Crest Nicholson Holdings PLC
LSE:CRST
Crest Nicholson Holdings PLC
LSE:CRST
Price:
187.9 GBX
0.48%
Market Closed
Updated:
May 2, 2024
Section:
Earnings Call Analysis
Summary
Q2-2023
Q2-2023
Challenging Start, Stable Outlook Ahead
The company faced a challenging start, impacted by September's budget crisis but showed resilience with a stable trading environment and robust pricing. A strong balance sheet with GBP 66.2 million in net cash positions the company favorably, supporting a dividend policy adjustment for FY23. An order book of 2,354 units, worth GBP 597.4 million, lays a foundation for about 85% of FY23's revenue. However, potential interest rate rises pose risks. Trading stability is expected to maintain, aligning full-year '23 adjusted pre-tax profit with GBP 73.7 million consensus.
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[Audio Gap] 6 months ended 30th of April 2023. My name is Nadia, and I'll be coordinating the call today. [Operator Instructions] I will now hand over to your host, Peter Truscott, group executive, to begin. Peter, please go ahead.
Thank you, Nadia. Good morning, ladies and gentlemen, and welcome to our half year results presentation for the period to the end of April 2023. We'll be adopting our usual format this morning with our agenda. I'll start with a summary of the period just completed before handing over to Duncan, who will provide a detailed financial review. I'll then return and pick up the market overview. And as always, there is a lot happening out there. It really is never boring, is it? I'll also go into some detail updating you on progress against our strategy and the future outlook. Finally, of course, there's a Q&A session; and as usual, there will be plenty of time set aside for this. And we'll try to be pretty candid on how we see things out there. You may remember, when I stood up here in January, I was lamenting the constantly evolving landscape out there and pleading for a bit of stability. I think what I was actually pleading for was a bit of boredom. And we did very nearly get that, but with wider inflation being a bit stickier than everybody had thought, there may well be some further volatility to come, so also, as I alluded to in January, it was definitely a challenging start to this half. November and December, both historically quieter months for us, also suffered from full-on Trussonomics. And as we expected and articulated then, a significant price correction has so far been averted. It has played out broadly as we thought: volumes taking a strain, with pricing holding up; and then a steady recovery in volumes following on, albeit at lower levels, as normal -- as confidence returned and mortgage rates stabilized. Pricing has broadly held up due to there being very few distressed sellers at this point. Of course, as I touched upon, the recent inflation data does now need to be considered. And the associated increases in the mortgage rate will have to be absorbed. The reduction in first-time buyers remains the biggest issue in terms of returning back to industry trend of volume levels. And in reality, government are going to have to think about it pretty quickly if they want any actions to play out before the next election. We have continued to be active in the land market. Our concentration has been on high-quality assets and with our underlying assumptions reflecting the current market conditions. There has continued to be competition for the best sites, albeit reduced from the overheated market conditions last summer. And with the planning environment getting worse, and I'll come on to this later, we still believe that securing quality land now will benefit us in the longer term. We have seen in recent months the supply of land for sale reducing as land sellers hold back, awaiting better conditions in the future. Our expansion into Yorkshire and East Anglia is on track. We said that we would be proportionate in the pace of this investment and growth, and I'll again give more color on this later in the presentation. Despite tougher market conditions in the short term, we're running the business for the long term, and our balance sheet enables us to do this. That's why we've continued with some land investment and are growing our operational footprint. And this has left us well positioned for growth when better market conditions return, as they inevitably will. So let me now hand over to Duncan Cooper, group finance director, for his financial review.
Thanks, Peter. Good morning, everyone. I'll start with the income statement, as I normally do. So for the half, we reported revenue of GBP 282.7 million, down from GBP 364.3 million in the prior year. Adjusted gross profit follows in turn, down from GBP 77.5 million to GBP 50.6 million; and that's an adjusted gross profit margin of 17.9%. Coming down to administrative expenses. And they were GBP 28.3 million in the first half. And be careful when comparing that to the prior year comparative and extrapolating a full year outturn. The prior year first half is lower for a number of reasons mainly due to the ramping back up to full operations post COVID-19. So we expect full year '23 admin expenses to be around GBP 60 million. And that's in line with the guidance we gave you at the prelims earlier this year and where we outlined the drivers for that increase, which I won't repeat now but again are detailed in our half year statement today. That brings us down to adjusted operating profit of GBP 22.1 million and adjusted operating profit margin of 7.8%. And I'll come on to give you an operating margin walk from that later on the deck. Adjusted profit before tax at GBP 20.9 million, down from GBP 52.5 million last year; and income tax of GBP 5.3 million at an effective rate of 25.7% brings us to an adjusted profit after tax of GBP 15.6 million. Below the line, we then have GBP 5.5 million of exceptional items net of income tax. And this includes GBP 11.1 million of recoveries we've been able to achieve in the half in respect of our combustible materials obligations. And again, I'll break this out in more detail later. Coming next to the dividend. And the Board has decided to hold the full year '23 dividend at the same level as full year '22, which equates to a dividend of 5.5p per share for the first half. I'll talk about the rationale for this later in a slide on capital allocation. And finally, return on capital employed, down to 14.6% from 18.3%, reflecting lower earnings, clearly; and the investment we have made in land, again which Peter will talk to in more detail later. So coming on to the next slide and the usual sales metrics we provide. Average outlets for the half were 48. And we started to highlight this time last year that the planning environment was becoming increasingly challenging, and this has affected the pace of opening new outlets. It's one of the reasons we remained active in the land market in the first half this year, to keep that pipeline of new land moving. And again Peter will touch on this later. Our SPOW rate for the half was 0.54, obviously down versus the strong market comparative last year but reassuringly up from the 11-week 0.35 we quoted at the prelims. And that sales rate is quite uniform across our divisions. The market doesn't appear to be more or less resilient in any particular part of the U.K., but clearly as we look forward, the outlook on interest rates is going to play a significant part of how that demand unfolds in the second half. ASPs were up across both private and bulk tenures. And that's largely a reflection of a profile that saw house price inflation continue to feed through in the second half of last year before tapering down to relative neutrality at the end of 2022. And finally, forward sales at the 2nd of June 2023 were 2,354 units and GBP 597.4 million GDV, representing approximately 85% of full year '23 revenue. On to the next slide and exceptional items. And we signed a developer remediation contract on the 13th of March 2023, which hopefully now brings certainty to the scope of our responsibilities in this area. In the top half of this table, you can see we received a GBP 10 million recovery in the first half from a third party. And we're actively engaged with several other counterparties, seeking redress from them in respect of faulty workmanship or design. That's offset by a GBP 1.4 million further charge to refine the latest estimate of provision. And it's worth saying that's [ ostensibly ] a pair of offsetting technical movements, with the change to the forward forecast of inflation applied to a material provision offset by the discount factor to reflect that. The underlying provision has only moved by a de minimis amount, and this is all detailed in Note 5 to the accounts. The GBP 2.2 million finance expense reflects the unwind of the imputed interest on the provision to reflect the time value of the liability. And the GBP 1.1 million credit in the JV line reflects Crest's share [ over a recovery ] we managed to achieve for that amount in a joint venture entity; hence, when added to the GBP 10 million I referred to earlier, makes the GBP 11.1 million of total recoveries. Our provision at the half year is now GBP 139.2 million, and we expect around GBP 72 million of that to be unwound within the next 12 months. Again that's detailed in the provision slide. We're currently working on around 90 buildings in various stages of assessment, from design and planning to works underway and works completed but awaiting sign-off. And we're making good progress in this exercise. Next, I want to come on to talk about operating margin, as I referred to on my opening slide. So we'll start with last year's 15% on the left-hand side. And the first down-block labeled volume/rate highlights the impact of 2 major shifts on last year. Firstly, the start of our financial year coincided with the immediate aftermath of the economic crisis post the 2022 September mini budget and the instant collapse in demand that followed. This translated into a much lower number of private completions in this year's first half but accompanied by a continuation of affordable delivery, which from a rate perspective has seen a significant increase in the proportion of lower-margin affordable units in the total number of completions and the consequent impact on the margin mix. Secondly, last year, we were operating in an environment where average selling price inflation was equaling or exceeding build cost inflation; and that clearly hasn't been the case this year. ASP inflation has been broadly neutral and yet build cost inflation has remained more persistent than consensus opinion would have originally envisaged. The second block relates to other items within gross margin which I consider to be more one-off in nature and isolated to our first half. These include further NRV charges at Farnham, which as we've repeatedly outlined is a complex and challenging scheme to complete. In a world of high build cost inflation, it's these types of schemes with bespoke material requirements and labor requirements that are more susceptible to material cost movements and increases. And that's also true for the next element of this block, old sites, which relates to remedial costs for some completed schemes. The number from [ the ] half is in line with the 5-year average for Crest, but last year was relatively de minimis by comparison. And again these costs are generally attached to those legacy schemes which are nonstandard house-type construction projects. And then finally, within this block is also a modest increase on prior year of incentives, which you'd expect given the current market conditions. As I said at the beginning, on this block [indiscernible] most of these items to be more one-off in nature and hence have an expectation of higher gross and operating margin delivery profile in the second half. Next on the graph is the movement in administrative expenses which I've already touched on in the first slide. Slightly higher sales and marketing costs follows; and then the nonrepetition of the ECL charge we took for disposing off the London Chest Hospital, which gets you to the 7.8% on the right-hand side for half year '23. On the next slide, I want to come back to something I've shared before on the evolution of the short-term land portfolio. I think it's easy to become lost on the year-on-year reduction when we get jolted by market uncertainty such as that we've experienced, but over the medium term, our confidence; and visibility; and the quality of our land assets and what they are replacing, given that's still being recognized in the earnings profile now, remains high. Firstly, as I would remind all of us, we still have poorer schemes still being recognized at either 0 or low margins: 45 units at Farnham this year and similar unit sales in full year '24 and '25. We've got 51 units to recognize in closing out the Centenary Quay tower development in Southampton we've also previously referred to. Notwithstanding the dilutive effect of these schemes in the mix and the deterioration in market conditions with respect to sales price and build cost inflation, we still see gross margin accretion being realized over the next 3 years as the land portfolio rebalances to one that is predominantly standardized house types, with new land acquisitions struck on current assumptions. And in essence, the portfolio represents improving returns for lower risk. On to the next slide and the balance sheet. Net cash at the half was GBP 66.2 million, down from GBP 173.3 million at the prior half. Net debt including land creditors was GBP 82 million, up from GBP 6.6 million at prior half. Average net cash was up to GBP 104.2 million from GBP 98.6 million. And the pension surplus under IAS 19 reduced to GBP 14 million. The overall lower level of capitalization of the balance sheet should be in line with expectations given the weaker earnings performance year-on-year and our decision to continue investing in land during the half. And I'll come on to talking about capital allocation again more broadly in the next slide. In summary. We've been able to use a very, very strong cash position at the end of last year, for our relative size, to drive a greater level of capital efficiency through acquiring some excellent assets which position us strongly for a future recovery in trading. It also means we'll be less active in the land market in full year '24, when we expect demand and net pricing for new sites to increase again as the sector looks to expand outlets. It's this context which has enabled us to adjust the proposed dividend and maintain the FY '22 dividend per share. We understand its importance to shareholders and are pleased to be able to make this commitment. I then want to try and stitch together the past few slides and present something I showed at our Capital Markets Day in October 2021 that outlines how we see capital allocation. The market conditions are undoubtedly a lot more challenging now than they were then, but our 4 core principles remain enduring even if the relative importance in the overall mix has changed slightly. The first item is the importance of maintaining a robust balance sheet. Over the past 4 years, we have swung from having a very inefficient balance sheet with capital-type and complex schemes and long-term loss-making sites and over-distributing dividends to having a very strong net cash position at the end of last year. And that journey has happened during a period of significant market volatility and macro events. The financial position we have now, I think, is about right. And hopefully, when you hear Peter speak later, we can outline how we've been able to deploy some of that capital into high-quality sites as well as maintaining the dividend, which brings me to the issue of geographical expansion. We fundamentally believe the best way to create value for shareholders is to grow the footprint [ that Crest needs ]. As Peter will outline later in his section, the planning environment is not going to get any easier anytime soon; and that's especially true in Southern England. Investing in both Yorkshire and East Anglia gives us opportunity to access a wider range of possible sites. And the revenue growth that accompanies this provides greater operational leverage to the group's fixed overhead base. We have a dividend policy of 2.5x cover, which we think ordinarily provides the right balance for returns versus growth and is appropriate when thinking about a sector that has historically been cyclical, but the last few years of volatility have outlined how resilient the housing market has become. The medium-term fundamentals continue to look attractive. There is a chronic imbalance of supply and demand. And the rate of population growth driven through migration, as outlined by the government's own numbers only a couple of weeks ago, is only accelerating after Brexit, not reducing. As we look forward, inflation will recede. Interest rates are expected to reduce again. And there will undoubtedly need to be some support given to first-time buyers as we rightly refocus on the virtue and the need of getting people onto the property ladder. I said back in October 2021, if we bought as much land as we could sensibly acquire and our combustible obligations were codified and known, then we would look to return surplus capital to shareholders. And it's with these parameters and this market context in mind that we've decided to flex the dividend policy for full year '23. And finally I come to the last [ block ], on capital efficiency. As [indiscernible] managed to outline on the previous slides, the quality of our land portfolio continues to evolve. Through disciplined and selective acquisitions of new sites in prime locations and plotted with our standard house type range, we've created a higher-margin, lower-risk store of future value. With our combustibles obligations now clearly codified and the continued depletion of our poorer legacy schemes, the group will increase -- will deliver increasing levels of capital efficiency in the future. On to the next slide and the usual land disclosure items we give. In the short-term land portfolio, we have 894 home completions; and added 1,539 plots since the year-end, including 473 plots at Wheatley in Oxford and 400 plots at Harlington in Bedfordshire. And Peter is going to cover both of these scheme case studies in his section later. 73.8% of the short-term portfolio is owned versus controlled. And in the strategic land portfolio, we now have 22,461 plots held at over 27% gross margin after sales and marketing costs. This continues to represent an excellent store of economic value for the group, especially in an environment where new land release is dwindling and allocations are taking longer to materialize. So in summary. We had a challenging start to the first half. The first 2 months of the year were heavily impacted by the shadow of the September mini budget crisis, but the good news is that trading has stabilized, albeit on a lower level, and pricing has remained robust. As we thought it would, the market has once again shown its relative resilience, vindicating our decision to remain selective in adding some high-quality sites to the portfolio. The balance sheet remains strong. Net cash of GBP 66.2 million, when considered in conjunction with an anticipated lower level of land activity in '24 and the combustible obligations now being codified, gives us the confidence to adjust the dividend policy for full year '23. We start the second half with a strong forward order book of 2,354 units and GBP 597.4 million GDV, representing approximately 85% of full year '23 revenue. This position gives us a great platform for the rest of this year, but we should recognize, although -- that, although stability returned in the first half, the recent core inflation rate results have already led to the market pricing-in further interest rate rises to curb this. If rates rise much further from these levels and remain elevated for a sustained period, we could see an impact to confidence and demand again. So providing trading conditions remained stable in the second half, we expect full year '23 adjusted profit before tax to be in line with consensus of GBP 73.7 million. And with that, I'll hand you back to Peter.
Thanks very much, Duncan. And I'll now turn to the second part of today's presentation as I provide my overview of the market; and update you as to where we are against our strategy that we set out in October 2021, a strategy centered around geographical expansion. So starting with the market overview. As I've already touched upon earlier, it's been a challenging period for the business and indeed the sector as a whole. Generally speaking, so far -- and it's too early to be complacent, but so far, the market is playing out broadly as we expected it to do. There is a little way to go before we see a sustained period of recovery, as inflation does have to be defeated. And monetary policy is the Bank of England's chosen weapon in this regard. Mortgage rates are trending upwards again. In fact, you can see this graph on the right, but we are hopeful that the trend line will flatten in a few months or so and that rates will not reach the peaks seen previously. So what is the story, so far, we've reached in our half year? Well, as I explained in January, the autumn and early winter was tight with slow selling rates and higher-than-usual cancellations, but from January, increasingly, sales rate stabilized as mortgage costs began to gradually reduce and confidence returned. Affordability was and still is a challenge for buyers, but confidence is important too, especially as it became increasingly clear that there was unlikely to be a price crash. There have always been throughout the period plenty of potential buyers, but they're, of course, nervous. And a wait-and-see approach has been adopted by many, and this is understandable, especially with affordability being stretching. And this has been particularly true for first-time buyers with even higher mortgage costs and now no support from Help to Buy either, but the important takeaway is this: There is still a massive imbalance in supply and demand, and let's face it, planning system is not going to help to address this anytime soon. The population continues to grow and alternatives like renting are hardly an attractive option, so in the absence of distressed sellers, and these are at modest levels, it is, of course, little surprise that pricing is broadly holding up and that the outlook remains for a soft landing. There may well be some short-term challenges, especially around volumes, but these will be transitory and will once again stabilize and build as the economic outlook improves. I've mentioned inflation in the general sense but more specifically in our sector. In terms of build costs, it has persisted for a little longer than we expected. There was still plenty of work around the supply chain in the early part of our half year, and some externally driven cost pressure was able to be passed through. We remain of the view that, with the very significant reduction in volumes for the sector, and I think you'll have seen the number of starts reported as been up to 40% down in the latest Q1 NHBC numbers, this has to eventually influence supplier pricing. We're seeing it in pockets across a lot of the supply chain but not all yet, so across the year as a whole, inflation may well average in the [ late ] single digits. I'm very confident about the direction of travel on this, but the timing has been slower than expected. And finally, I've talked about the mortgage rate outlook. There is still competition amongst lenders, and they're taking a longer-term view. Buyers' expectations on rates are more realistic now too. Rates of 4% to 5% are increasingly seen as normal. And although the -- although clearly the near-term moves in rates may well be upwards as inflation gets back under control, they will again start to come down, although probably not back to the lowest of the last decade. I think 3% to 4% [ will be ] the new norm as we go through 2024. I'm going to just talk for a moment on something which is more of an industry issue, which is around planning. I want to talk about this planning environment, as it's a factor that's going to influence the sector in the medium term and, of course, [ has really across ] the land. Obviously we've all seen the net migration numbers up 605,000 in the year, with a similar trajectory likely this year too. And people need housing. And the household occupancy rate is also interesting. In the U.K., it's been stuck at 2.4 for a decade, whereas across Europe the rate has actually fallen further. And for me, this suggests unsatisfied pent-up demand in the U.K. when the conditions are right, but the planning system is simply not responding. It's highly politicized at both a local and a national level and it's getting worse. Market conditions are, of course, influencing housing starts in the short term, but planning will constrain volumes and output in the medium to long term; and this matters. It matters because the supply-and-demand imbalance will continue to be weighted to the demand side. Housebuilders such as ourselves will help in satisfying this demand. And it matters in terms of the land market. We just do not see the likelihood of a tidal wave of land coming to the market anytime soon. And we see price pressure and margin pressure for those who need an overweight position in order to restore outlets. In reality, I think that most of the participants actually will be pretty disciplined. And the result will be that the interests of the industry itself will shrink to reflect the supply of land coming through. So why is it like this? The scrapping of top-down targets resulted in exactly the behaviors that we would have expected, a large number of local councils scrapping or delaying local plans. This has less of a short-term impact but does matter in the medium term. It was a bad decision driven by short-term politics. Local authority planning departments have a myriad of complexity to deal with when managing planning applications. They're often under-resourced and inefficient, and there are no consequences for poor performance. Overall, planning is now dysfunctional. And communication is often [ poor too ]. And there is the growing and unresolved problem around nutrients and, of course, water neutrality; and then coming down the track, [ recreation and mitigation ] and perhaps air quality too. Almost all of these are not issues created by housebuilders, but increasingly we're caught up in the middle of these things. And government have, so far, proven to be incapable of controlling this agenda; and to regulate sensible, proportionate outcomes. Some of the above commentary may well be harsh, but sadly, it's true. If you look at the graph on the right, you can just see statistics I mentioned earlier around the Q1 2023 start and how they compare historically. You can see that the supply side is being squeezed very tightly indeed. I don't think you can separate the land market from how you're thinking about planning, especially when you're looking at future land release and how this is going to impact supply and demand for this vital commodity but also timing. There is increasingly a time lag between identification of land in the planning system and bringing it through to production, so we always have to be thinking forward, having a view on the here and now but also on the future. And that's why we held our nerve and were disciplined last summer when the market was particularly competitive and we were underweight with our land buying. And why? With the strong balance sheet that we have, we stayed in the market in H1 and secured some excellent sites as others pulled out. And to be clear: No one was buying or selling land at that time, but the work had sellers keen to exit. And better value was achievable when compared to the summer. Once those land sellers who had either been jilted at the altar, if you like, or those betting on a crash had left, the supply of land tightened quite quickly. In a similar way to housebuilders sort of taking lower volumes but holding price, land sellers have largely done the same thing. They are, of course, equally aware of the tightening supply situation that the planning system has created and are not generally going to sell an important asset for a low price unless distressed. And again, there are a few distressed land sellers out there. As I mentioned, we have a strong balance sheet. And we approved just under 2,000 plots for purchase in H1, with a weighting towards larger sites that will contribute through the next cycle. These were acquired at an average gross margin of 26.2% after sales and marketing costs, crucially strong market -- in strong market locations and based upon up-to-date assumptions. As these sites come through to our ownership and other [ agreed ] deals since H1 come through, we expect to have lower participation during the balance of 2023 and through 2024 when we expect the land market to once again become competitive. Earlier purchase also gives us longer to work through planning system and get the sites into production sooner when better selling conditions emerge in 2024 and particularly 2025 and 2026. And keeping with the theme on land, I just wanted to bring a bit of color to the types of sites that we were acquiring. And I've pulled out 3 which are now completed. Firstly, there's the site in Windsor, a grade A location and a stone's throw from the River Thames and the M4. This is a greenfield site. Last summer, when we bid, we were a bit off the pace in third or fourth place. As others withdrew or delayed, we were able to both reduce our offer price and get better deferred terms because we were able to convince the landowner of our credibility to perform, traded a bit of margin for better deferral, but these are healthy returns for this sort of location. And we're also talking to the landowner about another phase which could become a separate outlet. Wheatley Campus, a few miles from Oxford, is a strategic purchase for us, with plans for just short of 500 units in what is one of the U.K.'s strongest market locations. The land price has phased over a number of years, with some held-back pending performance conditions. It's a strong margin for the Oxford market. And a site of this -- and with a site of this scale, we're in discussions with potential financial partners with a view to sharing some risks. We would, of course, expect to receive a premium on any part disposal of our interests. And then finally there is Harlington just off Junction 12 or the M1 in Bedfordshire. It's an attractive village highly commutable into London either via the M1; or from a train station, a 5-minute walk from the site, with direct services into London St Pancras. This is a 400-unit site and has a gross margin of just under 27% after sales and marketing costs. It's a simple site to develop, and we're paying for the land over a number of years. As you can see, we're buying high-quality land that will perform well in any market conditions. And if anybody out there wants to take a reservation, I'm sure we're happy [ to put it up on the plan ]. You can see, when the business is viewed holistically, we have all of the building blocks in place to support our investment case. We're moving towards sector normal margins as old lower-margin sites are depleted and newer land bought at higher margins comes through. We have operational efficiency and standardization of product in place, and a strong balance sheet, which provide us with options and flexibility. Our land portfolio is a key strength. There are really good signs coming through. And we will be in a great position to benefit from these as market conditions improve in the coming years. And let's not forget our fabulous strategic land assets held at very low cost on our balance sheet, and these are expected to deliver enhanced margins to complement our open-market purchases. And finally, we have a very experienced team of housebuilders here at Crest Nicholson. I'm surrounded by people of genuine quality throughout the organization. These human assets are every bit as important as our land assets. We've talked about the land and planning environment. Planning policies are squeezing land supply, and this is likely to be the case for a while. Therefore, in this period, having less reliance on capturing all of our land in Southern England and instead having a wider geographical footprint is important, as it creates more opportunity and spreads buying risk. In the medium term, this wider business footprint will be a real engine of growth for Crest Nicholson as land supply pressures ease as they must do over time. We will have the divisions in place to expand our operations; and at this time, we will also consider a third, new division. In terms of the 2 that we're concentrating on, Yorkshire is, of course, now up and running with 6 pipeline sites and ready to contribute from 2024 as these become operational. East Anglia is a little further back in evolution, with the team starting to emerge, an office opened this year in Bury St Edmunds and now with 3 pipeline sites. We're very disappointed to narrowly miss out on 5-star customer service status last year, and a number of immediate actions were put in place. We recruited a team of customer service managers to provide a direct interface with customers at site level to complement the role previously undertaken by the site managers themselves who will now have more time freed up on build delivery and quality. There are now better real-time processes around reporting so that we can identify any problems earlier. It will, of course, take a little time for the full benefits of this to show, but we're already seeing a beneficial impact. Getting things right first time is, of course, our priority. Where issues do occur, we need to be able to track and respond to these more rapidly, so we've also enhanced our aftercare processes within the divisional offices. And of course, the New Homes Quality Code has been introduced, and it's introduced wide-ranging procedural changes for the whole industry. We're well prepared to deal with these, and our sites are being extensively trained in this area. Our multichannel approach to selling homes and buying land remains an important part of our strategy. We continue to see good interest from the PRS market, particularly since the market stabilized. We're working with established partners. And as well as sales already secured, we're in the process of negotiating a number of further sales, which will make a contribution to 2024 and beyond upon attractive terms. In terms of affordable housing, registered providers are still engaged. The number of offers on affordable housing units has reduced, but there remains competition and good pricing for these units. I've touched upon strategic land already. This is managed by our partnerships and strategic land team. And they've enjoyed a number of successes in the period with new assets added, further allocation secured and with the prospect of these assets providing superior returns. And this longer-term view does allow us to see through some of the shorter-term planning difficulties. Another area where we've made strong progress is around sustainability. Overall, we're making strides against our wide range of targets. Firstly, to reduce greenhouse gases: To achieve this, we've increased our use of biodiesel and increased the proportion of electricity on renewable tariffs that we use across our operations. We've increased our monitoring and reporting and, of course, most importantly, continue to build thermally efficient homes. Another initiative has been around the education of our supply chain, with an increased proportion now engaged with the Supply Chain Sustainability School. During the period, we signed up with a new charity partner chosen by the wider workforce, Young Lives vs Cancer. And we'll be holding a major fundraising event in September; and of course, I can't just -- wait to walk another 26 miles. And finally, around social value, we have in the period been accredited as a Living Wage Employer. So to summarize. In terms of sales and the market in general, I think there's pretty consistent message around this. Sales rates have stabilized, albeit at lower-than-normal rates. And pricing has remained relatively firm too. I think we may see these conditions for a little while longer, although the trajectory of the latest moves in the mortgage rate are going to need to be absorbed. We've invested in the land market during the period and acquired some high-quality sites. We would expect to reduce our land investment as we go through the rest of 2023 and into 2024, when I expect there to be a good deal more competition in this environment, but the planning system is causing real supply-side issues. And our geographical expansion is on track. We aim to grow our footprint steadily over the next few years, and solid progress is being made. In terms of the outlook, whilst there will be no impact for 2023, I think that the only intervention from government that will make any real difference before the next election will be some sort of support for first-time buyers. This government really are struggling on housing. And it's pretty much the only thing that could make a difference before the next election, so we'll just have to wait and see. Given our strong balance sheet and the confidence that we have around our business outlook, we decided to maintain the 2023 division -- dividend at the 2022 level. We have a well-thought-out and well-explained capital allocation strategy. Overall we do think the market will improve from 2024, probably quite gently at first, with a more sustained recovery from 2025. We're in great shape overall and well positioned for when this recovery materializes. And now on to the Q&A session.
It's Aynsley Lammin from Investec. Just 3 questions, please. First one will be on net cash, with your kind of view that you meet a consensus PBT, [ not just cadence ] and other things in there. What's your kind of expectation for where net cash ends up by the end of [ next ] year? And then secondly, dividends. And obviously you've maintained that [indiscernible] for the full year. Did you consider share buybacks [ perhaps ] and maintaining the dividend and where the share price is? Just interested in your thoughts around that. And then thirdly, just on the recent interest rates moves. Have you actually see any impact [ from what increase ] that your customers are now seeing already? Do you think that increase is [ substantive ]? Just more color on that would be great.
Yes, Aynsley, thanks for those. I'll just touch on the third of those. And then I'll ask Duncan to just talk to cash and perhaps explain on the dividend. I mean look. We were expecting a question on recent sales, as we would expect. It was, what, just under 3 weeks ago that the news was out around the inflation [ data print ], so we're not going to be publishing statistics on 3 weeks of sales, but to try and be helpful: I think it's fair to say in the first couple of weeks that there was a bit of softening in sentiment, but then this week, it's actually looking like a pretty good week. So it's just too early to say, to be honest. I mean it's certainly nothing new in terms of incentives at this point in time. Duncan, on...
Yes. [ Trying to be helpful without getting to giving ] specific forward guidance on net cash, obviously, but order of magnitude, it showed under GBP 300 million net cash at the end of last year. I think sort of half -- broadly half of that would track sensibly from where we are at the moment but with moving parts. And I should say the -- one of the biggest [ impacts ] on that will be when we have to [ cash out the gold; for example, the -- certain things with the building safety fund ] and the combustibles obligations, so [ I want it to be proactively in a position ] where we're trying to settle that quicker than we're being asked for it. So that plays a factor. Look. Yes, we -- as you'd expect me to say, we consider all -- just considered all capital allocation decisions and ideas with our advisers. I won't go into that in too much detail given that's a confidential sort of consideration but needless to say, I think, the level of cash commitment and certainty we would have had to put behind a share buyback would have been significantly more than we've done at flexing the dividend policy and noting our comments around there is still some uncertainty as we head into H2 [indiscernible].
I think, Jenny...
Harry Goad here from Berenberg. I've got 2, please. So you've talked a couple of times about the increased share of standardized products in the portfolio. Can you just give us a feel for, maybe if you look out, where you will be in 2024 compared to maybe where you were at 3 or 4 years ago, for context, please? And then secondly, on build costs, I think, Peter, you said it's running at a high single digit, but I imagine that's probably a blend of a slightly higher number in the first half [indiscernible] trending down during the second half [indiscernible].
Yes, you're right. And in terms of the second question, Harry, you're right in terms of how -- we're not going to give a specific update number as at now, but you can imply from high single digits. It was higher than that in the beginning, and it's [ tapering ] down actually. I mean, in terms of the portfolio and what we expect from standard product, we've historically put up a slide on that, but because now it's businesses as usual and -- we'd expect it to be sort of [ mid-80% ] next year coming through on standard product. It depends how far you want to go back. If you went back to 2019, before we introduced the strategy, you probably would be much lower than that, maybe even 30% sort of range. So it's moved up quite rapidly and it's now BAU for us.
It's Emily Biddulph from Barclays. I've got 3, please. Firstly, just on the outlook that -- for the outlets number. Can you give a sense as to sort of where the average might be for H2 versus sort of the exit for this year? Secondly, on the gross margin, you obviously called out a portion that you thought was sort of relatively one-off in H1. Is there any [indiscernible] year-on-year in H2? And then of the component that you sort of called out being what you sort of thought was underlying margin [indiscernible], is there scope for that to be sort of slightly better or worse in the second half of the year as well [indiscernible] your P&L? And then thirdly, on the land that you're buying. You've obviously given sense what the gross margin is; and sort of called out that sort of [ you normally bids ] where previously [ you would -- mostly it's not closed yet ]. Do you have a sense of what the sort of underlying actual value reduction has been?
Yes, thank you. I mean, in terms of outlets, it's extremely difficult to predict simply because we have a planning system where it's quite difficult to get any communication. We definitely expect it to trend upwards. We've got [ more of that ] coming through. We've got more planning applications that are being processed. It will have little impact on our H2 numbers. We have near-term visibility around H2, so that's not going to be [ an interesting ] factor, but in terms of into 2024's, we will expect the trend to be upwards. But I'm reluctant to be too optimistic just given how difficult the planning system could be [ and ] actually predicting things. I will answer the third one and then I'll just ask Duncan to pick up the gross margin evolution. In terms of land, I think typically somewhere around 10% to 15% and better than the summer of last year would be fair, and better deferred terms, because, of course, sales rates have been trending downwards. So in order to get the return on capital employed to hit target levels, you need to expand the bank terms [ for that ]. Duncan...
Yes. I mean, [ maybe to expand, your ] question [indiscernible] specifically helpful. So the way I think about this is sort of bridge of -- as we go into H2 more broadly. We generally have a greater weighting of unit delivery in the second half versus the first half historically. That imbalance has only been amplified by the challenges of trade in the first couple of months, in terms of the completions; some elements of build cost inflation continuing -- as Harry has referred to, continuing to come off, albeit that probably plays less into the mix for this year given the amount [ of built stock ]. And the impact of that is less. And A little bit of timing of some planned land sale activity. And just again to contextualize that: So that is [ taken in a rolled sense ]. We did GBP 13 million of land sale contribution in H1 last year, placed GBP 3 million this year, just to put it into some context. We've under-delivered on sort of that land sale contribution in the first half, but some of the timing of that in a normalized sort of year would be more H2 weighted. And then those one-offs I referred to. I can say, through [ David Sat ], who's in charge of delivering Farnham, we've got our latest cost position on Farnham, which we're pretty confident is codified and [ adopted in ] the first year. And we are extensively through the build component of that, so yes, I have confidence that, that is ring-fenced in the first half and won't be repeated. So a number of reasons why we think the sort of purity of the underlying margin position in the second half will be better notwithstanding some of the caveats we've said around just general market stability and the demand environment in the second half generally and hence the comment on consensus.
Clyde Lewis at Peel Hunt. 3, if I may. First, Peter, you referred to first-time buyers being the sort of key target area for some policy change. Do you think it will be a revised Help to Buy, probably with a little bit of a different tag? Is that the sort of best solution, I suppose, on that front? And the second one was around your comment around the sort of consensus and meeting that GBP 73.7 million. You have seen some stable market conditions. Is that stable market on first half [ average ]? Or the first half -- sort of the last couple of months [ are starting to ] probably get an idea of [ your ] definition of stable within there? And the third one was around that 85% that you've sold for this year's [ recognition ]. Without going back [indiscernible], [ is there a doable ] figure for -- to remind us as to what that percentage will be [ over the actually more ] traditional period of 2018, 2019, let's say?
Okay, thanks. The first-time buyer comment, Clyde, is more of a general market comment. It's not specifically relating to us. I don't think anything that's going to happen is going to influence their number this year. I mean, who knows what the government are going to do on this? If you look at it from this government's perspective, they've got a problem with housing policy. I mean clearly they have -- nothing they can do on planning is going to have much of an impact for the next general election, but society has got a problem in dealing with trying to get first-time buyers onto the property ladder. And mortgage costs are particularly high. The availability of large deposits to access better-priced mortgage products is difficult, so it's something along the lines of Help to Buy is an obvious target for a government to look at if they want some form of impact on the market and for [ the effect it drew ] in the period before the election. Duncan?
Yes. Clyde, on your second question, on [ sales and the ] demand and assumptions in terms of it: actually a slightly lower sort of overall SPOW rate assumption mixed in that forecast, in that guidance that we've seen across the -- yes, just the first half, so it's not raising per se. And we don't think it's untenable, but again we just talked about the fact that there's the chance we are back into tough times. I can give you the number from last year for the coverage. [ It's like the direction ], which was 96%. It's crazy that we're having to go back 3 or 4 years to find a clean baseline, isn't it, to think back? I have to say I can't remember 2019. We didn't give you one in '21. We got COVID, but Jenny can push that number out for you. But 96% [indiscernible].
I think the difference, Clyde, between this year and last is maybe the sales position was incredibly strong. It was just [ a lot difficult to build them ]. This year, we've continued to invest. And it hasn't come up specifically in the slides, but we did say in January we're going to continue to build. So we continue to build that at a sensible rate on our sites. And we are in a good position on them and plenty of flexibility around the products that we offer customers for completions. We'll get to you, Alastair...
Chris [indiscernible]. Just asking about the affordable mix, first, and whether that's going to kind of normalize [ a bit ] in the second half. Next one is really just on bulk sales [indiscernible] sort of discounts [indiscernible] on sales rates. And then the final one I'm just trying to get your opinion on is the CMA investigation kind of where they're probing -- well, basically [indiscernible] [ an overview of that ] as well...
Yes, okay. I mean, in terms of the forward mix, I think it's -- it will be proportionately higher year-on-year. I don't think we're going to see anything particularly different in H2, but if you look at it in a comparative to last year, it would be a little bit higher because, as you would imagine, we would be concentrating more of the built on units that have sold and the [ default ] units, so -- I mean, on the PRS/bulk, it has been a part of our strategy for some time. And we've guided that the sort of discount that we're seeing [ to OMP ] is probably in the sort of 7% to 10% range. And as you might imagine, it's probably towards the higher end of that range on average now rather than the lower part of that, but that is part of our strategy. We've said that typically 15% to 20% of our volumes come from that and that still remains that case. I mean, on CMA, look. I can understand why -- or why this is being looked at, because housing is such an important issue for the U.K. In some ways, we welcome the intervention because -- I think that it's important to look at the housing sector and how it's operating in the U.K. Of course, there is a lot of work involved in that. And we've been contributing to that debate, but I don't, per se, see a particular threat that arises from there. It's more around short-term workloads that it creates in actually participating in that review.
Chris, just to build on Peter's point on the affordable. Just I think -- I don't think it's what you're asking. Just to make sure [ I cover off ]: Now obviously a -- that's a shift H1 to H2 just simply because private volume elevates H2. Set across the total [ denomination in ] completions for the year, its composition will be lower for the full year versus for the half, but yes, [indiscernible]...
Yes. So okay, in absolute terms [indiscernible]...
Correct, yes. I wouldn't add anything on the CMA. I think it's [ territory belief ] [indiscernible].
It's John Fraser-Andrews, HSBC. 3 from me as well, please. The first one is on the land gross margin hurdle rates that have been achieved, the 26%. How defensive is that hurdle rate to any changes in build cost inflation? Or can you share what kind of assumptions you've made to achieve those gross margins on build costs? Second one, on build costs, can you say, Peter, what you are seeing out there at the moment? You referred to some early signs of some declines or deceleration. And then also, on incentives. The language in the statement implies they've gone up [ a tad ], but perhaps you can put a number on what that incentive level increase is and how you're approaching pricing at the moment.
Yes. I think Duncan and I will both pick up the answer on incentive to try and build on that a little bit. In terms of the gross margin, as I said, the underlying assumptions that we've made in these investment cases reflect the marketing conditions we've got. That would be, one, selling revenues and build costs; and of course, also the current sales rates that we would have. I mean we do build-in some build cost inflation into our [ technical ] planned purchase as a contingency, anyway, but for commercially sensitive reason, we won't go into exactly what that is. But obviously, in making those assumptions, we are taking into account current market conditions and the forward-looking view that we would have on things like build costs as well. And build costs, more generally, some of those individual discussions, as you can imagine, with suppliers are going to be commercially sensitive, but we're seeing, probably across quite a wide range of materials, discussions around pricing which are more encouraging than they have been for some time. And on the subcontractors and -- we have thought that the price pressure would have been released a little bit earlier, but it's taking longer than we thought, particularly as there was a lot of work still around in the latter part of the last calendar year and early part of this year. But on new tenders, which is the current up-to-date indication of where people are thinking, we're getting some pretty competitive pricing coming through now. So I think it's too early to call that it's completely turned. It's still in pockets but increasing pockets, so we're convinced that, given the workload that is out there which is [ formally quite flat ], that has got to eventually be reflected in the way people think about costs, particularly those which are simply passed down through energy and raw materials. I mean, on incentives, we look at this slightly differently because we are looking at our [ price to book ] rather than specifically what incentives we offer. We don't break out a particular incentives number. We were tracking probably just ahead of where we thought pricing was in the early part of the year. And it's probably come off just a tad, but overall throughout the year, we're probably just around level with where we expect to be and with our book prices on. And Duncan...
I wouldn't add anything much more. The answer is relatively [ familiar ], so I think I'd point out the first part, John. Again I'm sorry to labor -- [ and I feel like over-protesting ], but that's a point on the hurdle rates. I'm far -- what keeps me awake at night is far more the fact that we get another GBP 0.5 million cost movement on Farnham than our ability to absorb another 1, 2 percentage points of margin degradation on something like Maidenhead or Windsor that we just put up on the page, my point being it's getting through and getting leased, older sites done and out of the way. That is the challenge, and then bring to bear a greater impact on the P&L., so we reduced our base assumptions on present terms, but they're far more controllable and far lower risk. And that's the point we just keep trying to get across in terms of the way the portfolio evolves. And indeed the whole sector will be subjected to those in terms of division returns. Our challenge has always been to articulate how we get this business back; correlate it back to sector average returns, whatever those sector average returns are, as opposed to it being uniquely stuck with [ sick ] margins and creating the belief case that those can be course corrected and changed.
Just a sort of quick follow-up, if I may. I think I understood, Peter, from the answer on incentives that, de minimis, your net pricing is more or less unchanged from where it was pre budget. Is that fair?
Yes, yes. That will be right, yes. So Jenny, I think Alastair and -- in front has got some questions. And Alastair, just for consistency, I hope you've got 3.
Great then, yes, something from [ deflation ] too. On that subject and following on from John, the -- [ you'll recall ] I'm looking more at product inflation. I was looking at the base numbers yesterday, the inflation data. So it's a bit blunt [indiscernible]. And material and components cost inflation on average is -- [ compared to the 26 ], is 4.5%, but what I noticed was it's -- the new house opening is 7.4, and then for all the other new build is [ 3.7 ]. I just wondered. Why is it -- that discrepancy in other new build versus other -- house opening? If you've any ideas on that. And then very briefly. One of the other questions was about the last 3 weeks. And I think you answered it, Peter, in terms of the consumer, but have you noticed any change in the lenders? There's a big spike up last week in [ 5-year fixed ] mortgages. Have you seen any ongoing sales sort of held up, I think, [ with the stronger repricing ] from...
Let me pick up that last one. And then perhaps Duncan can just talk around inflation data. I mean no in terms of behavior from lenders, other than the [ rates ] themselves. I think there's a lot of -- there's been a lot publicity around the lenders pulling products from the market, but what we've got to remember is that there are still around 5,000 products on the market, which is actually by historical standards still pretty healthy. So that's not really an issue. And throughout this situation, going back to the mini budget, I think lender behavior had been very sensible, particularly when compared to say the GFC when we saw valuations trying to get ahead of what they thought might happen. There's been a lot of discipline. And I think that's partly been reflected in the way that the mortgage market has operated and being disciplined throughout the last decade, anyway. Duncan...
Yes. [ And I'm sorry to be a cheat ], but -- and it's challenging enough in this job putting your name to data, that you are in charge [ over those name ]. Having seen the data sets you're referring to, I can't comment, but I can try and be helpful -- send it through to me on e-mail and I'll try and give you some considered thoughts, yes.
Glynis Johnson, Jefferies, on for [ Stewart, one of Alastair's slots around with the questions ]. Firstly, just in terms of forward sold, you took [ a hit much on ] forward sold for the year. Also you have the [ social-only book ]. I wonder if you could give us what that potentially could be of the [ private due to bulk ]. Second of all, in terms of the third-party recoveries in terms of the combustibles, I wonder if you can just talk a little bit about that. Is that [ mainly ] contractors? Is that from the build product companies themselves? Where are you getting those recoveries? What is the reason why you're getting those? And also, the total number of buildings. You say you're 90. You're [ fixing ] 90. What's the total number that need to be fixed? Or what's the proportion that you're yet to start on because of, well, [ material ] reasons? Average net cash: It was very good through the first half. I'm just wondering. Should we be assuming average net cash in the second half is [ at similar tones ] to what it was in the first half? Or is it bigger [ absolute flows that ] come through? And [ I refer to sort of the ] 6 months. [ And you can just give ] for the year, but it'd be good to know if -- where it might be at the year-end. And then finally, the sites you bought. You gave 2 examples [ of both ] good sites, 400, 473 units. What is the average size of those, the sites on your land bank? Because if I assume the 400, it doesn't [ give you very good sites ], so it's obviously lower than that. So what is the average size of sites? And going on to your point [ buying this land in '24 ], what's the right length of land bank for you?
Yes, okay. Just on the land, Glynis: So I simply don't have the data in front of me as to what the average site size is, but I'm quite happy to go back and get that, so -- get that for you. I mean, in terms of what should be the right size of land bank, I think it's always going to be reflective of planning. So if the planning environment was more benign, you will be looking at, say, somewhere in the sort of 4, 4.5 years short term would be right, but that does stretch out [indiscernible] environment. And clearly it's going to be more than that. It won't be 5 to 6x, which is the optimum just at the present moment of time, but let us come back to you on the average. Duncan will pick up the average net cash. In terms of buildings, those identified that need work were about half of those [indiscernible]. And forward sold, I haven't got -- I wouldn't be -- I wouldn't break out, unfortunately, Glynis. And on the third -- do you want to answer recoveries one as well...
Yes, yes. I mean they are, as you'd expect, confidential, sensitive negotiations which I can't comment on. And actually, if I even start to talk a little bit around it, it would start to become pretty clear who I was referring to but needless to say they are -- those conversations of that size and materiality tend to be more focused at subcontractors than necessarily architects or design firms.
Okay, thank you. I've got a feeling that might be it.
Yes. [indiscernible], [ do you have any comment ]?
I -- look. I wouldn't -- I think your working premise, [indiscernible], is a half-sensible one to be working on. I wouldn't be drawn much further on that.
[indiscernible].
Sorry. You asked about land creditors. Sorry. I should have -- look. A similar level, as been consistent for the last, for the next couple of years. We don't see that changing remarkably.
So that's what you get when you don't ask 3 questions. [ We complete ]. I think, ladies and gents, that's probably it for this morning from the room, so thank you very much for your interest and participation this morning. And feel free to stay and have a cup of coffee. Thank you.