Crest Nicholson Holdings plc ($CRST)

Hello, and welcome to the Crest Nicholson Trading Update Call. My name is Alex. I'll be coordinating today's call. [Operator Instructions] I'll now hand it over to Martyn Clark, CEO, to begin. Please go ahead.

Good morning, everyone. Thank you for joining us this morning at short notice. I'm Martyn Clark, CEO of Crest Nicholson, and I'm joined by Bill Floydd, our CFO. As you will have seen, we have issued a trading update in which we have revised our guidance for the current financial year. I wanted to briefly run through the detail of the update before turning over for Q&A. So turning firstly to sales. Open market reservations have continued in line with the improved levels seen since mid-January of around 0.6 despite the Easter holiday period. Overall, selling prices have also been in line with our expectations. And to date, we have not seen higher levels of discounting, an increase in the use of incentives or a higher level of cancellations. However, as we think about key indicators for likely future activity levels, there has recently been a reduction in both new inquiries and visitor levels and sales levels for the last week started to show a similar slowdown. Year-to-date progress on land sales has been slower than our plan, having completed one land sale so far. Much like our experience on the housing sales side of things in recent weeks, there's been a marked softening in sentiment among prospective land purchases. Buyers have become more cautious in the face of the uncertain outlook, resulting in reduced engagement in bidding processes and an increased reluctance to transact at market values. Again, this experience is making us more cautious about prospects for the land market for the remainder of the financial year. Although it has taken some time to be observable in the system and the market, there can be no doubt that the increased macro uncertainty we are witnessing as a consequence of the ongoing conflict in the Middle East is now starting to bite, whether that be in its contribution to increased economic uncertainty, the prospects of a more prolonged higher interest rates environment, renewed inflationary cost pressures and a deterioration in consumer confidence. As a result, we are acting decisively and have reflected the challenging backdrop in a more prudent set of planning assumptions for the remainder of the year, adapting our short-term approach and strategy to focus on cash generation to reflect the demands of the trading environment, protect our business and optimize our positioning to deliver on the attractive medium-term opportunity in our market. We have reduced our volume expectations to 1,400 to 1,500 units, previously 1,550 to 1,700 units. The current order book for the year stands at 1,106 units. As part of our revised guidance, we are targeting a faster reduction of finished plots inventory, particularly on completed apartment schemes. We will also continue to exercise real discipline around work in progress across our developments. We will continue to focus on land sales, although given the softer demand environment are now anticipating a reduced number with expected revenue of circa GBP 40 million, previously GBP 75 million to GBP 100 million. Under our revised forecasted assumptions, we are not forecasting to make a material level of profit on the disposals we are planning for the remainder of the year. I'm pleased to say that the ongoing work on fire remediation has not identified a requirement for any material change to the current provision, and the group remains on track to hit the government target of starting 80% of affected sites by the end of July, with cash expenditure this financial year to be slightly lower than originally planned at GBP 75 million to GBP 80 million. Our determination to recover proportionate costs from those contracts as responsible has not relented. Reflecting increased energy costs as a consequence of the conflict in the Middle East, the group has built in an expectation of higher build costs for the balance of the year. As a result of these revised planning assumptions, the group now expects to achieve an EBIT for the year of GBP 5 million to GBP 15 million and for the interest cost of approximately GBP 15 million. Our revised year-end net debt position is expected to be GBP 100 million to GBP 120 million. As a consequence of lower than originally expected profit, we are in the early stages of seeking temporary banking covenant relaxation from our lending group. Discussions with the lenders have commenced, and we'll update the market further in due course. So to conclude, whilst it is deeply frustrating that we've had to revise our expectations for the year, we are confident that having acted decisively, we are doing the right things in the near term to protect the business and best position in the group for the medium-term opportunity that we remain very confident in. We will now take any questions.

[Operator Instructions] Our first question for today comes from Chris Millington of Deutsche Bank.

Yes, a few, if I could do, please. Firstly, I'd just love to get a feel as to the scale of the slowdown you've seen in visitor levels and just how it's kind of been progressing over the last few months. I'll go one at a time, if that's okay.

Yes, that's probably easier. Thank you, Chris. I mean the slowdown in visitor levels, it's -- I'm not going to put a percentage on it. But when we look at our graphs, it is over the last 3 or 4 weeks, gradually reducing. And obviously, the concern there is that in the future, that will lead to a less of reservations. But at the moment, it's a curve downwards, and we don't want to obviously just dismiss that. We've got to look at the indicators that we're getting.

Of course, Martyn. I mean, are you able to kind of put it into context of prior years kind of how it's trending? Or are you not wanting to go any further on that?

Chris, I think the difficulty we're looking at prior year, by the way, is that we've had Easter in that period as well. And so that always creates a bit of a challenge. And so when Easter is at a different time, it's not easy to draw a straightforward conclusion from that.

Okay. All right. Next one is just the prospect of any sort of material write-downs. Now we're potentially looking at you guys being pretty close to breakeven. Some sites must be making a loss. What's your thinking around that, that side of things?

I'm not expecting any material new NRV provisions. At a site level, those that are sub-10%, we keep a close eye on, and I'm not expecting anything significant out of that.

Okay. And the final one, I mean, I could keep going, but I think 3 is probably enough is how are you feeling about shareholder distributions now? I understand it's a much reduced payment you're doing on the dividend, but we're now looking at the company kind of being pretty much breakeven. What's your feeling about distributions at this stage?

That's a kind of Board decision when the time comes. So it would be inappropriate to comment at this point, Chris. But as you say, it's a small number at this point. So I don't think it makes a huge difference either way, which way we go on that.

Our next question comes from Zaim Beekawa of JPMorgan.

The first is just on the land sales. Can you remind us on the expected profitability you were expecting when you were guiding for GBP 75 million to GBP 100 million and how much now? And then secondly, on build cost inflation expectations, where you see that now versus previously?

Okay. Zaim, I'll do the land sales and Martyn will pick up build cost inflation. So the previous guidance on the land sales, Zaim, was GBP 75 million to GBP 100 million of revenue. And whilst we didn't give a point number on the margin for that, we said it would be in line with what we've previously achieved in last financial year. So that's kind of where we were. In terms of where we're calling it at this point, we've done one land sale for about GBP 10 million, which is in line with the profitability achieved last year. We're then looking at a couple of other deals for this year, which I would be hopeful we can drive some profitability, but our planning assumption is we can't. And so that's the kind of piece that we're putting down. So GBP 10 million done, GBP 30 million to go in the -- is the balance of how you make up the GBP 40 million.

Zaim, with build cost, I mean, we'd assumed price this point sort of very low single digits. What we've assumed now is between sort of 4% and 5%.

Our next question comes from Will Jones of Rothschild & Co.

The first would just be around the covenant situation, please. Can you remind us what those covenants are? Clearly, the interest cover element looks like it's probably breached on current guidance. But any insights into the covenant metrics? And anything you can say more broadly about potential solutions to it? And to what extent possibly could that involve seeking new equity? If you can comment to any extent on those points.

So Will, there's 3 covenants. So the first one would be a tangible net worth, which is GBP 500 million, and we're comfortably above that. The second one is gearing of 70%, and we're comfortably below that. The one which we've kind of previously highlighted through the material uncertainty is the interest cover covenant, which is 3x. And so that's the one that we'd be in discussions with the banks about. In terms of an equity raise, at this point, we're comfortable and confident that we've got the self-help measures that, that isn't going to be the case.

Second was maybe just tying into the volume guidance for the full year and what you require from here on sales rate to achieve that? And if you'd add in potentially the order book figure you've given us currently, how that compares to this time last year?

Yes, I've given you the numbers there, Will, but to get this kind of 300 to 400 units to sell, most of those would be open market. We'd be looking to get to the bottom of the range would be in a kind of 0.4, 0.45 type territory and to get to the upper end of the range would be in the 0.5 and a bit above type territory. There's a few -- we kind of highlighted that we might -- we are looking to reduce the inventory position on apartments, and those would suit themselves to a bulk deal, so does that to factor in as well.

And maybe just more widely on pricing, clearly being quite margin focused under the new strategy. To what extent, I guess, might that need to change tack as cash generation and the balance sheet becomes more important? Or do you think you can more or less carry on with the current approach?

Well, we're very clearly here saying that cash is our priority. We've made some allowance in the numbers that we'll take a bit of extra incentive, but we're kind of in the couple of percent type territory, nothing in the -- we don't believe there's any reason we need to go higher than that. As Martyn said, our experience over the first half and the last few weeks has been that pricing is holding up.

Our next question comes from Aynsley Lammin of Investec.

I think I've got 3 as well, actually. Just on the interest charge guidance, the GBP 15 million, obviously higher than what it was previously. Just wondered, have you factored in an expectation of what might happen post the kind of discussions with lenders? Does that factor in breach of covenants and therefore, higher interest charge? And should we -- or is it just higher debt? I just wonder what's driving that increase? And should we kind of expect that to be a similar level in FY '27? And second question...

Yes, if we can do them one at a time, Aynsley, if that's all right. So yes, so interest up for both the reasons you said. So we've allowed for both of those. I wouldn't give a guide on '27 at this point. It's too early.

Sure. And then just in terms of cost cutting, any kind of actions you can hit the overheads a bit more or anything else you can do for the business? Obviously, you're running for cash, but I just wonder if you're doing anything already on costs.

Well, we closed one of the divisions a couple of months ago, and we're still absorbing that. So there's very clearly a balance to strike here between getting the cost base as efficient as we can, but also making sure that we don't break things. So I'm not expecting us to do anything significant on the overhead base, but we, of course, are always looking.

Sure. Okay. And then just coming back on recent trading. I mean, any more color if you seen an increase in cancellation rates, just on the incentives. Obviously, you see prices holding up, but are you now beginning to increase incentives? Is there much room you can cushion? Or is there much potential you can do on the incentives to drive sales a bit more?

Yes. I mean, look, I mean, we haven't seen any change in cancellation rates at all since January. With the incentives, we've been doing pretty well on the majority of the sites. We've got, as Bill said earlier, some apartments that we probably do need to make a decision on now on a couple of sites. But we'll look at every opportunity that comes along and balance what we need to do in terms of ensuring that we get a reasonable sales rate. But at the moment, I don't envisage any marked change on incentives for the majority of our properties.

Our next question comes from Clyde Lewis of Peel Hunt.

I think I've got a few as well, so I'll do one at a time. In terms of the land buyers that are not there at the moment, are they completely backed away from the market? Or are they trying to get lower prices for the sites that you're trying to sell? And if it's the latter, are you -- I suppose at what point do you sort of tempted to sort of move in terms of accepting a lower price on the sites you're trying to sell?

Clyde, it's different with different counterparties. So some of them are stepping back. Some of them are looking for a better return for themselves, which clearly drives the price. So it's different in different instances. We're very confident in the quality of the land bank and so -- and our ability to drive value from that. And so we're not looking to offload land at a loss at this point, and we believe there's enough out there for us to continue to drive value from it.

Okay. Second one was on new sites, I suppose, as you go through the balance of this year and into the next financial year. What will you be thinking around sort of starting new sites and obviously investing work in progress? Will it very much depend on your sales rates? Or are there other factors that cash flow, I suppose, in particular, that you'll be more directed by?

Yes. Look, it's quite nuanced, as you rightly pointed out. We've got to make sure we've got the cash coming in from receipts. And as you rightly point out, the initial phases of the site are more expensive. So we've factored in that we'll keep the number of outlets steady. And if we can increase them above the current levels, then we'll do that. So it's going to require us, I think, to look at this on a regular basis and make decisions as we go.

Last one was on build costs. I think, Martyn, you talked about 4% to 5% for assuming this financial year. Could you give us an idea of the sort of split between labor and materials within that number?

Clyde, yes, I mean it's in a typical cost, I would say that labor is probably 40%-ish materials, 60%. It does vary though across the U.K. to be fair. but we are...

Sorry, but in terms of that rate of change.

Sorry, say that again, Clyde.

Sorry. So the overall was 4% to 5%, but how much would labor be going up versus materials?

We haven't seen any labor increases at the moment. This is material prices...

Our next question comes from Charlie Campbell of Stifel.

Just first of all, just on the apartments. So you've talked about accelerating the disposals of apartments. Do you have any big schemes left to kind of start or complete in the near future? Just trying to sort of get my head around the cash flows around apartments.

No, we don't have any apartment blocks to start, Charlie. We've got a couple -- 2 or 3 where they're either completed or nearing completion, and that's the ones we're really talking about.

Yes. Okay. And timing of that, is that sort of all finished next few months or by year-end or just to get an idea of phasings as well would be helpful.

Certainly by year-end and reasonable expectation of Q3.

Yes. And then in terms of thinking about the waiver, you've said temporary. I guess you probably want to cover some of the next financial year. And then in terms of the discussions, I mean, I guess, I suppose it's difficult to kind of preempt this in a way, but we should probably think about higher coupon, shouldn't we? And we -- is there a mechanism by which kind of banks demand more security as well? Is that a mechanism we should be thinking about as we think about how these discussions will go?

It's too early to answer that last one, Charlie, but I'm not anticipating that. So what we will be looking to do is give ourselves an agreement through the going concern period. But it's early days, and we've got to work that through with the banks.

Our next question comes from Harry Goad of Berenberg.

Yes. Can I just come back on this point on profitability of land sales, please? I didn't quite understand, I think the answer you gave to an earlier question around the level of profit last year. I think you said in line with margins. And can you just remind me what you mean on that? And I guess, more generally, if we think about the reduction in the profit guidance today, can you give us a rough proportion of how much of that is attributable to not making profit on land sales as opposed to the operational piece of the business?

Yes, sure [ thing ], Harry. So let me just go through that for you. So on land, last year, we transacted GBP 1 million at 21% margin. What we said for this year was we were expecting GBP 75 million to GBP 100 million and expecting a similar kind of margin level. So that's where we previously were. Where we are now is, say, GBP 40 million for the year, GBP 10 million is already done at that circa 20% margin and GBP 30 million, the planning assumption or the GBP 30 million remainder to go, the planning assumption is that there's no margin on that. So that would kind of give you the moving parts. And that's a very significant part of the overall EBIT downgrade. Kind of on the back of that, we then looked at the units and sales prices and cost inflation. Those are kind of the 4 big components.

[Operator Instructions] Our next question is from Sam Cullen of Peel Hunt.

I've got 2. The first one is just coming back to the land sales. You've obviously been pretty clear for this year. Is there a number you had in mind for what would be in the following year's consensus number for land sales, either revenue or profit prior to today? And has that changed, I guess?

We haven't given any guidance on FY '27 land, Sam. And I don't know the answer to what are people assuming in consensus there. And I'm not even sure if we would have visibility of it.

Okay. And then just in terms of the apartments, I think you said 2 or 3 schemes. What's that in units? Is that 200, 300 units?

No, fewer than that. It's a lot 70, 80, probably 60.

60-ish. Yes, about 60.

[Operator Instructions] Our next question comes from Alastair Stewart of Progressive Equity Research.

Just really a question and a bit of color really on the apartments, the blocks that have been completed or near completed that you've referred to. Where are they? How many units are concerned? And roughly what level of reservations did you have when you started those apartments? And was that -- would you normally have looked for 100% reservations before you really got motoring with the construction?

Alastair, apologies. It's Bill here. So look, the apartments are in the south, some north of London, some south of London. In terms of these are schemes that have been started before Martyn and I got here and have kind of generally been building out in the time we've been here. So what our apartment reservation rate was before our time, I'm afraid neither of us can comment on because we weren't here and we don't know.

Sorry. And one -- yes, how many actual apartments are outstanding?

In these schemes, about 60.

At this time, we currently have no further questions. So I'll hand it back to Martyn Clark and Bill Floydd for any further remarks.

Good morning, everybody. Thanks for your questions and for your time today, and we'll speak to you in due course. Thank you.

This concludes today's conference call. Thank you all for joining. You may now disconnect your lines.