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

Okay. Good morning, everyone. Many thanks for taking the time to come and see us today. Just to remind you how we'll go through things this morning. I'll give a quick summary of the period. Bill will then talk through the financials before I provide an operational update and make some comments on the outlook. We'll then hand over for questions. Despite the challenging backdrop, we have made good strategic progress in the half and Project Elevate, the transformation program to reposition Crest Nicholson towards the attractive mid-premium segment is firmly on track. We have made clear progress in the half across product design, the customer proposition and experience, along with operational improvements. Our new house type program is also progressing well with a number of planning applications now in progress, which will underpin higher quality, more differentiated developments in the years ahead. At the same time, we are continuing to improve our efficiency and effectiveness, simplifying the business and strengthening the foundations for long-term profitability. Operationally, sales rates since April have been lower than in the early part of the year at around the 0.5 level, and the land market still remains very subdued. Therefore, alongside progressing our strategy, we have continued to take the right action to protect our business and position for when things improve. We are focused on cash generation and cash management, making good progress with working capital optimization, aligning build activity closely with demand and reducing costs. One of our strategic priorities and a pillar of Project Elevate is customer service, and we are pleased to have maintained our 5-star HBF customer satisfaction rating. Our lending group remains supportive, and we're in constructive discussions with them to amend certain parts of the facility agreement. These discussions are well progressed, but remain ongoing, and we have agreed further temporary covenant waivers to the end of September to allow us time to document and complete the transaction. Together with our rigorous focus on cash management, this gives us a stable platform from which to continue executing our strategy with discipline and confidence. Everyone is aware of the challenging macro backdrop and the impact that has across various parts of the U.K. economy and especially the housing sector. However, the mortgage market has moved from a period of volatility towards one of greater stability. Inflationary pressures are slightly easing and importantly, the government remains supportive of the housing sector. While the near-term trading environment continues to be challenging, we are confident in the actions we have taken and are taking. Crest Nicholson is controlling the factors within its control and building a stronger, more resilient and better positioned business for the future. I'll now hand over to Bill, who will take you through the financial performance in more detail.

Thanks, Martyn, and good morning, everyone. I'll now take you through the current status of discussions with our lenders, the measures we are taking to optimize cash flow, an update on fire safety, a financial summary of the half and the guidance for FY '26. You'll know that we've been in discussions with our lenders over the past couple of months. We've been operating under a temporary waiver of the interest cover covenant to allow us and the lenders to agree amendments to the covenants. We've made good progress over the last few weeks. The waiver period has been extended to allow time for conclusion of the discussions and documentation of the agreement, which we expect to achieve by the 30th of September. Given the ongoing discussions, I'm unable to provide any further color at this point, but we will, of course, provide more details when everything is finalized. As Martyn said, the key focus for the business at the moment is liquidity and cash flow management. The 2 key areas to drive out cash from the balance sheet are land sales and WIP management. Whilst the land disposal program is taking longer to action in the current macro environment, we've completed one material land disposal in the first half. We are active in the market on several others and would anticipate that 2 or 3 further completions in the remainder of the current year. Total revenue for the year would be of the order of GBP 40 million, which is in line with the guidance we provided in April. From a cash flow perspective, we've received GBP 10 million to date, have GBP 50 million to come in the balance of the year from deferred receipts from land disposals in previous years and expect to receive up to GBP 20 million from new land sales for a total of GBP 70 million to GBP 80 million in the year. We have sufficient land in the portfolio for FY '27 deliveries and are being selective on a small number of bids for land supporting FY '28 deliveries and beyond. On inventory, the key action has been to drive a significant slowdown in the pace of build across the entire portfolio. We have targets in place on all sites to reduce the current WIP to realign to an expected lower rate of sales. We have already made good progress here and expect to reduce by about a further GBP 20 million to GBP 30 million by the end of the year. On finished goods, we're targeting very specific discount structures at a plot level so that we maximize the cash opportunity in the year whilst desirable plot margins are protected. The fire remediation program continues to progress well and is delivering in line with our plans. All surveys are now complete. The table at the top of this chart shows you the analysis of our progress on the external wall work, which is where the bulk of the cost and risk lies in the remediation program. We have made good progress in getting more buildings started and have now completed external work on 60 buildings. Overall, our estimate of cost has remained broadly stable with an increase of around 2% of the remaining work. Included in the provision are all the costs for all known buildings, internal and external work, build cost inflation, project management costs and our best assessment of known risks. We did not make any recoveries in the first half of the year, but have successfully recovered GBP 3.8 million so far in the second half and remain active on several other recovery prospects. Overall, this takes our total recoveries to GBP 35 million. As a reminder, we do not include any assumption in the provision for recoveries and only account for these when we receive the cash. Here you can see the key financial headlines and clearly a disappointing outcome. Revenue for the year was GBP 197.6 million with GBP 184.9 million from housing and GBP 12.7 million from land. I'll have more sales metrics for you on the next slide. Adjusted gross profit reduced by GBP 21.5 million with GBP 13 million from lower housing volumes and mix and GBP 3.5 million from lower profit on land. We've also taken higher NRV provisions for reducing sales prices on unsold plots at legacy apartment schemes and taken a more cautious view on cost inflation at some of the completed sites. As a result, the adjusted operating loss for the half was GBP 11.9 million. Adjusted net finance expenses were GBP 6.3 million and the exceptional items before tax was GBP 17.9 million, which I will take you through later on. The basic loss per share was 5.1p. Given the loss in H1 and outlook for the year, the Board will not be proposing a dividend in FY '26. On sales metrics, average outlets is 41, in line with our expectations are now starting to head in the right direction. The open market sales rate for the half was 0.48. This was predominantly driven by the weak consumer environment in November and December. A positive start to the spring selling season in mid-January delivered a sales rate of 0.64 through to the end of March before a modest slowdown in April. Subsequently, we've been selling at a rate of about 0.5 in line with the broader market slowdown. On a regional basis, we're seeing good activity and sales prices in the Eastern and Southwest divisions. In the Midlands, our experience is more inconsistent with some good and some slower weeks. Trading is slowest in the South, as you would expect. We're not seeing any meaningful change in cancellation rates. On completions, we delivered 584, of which 76 were at joint venture sites. Open market units were down 5% to 414. Bulk units reduced to 63, reflecting the strategic shift away from this channel and affordable deliveries were 107. For the year, we're expecting 1,400 to 1,500 with the variation in the range dependent largely on the number of bulk transactions on completed apartment schemes. Open market units will be around 970 to 1,000. The reduction in the open market ASP from GBP 422,000 to GBP 414,000 is driven by mix as is the overall increase from GBP 342,000 to GBP 352,000, reflecting a higher proportion of open market completions. The details of the exceptional items are as follows. The combustible materials charge was a net increase of GBP 3.6 million. There were no recoveries in the half, but as noted earlier, we have received GBP 3.8 million since the end of the half. There was an increase in completed site costs of GBP 5.1 million as we continue to deal with customer warranty matters on legacy sites. Restructuring costs relate predominantly to redundancies and lease costs from the closure of one of the divisional offices announced back in November. The net finance expense of GBP 3.6 million relates to imputed interest on the combustible materials charge. In the second half, there will be modest further restructuring costs and adviser fees related to the covenant reset process of around GBP 3 million. On the cash flow, the key changes in working capital are that we reduced inventory by GBP 2.2 million despite the usual seasonal investments, and this will reduce further as we dispose of land and reduce building build to align with the sales profile. Debtors and other receivables reduced by GBP 16.7 million as we made good progress on collections, and these were offset by an outflow of GBP 85.4 million from creditors and provisions with the unwind of year-end creditors, the unwind of the combustible materials provision and the payments in respect of the fire-related legal claim that was settled at the end of FY '25. The net GBP 67.4 million from investing and financing activities is the net drawdown on facilities, offset by payments to JVs, leases and the dividend. On the balance sheet, inventory is approximately GBP 50 million lower than a year ago and in line with the year-end position, which is seasonally lower due to the completions profile. We made good progress on WIP controls, and there will be further reductions in the second half as we get the benefits of slowing the pace of build to realign the inventory position to the sales rate. There was an overall 10% reduction in land creditors, and I expect that to reduce further to close to GBP 60 million by the end of the year. The fire remediation provision reduced by GBP 23.2 million, as explained earlier. And by year-end, further spend of GBP 40 million to GBP 50 million will reduce the remaining obligation to GBP 140 million. Turning now to the guidance. Volume is expected to be between 1,400 and 1,500 with most variability coming from the number of bulk transactions on completed inventory. EBIT is expected to be in the lower half of the previously guided range of GBP 5 million to GBP 15 million, and we are not giving guidance on FY '27 at this stage given the wider macro uncertainty. I'll now hand you back to Martyn to take you through our progress on Project Elevate and a wider business update.

Thanks, Bill. I thought it worth making a few comments about the market backdrop before updating you on our strategic and operational progress through the period. The market started 2026 well with sales and inquiries up on the previous months in Q4 2025. The sales rate for the half was 0.48, but between January and the end of March, encouragingly, it was averaging 0.64. For the war at the end of February, it undoubtedly affected consumer confidence, reducing inquiries and visitor levels. Coupled with significant softening sentiment in the land market, we responded quickly to these demand signals and have continued to manage the business with discipline through that softer trading environment. While the longer-term fundamentals of the housing market remains strong and the chronic underlying need for new houses remains compelling, the broader near-term macroeconomic environment continues to be uncertain. Affordability has changed little in recent months, although the mortgage market remains supportive with banks continuing to demonstrate a willingness to lend to creditworthy customers. Mortgage rates have remained broadly stable rather than improving materially. These conditions continue to influence purchasing decisions, particularly for first-time buyers and customers with higher borrowing requirements. As a result, mortgage approvals have moderated from the stronger levels recorded earlier in the year, reflecting a more cautious consumer environment. Looking ahead, we expect the summer trading period to remain broadly consistent with current levels, and we're expecting no material improvement in either the housing market or the land market for the balance of the financial year. Beyond that, the market has clear supportive drivers. The underlying need for new homes remains significant, employment levels remain supportive and mortgage finance continues to be available. As confidence improves, we believe these fundamentals will support a recovery in customer demand and help underpin the delivery of our medium-term targets. I mentioned earlier that we are focused on what we can control and are making Crest Nicholson a better, higher quality and more consistent housebuilder for all of our stakeholders. This is a significant transformation and will take time, but the progress we are making is tangible and the commitment across the business gives me confidence in the direction we are taking. Firstly, creating a better product. We have now completed the design of our new house type range, representing a significant milestone in the program. These homes have been specifically designed to better attract our target customer. The external visuals of high quality have improved layouts and enhanced specifications. They will begin to be launched on selected sites during FY '27 with planning submissions already progressing as expected. Secondly, delivering a better customer experience. Our ambition is for Crest Nicholson to be recognized as the housebuilder of choice in the mid-premium segment and transforming the entire customer journey is fundamental to that. The customer experience was not where I believe it needs to be when I arrived, but we have made significant practical and cultural changes, and those improvements are now coming through in customer feedback and in our HBF 5-star rating. The number of issues being dealt with under warranty has reduced by 30% over the last 4 months alone, and the cost to remediate has reduced by 30% over a 12-month period. There is more to do, but the direction of travel is clear and the benefits of the changes we have made are evident. A good example of this would be our continued investment in digital capabilities, including the rollout of Digisuite, further development of our Arteva specification range and the implementation of HubSpot, enabling richer customer insights, more personalized engagement and a more seamless buying experience. Together, these initiatives are helping to strengthen customer engagement, improve sales conversion and reinforce our premium positioning. For instance, we are seeing the time to exchange contracts and reservation decrease by 10%. The look, feel and experience of being a Crest customer is now very different. The other theme I'd like to update on is our progress in making Crest Nicholson a better operator. Alongside the improving -- sorry, alongside improving the customer proposition, we are continuing to strengthen the way the business operates. We remain disciplined on costs, have enhanced our commercial controls and are focused on reducing unnecessary cost leakage across the business. These operational improvements are helping us build a leaner organization and stronger financial discipline and better decision-making. So customers are happier, and we are building homes more efficiently and effectively. Taken together, these initiatives are reshaping Crest Nicholson into a more focused, high-quality business. We have already reached several important milestones. The benefits are beginning to come through, and we remain firmly on track to deliver the operational transformation we outlined at our Capital Markets Day and the financial benefits that will flow from that. I've talked before about the importance of our strategic land bank and its value to Crest Nicholson. It underpins our long-term growth ambitions, providing a high-quality pipeline of future development opportunities with the flexibility to bring sites forward in line with the market conditions and our capital allocation priorities. In addition to our short-term land bank comprising 13,400 plots, which we are actively reshaping, our strategic land portfolio comprises around 41 sites, representing approximately 16,500 plots. The portfolio is well advanced with around 67% of the plots on those sites either having a planning status of allocated or are included as part of the draft allocation. That's moved from circa 39% 3 years ago. Importantly, if we include the unallocated sites where they are located in a local authority area without a proven 5-year housing land supply, then that figure rises to 82%. Or in other words, almost 14,000 plots could be granted a planning consent in the next 2 to 3 years. It's also worth noting that the land value on these option sites is at an average discount of 19% to the open market. And so all in all, we have a great confidence in both the planning prospects and of these sites and returns that they will deliver. There are a couple of points to make here, which pick up on the very positive momentum that we are seeing in our land bank planning status. From our perspective, much like the changes we made to our handling of the fire remediation situation, developing and empowering a strong central function has made a big positive difference. There is much greater and more effective management with the local authorities. And to be fair, they are responding positively, reflecting the government's keenness to push things through the planning process. We do continue to look at new options, but critically, the sites that we look at now are consistent with our new strategy. You'll remember that I've spoken previously about the high-value and high working capital-intensive sites, which were too large for a housebuilder of our size. The average size of those sites that we're now entering into option agreements for is circa 200 to 250 plots, providing a much more manageable and mixed portfolio for the future. I've set out before our need to improve the homes we want to build to reflect our mid-premium brand and better attract our target buyers. We have carried out a huge amount of work redesigning the entire range of homes that we build and have already incorporated on the current sites many aspects of specification that reflects our brand values. We continue to progress planning applications for the new house type range, and I'm pleased to say that we have started construction on our first development with the new timeless range in Heybridge in Essex. I look forward to taking you around a new show home when it is ready. I think you'll be able to see the difference. Critically, as well as being better and more appropriate product for Crest, we also know the incremental margin is higher than what we are currently building. We're expecting the first completions in FY '27 with other developments being planned or replanned within the organization. I know that this combination of a completely reset customer experience from the first visit to a website or a development through to our aftercare post completion alongside this new range is a positive strategic shift. We continue to invest in our teams to ensure that we continually improve our build quality across all of our developments. As well as our own internal quality teams that assess the sites independently from the divisional teams, we also use the data provided by our 2 warranty providers, NHBC and Premier Guarantee to measure performance standards. By referring to the tables here, you can see I've shown the NHBC reportable item metric, which has reduced further in HY '26. Improvement with NHBC is defined by a lower score, and you can see we have continued to improve to 0.23, an improvement of 57% over the last 2.5 years. With Premier, their site inspection rating is a measure of a range of KPIs and represents as a score out of 5 for each site and ultimately our group average score. We have again seen improvements year-on-year with the HY '26 score of 4.56 compared to 4.15 at the end of FY '23. Both of these metrics are important as it shows we are building better, providing a better home for our customers as well as reducing our aborted works and our ongoing customer care costs in future years. To this point, we have reduced the customer service cost for issues reported within the 2-year developer warranty period by 30% this year and 50% over the past 2 years, whilst gaining and maintaining a 5-star HBF customer satisfaction score. In recognition of the work we are doing on site, we received 2 NHBC Pride in the Job Quality Awards and 7 nominations for the National Premier Awards, our highest award count for many years. In April, we stated that we expected build cost inflation to increase to circa 4% to 5% this year as the effect of the war in the Middle East pushed oil prices higher. Whilst we have seen reductions from the high oil prices in April and May over the last weeks, it will take some time to filter that back through our supply chain partners. Where we have been able to negotiate surcharges based on diesel costs, then these surcharges are reducing. Where suppliers heavily relying on oil for the manufacture of their products with increased costs, we are now seeking to renegotiate to mitigate the effects of the price rises. However, we do also continue to progress alternative procurement methods to reduce costs without reducing quality and also to seek more control through central procurement. For example, buying certain products directly from suppliers rather than including them in subcontract packages, which would incur their profit and overhead markup. Labor cost pressures are low and have typically increased by 1% to 2%, with material costs increasing by 4% to 5%, subject to surcharges around diesel costs. Given this, current trajectories give us more confidence that build cost inflation will increase by a more moderate 3% to 4% this year. We will, of course, continue to work with our supply chain and a range of self-help measures to mitigate this further, but of course, remain mindful of continued uncertainty in the geopolitical environment. We're also carrying out a range of self-help initiatives to manage our costs. For example, the value of unnecessary damaged or mishandled materials on site has reduced by circa 20% over the last year, and our unbudgeted costs are down by 25%. With the continued strong group oversight of our CVR reporting process, I'm confident we will continue to see improvements to the overall cost base. An important part of our transformation is sustainability, which we see not simply as an ESG commitment, but as a key differentiator of our mid-premium positioning. Today's customers increasingly expect homes that are energy efficient, responsibly built and designed to support healthier, more sustainable communities. Sustainability has, therefore, become an integral part of what defines quality, making it a natural extension to our premium proposition. I'm pleased that our progress continues to be recognized externally. During the period, we achieved the highest possible AAA MSCI ESG rating, retained our A- CDP climate change rating and continue to be included in the FTSE4Good Index. These independent recognitions provide strong validation of the progress we are making across our environmental, social and governance agenda. Beyond external recognition, energy-efficient homes are increasingly attractive to customers, helping to reduce running costs while supporting stronger demand for well-designed, high-quality developments. At the same time, we are well positioned for the evolving regulatory landscape, including the future home standard, ensuring that sustainability remains embedded within our product design and development strategy. So as I mentioned earlier, the challenges faced in the housing market have been well publicized. Our focus has been to change the softer trading conditions with discipline, particularly through careful cash management while continuing to make good progress in the execution of our transformation strategy, Project Elevate. I'm pleased how the business has responded. Crest Nicholson today is a more efficient, more effective housebuilder than when I joined with a stronger customer proposition, better operational discipline and a clear strategic focus. There is clearly more to do. And of course, we need to see improvements in our financial metrics. But the operational and cultural transformation of Crest will continue to build over time. We have a clear plan. We are executing it with discipline, and we are positioning the business well for when market conditions stabilize and demands return. With that, I'll hand over for questions.

Will Jones from Rothschild & Co Redburn. A few, please, I think mostly around margin. Just the first one on land sales. Can you just remind us as to why the booking of the margin on the land sales went, I think, from 20 to virtually 0 as we went through?

It basically depends on the site. The site might -- so we equalize the margin across the whole site. If the site has got a low margin or if we have to take a price chip, then that brings the margin down.

So if we were to model sales coming back in '27, hopefully would be a reasonable margin associated with that.

I hope so.

Yes. Second on margins, I think at least based on my numbers, it needs quite a big increase in the second half margin compared to the first. Is that the case? And what are the drivers if that's the case?

Yes. The first half margin is depressed by the NRV provision that we've taken. So all the NRV provision is based on clearing out apartment schemes from legacy sites. So we've taken a view on price on those. So whatever -- so there's a hit on that in the first half and then anything that comes through on those sales comes in at 0 margin in the second half. So the overall blend should improve in the second half.

And the last one on margin was just I think in the past, you've given us a view at times of what you think the land bank gross margin is or might be. Are you in a position to update that today?

Have no change.

And the last one is more just a general one. When you think about the strategy you laid out at the start of last year and then the current position around lender discussions and the macro at the moment, do you think there's any fallout in terms of how that might evolve on the other side? Or is it too early to say?

I think the strategy is still the right strategy. The challenge is getting there because obviously, with a slow sales rate on what we've currently got, it just takes us longer to get to the future, unfortunately. So a bit of help from the market would not go amiss.

Glynis Johnson from Jefferies. Three, if I may, one which you probably won't answer, but I'll ask it anyway. The first one, just in terms of -- Martyn, you talked about the higher margin on the newer housing types. Can you just give us a bit of color around that? Is it more confidence in terms of the pricing you can get because the specification is right for the customer? Is it about the palette of raw materials and that gives you economies of scale? Just talk us through and remind us why those new housing types are better margin. Second of all, in terms of the strategic land, you talked about the newer sites coming into strat land being more appropriate size, but you do have quite a lot of big sites, I think, still sit in that strategic land bank. Time is lumpy, but of the sites that you think may come through in the near term, are there any of those sites which are particularly big, which we could see a step-up, for example, in terms of land sales that might come through? I'm just trying to understand what we might see there. And then on the financing. You talked about, I think, another cost in the second half of the year for the covenant reset. Is that for the current waiver? Or is that something to come? And the 175 restriction on the RCF, what is the negotiation around that? Is there any help you can give us to tell us what might lift that or not lift that?

Okay. I'll take the last one first. We've said everything we can say, Glynis, but thanks for trying. Do you want to pick up the other 2?

Yes. Look, our new house type range has been designed so that we make best use of the site size, shape, orientation location. We had quite a restricted range that we were selling from before. And when you plot it, whilst it might look in practice that you get a reasonable coverage square foot per acre, there are areas of the site that weren't very efficient. The new house type range covers odd shape sites, gives us more ability to have a varied street scene. So we're not selling the same house type for 4 or 5 months, which then gives a limited option for any customer that walks through the door. So the range of house types, better the plotting. You're right as well. It also offers or has given us an opportunity to actually reflect what customer needs, what they want. We've got a house type range at the moment that doesn't reflect the premium brand. There are compromises within that design as they have been developed over a period of time to reflect the change in regulations. The new house types reflect future home standards, they reflect M42 standards and therefore, what we needed to do for future designs. In terms of the future land bank and the strategic land bank, yes, I mean, some of those sites that we have under option are quite big. But they are under option. We don't have to buy the whole site in one go. We could and take the economies of scale that, that would bring. But we then also have options to sell the parcels off. And with our embedded discounts that we have on the site, that discount would flow through even if we sold the land then for what we paid for it before the discount. So yes, there's opportunities to sell the land for profit in the future, but we can look at each and every one as they come through the planning system.

Charlie Campbell at Stifel. I've got a couple. I'll do them one by one if it helps. Just trying to help -- this is to Will's question really, just to help us sort of bridge between H1 and H2. So operating profit H1 minus GBP 12 million. Even at the bottom end of the guidance, you need plus GBP 16 million in the second half. There's some more volume, but it's not a lot more volume. So I'm just kind of trying to just work through the moving parts. Is this more overhead saving that perhaps comes through? Is that doing it?

It's a combination of things. I mean the volume split is 40-60. So there's a good amount of extra volumes to come, that's been the main challenge in the first half. There's more land sales and the land sales in the second half should be a bit better. And as you say, overhead should help us out a little bit.