Good morning, welcome to the Crest Nicholson full year results for 2022. To register a question over the phone lines, please star star one on your telephone keypad. It's now my pleasure to hand over to Peter Truscott, Chief Executive to begin. Mr. Truscott, please go ahead.
Thank you. Good morning, ladies and gentlemen. Welcome to our results presentation for our recently completed 2022 financial year. I'm Peter Truscott, Group Chief Executive, and I'm joined this morning by Duncan Cooper, our Group Finance Director. Well, another very interesting year for the company and for the sector. I was just thinking, actually, it would be really nice to have a quiet, boring year. I'm not entirely sure 2023 is going to be that year, though. Turning to the agenda for this morning, I'll start off with a brief introduction before handing over to Duncan to present his financial review for the year. There's quite a bit to cover later, so I'm gonna be quite light touch on this first part of the presentation.
Once Duncan has completed his section, I'll return and provide some market context and update you on our strategy and outlook. Finally, we'll take some questions from the floor. There's obviously plenty going on out there, we've allowed a lot of time for the Q&A, and I'm also joined this morning by David Brown, Alex Stark, from the executive team, who can offer further granularity, perhaps during the break. Starting with the introduction. Once again, I'm pleased to be reporting on a strong set of numbers for 2022. You'll recall that following the first half, we upgraded our guidance for full year adjusted profit to a range of GBP 135 million-GBP 140 million, and I'm delighted to report results that are solidly within this range.
A key part of our strategy has been to rebuild margins back to industry standard levels over time, further progress has been made with an adjusted operating margin of 15.4%. The underlying progress was actually a little stronger than this, Duncan will break this number out for you. All of our other key financial metrics were also met with improvements, I'd particularly highlight the return on capital employed number, 22.4%, and a net cash balance at the year-end of in excess of GBP 276 million. I think that all of these numbers talk to a growing efficiency in our operations and also, importantly, a strong use of capital as well as financial discipline as we recover. Good progress has been made with our geographical expansion too.
Yorkshire is now an operational office with a team set up, and we've chosen to concentrate on organic growth with a pipeline of five sites, and these will start providing a financial contribution from 2024. East Anglia is now ready to go with a business leader in place, an office identified, and a couple of sites being progressed. I did touch on the balance sheet just now, but I'd reinforce the importance of this and the discipline already demonstrated around our finances as we enter tougher market conditions and also as we grow our footprint. We will not be compromising on this level of discipline as we move forwards. Let me now hand over to Duncan for his financial review.
Thank you, Peter. Good morning, everyone. I'm gonna take you through the financial highlights for the year, and I'm pleased to say despite a tough year of trading, especially in the second half and in the run into our year end, we have landed where we wanted to and report improvements across all key financial metrics. Coming first to the income statement and moving down the face of it, revenue of GBP 913.6 billion, up 16.1% off full year 2021, that principally drives the increase in adjusted gross profit up 16.6%. Adjusted gross profit margin is in line with prior year, and that's also in line with the guidance I gave this time last year.
If you remember, I outlined that a couple of zero margin schemes, Elveden Hayes and Sherborne Wharf Birmingham, had completion slipping from full year 2021 into full year 2022, which flattered prior years slightly and weighed on this year. Gross margin would craft sideways as it has done. Administrative expenses of GBP 51.1 million, again in line with prior year. Today, we are also guiding to full year 2023 overheads being over 10% higher than this number. Given the economic context, I wanna spend a bit of time putting this increase into perspective and also outlining its drivers. Back in full year 2019, we reported admin expenses of GBP 65.5 million per year, in a year where we paid no material bonus.
The following year, driven certainly by conviction that was indefensible for a business in our position but undoubtedly also hurried along by COVID-19, we delivered a significant and wide-ranging restructure of the group, with central costs and headcount reduced by nearly 25% and shrinking the organization by 215 permanent roles. We carried that overhead level through full year 2020 and full year 2021, and it's been an appropriate cost base for us to deliver the turnaround in performance. For full year 2022, it starts to become flattered. Firstly, remember, there is a two and a half million pounds JRS repayment in the full year 2021 comparative.
In line with many others in this sector, we've run with a high labor turnover and vacancy rate during the year. That's on top of what is already a very lean organizational structure. The past two years of strong trading conditions for all house builders and demand for construction activity generally has seen a war for talent. As we look forward to full year 2023, we expect a tougher economic environment to mean much lower levels of labor turnover. We're already seeing signs of that being the case this year. In addition to labor mobility, there are other areas of the business where we are making conscious decisions to invest for the future. There are, of course, the investments we're making into the opening of Yorkshire and East Anglia, as previously outlined.
We're also recruiting more resources into customer service and quality roles and readying ourselves for the changes that arise from the introduction of the New Homes Quality Code. Peter will talk about this in more detail later. We're also needing to invest in other areas of unavoidable regulatory change, such as the proposed audit reforms from BEIS and the additional administrative burden of the combustibles remediation program also requires additional resource and focus. Finally, of course, most obviously, against the backdrop of a cost of living crisis, we want to reward our people as generously as we can, and this has seen us award an average pay increase of at least 5% across the group for 2023.
Hopefully the guidance for full year 2023 is seen in the context of still being well below our full year 2019 baseline, and yet supports a host of additional and intensive activities within a more inflationary environment. Everything I've said does not preclude us from taking more decisive action, again, if trading conditions do not improve or become tougher than those Peter will outline in due course. There are roles and activities within our group that are directly variable to our output, and many of you will have seen what a significant recalibration in a house builder can look like in a period such as the GFC.
Having just outlined the challenges we face in finding and holding on to brilliant people in this sector, we are taking a considered view at this stage in the belief that trading conditions are tracking more in line with our own view rather than perhaps a more pessimistic consensus. If that doesn't remain the case, then we can, and we will revisit that position in quarter one of this calendar year. The GBP 2.3 million of net impairment losses relates to the divestment of the London Chest Hospital, which we outlined at the half year. It was held in a joint venture with an intercompany loan, and hence why it's presented in this way. That brings us down to adjusted operating profit of GBP 140.9 million, up 22.9% on prior year and adjusted operating profit margin of 15.4%.
If you discount the one-off effect of the London Chest Hospital disposal, the merits of which I won't go over again, that would be a margin of 15.7%. If you go back to the Capital Markets Day presentation we gave in October 2021 and the medium-term guidance of reaching operating margins of 18%-20% by full year 2024, you can see that we're firmly on track with that recovery plan, i.e., to move in line with the range of our other listed peers. Of course, the sector is viewed very differently now than it was back in October 2021, and the market is continuing to evolve its view on whether house builders will be making 18%-20% margins in full year 2024.
The principal objective that we were seeking to convey with that guidance was that there is nothing structurally preventing Crest Nicholson moving back into line with its peer group. Peter and I would reiterate that point again today. We would also reiterate that in normal trading conditions, given what we're acquiring new like that, we still think that 18%-20% operating margins are achievable for us and the rest of the sector. Coming next to adjusted net finance expense of GBP 7.1 million and then share of JVs at GBP 4 million. That brings us down to an adjusted operating profit before tax of GBP 137.8 million. Pleasingly in the middle of the GBP 135 million-GBP 140 million range we guided to at the half year.
Adjusted income tax was GBP 28.8 million at an effective rate of 20.9%. That now includes a part rate effect from the 4% Residential Property Developer Tax. Exceptionals net of tax was GBP 82.6 million, and I'll come on to cover that in more detail later. Which brings us down to a profit after tax of GBP 26.4 million, an adjusted basic EPS of GBP 0.425, and a dividend per share of GBP 0.17, including a final proposed dividend of GBP 0.115 per share.
I close on this slide with arguably the most pleasing metric being our improvement in return on capital employed, such an essential and important measure for our sector, and reflective of the progress that we have made, not only with earnings but also the balance sheet, up from 17.2% in prior year to 22.4% this year. The next slide covers the usual sales metrics we provide. Starting with average outlets at 54, down from 59 in prior year. We would expect full year 2023 average outlets to be slightly lower again. That's a function of the planning environment and the approvals process. Again, Peter will talk about that in more detail later on. Slow rate of 0.60, down from last year's very strong market of 0.80.
A total unit completion number of 2,734, up 13.6% on prior year, comprising 1,775 private units, 522 affordable, and 437 bulk. Unsurprisingly, average selling prices were up across all types with strong levels of HPI generally in the market, but that was tempered to some extent by the increasing participation of standard house types and the geo-geographic shift of where we sell in our mix. Finally, forward sales at the 13th of January 2023 were 2,018 units and GBP 510.8 million GDV. This presents a strong forward order book position for us as we start 2023. Coming on to the next slide in the exceptional charges for the year.
At the half year, we reported a charge of GBP 105 million, predominantly in response to having signed the Building Safety Pledge in April 2022. I should point out that is coincidence. Since the half year, we have seen some build cost inflation coming through on some scheme estimates, at the same time, this has been offset by some downward revisions in initial estimates as well. These offsetting movements are not material. I won't add any further comment. As I said at the half year, given the nature of this provision, we will continue to see moving parts in this area.
An example of which is that we received a GBP 10 million recovery settlement from a third party in January 2023. That amount will be recognized in full year 2023 as an exceptional credit. The overall provision related to combustibles at year-end was GBP 140.8 million, of which we spent GBP 5.3 million in the year. We expect to spend around half of the remaining provision within the next financial year. I think it's a reasonable challenge to ask, given that historic run rate, how confident are we that we will spend around GBP 70 million in the next 12 months? That's largely driven by an expectation that the buildings already remedied in the Building Safety Fund are swiftly settled upon signing any long-form agreement.
Other items in the table include GBP 1 million computed interest related to the discount effect on the provision and a GBP 1.5 million loss in a joint venture which has recorded a combustible materials charge in respect of a building it holds. Coming on to the next slide of the balance sheet. We closed the year with net cash of GBP 276.5 million, with net cash and land creditors at GBP 77.8 million, an average net cash of GBP 102 million for the year. In October, we renewed our revolving credit facility and signed a new GBP 250 million sustainability-linked loan, which expires in October 2026. That loan benefits from a lower interest charge if the group meets or exceeds four sustainability-linked targets, and our progress against these will be detailed in future annual reports.
Within that GBP 276.5 million of net cash is GBP 100 million of senior loan notes that mature between 2024 and 2029. Meaning at year-end, we had GBP 374 million of cash at bank. That liquidity position gives us confidence heading into a market downturn, whether short and shallow or deep and protracted. It funds our combustibles obligations and supports our current dividend policy of 2.5 times cover. It is also enabling us to remain active, yet selective in the land market. We are going to continue to make these investments, albeit at more demanding hurdle rates, and remain committed to a strategy of growth, but on a more moderated basis than that which we outlined at the end of 2021.
Finally, the pension surplus on an IAS 19 basis moved from GBP 16.7 million to GBP 11.1 million, principally due to a movement in the year-on-year discount rate. On the next slide, I outline the land portfolio movements for the year. We closed the portfolio with 36,700 plots at a GDV of GBP 12.1 billion and an ASP of GBP 333K. During the year, we added 3,094 plots to the portfolio across all divisions, including 439 at Perrybrook, Gloucester, 558 plots at Stephenson Way, Daventry, and we added our first site in Yorkshire at Melton Road, Sproatley.
Within that year-on-year movement, JV movement, is the disposal of 291 units at the London Chest Hospital, and 71.3% of the portfolio is owned versus controlled, down slightly from prior year. Finally, as I outlined earlier, we are remaining active in the land market, and Peter will touch on this in more detail later. Whilst the market remains competitive, we are seeing numerous examples of where uncertainty and an unwillingness to commit to new acquisitions from other developers has opened the door to Crest. In particular, enable us to benefit by virtue of our relative size and scale in completing our due diligence and getting deal terms agreed quickly. Consequently, we've been able to add some fantastic sites in great locations in recent months. Which brings me to my final summary slide.
Another year of delivering on guidance as our operating margins track back to 3%. Good progress in completing schemes like Old Vinyl Factory, Hayes and Sherborne Wharf, Birmingham, and divesting London Chest Hospital. The portfolio is so much stronger and more resilient than in previous years. We start 2023 with a forward order book of 2,018 units at GBP 510.8 million GDV. The balance sheet has been further strengthened following the good work and progress delivered over the past three years, ROCE up to 22.4% and net cash at GBP 276.5 million, with an extended RCF illustrates how robust that is. Finally, we remain committed to a strategy of growth, albeit one that has now been tailored to the current market conditions.
We will remain active in the land market because our confidence in the long-term resilience and fundamentals of the housing market remains. With that, I'll hand you back to Peter.
Thank you very much, Duncan. Now if I can turn to market context and what is an uncertain outlook as we look into 2023.
I was actually going to tone down some of the superlatives in the script this morning. I don't think there was anything getting away from it. In terms of the global domestic economic and political environment, I think 2022 truly was an extraordinary year, and it all started off so well. As we came into the year, the market still retained its strong momentum and some house price inflation was still coming through. There were signs of wider inflationary pressures in the economy starting to come through from the outset. Specifically in terms of the sector, we had Michael Gove's intervention with cladding and combustibles, and I'll come on to what this means for us as a whole. Needless to say, this has taken a lot of our attention and focus this last year.
In February, of course, we also had the start of the Ukraine War. It's fair to say that the impacts of this were gradually felt at first, in terms of the implications for energy and inflation. By the summer, what was more widely narrated as a cost of living crisis was recognized and started to have an impact on consumer confidence. This, coupled with rising interest rates, was slowly squeezing demand by houses. The fallout from the short-lived Truss government, however, brought a step change in this negative backdrop. Rapidly rising levels of inflation and interest rates, the market did take fright and sales rates slowed further. I'd reiterate, though, that there still was a market even then, and the lead indicators were pretty good. Cancellations increased and reservations were harder to come by.
The market remained very nervous in the run-up to Christmas. Buyers were being fed with a stream of commentary around potential price falls, and unsurprisingly, have been prepared to sit out of the market and wait and see. Actually, in reality, pricing has held up well so far, reinforced by very few distressed sellers. The scenario playing out so far is broadly as we expected, with pricing being quite resilient, but volumes coming under pressure. What we do have now is, domestically is the beginning of stability. It's stopped getting worse, and there are now early signs of economic confidence returning. It's probably slightly better, slightly earlier than expected. Similarly, the mortgage market was very volatile for a time, but there is increasing evidence that mortgage rates may have peaked in the cycle and are now starting to come down.
Of some of the political and economic issues already mentioned, our supply chains have changed both in terms of labor and materials were impacted last year. Increasingly, though, material availability improved, cost pressures remained throughout the period. Labor availability, including site management and office space roles, were also squeezed in the air. There was a lot of competition for people, inevitably, this pushed up costs for these resources and also created build disruption and delays. There are now early signs that these pressures are reducing actually in some labor categories are beginning to reverse as the outlook for industry volume softens. I think this is very encouraging. We have been successful in the land market, there were certainly signs of overheating by the late summer of 2022. These pressures, of course, have now reduced, with many competitors having exited the market.
Converting land identified through the planning system into active outlets has been torturous in recent years. Endless delays in getting reserved matters approvals through under-resourced, sometimes over-fussy, and certainly highly politicized local authorities has led to an industry-wide problem with outlets, we've been no exception to this trend. On top of this, the more widely discussed issues around nutrients and water neutrality have not yet been resolved despite Government rhetoric around tackling this. This matter alone is responsible for four or five pure outlets for us than we would have expected at this stage. The Government decision to see housing targets as guidance going forwards will inevitably reduce releases of land and with it industry completions over time. On this, I've got no doubt whatsoever.
This reduction in housing delivery going forwards and with the shortfalls already cumulatively built up over decades, the challenge supply side in England, in particular the south of England, will continue for many years ahead. The population will continue to grow, the desire for home ownership and occupation will not wane. Accordingly, the supply and demand imbalance will continue to offer support for participants such as us in the medium to long term, regardless of short-term market sentiment. That resilience has continued to be demonstrated in the sector, notwithstanding the major shocks to the economy in recent times, such as Brexit and the pandemic. Let me now update you on progress against our strategy that we set out in October 2021. Clearly, short-term market conditions warrant a review of and some adaptation to our strategy.
For the reasons set out at the time and given the likelihood of a further squeeze on land supply in the South, we remain convinced that a wider geographical footprint is in our best interest in the longer term. We remain committed to quality of earnings expressed through strong margins. With the market slowing down since summer, we have sought to protect margins and price as sales rates have softened, and this will remain our priority. The spring selling season will be important, but there is always going to be a balance between price and volume. For us, the weighting will be towards margin protection. We've kept a firm grip on overheads in recent years, the inflationary pressures that were around in H2 of 2022 will be more strongly felt in 2023's numbers.
Regulation changes mean that more roles will be required as we invest in our people and critical infrastructure to deal with these changes, as well as, of course, additional capacity in our new divisions. Until we better understand volumes going forwards, our inclination will be to retain our highly skilled people and to take some overhead deleverage if necessary, at least in the short term. I've mentioned, we believe acquiring volumes over the longer term, and in particular, our geographical footprint, is going to be a necessary and key part in maximizing our value for our stakeholders. We've made good progress in Yorkshire, which I'll come on to shortly, and we've also now made progress in East Anglia.
We have, however, deferred the opening of a 3rd division till better visibility around the macro environment and what that means for our sector becomes clearer. I've touched upon the land market. As this began to overheat in the 2nd half of last year, our participation reduced. We remain disciplined around our margins, that's meant we've been able to continue to be participants on a highly selective basis as some interesting opportunities presented themselves towards the end of the calendar year. Our strong balance sheet has enabled us to retain these choices as we move forwards. It remains the case that the supply of quality sites in Southern England will be very constrained for some years ahead. Furthermore, going forwards, we would wish to minimize our participation in what might become a scramble for land assets when better market conditions become more visible.
As you know, Michael Gove got involved in the combustible situation in January of last year. Whatever our personal views about this intervention, things have moved forward since then. We signed the pledge in April. In fact, I think we were probably the first to publicly commit to this. We provided for our liabilities as we saw things, and frankly, have just been getting on with the task. A task that is actually quite a major undertaking to be completed over a number of years. We have a central team set up to coordinate matters, and they're assisted by divisional teams who have the local expertise. Some of this resource is, of course, central and is provided for, but there is additional work from the normal divisional teams given their oversight.
In addition to undertaking the works on buildings that were constructed over a 30-year look back period, and regardless whether fire-related upgrades are necessary due to faults or simply due to changing regulations and changing attitudes, we in the wider sector are also now having to incur an additional 4% taxation rate known as RPDT, in order to deal with so-called orphan buildings over 18 meters. This has been accepted by the wider industry. What is also now proposed, and in our opinion is manifestly unreasonable, is to pay into a further fund of around GBP 3 billion to be collected over 10 years, probably on a roof tax basis, to fund orphan buildings between 11 m and 18 m. In our view, this should be funded through a combination of wider taxation and other market participants, such as material suppliers.
It's been a challenging year in terms of build programs in 2022. Delays have adversely affected some of our customers, which has been regretful. Quickly returning to being a 5-star rated house builder remains a strategic priority for us going forwards. Sadly, we have fallen marginally short of this threshold in 2022. Labor and materials issues were the primary reason. Also one of our divisions was impacted more heavily, and this in turn affected our collective score. As part of our investment in overheads going forwards, we've recruited additional people in the area of customer service, more managers in each division and a new quality assurance team. More training and support will also be provided across the organization. Shortly, we will be moving on to the New Homes Quality Code on all of our sites.
We're strongly committed to the principles of the code and enhanced training and processes in preparation for this change. These will be implemented on all of our sites by February of this year. I've referenced our new Yorkshire division, just a little more granularity on this. As you can see on the slide, we have a team now in place led by Guy Evans, the division's managing director. The team have an office located at Thorpe Park on the outskirts of Leeds and are progressing five sites. Some of these are contracted and others in solicitors' hands. Planning applications are now running on the first of these sites, with start due later this year. The first financial contributions come through from 2024. We continue to focus upon our multi-channel approach to selling homes and acquiring land.
More difficult market conditions at present and the likelihood of lower land releases in the future reinforces the need to have a wide range of partners and counterparts. In partnerships in 2022, we delivered a number of properties agreed for sale in the prior year. Many of these will also contribute in 2023. We're retaining strong relationships with the RP and the PRS sectors. New deals have been agreed or are in the procurement process. We did see throughout 2022 a shrinking discount to the open market price for PRS property, driven by strong rental growth and competition for product. There does remain an appetite for these units, notwithstanding wider market uncertainty. Our focus remains on private and affordable package deals. Our strategy does not include purely contracting work, which we see as higher risk.
We've had a good year in respect of strategic land, with a number of quality sites added to the portfolio, and good progress made in respect of new planning allocations on existing assets, with progress made on over 3,000 plots. I am very pleased with the strong progress made in the area of sustainability and social value. Against the target set out for the period to 2025, we have reduced carbon emissions by a very impressive 43%, well ahead of our 25% target by 2025. On renewable electricity, we've now reached 70% utilization against our 100% target by 2025. In respect of waste, where we have a 15% target by the same year, we've reduced this by 10% in 2022.
We are committed to going much further, and have set out net zero science-based targets earlier in the year, and these have now been validated. We aim to reach GHG net zero by 2045. Some of 2022's progress has been driven by the widespread use of biodiesel. Also, in the area of sustainability, we've developed a toolkit for our divisional teams to use in order to measure biodiversity net gain. We are progressing with our response to the impact of future homes. The cost impacts of this are included in our viability for new land purchases. We were early adopters of the TCFD disclosure, and have signed up to a new sustainability-linked revolving credit facility with targets linked to our strategy. Finally, the targets that we have in the sustainability arena are also linked to our remuneration policies.
To summarize, it's obviously been a very quiet year where not a lot has happened. Seriously, though, it's been a very challenging year to navigate across multiple fronts, and I'm immensely proud of the team's achievements against this backdrop. We've put together a strong financial performance, including further margin accretion and a strong return on capital employed. Our recovery plan is well on track. Most aspects of our strategy are ahead of or on plan, and the progress with our Yorkshire division is pleasing, and East Anglia will now follow this through. We have work to do with our customer service score, but have a plan in place and I'm confident of a recovery here. In terms of the outlook, well, another quite uneventful year ahead, I'm sure.
Although the economic outlook and read across for the housing market looks challenging, we have great experience within our management team and the strength of our balance sheet to provide resilience, and also, importantly, to enable us to evaluate the situation first and then to react appropriately. We'll prioritize margins and the retention of value. We expect to see a gradual pickup in sales rates during the spring, and we'll participate selectively in the land market. If conditions differ from those anticipated, we will react accordingly. Again, with policies prioritizing value retention and cash flow, and as Duncan mentioned, if necessary, a review of our cost base. We remain confident about market fundamentals and the longer term ability to create value for our shareholders. We remain convinced that this will be best expressed through growth, and this will be measured and disciplined.
Our new businesses in Yorkshire and East Anglia strengthen our footprint and better leverage its growth when improving market conditions return, as they inevitably will. Fundamentally, we believe that our business, with its great land assets held in the areas of highest demand, with the greatest shortage of supply, together with a strong balance sheet and highly experienced management, will enable us to prosper in most economic circumstances. Broadly speaking, we think that the market conditions that we're currently seeing, with pricing generally holding up, volumes reducing, but a better outlook as we move into 2023, are playing out broadly as we expected. It's early days, but it looks as if things are going as we expected so far. Thank you. We'll turn to Q&A now. There are a few hands up. Right. I think Chris was first.
Thanks. It's, Chris
Mm-hmm.
From J.P. Morgan. You've obviously alluded to your expectation there's gonna be a bit of a pickup in the spring and also what you've seen on the ground so far this year, which gives you that confidence. That's number one. Second one is just a bit of detail around the order book, if possible, please. Just give us a feel as to what's your performance in 2023, maybe split between private and social panels in exchange, if relevant. Finally, just on dividends. I mean, should we expect, following policy into this year, you're very well capitalized, clearly income's fine for certainly your share. Just so we know where you focused on there.
Yeah. I'll let Duncan pick up the one on order book to the extent that we can say anything. I mean, on dividends, we've got a policy of 2.5 cover. That is our policy. The balance sheet we've got, I think we have some reasonable degree of confidence around that it would be related back to the earnings. I mean, in terms of what we've seen so far, probably broadly similar to those who reported last week, in that there remained a lot of interest in terms of web traffic all the way through the back end of last year. That wasn't necessarily converting into site visits, and it wasn't necessarily converting into reservations. We also saw elevated levels of cancellations. We saw a further pickup, as you would expect over the Christmas period.
I think I'd just describe this as quite an encouraging start as we move into the first weeks in January. There's certainly been a pickup again in web traffic. Also we're seeing more of that now starting to convert into interactions with us and visits as well. Yeah, we're quietly confident.
Morning, Chris. Yeah, I'm not gonna give a sort of percent secure on the revenue for this year. Have done in previous years, obviously it's so difficult to forecast where our revenue is. I'm not sure that's desperately helpful. I'm not gonna get into breaking out the split other than to try and be helpful and say there's nothing remarkable in that compositional mix that's necessarily different, as you'd expect us to report a very large bulk component at half year. Otherwise, it's unremarkable in its comparison.
Thank you very much. I think you've got a couple on the second row there. Chris, Christopher. sorry, AC.
Yeah, I've got three please. Just first of all, on the bulk sales and the bulk sales you've done recently, and just in the kind of environment of higher interest rates, you're still seeing good interest from things like PRS and the right size to do more bulk sales increasing. Secondly, inflation, just wondering what your. Lastly, just on the gross margin, obviously it increased by 10 bips. If we took out the legacy sites, is it 30 bips actually underlying?
Duncan, actually. Gross margin, also bill cost.
Yeah. Yeah, the underlying gross margin, as you say, has been on an improving track for the last couple of years as we've taken out some of those sites referred to. Maybe best referenced to a kind of constant market conditions basis on the basis you'll probably have a view around bill cost inflation, ASP, selling price inflation in the next year to come. If you were to take a constant look basis for this year and next year, we would continue to see gross margin rate accretion on a constant basis from last year into this year, as well as we continue to work through and unwind those poorer sites in the portfolio. London Chest Hospital didn't feature in the match to the P&L in the year gone.
What that is to say is a foregoing, a further margin dilution that would have started to come into the P&L from 2024, 2025 and 2026. That is simply a one-off hit as we've taken the loss on the sale. As what I was trying to explain is the 15.4, all things being equal, had we not made that sale, would have been 15.7. You'd have had losses coming further down the line, Pat, on that site. Look, the portfolio continues to improve as we continue to wash out these sites. As I've said previously, Thornham unfortunately is still present in the P&L in 2024 as a drag, but it is a much cleaner position.
On bill cost inflation, look, I think we comment similar to others, in trying to be helpful and give some insight. I think we're starting to see early indicators coming through, perhaps more evidently in some contractor behavior, particularly groundworks, including superstructure tendering. There is more appetite to come back and sharpen the pencil on the second go and a realization and expectation that things are gonna be tougher. In some areas, materials, definitely starting to see signs of that, stabilizing and I think well on the trajectory through in H-two of this year, starting to come down the other side of it. In other areas of materials, as you'd expect, given sort of high single digit figure inflation expectations for the year, we're still getting increases coming through.
There are definitely signs, early signs starting to emerge of some normalizing of that. I think, you know, we are quietly optimistic that as we head into the second half of the year, that will become a lesser pressure than it's been historically.
I think if you think about it, the way that it has been playing out and others who have reported similar to us in the sense that pricing is going to be holding up and it's probably taking the strain. Logically, that has to have an impact eventually on the supply chain, particularly the labor market, which is more discretionary than say the materials market. We would expect that to, at the very least, tail off as we go through throughout the year. Just in terms of PRS, and we don't break out the bulk numbers specifically, but just to be helpful, you know, there's nothing unusual to think about in terms of the numbers that we've put forward. The PRS market, yeah, there definitely is still an appetite out there.
We've got multiple counterparties that are still really interested in looking at product. Now that discount to open market value narrowed almost to nothing, in terms of the mid 20 in 2022. I'd expect to see a little bit of discount there as we move forward, but certainly not at the historic level of maybe sort of 10%-15%. I'd expect it to be lower than that.
Thank you.
Morning, guys. James Gordon from Barclays. I've got two questions for you, but the first one's got a few parts. On land purchases or land commitments you're making at the moment, firstly, can you just set the timing, size and cost?
Of the things you're committing to, do they have some of the
Yeah, thanks. Well, I'll let Duncan pick up on the land and cash spend. Perhaps also just in terms of the pricing trends as well, and I'll tackle the question around land.
I mean, we don't have a particularly deep or wide-ranging incentives component in there, Emily. I think your pricing has remained pretty stable. There's not really a lot more to add. I mean, I think I've seen the color off some of our competitors have given on that. I just don't think we've got that detail to necessarily go into. Look, on the on the land cash, I'm not gonna guide to a specific number. What I will say is, if I look at the, if I look at the wish list of all of the divisions that have sent in what they'd like to spend on land, I can guarantee we won't end up spending all of it this year. That's one promise I will make you.
What I'll try and say to be helpful is in terms of thinking about a world of modeling lower receipts from a sales value perspective, they're going to have to be more considered in relation to our buildup of WIP on our build spend as well. Our land spend is the other component part in that bridge. What we will be aspiring to, we will ensure we deliver still a very healthy net cash position at the end of this time Saturday next year. We're not... Yeah, just to try and contextualize and put that in perspective, Peter's done, that we're talking about some considered and selective cracking sites. I'm sort of starting to move on to his perhaps that we're looking to do.
We're not talking about a massive glug or contrarian position to the market generally.
Yeah. I mean, let me just break out the whole land base 'cause I'm sure it's something that people more widely will want to explore with us. We're not gonna give a specific number of plots, but in the period it would be less than in a normalized market, for example. We are talking about being selectively in the market, not all in normalized land spend. In terms of locations, some high quality locations in Southern England where it is always going to be difficult to buy land and where the robustness of price is more likely to be found, would be the sort of answer that I'd have with that.
If we think about the market as a whole, a number of competitors have expressed that they are not only out of the market, but also withdrew from a large number of sites at the back end of last year. We didn't withdraw from sites. We did actually take the opportunity to renegotiate. Of course, in the febrile market that we were in at the back end of last year, you might imagine that most counterparties wouldn't have been able to have a conversation around either pricing or terms towards the back end of the year. Just some of the largest house builders, I'm talking about excellent sites, 50, 60, 70 sites. Some of those were distressed sellers, some of those were looking for a home for those land assets.
We've also got to think in terms of, yes, there is a risk in timing of when you buy land. Obviously, we're buying at better margins. To try and be helpful, rather than express it in terms of margin, perfectly reasonable to have expected somewhere at the 10%-15% discount off the land price and better deferred terms as well for those sorts of sites. It's not that there is no risk exiting the market or being in the market. There is some risk in either tactic because there will come a time when the market starts to improve. There's wider visibility. People need to buy land again. There's gonna be an almighty scramble for that land. One thing that will happen, and that is that margin again will be squeezed.
A lot of the land sellers who were around at the time of those withdrawals are taking the longer view, not all were distressed sellers. A lot are taking a long-term view and saying, you know, "The demand for housing and sites in the South of England will be strong in the medium term. We'll just wait." Relationships are also so important in this sector. As an ex-land buyer myself, I know that's the case. Just anecdotally, there was one very large land seller in the South of England, sells multiple sites each year, who had chosen to run with one of the larger house builders in the U.K. on the promise of a handshake from a member of their exec team, who withdrew at the last minute.
That landowner said to us, "We will never deal with that company again." I can believe that conviction. It's not that there are no consequences for being in the market or out of the market, but we are doing it selectively, being sensible about it. It's not all in. It is selective in terms of location, quality of assets, quality of land.
I think the thing to build the point earlier I was asking is we're just, we're not taking the stuff that was of a more complex nature that we've done in the past. These are all in our view as best as you can assess and due diligence, low risk sites in great A locations.
Sorry, sorry, Charles.
Yeah. Thanks, Roger. Just a question on first time buyer. Just wonder if you could remind us your exposure to that segment and what you're seeing there.
Also kind of, I suppose sort of, I hope, sort of the higher LTV products you've offered unlock perhaps progress on that front.
Yeah, sure. I'll cover that quite quickly. About a quarter of completions in prior year, and Deposit Unlock does not feature significantly. Well, it's very de minimis for us. Put it that way. It's not a big feature at all. You're right. Agree with your research as you start to see improvements, as we saw this morning, I think Yorkshire already announced they've lowered their rates on their 95%. Start to see further improvements of that and others follow, that will definitely help.
I think a functioning incentive scheme for first-time buyers would help the market quite a lot. There's no visibility of anything the government are currently doing, but it would be helpful because Deposit Unlock should be a good incentive. The pricing around that doesn't make it attractive for the buyer. It is encouraging, notwithstanding that, to see today Yorkshire just reducing it, starting with a four. It's coming in the right direction of market.
Just as a follow-up. One of the announcements reported last week, we made repeated comments of first-time buyer being more difficult. Has that been your experience? Is it the first-time buyers problem a question of mortgage cost, or is it more that they're more uncertain about the market?
No, I think it's more of a cost thing than uncertainty. I think what we've got to remember is that although there is a lot of uncertainty out there, the employment market is still very strong. Wage growth just out there today, the numbers are still strong. There are a lot of people doing well, and if they can get their head around confidence in the asset value, remaining strong, will gradually start to participate. That's been our central thesis all along, that there are fewer distressed sellers than there have been historically. People will initially sit on their hands, and gradually confidence will return once people see that house prices are not about to crash through the floor. That so far has been our experience.
Absolutely. Tom?
Thanks, Peter. three if I may. The first one in your costs, the admin expenses. Are there any mitigating factors such as perhaps more standardization to go or any other initiatives you're pushing through to minimize that admin increase? That's number 1. Secondly, on nutrient neutrality. My understanding is it's pretty intense down on the South Coast in one of your core areas. Perhaps you could just update on that, Peter. Is that driving perhaps some of the land that you're securing to give yourselves a supply there to combat that? I'll come back to the 3rd just then we can tie that chain. Can you just talk about that?
Yeah. John Brake. Two parts there. To, I think elements of what you're referring to is the standardization, what we're putting in the ground is in our build costs and obviously reflecting to our gross margin. Yes, in terms of moving away from some of the kind of more complex stuff as that washes out the portfolio, David would prefer to be building, sites unlike Farnham going forward, I'm sure, and that we'll naturally get a benefit of that coming through. We'll get the benefit of coming down the other side of the build cost inflation curve. On the admin expenses in terms of our central overheads in terms of mitigations or standardization, in all honesty, probably not a huge amount.
We are still culturally and all things otherwise, you know, very, very lean and quite draconian on managing costs generally. I think therefore, were we in a position, and I referenced it in my section, that we needed to take action on that is almost certainly, you know, because we've seen no, you know, there's not seen a pickup in the market or worse still, we've seen a significant further deterioration. I think you are then into, you know, having to say match, ultimately match the organization size and scale to your output and start taking out directly variable roles. There's not a lot of other discretionary areas in that admin expense type portfolio that we would be able to take out, and hence why we've given the guidance we have.
Thanks. I mean, on, well, nutrients come in two parts. There's nitrates and phosphates. Nitrates tend to be the issue around Solent and phosphates, if you go further west, and certainly into Southwest. Both impact on the sites that we have. There's water neutrality, which is a separate issue, and that's focused predominantly in West Sussex. That is quite impactful for us because we've got a number of sites in the Horsham Crawley area which are impacted by that. Water neutrality, I think, has probably got a better line of sight for exiting that. We would expect to see that become less of a problem, perhaps in a shorter timescale, a year, 18 months than, say, the nutrients.
The nutrients, there are various schemes being set up, but they're on a local authority by local authority area where you're effectively buying credits. They're expensive, they're difficult to get, and gradually the impact lessens. Government's inability to find a wider ranging solution has been quite frustrating. It's a sector-wide issue, but it does impact us as well. As I said, around four to five sites of ours are caught up in this mess.
Is that, driving some of it, those locations driving some of your land activity?
Well, all land, of course, is impacted in the same way. It actually is just blocking development in some of those areas. Land supplies are fun. You need quite a lot in at the one end of the hopper to get out the little bit at the bottom that's got all the consents needed. Where you've got the nitrates issue, the blockage is even tighter.
The third was on East Anglia. It's clear that Yorkshire is going to be contributing in 2024. Can we expect anything from East Anglia in 2024 or 2025?
I think you'd be looking at about a year behind, Yorkshire in terms of, its gestation.
Okay, lens.
Before we come back, can I press you quickly just, I'm gonna say quick clarification, which is really hard so far. The order book, private selling price on the order book at least. Second of all, what are the cash outs for land that we know about so far to land creditors and land that you've already approved? What's the bit that you can't control? Then two sort of bigger picture questions. First of all, just in terms of interaction with the government, particularly long forms, it's still presented at this point in time as opposed to taking levy. Separate discussion, or is it all being bundled? Then lastly, particularly to supply. Yeah, well, that's something. How do we think about how you manage your bulk sales intermediate division?
Is it that if the private completions start to drop down, we could actually see some, you know, could we private move into that actually division? Actually, is it entirely tied to the site you're opening therefore, if private completions come down, that bulk intermediate should also follow this?
Okay, I'll pick up the second two, and if, Duncan answers on.
Yeah, I'm gonna just point you on the first one, Chris. I won't give you a number, but what I would say is that back to the comment about pricing holding up, if you can, you can track that back in terms of that's not been a recent phenomenon. We haven't been, we haven't seen an elevated level of discounting or anything that's particularly remarkable in the current forward order book competition. To my comment to Chris earlier on, and it's mixed as well in terms of the various different tenant types. Again, the cash out land, we'll give that number at the half year in relation to the approvals.
Needless to say, in that total cash outflow for this year, there's still a very significant and sizable element that is ultimately discretionary. You know, and I say that more from a defensive mindset around should we have to not do that because the market turns down much more acutely then that'll be the case. To my earlier comment as well, not everything we've got on our pad that we would like to do this year will inevitably come off. Some land owners will conclude now's not the best time to be selling or will conclude we just can't get it at the terms we want to.
In reality, based on the number that I have on my pad at the moment, and making the statement and comment on us being, still being in a very healthy net cash position by the end of next year, based on our view of how the market plays out, that number is only going to be less, in my view. It certainly won't be more, if that makes sense, based on some of those factors.
Thanks. I'll try and be quite helpful on the long form agreement and the pledge. It's been a bit of a rollercoaster. We've predominantly negotiated as part of a wider HBF discussion. One or two of our competitors have also had very direct discussions with government. Of course, not everyone is created equally here. Some have different problems with different aspects of the pledge or the long form agreement. It's been a rollercoaster during the summer. Initially, I think some of the proposals went well beyond what we thought we'd signed up to with the pledge. We had the two clerks who had turned up at D. Luck briefly, very briefly, who were more conciliatory and had agreed to a more reasonable position. Then we had Mr. Gove return. Mr.
Gove was, shall we say, less reasonable and basically told us that take it or leave it, and everybody said, "Well, we'll leave it then." There have been more constructive discussions. Actually, truthfully, in the last 4-6 weeks, the discussions have been quite constructive. Those final discussions and negotiations are underway. Whether or not it's an acceptable agreement or not will just really depend on some of those clauses that are under negotiation at the moment. It's more constructive at the moment. I think that both sides are trying to be reasonable. I would expect this to play out perhaps over the next 2-3 weeks.
On bulk, well, as we've said, numerous times over the last few years, PRS is a fundamental part of our business in good times and bad. We think that portion of our sales will give us security over the longer term. When we buy larger sites, we do begin discussions with counterparties from the PRS side at that time, some of those work out, we get prices that we want, some don't, it's not a knee-jerk reaction that is related to market conditions now. We have those discussions all of the time on all of our larger sites that are suitable for the PRS market, that actually is continuing to happen now, as you would expect.
Yeah. I think probably got a couple for Duncan and maybe one for you. Duncan, you indicated that sites are gonna be slightly lower this year. Is that on an average basis?
Average annual basis, right, yeah.
average annual, closing and opening as well, do you think? Do you think actually you'll trough from then start to-
I think, yes, I have more, it'll have more of a trough with a better exit rate. I wouldn't get into breaking out that detail. The averages being slightly lower.
Okay. Second one was on average cash last year, month-to-end.
We gave it last year too.
The second one. The third one was on cancellation rates being. You've indicated obviously sort of the start of the year to be better. Have you seen a sort of drop-off in cancellation rates? Have you seen, probably following up on Charles' point around the first time buyers issue, have you seen a sort of a little sort of shift in that mix with stronger demand from second or third time buyers, I suppose, and that confidence level since the start of the year?
Yeah. On cancellation, I don't give specific numbers, but in terms of direction, at and just after the debacle with the Truss government, yeah, there was a spike in cancellations. It has gradually tailed off such that it's a lot lower now than it was at that time. Sorry, the second question.
Second bit was around, again, first time buyers.
Yeah, first time buyer versus-
Yeah.
I'll start. From the stronger demand, more confidence in the more established. What I'd say in terms of interest expressed by, you know, clicks on the website, it's pretty unchanged. There's a lot of interest from both. Ability to execute is probably second or third time purchasers rather than first time purchasers predominantly. Yeah.
Yeah. I've got, I think it's three more sections. The first one is kind of related to your comments around pricing and volume. Where's the sensitivity sit on volume in terms of how much volume do you like and be willing to let go to see to maintain price? On pricing, in terms of the land banks, obviously got rid of some of the lower margin land banks. Where's the sensitivity in terms of if you do see pricing across the country drop by 5%, 10%? You have a lot of walkable sites that may look to write down to category again. Just understanding that. The second one really is on the build cost inflation in the provision. What kind of what you said that was too low, basically.
What were you assuming? Is that coming on the labor side or the material side that.
You wanna pick up the second and third on the potential write-downs?
Yeah. I mean, Sam, as going back a couple of years ago, as we talked about gross margin evolution generally, it's the other side of that coin, isn't it? I mean, in a world where, and this is a really dangerous sort of thing to try and get into doing the mental math on, but I'll have a go to try and be helpful. In a world where you start moving down the curve of 5%, 10%, 15%, 20% impairment, corporates' behavior in our situation doesn't move in a linear fashion at that point, undoubtedly. You start to see, like you mentioned, if you saw a 20% price crash in the market tomorrow, you'd see a very different set of behaviors, clearly.
Look, assuming taking a 5% price reduction on the, on the portfolio as we sit here today, you know, we're talking about a couple of schemes needing to be potentially addressed through a further extension of an MRV provision, of which 99% of the magnitude of that provision relate to simply taking Farnham further below the waterline. Right? At 10%, and that's then, so that's probably GBP 1 million-GBP 2 million worth of club impairment. Moving up the scale to sort of 10%, that probably brings three schemes into the jaws of that sort of level. Again, 90% of that would be again, taking Farnham further down the waterline. The point being, you know, The portfolio is in much better shape.
Interestingly, had we not divested the London Chest Hospital, coming back to that 5% range, that had been in at the same money as Farnham, just to put it into context in terms of having to deal with that as well, because of where it sat from a margin recognition perspective. Again, yeah, good shape. I guess sort of summary take out for that would be in a sort of sensible, non, GFC type of pricing downward pressure environment, it is in the business. We don't anticipate it being a material impact to the PN Home portfolio. I think just remind me your build cost inflation piece on the.
You said on the provision that it was.
Yeah.
It was too low. I'm just wondering where that's material for labor.
It's a bit of both. I mean, it's not, it's not been material. You know, we. The sort of provision, again, as an extension to the point Peter was making earlier on around the long form, remain comfortable with where the provision is struck at the moment. Things that could cause that to go up, as we said at the half year, build cost inflation coming in or a glut or concept of new buildings that are undiscovered. We're getting some small scale build cost inflation coming through at the moment. I think it's reasonable to assume that will carry on. Are we seeing a lot of new buildings coming in? No.
We've seen a few, but it's not been material because as the logic we've gone through previously, that is, you know, those types of buildings have found ways to be identified. Against that, you've got opportunities on VAT recovery. There's opportunities on other recoveries generally versus the GBP 10 million we're leaning to. Just for color, we've got 26 buildings in the Building Safety Fund of which we now have control of 25 of those 26 buildings. If you remember as well, that was also part of the construct around if we can get control of those buildings, that's much greater level of control and oversight we have around managing the cost exposure on those.
Look, on the provision, generally, I can't sit here and say that provision won't move until the long form is fully inked and done. Directionally we remain comfortable it's in the right place.
Just on the, on the pricing volume thing. I mean, it is a bit of a circular argument. To some extent you can do your own numbers, but of course we've got fixed costs. We've got to generate cash in the long term. And we have to have a certain scale and volume. We would protect and hold margin to the extent that we have to retain a scale, but I wouldn't put a specific number on that. You've got to bear in mind that in an environment where volumes were even more squeezed and pricing was even more difficult, the build cost inflation would also come under.
Yeah.
severe pressure the other way, which would at least help to mitigate that. There are other things that you do in terms of cash flow. Obviously, overheads would be lower. The build spend would become marginal build spend. You'd start concentrating on where you can recover cash on build. Of course, you can eliminate pretty much all bad expenditure if you have to. There are a number of tactics that could be adopted, but so far we're seeing, I think volumes that are manageable.
Hello.
Yep.
Just to add to Sam's question. What's the fixed cost in the business? Just could you give the percentage of cash balance as well?
Sorry, what's the second part of the question?
Percentage of cash balance.
Oh. Well, look, I'm not gonna get into breaking out the fixed cost in the business. You know, I think it's... I think it's unhelpful, the disclosure we give out to in the future. I mean, needless to say, back to my other comment, we can, we can make further variable cost reduction marks if we need to in a, in a world of, in a world that's tougher than at the moment. The cash balance that you can historically disclose that, you know, to be honest. Give me a moment, can you draw that one?
I mean, just in terms of, you know, quantity of fixed costs, you only need to look back to the COVID-19 period where across the sector, bunch of people could generate cash with very, very little revenue coming in. So the liquidity position in house is very strong. Basically, if we could deal with a challenge such as the pandemic, deal with softening market conditions.
I think that's probably it. Assuming there are no more questions, feel free to grab a coffee and a cake and have a chat. Thank you. Oh, sorry. You might have questions from. All right. I'll conclude the questions from the room. Everyone's gone to sleep. It doesn't sound like there are any further questions from outside the room. As I was saying, please help yourself to coffee and a cake. Thank you so much for your attendance this morning.
Thanks so much. Thank you.