Earnings Call: H2 2017

Sep 6, 2017

Good morning, everyone, and welcome to our results presentation. I am very pleased to see so many of you here this morning. I know it is a very busy day for you all. Firstly, I would just like to say that I am really delighted to welcome Jessica for her first results presentation as our CFO. I am going to start with a short overview, and I will then hand over to Steven, and Steven will talk through our operational performance, and Jessica will then talk through our financial performance. I will then come back again and talk about our investment proposition and look at current trading and outlook. Let me start with a financial and operational overview. It has been a very strong year for the group. We are reporting record pre-tax profits up 12% at GBP 765 million. Our year-end net cash position was GBP 724 million. Our return on capital employed increased by 2.7 percentage points to 29.8%. Current trading is strong, and our forward order book is up 14% at GBP 2.75 billion. Our confidence in the business going forward was reflected in our improved and extended capital return plan that we announced in February. We also continue to perform very strongly operationally. We see it as being fundamentally important that we maintain a focus on delivering industry-leading customer care and build quality. We have gained our HBF five-star customer satisfaction rating for the eighth year in a row, and we have also won more NHBC Pride in the Job awards than any other house builder for the 13th year in a row. We have also hit our 20% gross margin target for full year 2017, a target that we set back in 2014. However, I would emphasize that we are not complacent. We are continuing to drive for further improvements in the business with a particular focus on our operating margin. As we outlined in February, there are a number of initiatives we are implementing in respect of margin improvement. On this slide, you can see some of these with a broad indication of when we expect to see the beginning of the positive financial benefit and when we expect to see the full benefit. Strategic land, this is an ongoing journey, and it will continue to have a positive impact for several years to come. Meanwhile, the new ranges will take time to be rolled out to the majority of our sites, and so the effect will not be immediate, but will kick in across all of our standard sites over the next few years. Steven will give you a bit more color with regard to this. Our removal of the five-year warranty will begin to have some impact in FY 2018, but we will not see the full benefit until November 2020, when there will be no remaining customers under the original scheme. It is a similar picture with the recent end of our show home lease scheme, and Jessica will cover this in more detail. Overall, we are very confident that we have these and a number of other self-help levers we can pull to ensure that we deliver margin improvements. Thank you. I will now hand over to Steven. Thank you, David, and good morning, everyone. I would now like to take you through the operational aspects of the business. Starting with our sales performance. We have delivered a very strong performance for the year. Across the group, we achieved a private sales rate of 0.72 per site per week, up over 4% on last year. Sales rates were particularly strong in Scotland and Northern, with significant contributions from the Edinburgh and Yorkshire markets, endorsing the quality of land acquired in recent years in these locations. In addition, we have seen continued good performance in the East region, with notable delivery from locations such as Bedford and Milton Keynes, offering customers good value homes with excellent commuter links. London sales rates were down, reflecting a more challenging Central London market and the reduced availability of units below GBP 600,000. However, the sales rate of 1.07 per outlet per week remains healthy. Putting London into perspective, it is less than 7% of our wholly owned reservations. JV sales rates were up by 10%, driven by a higher contribution from the London site, where we also agreed some bulk sales. Moving on to completions, which were at the highest level in nine years. In particular, we saw significant growth in our regional business, with completions up nearly 5%. JVs were down 47%, in line with our guidance, reflecting our build program and availability as we trade out of some of the London sites. Help to Buy remains an important support for the industry, and 35% of our total group completions utilize the scheme. The increase year on year is partly as a result of being the first full year that the increased 40% level in London has been in place. Affordable completions were 20%, up year on year as a result of timing of delivery on sites. We expect them to be at similar levels next year. However, in the medium term, we expect them to return to our average run rate of around 18%. Investor sales were down to 6% from 8% last year, as the market has been impacted by stamp duty changes and reduced tax relief available to landlords. Turning to pricing. The group's private average selling price on completions was GBP 313,000, up 8%. This benefited from changes in mix and underlying inflation. We have targeted a full market mix and optimized all our brands, allowing our customers a wide choice of house types and sizes. Outside London, the private average selling price was over GBP 291,000, up 6%. Our prices in London increased to an average of GBP 621,000, up over 28%, reflecting site mix changes towards higher price point sites in the year, with completions on sites such as Chapter Street, Westminster and Kidderpore Avenue, Hampstead. Now looking at land supply. Supply is strong, with annual planning consents in England running around 293,000 compared to new build additions of around 164,000. Prices remain stable and there is a good flow of excellent opportunities across the country that exceed our hurdle rates. We are focused on securing standard product sites for the regional business, while in London we are targeting Zone 3 and outwards. In the year, we approved the purchase of almost 18,500 plots across 106 sites. These figures are ahead of our target and give us scope to grow. We expect to approve the purchase of more than 20,000 plots in FY 2018, and I will update you later in the year on progress. Looking at the chart on the left, you can see our land bank reflects our national coverage, with 91% of our plots within the regional business and representative of our divisional structure. We operate a diversified business with a broad market exposure. The chart on the right shows that 93% of private owned plots in our land bank in England has an ASP of below GBP 600,000, leaving us well-placed to benefit from Help to Buy. Looking more closely at our London land bank now. This shows a widening of spread across the capital, with 84% of plots now in Zones 3 and beyond, compared to 74% last year. Taken alongside the previous slide, just over 1% in terms of plots of the group's private land bank are in Zones 1 and 2. The chart on the right shows that just 7% of our private London land bank, including JVs, is priced above GBP 1 million. This is down from 11% a year ago. We expect this to continue to reduce as we trade through higher ASP sites. In terms of scale, our London outlets represent circa 5% of the group's average active outlets, including JVs, during the year. Now moving on to strategic land. The market provides extensive opportunities for strategic land and is supported by a positive planning framework. During the year, 25% of completions came from strategic land, up from 22% in the prior year, thus hitting our medium-term target. We will continue to grow the number of completions from strategic land, with our next medium-term target being 30%. Strategic land generally traded at an enhanced margin of circa 300 basis points compared with instantly acquired sites. It provides a good source of land to support growth, and during the period, we converted over 6,750 plots into our owned land bank from 34 sites, up by nearly 50% in the year. Our closing position is also strong at 11,737 acres, with a good geographic spread across 267 locations to support future growth and margin performance. Over 50% of the locations under option are either allocated, consented, or have an allocation in an emerging local plan, which is slightly up from 48% in the prior year. A key driver to improving margin is product, and last year we launched our new ranges. At the half year results, I explained how changes to roof pitches could save GBP 700 per house, and how expanding the use of combi boilers could save up to GBP 1,200 per house while reducing running costs for our customers. As well as reduced build costs, these new ranges have more efficient floor plans which support plotting optimization. The simplified designs reduce build complexity and help address trade skill shortages. Their more regular footprint is also better suited to modern methods of construction. To give you an update on progress, we have identified 132 sites with over 19,000 plots to use the new Barratt range. We are currently building on 51 of these with over 5,800 units, and a further 25 sites for almost 4,300 units have recently received planning consent, and are expected to commence soon. The other sites are progressing through the planning process. All our new standard product sites are expected to incorporate our new product ranges. The additional margin improvements from these sites will have some impact in FY 2018, with greater impact materializing from FY 2019. We are also busy working on many other initiatives to improve our margin across the business. Improving densities and coverage on both our existing and new developments remains a major opportunity to deliver additional profit. To complement our new product ranges, we have updated and rolled out comprehensive plotting guides to our divisions. These guides are designed to help maintain our class leading street scenes and also support greater land utilization. They give good examples of high quality compliant schemes, as well as standard grid solutions to optimize product use and drive returns. For example, improving coverage by circa 1,000 sq ft per acre can add three percentage point margin. We have held six regional workshops, with almost 400 employees and design consultants attending these briefing sessions. One thing I do want to emphasize is there is no compromise to the quality of service or build standards, and this is evidenced once again by the group being awarded the maximum HBF five star rating for customer satisfaction for the eighth year running, meaning more than 90% of our buyers would recommend us to a friend. In addition, 74 of our sites received NHBC quality awards, more than any other house builder for the 13th year in a row, making us the clear industry leader in terms of site management and build quality. We actively manage our supply chain. We have a centralized procurement team responsible for build materials. We have around 190 group supply agreements with 160 suppliers with an annual spend of circa GBP 450 million. We centrally manage 95% of build materials from foundation level for our standard product. Our function and arrangements enable us to gain best commercial leverage and manage supplier relationships effectively. Through this, we also ensure material quality as well as supplier production capability, and their quality control processes are in place to deliver the high standards we require. We have enjoyed strong long-term relationships with many of our group suppliers. The value of these relationships is seen in times of supply constraint when we are able to secure sufficient product to maintain build. We purchase very little product that is completely manufactured offshore. 90% of what we spend with group suppliers is manufactured and assembled in the U.K., although some elements of offshore components can be used in these products. We promote an approach of purchasing from U.K. businesses wherever possible, as this reduces supply risk and currency exposure. It simplifies logistics and benefits U.K. economy. Turning to build costs. On materials, we are expecting modest inflationary pressure. All of our material pricing is fixed until December 2017, and 75% is fixed for FY 2018 with the remainder currently under negotiation. To date, we have seen relatively little cost movement attributable directly to currency exchange rates, with circa GBP 1 million additional cost in FY 2017 equating to 0.3% of spend. On an annualized basis, this would equate to circa GBP 3 million additional cost and 0.8% annual spend. So relatively minimal impact. On labor, some pressures still remain on availability of skilled labor, however, this has eased during the year. We continue to attract resource due to the quality of our site management, with trades preferring to work on well-managed and organized sites. We continue to help mitigate labor shortages and inflation by training apprentices and the increased use of offsite manufacturing. Overall, for FY 2018, we expect circa 3%-4% increase in total build costs. In summary, a very strong performance. We have achieved some strong sales rates along with the positive pricing trends, and we continue to successfully manage our cost base. Our key focus remains on improving operating margin by driving efficiencies throughout the business. However, we will not compromise on health and safety, which remains our number one priority, nor on customer service or build quality. Thank you. I will now hand over to Jessica. Thank you, Steven, and good morning, everyone. I am pleased to present my first results presentation today. We delivered a strong set of results for the year and achieved our FY 2017 targets. Revenue was up nearly 10% to GBP 4.65 billion. Gross profit was up 16.4% to GBP 932 million at a margin of 20%, achieving the target set in 2014. After net administrative expenses of GBP 133 million, we delivered an operating profit of GBP 799 million. We made further good progress on operating margin, which improved by 1.4 percentage points to 17.2%. Joint venture profits were GBP 25.6 million, GBP 46.5 million lower than the prior year, reflecting planned site delivery and the headwinds that we have experienced on some of our London sites. Our profit before tax was GBP 765 million, a record profit for the group. We are cash generative and closed the year with net cash of GBP 724 million, GBP 132 million higher than the prior year end. Our ROCE was 29.8%, up 2.7 percentage points on the prior year and exceeding our 2014 target of 25%. Our private completions were 13,303, slightly ahead of last year. Affordable completions were 20% of total completions, up three percentage points. On guidance, we expect a similar mix in FY 2018. Wholly owned completions were 16,645, up 4.7%. Joint venture completions were in line with guidance at 750, down 47% on FY 2016, reflecting the timing of site build programs. Total completions including joint ventures were 17,395. Our private ASP increased by 8% to GBP 313,000, driven by mix changes and underlying price inflation. Overall average selling price increased by 6% to GBP 275,000, which compares to our closing land bank at June 2017 of GBP 265,000. In terms of average selling price, the ASP in our owned land bank remains a good guide. Since we set our gross margin target in 2014, we have made significant progress. In the year, our gross margin improved by 1.1 percentage points to 20%. This margin improvement has been mainly driven by changes in the mix of new sites and product mix with some benefit from the unwind of legacy land. We have also seen underlying price and build cost inflation during the year. I will now outline another action that we have taken to enhance margin. Since 2008, we have undertaken show home sale and leaseback arrangements, where we sell the property to an investor and then lease it back until the development is complete. The total value under leaseback is around GBP 230 million. In August, we completed a $200 million US private placement at 2.77% to provide a core of low-cost debt. At the start of July, we ceased show home sale and leasebacks, and the reduced operating costs will feed into our margin over the next few years. In addition, ownership of our show homes improves our balance sheet resilience. Turning to the balance sheet, I will highlight a few items. Investments in joint ventures decreased by GBP 42.8 million to GBP 213 million, reflecting dividends received during the financial year and the sale of our shared equity joint venture assets. Our gross land bank was at a similar level to last year at GBP 2.9 billion, with land creditors representing 37% of the owned land bank. Net assets at June 30 were GBP 4.3 billion, up GBP 0.3 billion on last year. At June 30, we had a 4.5-year supply of owned and controlled land in line with our operating framework. The graph on the left-hand side demonstrates the progress we have made in terms of reducing the cost of our land in the land bank over the last five years to 18% of selling price. This was a reduction of 1.7 percentage points in the year. Turning to work in progress. The growth in WIP reflects planned site delivery with more sites build active at the end of the financial year. We ensure that we match build speeds to sales rates and control the level of unsold stock on our sites, with unsold stock remaining appropriate at 1.1 unit per active site at June 30. There has also been an increase in site infrastructure investment required. We previously shown our progress in terms of legacy asset reduction, and this year add the impact that they have upon our ROCE. Legacy assets reduced by GBP 144 million in the year to GBP 223 million. Whilst they will continue to reduce going forward, the rate of reduction will slow down. If we exclude them, the ongoing business ROCE is 1.1 percentage points higher at 30.9%. Turning to the cash flow. The group delivered a GBP 799 million operating profit in the year. We made net cash and interest and tax payments of GBP 162 million. Overall net site and JV investment resulted in an outflow of GBP 118 million. After non-cash and other working capital movements, our net operating cash inflow for the year was GBP 458 million. This inflow was mainly offset by GBP 322 million of dividend payments, resulting in a net cash inflow of GBP 132 million and a year-end net cash position of GBP 724 million. As a point of guidance, we expect total cash spend on land for FY 2018 to be around GBP 1 billion. Of that, around GBP 500 million will relate to the payment of land creditors held at June 2017. As the previous slide shows, our business is highly cash generative. We focused on ensuring that we manage our total gearing across the cycle. Since June 2013, total gearing reduced from 35% of tangible net assets to 10% at June 2017. We have a clearly defined operating framework of year-end net cash and land creditors of 30%-35% of the owned land bank. Looking forward, we would expect the level of our land creditors to be 30%-35% in FY 2018, and therefore, year-end net cash to be around GBP 500 million. Turning to a few areas of specific guidance for FY 2018 not covered previously. We expect modest growth in wholly owned completions, with affordable completions at around 20% of the total and around 750 joint venture completions. Administrative expenses are anticipated to be around GBP 150 million. Our share of profits from joint ventures is expected to be around GBP 25 million. Our new US private placement has reduced our finance costs, so expect interest costs to be around GBP 50 million, with cash interest at around GBP 15 million. To conclude, it has been another year of good performance for the group, and we have delivered a strong set of results. Our balance sheet is in good shape, and our cash generation supports our capital return plan. I will now hand over to David. Thanks. Thank you, Jessica. I am going to start with our investment proposition, which I outlined in February. I really strongly believe that we have clear differentiators that provide a great investment case. We run one of the shortest land banks in the industry, which improves our return on capital employed and reduces our longer-term risk. We have underlined this with a near 30% return on capital employed, despite the legacy assets on our balance sheet. Equally, with the land market remaining very attractive, we believe that there are limited benefits to having a longer land bank. We have a strong balance sheet, and as Jessica said, we expect to have around GBP 500 million of cash on the balance sheet at the year-end. We remain industry-leading in terms of quality and service, with experienced build and sales teams on site. I have said before that in our business, quality and service is non-negotiable. Our sales and marketing remains industry-leading, with our sales rates at the higher end of industry norms, and this allows us to support our aim to build and sell houses quickly. Finally, due to our national portfolio, we do have a diversified business that represents a broad U.K. market exposure. These differentiators allow us to deliver. We have delivered disciplined completion growth with volumes, including joint ventures, up over 55% in the past six years. We have delivered growth and maintained quality and service, and we believe that we can continue to deliver growth and maintain quality and service. We have improved our financial metrics, particularly on return on capital and operating margin, and we believe that there is more that we can do in both areas. We've also seen strong cash generation and attractive dividend payouts, both through the ordinary and the special dividend. Again, we believe there's more we can do. Moving on to look at the market. We believe that the fundamentals of the market remain very attractive. The lending environment is very positive, especially for new build, and I will cover this in a little more detail. The government housing policy is very supportive. They've recently confirmed that Help to Buy will be in place until 2021. There is clearly very strong demand for new homes across the country, and there is still a limited supply of new housing. Whilst last year, net additions were 190,000, and annual household projections are 210,000. The government estimates that we need to deliver 250,000 homes per annum to make up for the years of undersupply. As Steven has outlined, the land market remains very attractive. Moving on to cover the mortgage market in a little more detail. On the left hand chart, you can see that the average mortgage rates have fallen over the last two years, with standard 85% product decreasing by around 70 basis points. Additionally, new build offers a significant advantage for customers with a 5% deposit available under the Help to Buy equity scheme. Here we see that rates are typically up to 200 basis points lower than for the equivalent 95% mortgage product in the second hand market. These low mortgage rates overall reflect the emergence of more new entrants into the market and therefore increased competition over the last few years. The chart on the right hand side shows the proportion of average income spent on monthly mortgage interest and repayments. This data shows that the affordability of mortgages is well below the long run average. This is due to low borrowing rates, some wage inflation, and more recently, tempering of house price inflation. Despite a big uplift in completions from the major house builders over the last few years, it's very clear that housing demand still significantly outstrips supply. At Barratt, we're doing everything that we can to close the gap, pushing forward with completion numbers, and as we've outlined, delivering our highest number of completions for nine years. We are turning our land bank as fast as we can, and we have one of the shortest land banks in the sector. We are using our land bank and delivering houses to the market as quickly as possible. Clearly, a limiting factor for both us and the industry is the availability of skilled labor. We are working hard to address this, and we are committed to investing in the future of house building. We are one of the largest employers of apprentices in the industry, and we offer a number of schemes for graduates, apprentices, and trainees. We've also been looking outside the traditional pools for skilled labor and have successfully trialed a program to recruit and train ex-armed forces personnel in site management. This has been a big success for the group, bringing in a significant number of people into that discipline. Additionally, we continue to develop, trial, and implement modern methods of construction, and Steven outlined this in more detail in February. We believe that this combination of pulling both levers and addressing the skill side of the equation, whilst also looking at modern methods of construction, is key. Moving on to quantity. We are focused on increasing volumes to help address the housing supply demand imbalance. We've increased our delivery of homes by 55% in the last six years, a compound annual growth of 8% per annum. This has made us the largest house builder in the U.K. by volume by some distance. We recognize that we need to be disciplined in terms of future growth. We need to ensure that our quality and service is not compromised. However, we have 27 divisions, and the majority of them have the capacity to grow. We believe that we have strong controls in place in each of those divisions to address both quality and service. Each division can support around 700 to 750 completions per annum when they operate at their optimum level. Additionally, we clearly have an opportunity to open further divisions, and we will keep this under review. As I mentioned, whilst we are focused on growth, this cannot be to the detriment of the quality of our homes. All of you will know that we've emphasized over the last decade the importance of quality and service, and we put it at the heart of everything we do. We believe it's a strong differentiator for the customer. You can see the awards that we have received, and we are very proud to be a five star house builder eight years in a row. We're very proud to have won more NHBC awards than any other house builder for the last 13 years. We genuinely believe that it is important, and we believe that the market is starting to understand that it is important. Let's move on to the capital return plan. The board recognizes that an ongoing dividend stream is an important part of total shareholder return. As we announced in February, given the significant operational and financial improvements the group has made over the last few years, we improved and extended the capital return plan that we had originally put in place in September 2014. Therefore, going forward, the board is targeting a level of ordinary dividend cover of 2.5 times versus three times previously. When market conditions allow, ordinary dividends will be supplemented by the payment of special dividends. During the four years to November 2018, total dividend payments are expected to be around GBP 1.4 billion based on current market estimates. In accordance with the new policy, the board is pleased to announce a proposed final dividend of 17.1 pence per share, together with a special dividend of 17.3 pence per share. Let's just have a look and remind ourselves in terms of our operating framework. Again, we've provided this operation framework over a number of years. In line with the last few years, we continue to have minimum land acquisition hurdles of 20% gross margin and 25% return on capital employed. As Steven's outlined, we're seeing some really fantastic opportunities in the land market. We're being able to buy land above our minimum hurdle rates. We will keep these hurdles under review, and we will increase them formally if we can buy land at higher rates for a sustainable period of time. To illustrate our commitment to this overall framework, our land bought since we entered the land market in 2009 has performed above the minimum gross margin and return on capital levels. For sites that we have started and finished since 2009, which is now 306 sites and 27,000 plots, we have delivered a gross margin of 21% and a return on capital employed of 36%. We do aim to have a land bank of at least 3.5 years with 1 year of conditional contracts. As Jessica outlined, we are targeting land creditors in the range of 30%-35% going forward. We will continue to operate with low levels of average debt during the year, and we firmly restate our commitment to continue to be cash positive at every financial year-end. As I said, we revised our dividend policy in February, and we will return excess cash to shareholders. We have very clear parameters and targets which outline the framework within which the business will operate. Let me bring you up to date on current trading. It has been a strong start to the year, and with our net private sales rate per outlet per average week since the 1st of July at 0.74. This is in line with a very strong performance last year, and it is clearly a very good sales rate. Our forward order position is up 14% at GBP 2.75 billion, and we believe that we are in very good shape for trading in FY 2018. In short, we are very positive on outlook. There are clearly strong market fundamentals, and we are very focused on driving our operating margin. Something that I think we have clearly emphasized both in February and again today. We will operate to our clearly defined framework, and we recognize that attractive cash returns are a key part of the proposition to shareholders. Our strong forward order book gives us confidence that we will make further progress in FY 2018. Thank you. Okay, so we will now move to questions. We will start with Andy because he put his hand up first. Good morning. Andy Murphy from Bank of America. Two questions. You talked about the margin or potential for margin improvement quite a bit without giving any specifics. Kind of an obvious question. Could you be a bit more specific about what those targets might be? And just a point of clarity around the admin costs. You are guiding to quite an increase this first 18 over 17. Just wondered whether you could help us understand what is driving that. Thank you. Certainly, Andy. If I talk about the margin improvement, then Jessica will pick up in terms of the administration costs. I think on operating margin, and we touched on this during the February presentation. We recognize that if we look at the balanced scorecard of our performance, both operational and financial, and we look at our peer group, operating margin percentage is something that we can clearly improve. I think as a business, we are also focused on improving other things, but that is the most key thing. We recognize that looking at our major peers, there is significant differences between our percentage performance and their or the norm performance. Some of those are structural. Our peers are holding typically longer land banks, and they've got holding gains that come through the P&L. Areas like strategic land, some of our peers have got significantly more strategic land. But as Steven outlined, we've got big ambitions in terms of growing our strategic land business, and we've gone from 5% to 25% in a relatively short period of time. I think everyone is aware of what we see as being the way that we would like to move the margin forward. We're not providing specific guidance in terms of FY 2018, FY 2019, and beyond. What we are committed to do is to continue to update the market. The biggest single driver of our margin improvement will be the way that we buy land, and our land purchasing is going to be underpinned by initiatives such as the new product range that is allowing us to go out and buy land at improved hurdle rates, which we are doing. Once we are confident that we have a sustainable pattern for that, we will then look to revise our minimum hurdle rates accordingly. In terms of administrative costs, firstly, I'd say we very carefully control our level of administrative costs. The admin cost of GBP 132 million in the year benefited from some one-off items of sundry income, which won't be repeated in FY 2018, hence why we're guiding to GBP 150 million. Moving on. Again, bottom left. We are having a run at it here. Chris? Morning, Chris Vincent at Numis. Just wanted to ask a quick one just on FRI sales, just the quantum of them and what your policy is in terms of leaseholds going forward. That is the first one. We also heard from one of the competitors the other day that the land market was maybe getting a touch more competitive. Have you seen that? Could you just comment around that subject? The final one is really just about London and kind of how you see that ASP progressing and proportion of completions as we look out to 2018 and 2019. Okay. I think what I am going to do is I am going to try and have a go at all of them. Steven will step in when I falter. Just as I understand it, the first question in terms of leasehold, yeah? How much of that, then, what is your- Yeah, no, I understand. Okay. I think in terms of leasehold, our approach in terms of the sale of leasehold houses and leasehold flats has been an unchanged approach over the last decade or longer. We clearly in line with the market sell flats on a leasehold basis, and historically, we've sold houses in the northwest and a few in the northeast on a leasehold basis. I think that we're well aware of the government consultation that's taking place regarding leasehold and of the position that the mortgage lenders have taken in relation to leasehold. None of that gives us any concern. We've always had very transparent terms on our leases, and we have escalated ground rents from relatively low bases on an RPI basis. We will continue to keep the position under review. When you look at leasehold income on houses coming through the P&L, probably somewhere in the order of GBP 3 million or GBP 4 million per annum. Clearly not significant for the group. But you're just not doing as far as leasehold properties this year. Is that not distorting the admin costs? It's not the bulk of it, no. The difference in the admin costs on a year-on-year, probably half of it is leasehold and half of it is other items. In terms of the overall leasehold costs, i.e., including flatted products, bear in mind our business in London, probably overall somewhere in the order of GBP 20 million to GBP 25 million. In terms of land market, I saw the comments that were made, and I think they tend to be fairly geographically specific in terms of comments around the land market. Every site that we bid on has got somebody else bidding on it. I think Steven touched on it, and I would just underline the fact that we really are seeing some great opportunities coming through. Think that is best represented by Steven giving guidance. Relatively early in the year, we are confident of intaking more than 20,000 plots in the current year. That clearly is across the country. We believe we have been successful in Zone 3 to 6 in London, and we are buying around the country, whether it be in Aberdeen or Southampton, we are buying everywhere. On the London ASP, the overall trend, if you looked on the medium term on London ASPs, the overall trend is one of falling ASPs. We have not acquired a site in Zone 1 since September 2014, and we are very focused on Zone 3 to 6. If you take a three to five-year view, then clearly falling ASPs will be a trend on a like-for-like basis. We will see strong ASPs in London in FY 2018, which will be particularly driven from some Zone 1 completions, but in particular from Landmark Place. What was Sugar Quay, where we will deliver perhaps 80 units out of that development this year, and the balance in FY 2019. That will drive ASP strongly in London. But on a three to five-year basis, very definitely a declining trend. Steven, do you want to add to that? Yeah. I can just add a bit on the land, Chris. Certainly, as David said, we are seeing no shortage of excellent opportunities in the land market nationally. I think what you are seeing in this market is, or this cycle should I say, is a lot of the developers have got their own strategic plans which we are pulling through. In addition, we have got the introduction of land promoters. There is a lot of land promoters now who are getting land through, putting it into the market. So there is plenty of good opportunities nationally to buy land, and as I said, above our hurdle rates. There is just a flurry of hands have gone up there. I do not mind. Fire away. Yeah. Yeah. Morning, sir. Gavin Jago from PL. Just a couple if I could. The first one's for you, David. Actually, I think it was a year ago we sat here, and you were talking about modern methods of construction and saying that over the medium term, you still expect the vast majority of homes to be built traditionally. Has anything changed within that of your thoughts on modern methods of construction within your build program? Maybe elaborate on that a bit. Maybe just to push a bit more on this margin point. Steven, you talked about strategic land coming through and that target coming from 25% to 30%. All other things being equal, what would that add to the margin on a medium-term view? Okay. Well, I think, again, if I take on both of those. Just on modern methods of construction, I think it's important that that is one side of the equation. If you take a 3-5 year view, we would absolutely take the view that brick and block will be the predominant method of construction within the regional business. Therefore, we have to look at both the skills side, how do we bring in more bricklayers and more other trades as well? That's something that we are very focused on as a business. In terms of actually implementing modern methods of construction, we've got a number of sites where in England we're using timber frame. All of our businesses in Scotland is on timber frame, and we've also been trialing large format block and light gauge steel frame. The reality for us is that we need a supply chain on those formats that can deliver significant volume. So 1,000, 2,000 units plus per annum. Therefore, we need to ensure that we've got confidence in the supply chain. So I still would say that overall, the view is nothing has changed. We will still be predominantly using brick and block, but it's incumbent on us, clearly, to implement more alternate methods. Steven, do you want to add any more on that? Yeah. The only thing I would add there. Gavin was, yeah, we did 1,000 timber framed units in FY 2016, and it stepped up to 1,400 in 2017. So a 40% increase in a year. From the orders we've got placed this year, we'd expect a further step up as well. So along those lines. Sorry, Gavin, in terms of margin, do you want to just repeat the question? Yeah, in terms of Oh, yeah, sure. Steven touched on it, that we are seeing. Since 2009, when we have really been investing in strategic land, we have seen that on average, there is a basis point improvement of about 300 basis points between strategic land and operating land. Therefore, depending on the volume of completions, you can factor that through the P&L. Moving on to John then. Oh, you have already got the mic, John, sorry. John Bell from Barclays. Just one from me, actually. Just interested in your views, David, on Help to Buy. And a possible extension, possible tapering, whether you have picked up anything in the market that might help us arrive at where the scheme might go medium-term. Okay. First of all, just to put Help to Buy in context. Clearly for the consumer, it is an incredibly strong supplement to the mortgage market. It is providing a 95% loan-to-value at incredibly affordable rates. Therefore, the consumer demand to use Help to Buy is very high. Steven outlined that in terms of as a percentage of our total completions, it is around 35%. Clearly as a percentage of private completions it is a little above 40%. So a very, very important product. I think the good news is it was originally launched for a 3-year period, and it was then extended by 5 years. So we are going to see an 8-year scheme from 2013 through until 2021. It is obvious to the house builders and to government that it is an important scheme. Government, I am sure, will review an update on their intentions beyond 2021. When you look at our land acquisition, our average site size that we are intaking presently is 160 plots, somewhere in that order. The vast majority of sites that we are taking in, we would be well through by 2021. But as we move closer to 2021, it clearly becomes more of an imperative that a government decision is made regarding the future of the scheme. Okay, I will move back to Charlie then. Morning, it is Charlie Campbell at Liberum. I have got 2 questions really. Both quite short I think. In terms of the margin, on slide 4 you showed some initiatives. Am I right in thinking you have done those in order of importance? As you go down that page, they become less incrementally additive to margins. My second question on scale. You said that each division might be capable of doing 700 to 750 units. I guess there are others in the industry who think divisional output is more like 500 to 550. So I just wondered why you think each of your divisions can run at a much higher level of output than others? What is it you do differently or approach differently to give you confidence in that scale? Okay. Thanks, Charlie. I am now wishing that I had put them in order of importance. So I could have just said yes. No, look, I think in truth that the house type range is going to drive the bigger financial improvements. Strategic was put down because really that was what we started first. We have come from 5% back in 2012, and as Stephen said, we are now at 25%. The changes that we have made to the Barratt range are fairly fundamental, and we believe that they can drive through not just build cost efficiencies, but they can also drive through a faster speed of build, and we believe that they can give us more optimization in terms of layouts. All of which Stephen covered. I think the Barratt range individually is the biggest driver, and then David Wilson range will be our big driver and strategic will also be a big driver. Divisional size. The size of divisions. Oh yeah, sorry. Yeah, in terms of divisional size, I know it seems like probably just a simple answer, but I think our divisional structures are simply bigger. We have large divisional teams, semi-autonomous boards sitting at a divisional level, and we have a large number of divisions that are presently operating in the range of 700 to 750 completions. It's almost as simple as, well, if 10 of them can be there, then everyone can be there. Steven, do you want to add to that? Yeah, I can add to that as well. As you say, we've got, as you know, 27 divisions. 24 out in the regions. Those 24 are set up very similar. Full management teams, full responsibility. A number of them are currently exceeding 700, 750 units. I think the thing we do differently, and Barratt used to be a situation where 500 was seen as a good number, but we have a central overlay for technical who do all the standard work in drawings, so it makes life very easy for the divisions. We've got central marketing, central commercial. As I mentioned, all our procurement is dealt with centrally. We've got a small team dealing with procurement. The divisions are there focused on building standard product. All the solutions are done for them, so they've got to basically buy the land, build the houses, and sell them. We do everything else. Very good. Thanks. Aynsley Lammin from Canaccord. Just two questions, please. I wondered if you could give us the average site numbers for the year just gone and what your expectation is for the current year. Then just back on the gross margin. Outside of all your kind of self-help initiatives, I just wondered what your expectation was in terms of the net benefit or not that you'd expect from pure HPI versus, I think you said build costs, kind of up 3%-4%. I just wondered how you see that trend into current year, financial year 2018. Thanks. Okay. Jessica can just talk through in terms of site numbers. In relation to HPI trends and how that faces up to cost increases. Steven outlined that we expect cost increases in FY 2018 at around 3%-4%. Last year, we'd given guidance for FY 2017 at around 2%-3%. I think we've tended to be reasonably precise and reasonably accurate. Partly driven because we are agreeing prices forward, as Steven outlined, and partly because I think the labor market has been a little more stable over the last 6-12 months in terms of pricing inflation. In terms of HPI, in FY 2017 we saw HPI running at probably around 3%. It's never going to be an absolutely precise measure, but we can track same house type on the same site, and we get a fairly big sample that we can populate. So something around 3%. The trends so far have been fairly good, but it's early days. We are only nine weeks into the financial year. We believe there is still house price inflation. The build cost inflation is clearly only affecting a limited percentage of our cost base, whereas we are getting all of the benefit coming through on revenue on the HPI line. Jessica? Yeah. In terms of site numbers, we operated from 366 wholly owned sites last year and 11 joint venture sites. In terms of FY 2018, we would expect a modest growth in site numbers, which is driving the modest growth in completions. So 1%-2%. Thanks. Clyde Lewis at Peel Hunt. I think you have got a couple for me. Going back to Help to Buy, David, do you, and Steven I suppose, what sort of impact do you think there would be on your business if they cut the equity loan from 20% to 15% or even 10%, and maybe sort of carve the GBP 600,000 limit down to, say, GBP 400,000 or GBP 300,000, particularly outside of London? The second one is probably more for Jessica in terms of sort of land costs going through the P&L. I think, I do not know, doing some quick maths, it looks like it was about 19.8% last year. Obviously, that is sort of higher than where it was in the balance sheet a couple of years ago, but it was in line with last year. Are we going to see a little rise in that land cost going through the P&L because of mix of product coming through this year? Just trying to sort of help us a little bit in terms of sort of modeling to think about the moving parts of that gross margin. Okay, Clyde. Thank you. I like the way you've allocated the questions for me. The second one sounds quite difficult, so Jessica will be pleased to answer that. Just on Help to Buy, the reality is that if price points are varied, i.e., it comes down from GBP 600,000 to, say, GBP 400,000, based on what we can see in our business, we know that the impact of that is going to be relatively limited, because the vast majority of transactions would take place below GBP 400,000 price point. If the equity share percentage is varied, that is more difficult for us to see. But my sense would be, if it went from 20% to 15%, the impact would probably be fairly limited. If it went from 20% to 10%, the impact would clearly be more substantial. It's interesting in that we, and our peers as well, are seeing three different Help to Buy schemes operate. So we have the scheme in Scotland, in Wales, and in England. If you look at the scheme in Scotland, the capital values in Scotland are GBP 200,000. Now, I understand that average house prices are different, but nonetheless, that is a materially lower capital value. The equity percentage available is also lower than the 20% percentage at 15%. And relative to our product profile, clearly participation is at much lower levels. But if you look at our trading trends in Scotland or our trading trends in Wales, they're very strong. Steven touched on Scotland and Northern as being two of our strongest markets. So modification of the scheme, I don't think presents big challenges for the housebuilders. In terms of the land cost going through the P&L, there is further details in the appendices, but the number going through the P&L in the year was GBP 54,000. And if you look at what's in the balance sheet, it's actually lower. It's GBP 47,000 is the average plot cost in the balance sheet. But are there any lumps this year in terms of sort of, because we look back in the plot cost in the chart that you put up earlier on, again, I think a couple of years ago, it was over 20%. That GBP 47,000 is obviously going to be lower than that 20% that you bought in a couple of years ago. So is there a little bulge this year in terms of that plot cost as a result of some of the stuff going through London in particular? Well, clearly it depends upon site mix. If you were to, say, pick Landmark Place, that would have a higher plot cost. What I would say is in terms of what we're intaking at and what the plot cost is in terms of ASP ratio in the balance sheet, that's at 18%. Okay. Two from me, just one specific and a more general one. It's probably my normal thick question, but just going back to the show home leasebacks. I think you said you'd been undergoing that program since 2008 or 2009. Why therefore is it a benefit looking forward when it hasn't been a benefit already? I'm not quite sure I understand why it should help you in future and it hasn't helped you in the past. Second thing I had more generally. To what extent is it a real debate internally around the two strategies you have in terms of keeping the land bank at 3.5 plus year, and being quite disciplined about that, and obviously having this real drive to improve margins. When you've got a situation where you sit here today and you're profoundly positive about the opportunities in the land market, surely in a way, the two things are mutually inclusive. If you can buy land comfortably within your margin targets, surely you'll get your margin gains quicker if you've got a bigger land bank in the current circumstances of the market. I just sort of wondered what would make you sort of give on where your land targets are? Okay. If I start in terms of the land position, then Jessica could pick up in terms of the show home and the license back on show homes. I think in terms of land and the operating framework, we see that a land bank at 3.5 years is sufficient for us to operate the business. The big swing factors on our operational requirements are really largely around planning. If the planning environment improves or deteriorates, we would need a longer or a shorter land bank. We're not trying to buy land just to speculate in terms of what will happen to land prices or house prices going forward. I think we're happy that 3.5 years gives us sufficient to operate the business. I think, the two additions to that would be, one, if you look at our intake in the last two years, we had a short pause last summer post the referendum. But if you look at our intake in the last two years, we had 24,000 plots in FY 2016, 18,500 plots in FY 2017, and as Steven outlined this morning, we are going to be above 20,000 plots. I think what is incumbent on us is we are happy to intake more plots, but we have got to deliver more volume. We cannot just be intaking more plots and sitting on them. We will stick to the three-and-a-half-year land bank, and we are happy to intake more plots, but we must then deliver against that. Clearly, we have delivered strong completion growth over the last six years. In aggregate, last year, our completion growth was broadly flat, but our own business, as opposed to joint ventures, grew by 5%. We are still growing our own business substantially. In terms of the show home sale and leaseback arrangements, clearly those had a fee associated with them, a yield for the purchaser. That would have been at around 6%. As I said, we can borrow longer term for significantly lower than that. Our new US private placement note is at 2.77%. There is a net differential which will come through in terms of the bottom line, but there is also the operating fees going through the operating profit line. Thank you. Thanks. It's Will Jones from Redburn. Three, if I could, please. First, just around the brands and the business, could you just give an update on where David Wilson sits relative to Barratt in terms of the proportion of sites and how you see that evolving going forward? The second, just coming back to margins, did you give any thought or have you given any thought to overage arrangements? Can you just remind us how much of your land buying comes with overage, and have you considered lowering that as a means of potentially improving the margin potential? The last one was just around the net cash guidance for this year, GBP 500 million. I think historically, that's probably been the most conservative element of your guidance over the last few years. Last year, I think you talked about a GBP 200 million outflow at the start of the year, and it was more than GBP 100 million inflow net of dividends in the end. I'm just trying to work out, are we sitting here with similar conservatism in the guidance at the start of the year, or is there something to bear in mind around, I appreciate land buying is going to be higher, but is there a new message you're telling us around land creditors in there? The 30%-35% ratio, I think you've talked about in the past, but if you're going to get into that range this year, just wondered if there's anything to bear in mind there. Okay, great. Well, in terms of the questions then, I'll start off in terms of the David Wilson, Barratt split, and Steven will pick up in terms of the overage arrangements, and Jessica will talk about net cash guidance. Just in terms of Barratt and David Wilson. So we have three brands in the business. Everything in London operates under the Barratt London brand. Of our 17,400 completions, we're running around about 1,600 completions in the London business. The balance of completions are in the regional business, where clearly we have both private and affordable content. When you look at David Wilson to Barratt, the ratio is around 60% in favor of Barratt. The changes that we've made in terms of the house type ranges, I think have really made a clearer differential between David Wilson and Barratt. We would expect that the David Wilson participation, if you're taking a 3-year view on it, that we would expect that 40% to be moving down. So a bit more Barratt over a 3-year period and a bit less David Wilson. In terms of sites that they share, we're around about 45 to 50 sites where they're shared. I think that's a big, big benefit that we see in terms of our land acquisition strategy, is the ability to go on site and act as two house builders on the same site. In terms of overage, Will, I think what we've seen in the land market over the last 12 months is the number of overages have been reduced significantly. There's very few parcels of land we're buying, private land we're buying with any overage, which reflects the improvement in hurdle rates we're seeing through the land in terms. The only other sort of exception to that would be public land, MOD, where it is a precondition of tender that there is an overage. That's where we are. Okay. In terms of net cash and land creditors, we closed the year with GBP 724 million of cash, and land creditors were at 37%. As I said, we're expecting land creditors to reduce during the course of this year to be 30%-35% of the owned land bank in line with our operating framework. With that reduction, we're therefore expecting net cash to reduce to around GBP 500 million at the end of the year. Okay. That's no more questions. I think no more questions. Okay. Thank you very much for all your questions. We will see you in the interim, but we will be back in February. Thank you.