Hello, and welcome to today's Crest Nicholson PLC Interim Results 2022 conference call. My name is Bailey, and I will be your moderator for today's call. All lines will be muted during the presentation of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to our host, Peter Truscott, Chief Executive of Crest Nicholson PLC. Peter, please go ahead.
Thank you. Good morning, ladies and gentlemen, and welcome to Crest Nicholson's half-year results presentation for the period to April 2022. I'm Peter Truscott, Group Chief Executive, and I'm being joined here this morning by Duncan Cooper, the Group Finance Director. Let me start with this morning's agenda. I'll begin with a brief summary of the half year just completed before handing over to Duncan, who will provide a comprehensive financial review. I will then return and give you an overview of the current market, as well as a strategy update and some thoughts on the outlook ahead for the company. As usual, there will be plenty of time set aside at the end of the presentation for your questions. Firstly, a summary of what has been a very strong first half of trading for Crest Nicholson.
When the leadership team came together in 2019, our aim was to restore Crest Nicholson to its rightful position of being a leading UK house builder with a proposition for investors, strong, stable and consistent returns, and to rebuild margins to industry normal levels of 18%-20%. In previous periods, we've been able to demonstrate good progress against these goals, and this period continues this theme with an excellent financial and operational performance. Our key financial metrics in the form of margin and return on capital employed have shown strong progress and with visibility around further improvements to come. Our already robust balance sheet has once again been strengthened. Duncan will, of course, provide the granularity on all of this in his section that follows.
Pleasingly, we have maintained our valued five-star customer service status, which I'm delighted to report as it's a key part of our strategy to 2026. Geographical expansion in Yorkshire and East Anglia is well on track. Again, a little more on this later. In previous periods, we set out ambitious environmental strategies, ensuring that as we grow, we do so in a responsible and sustainable way. Today, we go further. We announce our new science-based targets. Finally, before I hand over to Duncan, having delivered a strong financial performance in the first half, we're sufficiently confident in our prospects to announce upgraded earnings guidance today for our full year. All in all, a terrific first half for Crest Nicholson and plenty of reasons for optimism ahead. Now I'll hand over to Duncan.
Thanks, Peter. Good morning, everyone. Good, nice to be doing a results presentation in person again. Especially when you're announcing an upgrade in earnings, but we'll come onto that later. Starting with the income statement for the half, revenue of GBP 364.3 million, up 12.3% on prior year, an adjusted gross profit up to GBP 77.5 million, up 22.4% on prior year. That's a rate accretion of 180 basis points. I'll come on to giving a little more detail about our margin recovery progress versus those Capital Markets Day targets we set out in October last year in a future slide. Admin expenses at GBP 20.7 million, and they remain tightly controlled.
Again, as we committed back in October, we are starting to incur costs now for the new divisions, but this is on a judicious basis and can be scaled sensibly going forward. Remember, in the prior half comparative was the two and a half million pound JRS repayment, which we had received in full year 2020. Below that is a GBP 2.3 million impairment loss relating to the London Chest Hospital and a GBP 105 million exceptional charge for combustible materials, GBP 82.6 million net of tax. Again, I'll come on to both of those items again in a bit more detail later on.
That leads down to a loss after tax, excuse me, GBP 42.2 million, with an effective tax rate of 19.6%, which reflects a prorated impact of a 4% residential property developer tax along with the 19% statutory rate. Over time, we will of course, see the effective tax rate increase in line with a full year effect of our PDT and the increases that are coming in the statutory rate. Finally, we are pleased to announce an interim dividend of GBP 5.5 pence per share in line with our dividend policy of 2.5 times cover and a strong improvement in return on capital employed with ROCE up to 18.3% for the half. Moving on to the sales metrics slide next then. We continue to experience robust demand and good trading conditions.
We operated from 58 outlets, which is in line with prior year. I'll let Peter talk in a little more detail about the planning and regulatory environment, which does remain challenging as we seek to grow this number going forward. Our SPOW rate was 0.72, up slightly on prior year. The pleasing element of this performance is the consistent execution we're now delivering across all divisions in the group. Which wasn't the case when we arrived back in the business in 2019. It does clearly bode well for geographical expansion, as of course, as we prove to ourselves that we can implement and maintain consistent replicable operational standards and processes for sales and marketing across all of the group. Total home completions of 1,096, up just under 8% on prior year, and average selling prices up across all tenures.
For private sales, that number continues to experience opposing forces. On the one hand, we have good levels of sales price inflation that's offset by the shifting composition of what we sell and where. Our new house types are generally at more affordable price points and in locations which support this pricing. For the number including bulk and given its weighting in the mix, you can see the increase for bulk deals was significantly higher. That's a specific reflection of two bulk deals which were completed in the half for The Old Vinyl Factory, Hayes and Brightwells Yard, Farnham, both schemes being high-value units in urban or suburban Southeast England.
Finally, as we look forward to the second half, we carry with us a very healthy forward order book, 2,891 units, GBP 814.9 million GDV, which gives us over 96% coverage of full year 2022 revenue. On to the next slide then, and the GBP 105 million charge related to combustible materials. Back on 5th of April this year, we announced we had signed the government's Building Safety Pledge, and that would necessitate a further charge in the range of GBP 80- GBP 120 million. Today, we can confirm that charge is GBP 105 million.
It comprises a further GBP 70.3 million for buildings contained within the Building Safety Fund, the BSF, which we will have to fund if the remediation works are complete or ostensibly complete, or take on the projected cost of remediation and perform the work ourselves. The balancing element relates to buildings we had already identified as requiring a review, and for these buildings, we have seen some examples of increased scope of works following further investigation. The overwhelming driver is the requirement within the pledge to increase the look back to 30 years, which of course brings more buildings formally into scope. The detailed calculation of the provision, including its expected utilization, is detailed in note 12 of the accounts.
What I would say is that forecasting the exact timing of these cash flows is difficult and unpredictable, and in part depends on how or when DLUHC wish to close out these commitments, and that will be finalized, obviously, in the, in the fuller drafting that's taking place. However, our best estimate is that we expect these works will be complete within a 3-5-year time period. Assessing this provision remains complex and iterative, but reassuringly, we have only received one further in-scope project notification from a building owner since signing the pledge. At the same time, we continue to see new opportunities emerging to mitigate the overall financial commitment and are therefore confident that we are now past the peak of uncertainty that this issue has represented in previous updates. On to the next slide, and as promised, an update on our margin recovery progress.
Operating margin was 15% in the first half, well on the way to those 18% and 20% milestones we outlined at the Capital Markets Day back in October last year. At the risk of sounding like a stuck record, I will repeat again, the biggest driver of this recovery is the passage of time, allowing us to deplete and recognize the poorer legacy schemes in the portfolio and replacing them with the new land plotted with the new house types. In the first half, we completed and handed over The Old Vinyl Factory, Hayes, and in the second half, we'll do the same for Sherborne Wharf, Birmingham, both unprofitable schemes in this year's P&L. As we have previously referred to, we still have an excellent scheme, albeit unprofitable, at Brightwells Yard, Farnham, which will unwind to the P&L through to full year 2025.
The best justification I can offer you for moving away from these types of schemes into the standardized house types we now seek to build is the experience I see every time I visit sites. In a volatile operating environment such as the past two years, where sourcing labor and materials can be challenging, it's the site managers on those bespoke complex schemes that are finding it an even bigger challenge than most. You see that reflected in the delays to the build completions at The Old Vinyl Factory and Sherborne Wharf. That's not to say life's easier on the sites with the new house types, of course, but relatively speaking, it's a much easier task and thoroughly vindicates the decision we took back in 2020.
With that logic in mind, that brings me to what was the last such asset in the portfolio, for which up until now, we had not identified or communicated an appropriate mitigation for. The London Chest Hospital carries many of these features. The regeneration of London Chest Hospital in East London with complex build requirements and which has been subject to judicial review on planning. It's actually an excellent site and location. It just doesn't fit with our strategy anymore, and again, was forecast to be unprofitable, and dilutive for the group in the future. We disposed of our 50% share in the joint venture to our joint venture partner on the sixth of May.
Although the transaction finalized after the half year date, because that deal was so advanced, we marked the asset to market value and recognized a GBP 2.3 million loss on its disposal. That charge is recognized on its respective line on the face of a P&L and not in gross margin because it reflects an expected credit loss on the intercompany loan arrangement with the joint venture. We will receive GBP 16 million cash contribution for this sale, 50% in October this year and the other 50% next year. Aside from the build profile and risk not fitting our strategy, there's a strong capital efficiency rationale. We've been able to further strengthen the balance sheet and in so doing, have also foregone a significant peak in forecast work in progress that would have arisen from the construction phase of this asset.
Finally, in assessing our progress on operating margin, as I've already alluded to, we're maintaining a tight grip on overheads. Therefore, the summary message from me is our operating margin recovery is therefore well on track, and we're really pleased with the progress we're making. On to the next slide then, and the balance sheet. We continue to strengthen our financial position all the time. Net cash at the half was GBP 173.3 million, and net debt and land creditors was GBP 6.6 million, down from GBP 48.1 million in prior year, with average net cash at GBP 98.6 million. Incremental decisions like the London Chest Hospital follow progress on items such as the Longcross Studios in demonstrating we are looking at every element of our capital and cost allocation.
To that end, I'm also pleased to announce that the group reached a swift resolution with the pension trustees following the most recent training valuation and will now contribute GBP 1.5 million cash contributions per year to the scheme following the previous schedule of payments of GBP 9 million per year. For the purposes of your models, given this year is blended, assume GBP 3.4 million for pension cash out in full year 2022, and GBP 1.5 million for full year 2023. I'd like to briefly thank the trustees for their constructive dialogue with us and their support on payment deferrals during COVID-19. Against this backdrop, therefore, we have the resources to execute the plans we've laid out at the Capital Markets Day in October last year.
We can meet our combustible materials obligations, fuel organic and inorganic growth if the right-sized opportunity comes along, and continue to pay a healthy dividend at 2.5 times cover. On to the next slide, then, for another layer of detail on those cash movements, and I'll be brief on this. The impact on operating profit and the increase in the provision are ostensibly offsets of the combustible materials charge, which also reduces the income tax paid in the first half as well. The increase in inventories reflects a higher year-on-year investment in land, as you would expect, and the pension contributions being lower, as I've just covered. My penultimate slide covers the usual land disclosure we give you, so 1,096 home completions in the half, but we also added 2,204 plots since the year end.
Two of the larger sites for interest were 558 plots at Stephenson Way, Daventry and 500 plots at Charlotte Avenue, Bicester, but we saw good additions across all existing divisions. The owned versus controlled split is 76.1% at the end of the half, broadly in line with prior year, and the GDV has grown since year end due to the impact of sales price inflation and further replan effects being embedded. Assuming no other changes, you can expect the JV plots number to reduce by 291 plots for year end because of the London Chest Hospital disposal. Finally, we approved 1,543 plots for purchase in the first half at a forecast gross margin of 26.8% after sales and marketing costs.
To summarize, before I hand back to Peter, a strong first half of trading as we carry a very healthy forward order book into HT. The net cash position gives us the flexibility to execute our plans as we've outlined, and we're making good progress towards our five-year financial targets, with both ROCE up to 18.3% and adjusted operating margin up to 15%. If you'd have excluded the one-off impact at the London Chest Hospital in the half, that operating margin would have been 15.6%. Tangible progress now really starting to come through.
Finally, in recognition of the strong progress we are making on all fronts, the first half of trading and the forward order book, we're delighted to be increasing our earnings guidance today with full year 2022 adjusted profit before tax expected to be in the range of GBP 135 million-GBP 140 million. With that, I'll hand back to Peter.
Many thanks, Duncan. Let me now provide you with some thoughts on current market conditions and an update on the early progress against our strategy to 2026 that we set out last autumn. Well, obviously, not a lot's been happening in the wider world since then, has it? It's all been pretty quiet and predictable. The last vestiges of COVID, energy cost of living crisis, a war in Ukraine to think about, but the good news is that the housing market has remained very robust throughout this period. The forward-looking indicators have been and remain strong and in line with seasonal trends. Similarly, sales rates have been robust and continue again to be in line with those same seasonal trends. This remains a good market in which to sell homes.
Importantly, house price inflation continues to sufficiently cover build cost inflation and therefore to protect margins. Of course, there have been operational challenges to overcome, and these remain. Material supplies have been inconsistent, as has, but to a lesser extent, labor supply. However, there are early signs of a greater degree of stability coming through now. Pricing has been inflationary due to these shortages, and some of this, of course, has been driven by the cost of energy, which remains volatile. The land market is interesting. I had initially thought that it would normalize this year with more land coming through, but that has been slow to happen. Actually, the speed of getting planning consents, though, together with issues like nitrates and water quality, delaying sites in some areas has meant that it's still very tight and of course, the demand for land remains strong.
Everyone's working through outlets quite quickly and with these strong selling rates. As you would imagine, overall, it's a pretty competitive environment for land. That said, we're still picking up what we need to and at the right margins, as you will have seen from Duncan's slides. We're having to work very hard on this, though, really maximizing sites and leveraging our strong relationships. Importantly, having a good strategic land portfolio takes a little pressure off the spot market, and this definitely does help us. We've also been really active in replenishing this. Another slide on this to come. I've touched upon the planning and regulatory environment. To be honest, it's always been inconsistent and difficult to navigate in this country, and it's probably been a bit slower and even more inconsistent in the period post-COVID.
These difficulties are eventually overcome, and it's certainly easier for larger organizations such as ours, when compared with, say, smaller house builders having to deal with them. Despite all these challenges that I've touched upon, here's the good bit, the long-term fundamentals for the housing market remain strong. There is a structural imbalance between supply and demand, and if anything, planning changes in the pipeline will do little to address this in my view, certainly not in the short term and certainly not in our key markets in Southern England. Mortgage availability is good, with plenty of participants, good pricing, and increasing numbers of products aimed at the higher loan-to-value market. Despite what I've said about the upcoming changes to planning rules, it's still fair to say that there is strong political support for home building in the UK.
Sadly, politicians have yet to be able to reconcile the need for new housing and their desire to deliver it with the short-term political difficulties in actually getting development through at a local level. At some point, they will have to overcome these barriers. Now turning to our strategy for the period to 2026 that we set out last October. To remind you of these, we have two main targets delivered over two periods, firstly to 2024 and then to 2026. By 2024, we're seeking to build volumes back to above 3,000 units with an operating margin of 18%. We're targeting return on capital employed in excess of 20%. These targets will be achieved by utilizing our existing business capacity and the benefits of our operational efficiency and better land buying will help these margins to come through.
These improvements also continue to accrue margins to 2026, where we're targeting a 20% operating margin and a 25% return on capital employed. The volume growth, as we expand to over 4,000 units annually, will largely come from three new divisions to be opened by the end of 2023. Our dividend policy is consistent at 2.5 times cover, and our partnerships business will support our growth by contributing some of this extra volume as the market grows. Additionally, this activity also offers improved resilience for us during the cycle. We will maintain our balance sheet discipline throughout. This includes holding our land creditor obligations below 30% of net assets. Overall, our strategy provides a strong earnings accretion from an enlarged group.
We are, of course, in the very early stages of our strategy period as we move from a position and period of business recovery to business expansion. How are we doing so far? Firstly, margin. As you will have seen, we're firmly on track towards our 18%-20% target range. We're very pleased with where we are at this point in time. We have also seen a significant improvement in our return on capital employed, a key target for the group with 18.3% delivered. Our volumes have continued to grow in the period, up 7.8% against last year. We have a clear line of sight towards our first goal, 3,000+ unit completions. We've been very active in what is a tough land market. I've already referenced this.
The land approvals highlighted last year have now come through to the short term land portfolio, and we continue to approve more land that we deplete and at significantly better margins. Our geographical expansion is now underway, and I'll come onto this in the next slide. Let me start with Yorkshire. I'm absolutely delighted with where we've got to so far. We are now in our new office at Thorpe Park, Leeds. The space can be flexed as we grow, so it is intended to be our longer term base. Key leadership appointments have been made. Guy Evans, who joined from Bellway, is leading the business and further strong experienced recruits with local knowledge have filled senior commercial and technical roles, Guy's background being land.
Most pleasingly of all, we have now approved the first two sites for purchase, both with planning consent, the first in the South Yorkshire market and the second in the East Riding. We expect these to commence construction in the first half of 2023. With East Anglia, we've chosen Bury St Edmunds as our office location and will have a number of our key team members in place during the second half of 2022. We have, though, been sourcing land already with two sites acquired, one in Norwich market and one in the Greater Ipswich market. Finally, as we've previously mentioned, if the right merger and acquisition opportunity presents itself, we remain open-minded to this route in order to accelerate our strategy. However, it will always be about the right asset at the right price. We continue to deliver five-star customer service status for our customers.
As we roll out our new house start range and embed standardized operating systems, we expect these high levels of quality that Crest Nicholson is associated with to continue. Preparations are well advanced as we begin to adapt to the New Homes Quality Code being introduced later this year. We are continuing to develop our aftercare capability so as to deliver this more consistently too. Overall, service and quality are very important to us and will remain a focus. As I previously explained, our partnerships and strategic land units, led by Kieran Daya, have three main areas of focus and expertise. Bulk sales to the affordable sector and PRS markets, strategic land promotion, and managing key relationships, including with entities such as Homes England, the Defence Infrastructure Organisation, and financial institutions. Aviva would be one such example.
In previous periods, I've highlighted successes around bulk sales to the PRS market, and as you've seen, a number of these have come through to completion in the period, and we continue to progress more of these. Today, though, I want to provide a little bit more color around strategic land. The aim of investing in strategic land is to control and secure land that in the future is likely to be granted planning consent, but doesn't have a consent at the time that we acquire an interest. This represents a capital efficient way to access the land market. Usually, this is via an option arrangement, sometimes also by outright purchase.
The company promotes the land through the planning system, and when consent is obtained, it has the exclusive right to acquire the land at a discount to open market value, typically 10%-20%. Kieran has now assembled a strong experienced team to manage our existing portfolio and to also seek out new opportunities. In the period, we've seen tangible progress through the planning system on a number of our assets, with allocations confirmed in respect of two sites in the Brentwood market and further planning stages reached towards this status for a large site, the Tonbridge market in Kent, and a similar size site now identified for development in Bury St Edmunds in Suffolk. Four new strategic sites have been approved in the period, which will form the next generation and replace those that are currently coming through to planning.
Obviously, it will take some time for these to come to fruition. We're really pleased with the very demonstrable progress that Kieran and his team have also made in relation to strategic land. As we've consistently stated, we take our responsibilities around climate change and the environment very seriously. That's why we set ourselves challenging targets in this area for the period to 2025. We set out to reduce our scope one and two carbon intensity by 25%, reduce waste by 15%, and utilize 100% of our electricity from renewable sources by this date. These targets are now well embedded and subject to strong governance and are linked to remuneration throughout the organization. Good progress was made against these targets last year, and progress has continued in the period. We recognize that we must do more, we must go further.
Therefore, I'm setting out today our new science-based targets for the group. We will transition to net zero by 2045, and from our 2019 base, reduce our scope one and two emissions by 60% by 2030, and finally, reduce our scope three emissions by 55% in the same period. You see there a photograph of a very environmentally friendly, battery-operated forklift truck. No doubt you'll see that photograph quite a lot in upcoming presentations. But I think it does demonstrate at a practical level some of the things that we're doing. I can assure you that is a JCB, it's real. It's not a photograph of a toy. My final slide before we move on to Q&A summarizes the key points from this morning's presentations and provides an outlook as we move forward.
As a summary, we've again produced a strong operational and financial performance in the period. Our aim is to produce strong and consistent results, and again, we've achieved this. More clarity has been provided on fire safety and remediation and how it will impact the company. We are now as a sector, and certainly as an organization, at the point where we can start to draw a line under this issue and move forward from it. I'm delighted that the momentum delivered in the first half has enabled us to now upgrade our earnings forecast for 2022 to a range of GBP 135 million-GBP 140 million. The visibility that we have with our order book offers us confidence to underpin these expectations. Over 96% of our sales for the new upgraded profit forecasts are now secured.
As we turn to the outlook, that order book also provides confidence not only for 2022, but also for beyond. Order book security is one of the reasons why we participate in the PRS market. It enables for better business planning. Our margin rebuild, a cornerstone of our strategy, is very much on track. An operating margin of 15% in half one, and also a return on capital employed, 18.3%, both significantly improved on the equivalent position a year ago, but also against full year 2021. With our geographical expansion making immediate headway, we are well on track with our wider five-year targets. The business really is now in great shape as we look ahead.
All in all, I'm very pleased with our performance in the period, and I'd like to thank all of my colleagues who have helped to deliver this result. At that point, I will move on to Q&A. How we'll do this, I'll take questions from the room first, and once we've exhausted those, then we'll go through to the phone. If I may, I'll ask Jenny to adjudicate the order of questions.
Okay, sure.
They should put their hands up.
Can I ask you guys to project your voice as well? Just kind of put a bit. Chris Millington, from Numis.
Thanks, Jenny. A couple if I can, please. Firstly, you mentioned about the difficult planning environment. Can you just give us a feel as to what visibility is over outlets and detail planning for 2023? It does feel like it's more of a 2023 phenomenon there. Duncan, you mentioned about some cost mitigation on the fire safety side of things. I just wonder if you could elaborate on that. The final one's just really a checking query on Help to Buy usage and where that's been.
Okay. So if I take the first and third, and Duncan, the middle one. We're not giving specific guidance on outlets, but I'll just give you a sense of the planning position. It's been difficult, of course, forever. I'd say it's just become more difficult period on period over the last few years. Certainly since COVID, a number of factors are at play here. I think that with local authorities utilizing work from home, I think that's slowed it down a little bit. I mean, seeing a gradual improvement. It's not just planning departments, it's all of the other regulatory approvals that are needed. Increasingly, we're seeing things pop up, nitrates, phosphates, water neutrality just starting to impact. We find ways to mitigate that.
We have got a sufficient number of outlets. SPO rates are good. The market's strong. We're able to buy land to replenish them. The planning system is a barrier to entry for some. I think the existing incumbents find a way of managing our way around it. It is difficult. Of course we're confident about our ability to continue to have the outlets that we need for our strategy period, as I've set out today. Duncan, just on fire safety.
Yeah. I mean, a range, Chris, to be honest, without giving any specific guidance per se. No doubt some of our peers will have commented when you ask them as well, we are in dialogue and recognizing it is to some extent a commercially sensitive a confidential conversation with HMRC around the VAT assumption around particularly if we take on properties that we either we've had on our own books to start with, we're remediating those, but also those in the Building Safety Fund, and our ability to recover VAT on those. If we take them onto our own books, we think that's recoverable. Are having a conversation on that. Also if the work's already been done and conducted and we'll recharge that cost from HMRC.
Sorry, from the government, there is a judgment to be made on that as well. I won't comment too much more on that. There's clearly a large sum associated with that. We continue to have line of sight of a number of substantial recoveries with large enduring subcontractors that I anticipate will be around. They'll be trading for some time to come. Again, I can't comment on those 'cause they're commercially confidential. Again, seeing you know, grown-up mature reactions to the challenges we face and willing to work with us to put those right.
We're starting to see some examples of some contingency unsurprisingly baked into some of the buildings we've had passed over from government, albeit very early days in respect of that, where we would think that our assessment of that cost is lower. We're also starting to see some pragmatic solutions. What I mean by pragmatic solutions is that as more and more focus and energy goes across the sector into remediating these issues lock stock, it's unsurprisingly driving innovation and creativity into manufacturers to come up with alternative solutions.
Without boring you with huge amounts of details, I was going through a presentation the other day talking about whether we can inject, you know, silicone into the cavity walls to act as a fire barrier, which is far less invasive than being able to do it. Again, entirely from the satisfaction of the fire engineer or the fire officer signing it off. We gave a talk the other day about sort of render catching around window frames can often be as well addressed by simply installing a metal sheet now around the outside. Far less expensive than tearing all of the render off from the external walls. There are signs of pragmatic, less intrusive, solutions being developed, which is in the interest of residents and stakeholders, 'cause it's less disruptive and less changeable too.
There are a number of mitigations starting to come through.
Just on that, on the third question on Help to Buy. I haven't got the number off the top of my head. Duncan might. It could be-
Mid-teens.
Mid.
Mid-teens.
It's almost becoming a non-issue really. There are very few properties that we've still got left to sell with Help to Buy, and it's certainly not having an impact on or any discernible impact that we've noticed on SPOW rates. It's just becoming a non-issue. Increasingly we're getting traction with Deposit Unlock.
Can I just have a quick follow-up just on the outlet point? Would you expect them to advance into 2023 versus 2022, or are you not willing to go that far?
I wouldn't be specific about the inflection point, but yeah, clearly as our strategy period advances and our volumes grow, we would expect to see growth in outlets at the same time, yes.
Thank you.
Yeah. It won't be all about sales, right.
Next question we have is John. John Bell from Deutsche Bank.
Yeah. Thanks, Jenny, and good morning. I think I've got two. The first one really is just to expand on the point, should we be thinking about that as part of the geographic expansion route? Or is there a kind of vertical integration angle potentially there? And the second one, Peter, you've just alluded to this, but Deposit Unlock, any color you can give us, you know, how much that's been used by buyers, feedback is, how it's working, be helpful. Thank you.
Yeah, sure. First one, certainly, the first answer, it's more about geographical expansion, and it's always gonna be about if the right asset was available at the right price. It would be complementary to the organic growth. It's a way of getting to the strategic look that we want faster if the right opportunity came available. On Deposit Unlock, I mean, it's tapering up from a very low level. Increasingly as Help to Buy isn't available because we either don't have product or timescales don't work, we're getting traction with Deposit Unlock. I think we would expect to see better pricing from the mortgage market as well as time goes on.
Next question, Will Jones, Redburn.
Thank you. Three, if I could. First, just if you could help us with what's changed in your thinking on the revised guidance for 2022, within the mix. Second, where you see net cash broadly landing at the end of the year, and if you can give us a broad steer on how that might evolve as you both invest in the land over the years after. The last one, a very general one around strategy and what flexibility you retain, I suppose, around the expansion plans or consider the macro uncertainties, how willing or able would you be to pull back on the pace if the world changes over the next years.
Sure. I'll start with do the first two, and then I'll pick up on the wider one.
Yeah, I mean, in terms of what's changed, well, I mean, the simple uncomplicated answer is, you know, we're looking at where we are on the forward order book and looking at where we are on the progress that we've made in the first half. We think it's the right thing to do to set that guidance for the end of the year. Yeah, we've got good momentum, strong confidence, and yes, there are some, as Peter's alluded to, some you know, clouds out there. But I think, we've set it at a level that we think is the right thing to do and reflects our best view of our internal forecast. Not much more to add, really.
I think on the net cash position, really difficult to forecast with certainty and predicated on that BSF funding element, which is obviously of the GBP 85 million total, a further GBP 70 million for the end of the year. The proportion of those buildings that we take on to remediate ourselves versus the proportion that is effectively writing a check to the government is difficult. We're in the process of having that conversation, and that is a spectrum between null to 85. In so deciding that, then whatever you come up with in terms of the government remediation piece, when is that check called for in terms of is an invoice come over in the next two weeks, or does it come over in six months?
Now, my sense is that the amount of cash we have forecast going out for the end of the year in our own view and our own internal forecast is circumscribed. To be helpful, you know, circa around GBP 65 million. I don't think that degree of cash will go out in relation to those buildings between the end of the year. I could be wrong, but we're certainly set for it if it does. In relation to the land piece as well, we've obviously a greater visibility on that. But again, also that is, as Peter has alluded to, uncertain. To try and be helpful, you know, I would expect the net cash position at the end of the year to be as good if not better than it is for the half year.
As I say, it is quite. There's some big swing factors in there in relation to particular combustible materials.
Okay, just on that third one. I mean, I think the strategy that we've got is the right one for the long term. I also recognize that there's potentially volatility in any market over a period of time. There are always gonna be headwinds and tailwinds. It's the right strategy, particularly with the planning focus becoming more constrained over time in the south and freeing up in the north. I think having a wide geographical footprint makes absolute sense for us. I think the pace of that growth is always gonna be determined to some extent by market conditions because we want to ensure that we buy land at the right margins.
If the market is particularly strong, land buying is particularly tight, we're not gonna compromise our margins, and that would entail perhaps growth at the sort of pace that we're already envisaged. In the event that the market becomes more difficult, in some ways, that is an opportunity to take advantage of some of that short-term dislocation to perhaps grow even faster to access the land market at the right time. I think it's the right strategy, but we're always going to have some flexibility around pace depending on what the market conditions could be like at any particular time.
Next, we have Glynis from Jefferies.
Good morning. I'll reel them off, get your pen ready. The first one's in terms of land buying, and you talked about working hard to navigate. What does that actually mean? What are you assuming in terms of pricing? Are you putting less contingency in? How are you working hard? Of your strategic lands, you had some big, bulky strategic land come through, which is really good in the first half. What should we assume the cadence going forward? Because it's clearly very lumpy. I'm just wondering, is that kind of a profile of what we should expect? Second one in terms of working capital, under the cash cost largely reduces some of the bigger episodic flows. How should we forecast it now? Should we just take the number of outlets into a GBP 4 million, GBP 6 million working capital per outlet?
Is it now going to be that smooth that we can forecast it that way? Thirdly, your SPO, your sales rate per site per week, it is below par. I'm wondering, is there something structural in that? Is that because of the bulk? Is it something that you can move up more that you can get growth without necessarily having to move the outlets? Cash, if you don't have that big call, what else to do with the cash? Will you buy back shares given the significant trade up? One last one in there, bulk. The selling price of bulk moves up because of what went through the bulk this past year. Can you remind us the selling price for bulk going forward in terms of what's in the land bank or how we should forecast that?
Also how that fits in your margin target. Forgive me, this is my, you know, my lack of memory. Your margin target is 20%. What are you assuming for that bulk within that, and therefore what do you have to be doing at the private side in order to be able to get to your 20% target?
I'll almost answer those in reverse, and I'll ask Duncan to pick up the one on the cash allocation. Just on margin around bulk, to remind you that the strategy is that we'll do approximately 15%-20% of our volume with bulk. The sort of pricing that we're seeing on that would be a discount, typically 5%-7.5%, something like that. That's pre-sales marketing costs where there is a saving. There is a small dilutive effect, but that is inbuilt in that margin target. The 18%-20% is after the impact of a proportion of bulk sales. That's how you should be thinking about that.
I mean, just on the SPO rate, I mean, obviously there is always going to be some elements of volatility depending on the number of bulk deals done in any period. The sort of number that you're seeing now around that 0.6 is what we would think is around the optimum for our average selling price, our business, and the ability to take the margin versus volume, if you like. There's always a trade-off between the quantum and the margin, the pricing. We think that that's about the right level around 35 in sales per site per year. I'll just let Duncan pick up on cash, and then I'll answer the
Yeah, I mean.
The other two questions around it.
If we start, I think you're interested about buyback. If you think about what we have to do, what we have no choice on, there's GBP 146 million. First rock in the jar is GBP 146 million worth of combustible material obligations we've got to settle over the next period of time. If you look around then beyond that, what we have choices to do, I mean, as you'd expect, continue to review in the current market, given where our share price is, all capital allocation options, and decisions. Yeah, my view would be, empirically, not just in this sector, but more broadly, where you see, businesses deploying a one-off use of capital in relation to a buyback.
Evidently, there isn't a lot of evidence from my perspective that in the share price reaction necessarily reflects a recognition of an enduring creation of value on the part of shareholders. Indeed, you've then, you know, you've parted with that capital and you can't use it for something else. I think if we were to do something in that space, hypothetically, we'd want to do something on a more enduring and recurring basis, which I think you do see as the evidence that you're getting value creation out of that. That clearly needs to be set against the plan we've laid out for growth.
As you'd expect me to say, it's because it's true, you know, we have set that against, you know, our own internal growth agenda and plan. I think the value creation from doing that is more accretive and more valuable. We will continue to keep that under review, as you'd expect. I think that's probably all I have to say on the cash flow, to be honest.
Yeah. Okay. I mean, on outlets, trying to be really helpful here. Outlets are almost impossible to predict. If anything, they always go backwards as opposed to forwards. Often when they go backwards, that's when the market's quite strong, so you get a better SPO rate, so it doesn't matter to that extent. Also, it comes back to the sort of land that you buy and whether or not it ends up being one outlet, whether you double head a larger site, whether you do part of that site as a bulk deal in a period, therefore it doesn't count as an outlet, or whether you don't and you can get two.
It is actually quite difficult, but the trajectory of outlets will be upwards as we move through that period to 2024 and 2026. I really would find it difficult to be very accurate about predicting exactly what that will look like as a profile when you compare it to the other constituents of the volume. I mean, on strategic land and the land that we've bought and how the pricing works, what we mean by working harder on this is that, we really have to maximize sites, and probably more so at the earlier parts of the land buying. It needs to be put more work into it now, whereas I suppose in a softer market, there's always a little bit left.
You can do some of that work afterwards and continue to replan and accrete market. Some of that has to go in a lot earlier to create the value in the first place. We've got very competitive build costs comparable to where we were, and certainly comparable to. I think the best in the industry now. Sufficient house type range, which bodes well. We've got key relationships with land sellers, and importantly, the business of our size, it's actually a lot easier to get quick decision-making through the organization. Just in terms of some of the way you look at land, in a softer market, you might be able to get sites conditional on detailed planning consent. You might be able to pay for them over a period of time.
In a tougher market like now, it's more likely you're having to buy on the outline consent, and sometimes you're having to put more money up front. With the balance sheet that we have and our competitors, that becomes quite normal. That's what we mean by having to work harder. It's not margin that is being compromised. The constituent mix between strategic and non-strategic, as you apply it's always going to be a little bit lumpy. You see there are a couple of sites that we have name-checked in there. Both of those would be open market sites, not strategic sites.
Because of the mix that we've got, about half of our land is strategic, half short-term, there is always going to be a relatively decent mix of strategic land coming through, but it will be lumpy. Certainly, I think you would expect to see something in the 25%-33% of the land over a period being strategic resource.
Just final one on your working capital question. So that has a big release and unlock effect with the London Chest coming out in 25/26. Don't forget, we've still got Chigwell and Waltham H2 for this year, and we've got Farnham still into next year. To try and be helpful and as a proxy, I think you probably can start moving towards a greater linear assumption around that as we move into clean air, definitely into clean air from 2024 onwards.
Bigger sites that are more infrastructure-intensive in the early stages and then settle down, but they're not all going to be sort of 100-unit sites fully serviced from day one.
Yeah.
I think Aynsley is next. Aynsley from Investec.
Thanks. Yeah, just three from me. Just wondered if you could give a bit more color and a little bit more what you're currently seeing on labor and materials inflation, and you're becoming less or more confident that continues to be offset by HPI. Secondly, just on PRS, given obviously interest rates, bond yields going up, fuel costs, inflation, is that market becoming a little bit more nervous and hearing some of the big commercial projects that are targeting yield beginning to maybe delay or postpone projects? Are you seeing anything around the PRS side? And then lastly, just on the Building Safety Levy, just if you could update us on your thoughts of, you know, the timing of when that might get imposed, any changes around how much it might be, anything you've heard that we might not have.
Okay. I'll try and pick up those and then ask Duncan to add to anything that I say. On labor and materials, it's always quite lumpy as you can imagine. I think materials have been more inflationary than labor, and certainly more inconsistent across products. As you would imagine, those that have an energy constituent are more volatile than others. Overall, 6%-8% sort of range I would say in the basket that we will have seen with our cost base. Labor, I think, is actually quite elastic. They're price takers. I would've said it's probably the lower proportion of that on labor, perhaps the higher on materials overall, 6%-8%.
I'm less concerned about the quantity of labor in the longer term because I think that the constraints in the planning system are going to mean that the expected expansion of overall house building to 300,000 a year is frankly for the birds. I don't see that anytime soon. That real squeeze on labor that people were expecting over the next few years, I'm not sure will happen. Increasingly, there is a proportion of offsite manufacture which is having an effect on the market. I think labor can be managed. Materials will always be a little bit volatile there. PRS, the demand side is still very strong. No shortage of people knocking on our door and existing partners looking to do repeat business.
Pricing is still strong. I mean, obviously we need to make sure that when we do these deals, we're mitigating against cost inflation. Actually, we're having some very sensible discussions with the counterparties on how that might look to make sure that we're protected on that because of course, that is the obvious risk. On the levy, we don't know any more than you've heard. I still fundamentally believe that we as a sector have done our share. I think we've stepped up to the plate with the government's ask on buildings going back 30 years.
The idea of us having to go further and pay for other people's buildings completed by investors, foreign-domiciled, home builders. I'm not sure that is fair or reasonable, but we haven't heard any more.
Rajesh from JPM.
Yeah. I've got two. On intake margins, I think you provided a number. Where does that leave the margin in the overall land bank? If you can give some sense on that.
On OpEx, I think you provided some indications at the Capital Markets Day. Could you put a number to it for 2022 and 2023?
Yeah. I mean, sorry.
Yeah.
On the intake margin on short term land, blended 26.7% on the short term. On the strategic land, 29%. On the OpEx, to be honest, I will not wanna give any more detailed guidance at this stage as to where that goes to because I just think it's too far out, to do so at the prelims. But I think at this sort of sensible base now, we've done what? Two years of whether it's question marks around the ability of the business to run on a more efficient, more frankly pegged percent of cost for sales operating cost base versus our peer group.
Then when you take those costs out, there's understandable questions and challenges around does it start to disrupt things or is it sustainable? I think we've proven that we can operate at this sort of set, this level of central overhead at the moment, and there's relatively minimal cost as you can reasonably assume and therefore the new division stuff at the moment. But just make some sensible assumptions both on inflation from this point forward for the central overhead, and then just the incremental cost that you're capable of working out in terms of putting in the new divisions as we grow and from that point forward. But you know, we are, as I said, we're running a sensible lean overhead cost structure that's working well.
At a very high level, if you're thinking certain input margins of 26%-27% gross, that sort of range, we would want to see our overhead percentage in the fives. There's a bit of dilution from a proportion of bulk. You can see how you end up at 20%.
Charlie Campbell.
Thanks. Yeah. A couple of questions from me. One detail, one sort of a big picture. Just wonder if you could split the forward orders between 2022 and beyond, that'd be very helpful. Just sort of a big picture question. You've been in the industry a long time. Just wondering how likely you think it is that house prices go down next year?
Yeah. I don't know. I'm happy to pick up that one with what I've just asked.
The first one's no, Charlie. I'll try and say it politely, no. I'll leave you to do the second one.
Yeah, I mean, obviously there's a lot of commentary around what people's expectations are. I think pricing is really about pressure. You think last time there was a significant change in house prices downwards, 2008-09, there was a lot of pressure. Individual homeowners were subject to repossessions and house builders had very weak balance sheets. Those two factors are not the same now. House builders have not got weak balance sheets, but very strong, so more likely to hold on to price. Similarly with individual buyers, when individual householders, there isn't the same pressure with the strong labor market, stress tested mortgage availability, a much lower propensity from the mortgage market to repossess rather than look at other options first.
I don't think that pressure to buy or sell property is going to be there anytime soon. You also look at the supply side. I think this is really important, and the planning system is not delivering a lot of new homes coming through. There isn't intense competition and demand in many locations. The second-hand market tends to clog up quite quickly when people sit on their hands. The much more likely impact would be a loss of liquidity first. Then I think what happens is that confidence returns and people then don't see a crash in prices.
We actually saw that as a dynamic for ourselves in 2020 with the COVID crisis because pretty much everybody from an economic position was looking and saying, "Well, house prices must crash as a result of all of this technically." Speaking of the Bank of England, I think they were looking at 16%-17%. The reality is what I've stated, it's exactly what played out. People sat on their hands for a short while, then sort of worked out that it's not gonna crash, so we better go participate again because if you need a house there aren't many available and that's the price. I think I am firmly in the camp of soft landing for the market.
Probably liquidity going a bit first and perhaps a softening, certainly a softening of house price inflation, before it consolidates and starts moving forward again.
Thanks very much.
Okay. Next question, John from HSBC.
Thank you, Jenny. I'll ask three please. The first one is on the admin costs in the first half came in flat on an underlying basis, which was quite an achievement considering you're taking on new division costs. Is it that savings are still coming through from the self-improvement programs over the last couple of years? Is that the factor? Perhaps on the same theme, how much juice is still to come from new house types beyond the 75% this year? How high can that number go and help margins in 2023, 2024? That's the first area of questions if I may. The second is on the new divisions and the volume targets that you've got.
Is 600 per division still the right sort of level for the five core divisions? Can the two new divisions get up to that level? Is that the target for them? How much will the third new division play in the 4,200 target? Finally, on the management team having parted company with the chief operating officer, perhaps, Peter, you could just set out how the team is operating in the new world.
Yeah, sure. Let me pick up some of those, and I'll ask Duncan to pick up on the admin costs and how we see that going through. House types, we set out a target of 80%. I think 80-85% is a sensible range to be looking at. I think we'll get to the 80% fairly quickly. We're working very hard at that. That's certainly helping us in terms of the operational efficiency. On the new divisions and the existing ones as far as capacity is concerned, I think 650 is probably the right capacity that we should be thinking of in terms of the existing divisions. It'll never be exactly 5 doing exactly 650. It'll range from, I don't know, 600 to even 700 in a particularly good year.
650 is a sort of sensible proxy. Certainly, the new divisions, in time, should be capable of doing exactly the same, but it will take time. In terms of the third division, yeah, the 4,200 targets for 2026 would include having a third division open at some point in full year 2023, at least calendar year 2023. On the management side, as you will probably recall when I joined the business in 2019, along with Duncan and Tom, we had an awful lot to do. My main focus was on the strategy, Duncan's balance sheet.
Tom got on with the operational efficiency and running a lot of the detail side of the business and getting there and doing that rapidly and doing a really good job. I mean, it just was a natural point in time that both Tom and we recognized that that job was largely over, and that I have more time and capacity to get involved more so in the day-to-day operation. With an organization of our scale, it wasn't really necessary to have both a CEO and a COO overlapping to some extent. It was a very sensible conversation that was mutual at that time. The management team will be operating slightly differently going forward as a result of that.
Just on the admin expenses, John, nothing particularly I'd draw out. There's undoubtedly some further annualization effect rolling over when you're trying to do a half year 2021 to half year 2022 comparative. Equally, I wouldn't seek to mislead anyone by saying there's another load of low-hanging fruit or costs that come out of that. As I said, there's a relatively small element in there associated with the new divisions, which will grow. You know, the admin costs total will start to grow inevitably, which we've said previously.
Finally, we have Sam from Hillhouse. Thanks for waiting.
No worries. I've got three. First two should be pretty straightforward, though. Just a clarification. On the land buying, are you moving your hurdle rates up from here, given the uncertainty? Second question is on the margin target, and I guess it's the HPI and build cost assumptions within that. Are you assuming that they offset each other on that journey to 18%-20%?
That's an easy one, yes.
Yeah. Okay. Year zero. Then the last one is, I appreciate it's a range and an estimate, but on the three-five year timeframe for the building safety funding provisions flowing out, that's kind of half as long as some other peers. Just interested in your reasoning around just the three things to me, kind of, particularly optimistic or aggressive in terms of that, the logistics of the work being done in that time frame. It's interesting your thoughts on that.
Okay. Well, Duncan will pick up the third one. I've answered the second. Just on the hurdle rates, no, we're not increasing hurdle rates, nor are we decreasing them. We've got what we think are a very sensible range which align with our strategy. That's where we are on those. Just on the price stack.
I mean, look, it's in part aspiration and expectation. I'm not sure I'll be sat here if it takes us 10 years to fix this stuff. I think the shareholders and our customers and all the affected stakeholders will determine they get someone else going on it. Look, let's be really clear, we want this, you know, said in the right way. We want this provision discharged as quickly as possible. I'm sure that's the case for all of our peers, because this is clearly a very sensitive area.
The idea or notion that we're sending a message to people that says, "We're coming to help, and we'll be with you in a decade's time," I don't think sits brilliantly in the court of public opinion. We're doing everything we can to try and mobilize and put resources behind it internally to get going on this. My expectation is the pace will now start to pick up because there's a coordinated effect from both government and from us. There are some limitations and challenges in getting stuff through the pipe and getting signed off and so forth. You know, I hear your challenge back around three, but I think three to five feels right.
I think if you're positioning over a longer period, it might be the cynic in me suggests because you're trying to somewhat underplay the cash out piece. I'm not in that place. I'd like to write a check and get this sorted tomorrow if we could, because that's the right thing to do, and it's also frankly the way we should all be approaching this matter.
I agree entirely with Duncan.
What's the build cost inflation assumption within that?
If you go to the note, we put a long-run build cost inflation assessment into the provision. We also, given the materiality of the provision, discount the provision as well. We're comparing apples with apples in terms of the assumption of the long-run rate of build cost inflation in there, and also then discounting it for the time value of money as well. It's in the notes to the accounts.
Okay. Any more questions in the room? No. Can we pass on to the phone questions, if any, please?
Thank you. As a reminder, if you would like to ask a question on the phone line, it is star followed by one on your telephone keypad.
I think those people are in the room, that's why.
We have no questions registered.
Okay.
Peter. Yeah, we'll just pass you on to Peter to close out the presentation.
Okay. Thank you very much for those who have attended, both in the room today and also online and for your interest in Crest Nicholson. Of course, if there are any further questions that you would like to answer and ask post the meeting, then feel free to reach out to Jenny. Thank you very much again for your time this morning, and thank you, Bailey, for hosting.
Thank you.
Thank you.