the Farnham and the 10 sites. Slide 17 gives you kind of the split by how it will hit each of the years. The bulk of it is relating to the loss-making and the low-margin sites, that 8% you referred to. Some of it is further out, and that's why the P&L is at 27, 28. But the bulk of it is in the high-margin sites.

Will Jones from Redburn. I'm going to take 3, please. First, just respect to your sales rate assumption, [indiscernible]. I'm not sure maybe this is an issue with inclusion on the poll sales, but to see like 4-5 year and keeping commentary and making on [indiscernible] is that potentially on the conservative side? Second is just about net debt and just previously I was thinking for the evolution of that beyond the FY '24 will reduce. And then the last one, just around the land bank in 2 miles too, firstly, I think there's a attempt to increase the land bank ASP this year versus last land bank. And the land bank gross margin of 23% feels pretty robust if it had been what I thought over the last 12 months. Can you give us a bit more color around the assumptions within that? [indiscernible].

Bill, [indiscernible].

Again, on the 0.45, Will, that is excluding 9% [indiscernible]. On the net debt, yes, past 24, our assumption is that we get improvement market as we go forward. And the chart where we've shown you gross margin evolution, the 2 things you've got to believe on that chart. One is that you get market improvement and the planning, we get consensus we expect to. So they're not -- they're sensible assumptions given what we know about the market. But clearly, if funding slows down even more, the market doesn't return, then that evolution comes more slowly. I think that's the key driver for us on when does the net debt go after that. But after the end in '24, if -- certainly in FY '24, I think the more confident we are in FY '25 and beyond, would drive us towards the higher end of our net debt range for this year. If we're less confident, then we'll obviously rate things in on kind of the low, but look to come in at the lower end of the range. But I would expect '24, as Peter said, '25, we should be back to a cash generation unless we see a combusting market and we can go and get more land and we go that way. But we should start improving from the net debt position in '25 onwards.

And in terms of land bank and the [ ISP ], that land is just of the evolution of mix. In terms of the 23% of all current sites current imputed margins and future sites are in the last about margin of the land acquisition or [indiscernible].

Aynsley Lammin from Investec. I think I have 3, please. Just on the SPOW rate, what has [indiscernible] and the SPOW rate and what the trend has been since beginning of November? And then secondly, on the interest charge of FY '24, kind of we'll see low entries, I guess, the land grows [indiscernible] is at GBP 2 million, GBP 3 million higher than what you [indiscernible] appreciated. And then just on the, I guess, the cost, the GBP 13 million and how confident are you that's an isolated case, was the design or metal construction specific to that site? [indiscernible] sites may have similar issues. And then related to a gain on the cost, you have given the 2.7 incremental cost overrun for FY '24. I mean, can you give a bit more clarity around on what the actual costs are in FY '24 from the old designs? Just kind of how much of that would reverse or I guess work [indiscernible]?

Okay. I'll let Bill take the point on the cost. I mean in terms of the nature of the buildings, it was a low-rise deign one-off is now on this side with 5 buildings in total. There was a fire in one of the buildings, the defects have been identified by our clients and the claim includes the 5 buildings. But this was a one-off design for this particular site. Now other buildings of this nature, if there are any [indiscernible] scope are now wider, so 258 buildings even scope in our run combustible materials exercise. I'll pick up the one on year-to-date the trends, and then Bill will also pick up the question around the interest. So we don't give any specific number around SPOW today, but it's about 0.4. But of course, that includes the fact that there were 2 weeks leading up to Christmas and 2 weeks leading the afterwards when you have very low sales, that was probably a period of 2 weeks ago, virtually no sales as you are around the Christmas season. So that's got a normal sales rate for the period. Why I was so encouraged is that the -- all of the lead indicators are strong, 25% up in terms of website business. Somewhere between 10% and 20% up on inquiries and visits. So the -- and also just the [indiscernible] from the nature of the office team, administrative team, faster decision-making when compared to last year, all early signs are encouraging in that regard. Bill?

On the interest charge, yes, your number are more, I would say, because we'll get into net debt and go sort of this number pretty quickly. But I think 3 to 5 be sensible. On the cost overruns and why we would be confident on where it would occur, the bulk of order taking is on low margin complex sites which are getting towards to the end, so we should be through the 3 sites that have impacted us most. Should be through those at the end of FY '24 or certainly in early FY '25 in terms of the build. As you get closer to the end of these, it's just much easier to see what's left to do. And so your level of risk of scope gap reduces as you go. And so as we get closer to the end, we can be more confident of what we've got to do. I'm 2 months in, so I can't put my hand on my heart and say we're done. But we've put in what we think is our best view of it. And so my expectation is that we'll have lower cost overruns and lower hits to take in FY '24. And we should be more confident as we go forward that as these sites come out of the portfolio and more straightforward ones come into the portfolio, that we shouldn't be on a more stable footing than we've previously been. We have had a really good capable times.

Christopher from Numis. Just a couple of follow-ups on the questions before. Firstly, [indiscernible], FY '25, I know it's really difficult to call [indiscernible].

Sorry, Chris, could you just repeat that, sorry?

Average, maybe for this year just gone, and how you see that evolve next year?

Yes.

Can I sneak one in?

I thought it might go -- keep going.

All right. Next one is in sales rate details [indiscernible]. And then final one is really just are you able to provide the size of the claim on this final [indiscernible].

Yes, I think it's public record in course, GBP 15 million, GBP 14.9 million [indiscernible], not much different. On the average, I mean, look, if you take the average at the start, the beginning and go up a bit, you're not going to be far around.

Emily Biddulph from Barclays. I've got 3 please. The first one, as you said that the asserted pockets to be H2 rated for this year. I wondered if you could give us a bit more sort of specifics to all that you're expecting in H1 and H2? And secondly, if you can [indiscernible], the 1,800 to 2,000 completions you're [indiscernible] for this year, can you tell us what you're seeing this essentially go [indiscernible]? And then of the sort of remaining open market conditions, could you possibly give us a sort of percentage of cover by the expanses after the year?

Sorry, I didn't quite hear the third one again.

Sorry. All the completions [indiscernible].

Yes. Sorry.

And then of the private components, the sort of all the open market components, how much is already kind of [indiscernible] start of the year? And then finally, on completed stock and part exchange, both obviously increased during the year. Just wondered how you're thinking of those and if you sort of counsel further increase in here and sort of how the PX is turning?

So I'll pick up some of those and then I'll give Bill to do the difficult ones. So the PX, we're entirely comfortable, in terms of long-term average, it's around that level. In '22 it was very low, everything that we had on the balance sheet, it's very low, which will now drive that very strong cash position, but we're very comfortable that we are on PX. We don't expect any really uptick on that going forward. The IT task 2,000 was bulk, not affordable, but we don't split that out, but we've not assumed any additional bulk and above what's already contracted in the pipeline. So no new unidentified bulk assumed. I don't think we break out -- we're not going to break out the number on the private open market for this cover. But it's easy to back work that by we've got a SPOW rate 0.4 for the year. And I think I said that it's about 0.4 year-to-date. So you probably solve that. But I won't give a specific number, but exact from this. And Bill, profit rate?

So look, I understand the normal profit rate you'd expect 40-60 because we're coming in at a lower starting point than normal. I think we're going to be below that, but there's also timing above deals and potential ad sales, which could give us a bit more into H1. So -- but I don't know if we're going to be dramatically below 30 to 40 at this point, but early days obviously. And I mean, 1,800 to 2,000 what I said in the speech was we'd expect broadly similar mix between the market and the bulk as before.

I think that's it. All right. So that then concludes the presentation and Q&A.

So we'll now take questions from the phone line. [Operator Instructions] It seems we have no questions. So I hand the call back to the management team.

All right. Thank you very much. That does now conclude not just events in the room, but also externally. So thank you very much for your time and for your attendance this morning.