Thank you very much, thank you everybody for joining us. Sorry about the slight delay. We just wanted to give everybody a chance to join. If I just give you an overview of what I feel are the key parts of the statement and where 2019 stands, give Chris a chance to add anything that I have missed, we'll open up for questions. Very conscious that there's some fairly significant elements to this particular statement, particularly around sales performance and costs. I want to spend time on the two of those first, the market and sales first, the cost position. Relatively quickly run through the broader pieces, and probably finish with our view for 2019 as a whole and a broad sense of 2020 and beyond.
Starting with sales, I think, if you go back three to four months, we would've been extremely pleased with this sales performance, with a sales rate that is 21% ahead year-on-year. Even if we strip out the bulk sale that you're already aware of from our earlier statements, then still an underlying sales rate is 16% ahead, and there's no material bulk sales or other elements in the balance of the period. There's nothing new in there. That is a clean and comparable sales rate year-on-year. Very pleased with that.
I think it's a sign of the market, which has broadly remained robust, despite all of the wider uncertainty, but it's also, it won't surprise you to hear me say, a sign of the shift in our underlying strategy from a year ago coming through and I think showing real evidence that we can make a real difference to that sales rate performance. On price, I think our view is, if you take a broad take of the U.K., prices remain flat in an underlying way. There are not any big movements. I would say London still remains the toughest area, and the upper part of the market generally still remains slower. I would say you've probably got small price pressure.
Not big movements, but small movements to make sales rates happen at the upper end in whatever region you're in, and you've therefore probably got a little bit of price upside on smaller units. None of those moves outside London are particularly significant. That general sense of price is flat is key. I think it is worth just touching on because if I were you, I would be asking if I don't cover it, price versus volume strategy for 2019 on sales. You might argue given the sales rates and particularly given the cost pressure, that why wouldn't we stand back from the sales rate slightly and push price harder? It remains our sense that even at a lower sales rate, there isn't a lot of price upside out there at the moment with the level of uncertainty that people see.
Whilst sales remain robust, I would say there is still an air of caution in the market, and therefore, it's our view that having changed our build plans and therefore our availability and look differently at how we sell and how we make sure we've got a broad mix of product, that gives us quite a lot of sales rate upside. Converting that into a meaningful and justifiable price upside at the moment will be tough. I think I am more optimistic about the prospect for price later on in the year and into next year, obviously subject to where the broader economic and political situation ends up. I think we have now seen 2-3 years where effectively affordability has been getting better in the background, and this year in particular, flat prices, but with sensible wage growth, has a meaningful impact on affordability.
I think there is a bit of upside that builds up there over time, but I think in the very near term, we see it being more advantageous to build a stronger order book, to create the size of business that we want to be this year and don't see that there's a lot of price upside in the short term. As I say, feel reasonably optimistic about pricing into future years, certainly compared to 3-6 months ago. On the flip side, I think we have been surprised by how tough cost has been in the context of the first quarter of 2019. As you see from the statement, that is particularly weighted towards the material side. I think we've seen things flip slightly in the sense that four or five years ago, the biggest pressure was definitely on the labor side.
For the last couple of years, it's been pretty balanced. To a certain extent, I think what we're seeing at the moment is a bit of a catch-up, particularly of the impact on the underlying cost base of the supply chain from exchange rates movements post-referendum, which never felt like they'd fully come through. They still sort of pent up in the supply chain. There is also, and I don't want to overplay this, but I think it's important to understand that it's in there, an element of everybody trying to secure stock lines a bit further into the future with the uncertainty of different kinds of Brexit.
We're not talking about huge stockpiles of bricks on sites, but we are talking about generally trying to make sure that we can clearly see the stock in the supply chain and that we have a longer security of supply than we're used to, and that certainly adds to that cost pressure. I think you can see from the numbers that our guidance for cost this year has moved from roughly 3%-4% up to 5% up. That's not mathematically a huge shift, but in a world where prices are flat and cost pressures have increased, then inevitably that has an impact on margin. I also wouldn't want to underestimate the impact that a stronger underlying demand has on that cost side.
There is clearly a relationship between the industry selling more strongly than it expected and trying to secure more materials than it necessarily thought that it would need three to four months ago. The two are closely related. Come back to overall guidance. The summary version is that in terms of impact on 2019, we see those being basically neutral. Our underlying guidance hasn't changed. It is slightly more volume at a slightly higher price point because of mix, offset by slightly higher costs and therefore a slightly lower margin. Coming on to some of the more general elements and picking up land, first of all, we haven't seen any meaningful change in the land market. We've been pleased with how our own plans have progressed, particularly on outlets.
We've been tracking every single outlet very closely to really make sure that the specific plans we've got are sensibly put together and that we've really got the right pressure in the right places. Actually, pretty much every outlet that we set out to open has opened when we plan to, which is not normal for the circumstances. Relative to our internal forecasts, our outlet numbers are slightly ahead at this point in time of where we would have expected to be. That's not a big shift. Certainly in a world where expect outlets will always be slightly behind, that's a pretty good place to be. We feel pretty positively about that. I think I would still say, and you will have heard me say this before, I personally feel this is a difficult environment in which to take the bigger strategic land decisions.
I don't mean strategic in the sense of land without planning, I mean the broad land strategy. With the wider economic uncertainty, with very good terms on land available, it's quite hard to work out where the balance is. I think we're in a relatively neutral replacement position still looking at where there are great opportunities, sort of in a more uncertain market to get particularly strong deals. If you looked at the financial performance on the land that we've secured in the first quarter, it's very much in line with the high returns that we secured last year, if anything, slightly above. No shift. It's certainly an environment where, because the opportunities are so great, the uncertainty is high, it's difficult to work out what the right balance is overall.
Those are, I think, the key elements, as I say, on guidance. Our guidance for the year remains unchanged, with a slightly different makeup. I think we do have more volume upside this year. The sales rates mean that the limiting factor is about build and getting build right and that has stepped up through the first quarter. We do think some of that will come through in completions this year. We're not talking huge numbers. A year which we expected to be flat. It will be pleasing to see some volume growth and gives us confidence in the strategy for volume growth into 2020 and 2021. As I say, offset by those higher cost pressures. Chris, have I missed anything?
I'd just add one thing. I think it's worth noting that we recently formally regained our five-star status in the NHBC customer satisfaction ratings. Pardon me. We've worked hard over recent years to improve our approach to customers. Doesn't happen overnight, but our customers have been telling us for a while now that the improvements we've made are working, That gives us really good momentum to continue to improve.
Thank you. Can we open up for questions then, please?
Thank you. Ladies and gentlemen, we'll now begin the question and answer session. If you wish to ask a question, please press star and one on your telephone and wait for your name to be announced. You can cancel your request by pressing the hash key. Your first question is coming from the line of Aynsley Lammin from Canaccord. Please go ahead.
Hi. Morning. Just three from me, actually. Firstly, just on the margins, going back to that, obviously, you've given a very clear overview there. Just wanted to confirm that the margin pressure and the incremental pressure you're seeing is just the cost inflation, doesn't relate to any kind of site or infrastructure issues or maybe more money being spent on customer care. Secondly, just interest here a bit more on regional differences in terms of sales rates, particularly London and Southeast versus Midlands and the North. Then just on the H1, H2 split, I think you've very recently had about 40%-60% H1, H2. Does it go as much down as kind of around a third, two-thirds? Is that what we should expect for 2019? Thanks.
Thanks. I think on the cost side, Aynsley, I certainly don't think there is anything material in there on customer care. It is part of our underlying cost base, the changes that we made sort of now kind of two or three years ago. We've not committed anything new. I think they're still of the view that next two, three years, that cost will probably come down slightly. In terms of relative kind of where we are compared to where we expected to be four months ago, no, I don't think that's changed. Similarly, sort of at an individual site level, it is that general underlying pressure, I think. There's always site-specific issues, but there were site-specific issues a year ago, two years ago, and five years ago. That's just the general mix.
In terms of half one, half two split, I think inevitably because we've got slightly more of this year's business coming from sales that we're now building up production for, we will remain more weighted towards the second half. I don't think we're talking about kind of a two-thirds, one-third split. Certainly not at a volume level. We're still in the low 40 to 60, not starting with a three. I think you had those questions in the middle, but I was still noting down the first one, and I missed that one. Apologies.
Just any more color on kind of regional differences on sales rates in London, Southeast versus Midlands, North?
Yeah. I think it sort of goes back a little bit to the comments on price, and you could say the same on sales rates. There's no doubt London, sort of with all the dynamics that we've seen over the last two or three years, and probably still much more affected sentiment-wise by Brexit, is definitely at the slower end. I think aside from that, the regional variations are very patchy. It's more local sites and the kind of buyer and the kind of price point than it is a difference between north and south. I'd say there is probably a general trend that commuter markets into London are generally softer, which probably isn't a great surprise, but they're also the higher price point markets. There isn't a north of the business doing extremely well and the southwest not, or anything like that.
Apart from that London dynamic, there's no big shifts.
Great. Thank you very much.
Great. Thank you. No problem.
Thank you. The next question coming from the line of Will Jones from Redburn. Please go ahead.
Thanks. Good morning, guys. Three as well, if I could, please. The first is coming back to the issue around materials costs. Could you just remind us typically how long are the contracts that you enter into on materials, just so we can appreciate the ones that have rolled off that are being renewed? Are they from six months ago, one year, two years? I guess just to double check, how confident are you that this is not in any way linked to the strategy, obviously, of stepping up on sales rates in the near term and volumes in the medium term? We haven't really heard this being raised to the same extent by others as yet. Just wanted to know if you think it is slightly company specific or it's actually an industry thing.
I guess just coming back on London. In the past, you've sometimes drawn out what you need to achieve on sales rate or how much it might contribute within the full year P&L. Is there anything numbers-wise you can put on what's needed from London this year, and to what extent you're on track for that? Then the last one, I guess since you last reported, we've seen Persimmon come out with their intention to introduce a retention policy on completion for certain elements of the ASP. Is that something you've given any consideration to either recently or in the past, or is it just an issue for them? Obviously, you're up at five-star, so from a different position, but I guess, is that something that everyone's going to migrate to over time, I suppose? Thanks.
No problem, Will. I think I got all of those, but feel free to remind me at the end if we've missed any. On materials and contracts, most of our materials do not have a firm fixed contract price. We have an agreed price that generally runs for either a year or two years. Two years is probably the most normal. You happen to have two years in place at any one point in time. It varies. Some of the bigger commodities, bricks and blocks generally are one year. They are normally sort of fixed on a calendar year. The first quarter is when the negotiations tend to happen, and those changes then impact on that year as a whole. Some things we do not renegotiate on an annual basis.
They will roll around again next year. Then we'll have effectively a two-year negotiation at that time. We have not, as a general rule, no more than I would normally expect, seen people effectively renege on those price agreements over time. We are talking about a normal negotiating process. What we have seen is the negotiations that we would normally have in this first quarter, which would normally have come up, have tended to be harder and start at a higher price point and be harder to find the supplies that we need. If you go back to the dynamic of more demand than the industry expected, a desire for more security from everybody in the supply chain and not in new build, but amongst merchants and the RMI market as well, you can understand broadly what's happening there.
It is a bit of a first quarter thing. It's not that we expect people to be coming back for renegotiations every quarter. We can kind of at this point in the year, we can pin it down. I just think in the context of a stronger market with the last three months of bun fights over Brexit and no deal, and a sense from the industry, we need some security here. You've got a slightly unusual dynamic. That's why I'd say, it's not that I think cost pressure won't be there in a year's time, but I do think there's a sort of slightly unusual set of circumstances in 2019 with the stronger than expected demand and that uncertainty. To what extent is it strategy linked and company specific? Whilst obviously the questions are linked, I don't think they're totally the same question.
I don't think it's meaningfully strategy linked, although undoubtedly it's linked to stronger sales rates generally in the industry as a whole. I don't think we're having to give more on price because our volume expectations at an individual site level are higher. I think from a supplier's point of view, particularly on materials, it's academic to them whether that's on more volume across our sites. I don't think that has a direct impact at all. If it had an impact, and we're not saying this, that would be more likely to be on the labor side where actually sub-contract base tend to think about it at a site level in the way that the material suppliers do not. I don't think it's linked to strategy.
If I'm completely honest with you, we will know as we look back, probably not until the end of 2019, and to what extent that's totally across the industry and what we're seeing is completely normal and to what extent it's specifics. I think it is a broad industry-based thing. You know what it's like when you're in a price negotiation. You are always looking for confidence that you're getting the best deal that you can, and you're getting a fair deal compared to everybody else. You get some degree of assurance of that, but you can never be 100% certain. You know we tend to be pretty upfront with you when there's good news and when there's bad news.
I don't place any great surprise in the fact that we're the first to be saying, "Actually, no, costs are tougher than we would have expected at this point." I can't promise you that everybody will come up with the same number in the course of the next three weeks, if you see what I mean.
Yeah.
You will see and we will see.
Yeah.
I don't think it's company specific. Inevitably, there's bits of geography and there's bits of people at different points in the development of their business, pressures are always going to be slightly different. I think it is likely to be a general trend, even if the trend impacts different people differently.
Yeah.
Going on to the question on London. I think our dependence on Central London this year, and we've touched on this before, but I'd reiterate it, is very small. It's one of the things that kind of holds back our year-on-year progression in 2018 and 2019, is that we had a decent contribution in 2016 and 2017 that we don't have. Actually, the impact on our expectations for this year of what we're talking about in London is very small. We still see an uptick from that sort of input in 2020 and 2021. It doesn't change any of that. I haven't got the numbers in front of me, but I can assure you that they're not particularly material for this year. It's not. We're giving you a sense of where we think the market is rather than trying to flag a specific concern.
Sure.
Going on to retention policy. We are looking across the board at where we think we can make the experience, the process, the product, the service, the trust, and assurance for our customers as good as it possibly can be. We're trying to do that in a creative but also in an honest way and work out what customers actually really worry about and what will provide a good long-term solution. In that, we do not think that retentions are the best way to do that. I've, at different points in my career, operated on the fringes as a customer and as a supplier in the construction industry, certainly separate to house building, and I see retentions as an enormous negative from not just the person providing the retention, but from a customer point of view as well. They're a point of contention.
To me, they're an anachronism from the construction industry, that construction industry is trying to get rid of and that I do not see us wanting to implement. We're not seeing any pressure from government or customers to do so. There are other things that we can do that I do think can offer our customers more assurance of the product quality and around the process that I don't think are huge cost issues, but are more about making sure philosophically we think it through what the process looks and feels like from a customer's point of view. Short answer, I think there are better ways of doing it.
Great. Really clear. Thank you.
Thank you.
Thank you. Your next question's coming from the line of Gregor Kuglitsch from UBS. Please go ahead.
Hi. A couple or maybe three questions, actually. Just coming back on the margins, I think if I kind of put everything together, I think late last year, we were talking down 50 basis points. Now it looks like maybe that's doubled to something like 100 basis points in terms of year-over-year decline. I just want to get a sense of that's kind of the ballpark. I suppose the question is slightly longer term, do you think the direction of travel continues to sort of be down also into next year? Perhaps because this cost issue doesn't go away unless, of course, house prices pick up. In that context, what do you kind of think is the realistic range we should be talking about as we think about the next couple of years?
Perhaps on the flip side, I think you've been quite clear on volumes. You've always said you expect the volume pick up next year, with the new strategy kicking in. Is this now just being kind of front-end loaded into 2019? Do you still think you can have a meaningful pickup in the rate of growth next year? 2021, I'm not quite sure what you're thinking because obviously this will Help to Buy switches over, but perhaps it's too far away anyways, but for 2020.
Finally, you've given us a spot site number, but in terms of average on average, to sort of put the 21% increase in sales rate into context, if you could just give us kind of the absolute, well, I guess the average site reduction year-over-year so we can get a sense of the actual volumes sold are. Thanks.
Thanks. I'm conscious as ever, I've hogged all the questions so far, so I'm going to hand the first two over to Chris and just quickly add up what the answer to the third one is while he's working on the first two.
I think the first question, Gregor, was on margin, and you mentioned the 50 basis points from back in November, and was it going to be more like 100 basis points now? Obviously we've guided to slightly lower in the statement. Is that about 1%? It's probably about that in the context of current consensus. I don't think that's an unreasonable assessment of the statement. Longer term, in terms of the direction of travel, assuming the market remains stable, we are confident of seeing an improvement of the margin in 2020, and that confidence is sort of more mechanical than anything else to some extent. Central London and the drag on margin that has in sort of 2019 is sort of 50 to 60 basis points. That reduces to about 10 basis points in 2020.
Secondly, we've got more completions from land that we bought more recently at higher hurdle rates. Yes, we would also expect to see some volume growth in 2020 as well, which will help the operating efficiency of the overhead. I think that's certainly the direction of travel. I suppose, going back to the point on build cost and just reiterating, I think what something Pete said earlier. We don't necessarily see this level of pressure on material costs being maintained. There's a lot of moving dynamics in between now and next year.
I think that was the first two. The mathematical answer to the last one, Gregor, as you see, the spot number's down just over 5%, and the year-to-date average is down 8%.
Okay. Thank you. Thank you. Very helpful.
Thank you. Your next question's coming from the line of Priyesh Saiya from HSBC. Please go ahead.
Thank you. I have two questions. One is related to your sales rate and large sites. Now, these large sites are delivering much stronger sales rates. Can you quantify what kind of efficiency gain you could expect from these large sites compared to small and medium sites? That's the first one. The second one is, again, relates to that large and small. In 2018, the average outlets were kind of 48% skewed towards small and 55% towards medium and large sites. Can you tell us what's there in the land bank and what you are currently selling at? Is it more like a 30-70 ratio or 35-65? If you can give a broad idea about it. Thank you.
Okay. Both of those are quite hard questions to answer without data in front of us, that we can show you, showing the makeup and the split and in the context of an AGM update. I can give you a very broad answer, but it's probably one to come back with at the half year. I think picking up the second one, there is a slightly bigger proportion of large sites in our land bank than there is sort of trading. I don't think it's quite as big as the 30-70 split that you talked about, but it's sort of slightly more weighted that way. It's not 35-65, it's probably something like that. I don't think there's a materially different mix of sites in our current trading pattern.
There might be a slight trend, but you might be talking about a 1% shift, not a 5% or 10% shift. Where we sit today in terms of trading is not that different to where we were six months ago. It's how we're operating those large sites, not that there's suddenly more of them suddenly in the portfolio. There is a general land trend because our buying pattern, because of a combination of availability and margin options and that shift in strategy, the land bank is more weighted that way. That will come through steadily over two to three years.
I think the important thing is that on the large sites that we have in the active trading portfolio, we are able to see and show, and not just in the regions that were already operating to some degree that way in the early part of 2018, but in almost all of our regions, that we can see that actually that way of trading is effective and there is a strong sense of belief across our business that that works and is the right thing to do. Whereas if you go back a year, people saying, "Well, I get what we're saying, and I can see it's working there.
I'm happy to try it, but I'm not sure if it's going to work in my patch." Now we have a much broader sense of consensus that no, actually if you change things around, think about product mix, think about sales strategy, think about how you staff up production and sales, you can make that work. I think there's a much broader sense of confidence within our operating business that that can be done, rather than a big mathematical shift in where the sites themselves actually sit.
Okay. Can you give us any quantification of the efficiency gain you could get from those large sites?
Sorry. Again, it's a really hard question to answer without putting up some data in a slide in front of you, because I'm struggling to work out how to quantify it, because we obviously saved some preliminary costs from the efficiency, but we also have some additional preliminary costs at an individual site-by-site level that there's a net efficiency gain, but it's really quite hard to quantify. We haven't flagged it as a separate material gain from that strategy. If I'm honest, I think it's probably best for us to think about that. There is a net positive, but it's not enormous. We'll think about how we can best show you what sort of scale that is and where that sits, and maybe pick that up at the half year.
Okay. Thank you. Just one more, if I may, on the land bank strategy. You continue to do it on a replacement basis. Is there any kind of target that we slow down some point in time to meet those long-term targets of bringing down the land bank quite close to one year?
I think whilst we see a strength in the underlying market, I don't just mean in the short term. I actually think one of the most important things to think through right now is the positive shift in affordability that we've seen over the last year. Everybody's very focused, not unreasonably, on where we are in the cycle. There's an awful lot of characteristics of where we are at the moment that do not look anything like any of the late cycles that I have seen. The fact that affordability is improving is probably one of the most significant ones. Actually, interest rate forecasts in the future have tended to increasingly get more benign, and you look at a combination of general expectation of quite flat selling prices, low interest rates, and continued inflation and wage pressure, and that doesn't all add up.
If you stand back and look at that, I think that's in some ways more important to get our head around. Going back to the land strategy, we actually see we always thought it was the most likely route, but it's always going to be a balance depending on market conditions, that that long-term efficiency of the land bank comes slightly more from these higher sales rates and how we operate them rather than from, in absolute terms, reducing the quantity of land that we have. If we're effectively building a bigger business off the same land bank, you get the same mathematical answer.
When we launched the strategy a year ago, we talked about those were the two different routes, and it will be a bit of both, and it would depend on market conditions. At the moment, with the market conditions we see, it feels like it comes more from those higher sales rates off those sites rather than buying, in an absolute sense, less land.
Got it. Thank you.
Thank you. Your next question is coming from Charlie Campbell from Liberum. Please go ahead.
Hi there. Yeah. Good morning, everyone. Just a couple of questions from me. Actually, maybe three, actually. Just wondering if you could give us a bit more color on which materials in particular are moving in price. Is it more of a light side comment or a heavy side comment? Is it more sort of things that are imported? Secondly, I just wanted to be clear on use of incentives, just I get the impression that hasn't changed, but just to give us full color on that, really. Thirdly, you said that if you were us, you'd be asking about the price volume trade-off, so we might as well take you up on that.
I'm just wondering if that's something you've tried in a few sites where you've maybe tried to nudge prices up, and you know from experience, therefore, that it doesn't materially impact, or it does materially impact selling rates. I'm just wondering if you could help us with that.
Sure. Yeah, happy to do that. Charlie, could you just pick up the second one? I was still noting down the materials question.
It was just on incentives. Just whether there's any meaningful change in that year-on-year.
Yeah. Okay. On materials, I'm going to be fairly cagey, largely because it's commercially sensitive, and when you're negotiating, I don't particularly want it being held against our guys when they talk about it. Also because I know part of the reason for the question is you want to read it across to the supply chain and what it means for them. I wouldn't say it's massively weighted to either light side or heavy side. It's quite specific, which is generally the case.
Yeah.
I'm always uncomfortable with the bricks is always the kind of lead indicator, and bricks isn't by any means the area where we see the most pressure. It is probably across about 50% of our materials that we see a reasonably significant pressure. It's quite broad-based. It's not just one or two.
Sure.
It massively varies with a combination of what the industry structure on the supply side is, to what extent that's changed, to what extent people have changed, to what extent they're impacted by energy costs or exchange rates, and how quickly that flows through their supply chain. It's very specific case by case. The supply base would say all that's happening is they're passing on to us cost inflation that they've seen over the last three years that house builders has held off. Actually, the reason they're able to pass it on is because there is more demand out there at the moment. As ever, if somebody has a plant go down, maybe that has an impact on that price dynamic as well. It's all the usual things, there's just more of them.
In terms of incentives, I don't think there's any big shift. I would say, as always, everything we quote is net of incentives, it's factored into all of our comments. I would say, and it wouldn't surprise you that at the upper end of the market where sales rates are slower, generally level of incentives is a bit higher than it was. You're talking about 0.5%, 1% either way. You're not talking about 5% or 10% or anything like that. There's definitely a bit more in bigger plots where there is less movement. Going back to that price valuation trade-off, the easy answer is, yes, we have tried it on a number of sites because the way we price is an active dynamic, we are always trying it on a number of sites, if you see what I mean.
We're always kind of trying it on all of our sites where we will push prices and we will move prices around to try and get the right balance between price and volume. Yes, it is based off experimentation and testing rather than just, "Oh, we don't think that will work." It's a very live dynamic pricing structure. Inevitably, testing is built into it.
Thank you very much. Thank you. It's really clear.
Thank you. Your next question is coming from Clyde Lewis from Peel Hunt. Please go ahead.
Good morning, Pete. Morning, Chris.
Hi, Clyde.
Three, if I may. One, coming back to the build cost and the materials in particular. Do you think there is much in terms of the figure that you're talking about that would be temporary, or do you think this is very much structural and it's there and it's not going to reverse in any shape or form? Thinking, again, you were talking about the increased stocking levels ahead of Brexit. Do you think there's anything in that higher number for materials that is going to reverse next year? That was the first one. The second one was on land pricing, I suppose, and partly reflecting your comments on build cost pressures. Given the lack of movement in selling prices, are you actually seeing some softness in land price negotiations to reflect the increased build costs?
The third one was, again, going back to that first half, second half split, obviously you've got a lot more pressure on production in the second half of the year. How twitchy are you, I suppose, about making sure you meet those numbers in terms of completions and keeping the five star? We all know one or two examples of the industry where there's been a huge H2 bias and getting things finished has led to a bit of a mess in terms of customer satisfaction. Is that keeping you on your toes at the moment?
Yeah. On build costs, I think we feel there is certainly the pressure, the level of pressure we expect to be relatively temporary. As I say, I think it does a bit of catch up and a bit of the strength of the market at the moment and a bit of extra stocking, all of those to some degree are slightly temporary. It will be, I think, overconfident for us to then say, if there's an extra 1.5% of build cost inflation in there on what we expected, suddenly that reverses. I don't think we expect to be seeing a 5% level of pressure this time next year, if you see what I mean.
Yeah.
There are a couple of moving parts that could have that sort of dynamic, particularly I think exchange rates. Sort of effectively the exchange rate movements post-referendum taken a long time to come through in the cost base. If that moves back structurally over the course of the next 12 to 18 months, that would be a confident statement to say that it will. If it does, then I think that has a slightly more meaningful impact.
Okay.
I think the level of pressure, I think will reduce. That doesn't mean that I think costs will go backwards. I think Chris' general point about margins, though, I would just want to reinforce. We have some underlying company structural reasons why we've always felt that 2018 and 2019 were particularly relatively tough years because of where our strategy shifted, and that 2020 and 2021 have some upside for a whole series of reasons of London and geography and land purchase and timing and things. That probably gives us a slightly more confident air around the year as a whole. On land pricing generally, I would say yes, there is some softness in land pricing. I don't think that's particularly new in the last three months. I think it's been around for the last eight or nine months. I wouldn't want to characterize it as a huge shift.
It goes back to my comment, it's quite hard to work out what the right strategy for the volume of land we want to buy at the moment is, because the deals are good. There is a reason that the deals are good because everyone's a little bit uncertain about where the world goes.
Yeah.
We're certainly not in a fill your boots mode, but we're in an active buying mode, and the deals are pretty good. That's very consistent with that. Twitchy over the volume and customer service, I would say we are not driving to a specific volume number that we're wedded to and would die in a ditch for at the expense of customer service. We're very clear that we want to hand over our homes in a good place. We think we have, even though the back end of 2019 was pressurized, actually we are confident in the quality of homes that we handed over. Actually even if you go back to a point in 2015, 2016 when that was most pressurized, we still think we were not driven by our financial forecasting to do things that we thought were wrong.
We had one business unit in one year where we looked at it and thought, "No, that's not right," and we stopped things from being handed over. That philosophy still runs through it. I have to say there is always going to be a balance, though. There is more pressure on the second half of the year, and we've got to make sure we get it right. To be honest, and you have heard others say this, I'm more concerned from a service point of view that the quality of the home will take priority. Sometimes that means you're handing it over less quickly than the customer expected it, and that can impact your scores. That's a hell of a lot better answer than handing over a home that isn't ready.
Yeah.
That dynamic is there for all of us. Sometimes you need to make sure you take a bit longer and get it right. Customer's not then entirely happy, but at least they get a home that's in the right condition when they take possession.
Okay. Can I come back on the build cost and your comment on FX exchange rates? Traditionally, I've always thought house builders by and large, don't buy a huge amount from overseas. Obviously as you flagged, the dynamic of imported costs for the manufacturers that you're then buying from domestically. Have you tried to do some sort of exercises to try and work out how much you are exposed in terms of your materials cost to exchange rates?
Yes, it tends to be, and it makes it hard for me to give you an overall number. It tends to be, we look at it in quite a lot of detail, component by component, as we're going through price negotiating strategy to understand what the supplier's exposure is. The numbers I would quote you at a sort of across the board national level are quite generalized. Where we really look at it in detail is area by area.
Okay. The last one I had, going back to the sort of production thing. Could you maybe share with us as to how big Q4 would likely to be in terms of completions? It's not going to be 25%. I think we'd all expect it to be higher than that. Would it be as high as 35% or even 40%? Would it be that biased towards Q4?
Yeah, I think I'd stick to the half one, half two split at this point. Something like 42%, 58%. I don't really want to go into quarter by quarter on a phone call. We may well come back at the half year and feel free to re-ask the question and we can take a bit of time and talk you through it. I don't want to pick a number out of thin air without giving you a bit of background.
Okay. All right. Thanks very much.
Thank you. Your next question is coming from Ami Galla from Citi. Please go ahead.
Thank you. Just three from me. The first one is just a follow-up on the material cost pressures. Based on what you say, would you then say that the sort of cost pressures that you're seeing in your London business are relatively higher than some of the other regions? The second one, a clarification. Is there any key differences in the strategically sourced plots coming through the completions in 2019 versus 2018 in the numbers? The third one, just on the sort of sales rates that you have achieved over the first half of this year. Is there a plan that these accelerated sales rate would at some stage feed into the sort of land negotiations that you get into?
Non-negotiable. Sorry, just remind me what the first one was. I got the strategically sourced
Is there a difference in the cost pressures in London versus the rest of the business?
Yeah, got it. No. In fact, if anything, I would say in terms of the cost balance in London versus the rest of the country, it's the other way around. London is the one place, and particularly where you're talking about contractor-led build or using the same subcontractors as contractor-led build. Because the London market is reducing in terms of the level of build, actually, it's one area where we see price pressure going the other way. The price pressures are much more generally around the rest of the country, including the wider Southeast. Central London particularly now is the one place where you would expect that. It's one of the underlying pieces, reasons why you can see it. It's a market-related trend. In terms of proportion of strategically sourced land, not a big shift.
I don't have the number in front of me, but broadly the same as last year. We expect to be at more or less the same level through the next two or three years. Land prices and land purchasing and whether we build in the view of our new strategy. What we do not want to do, and we've all seen it in the past in different guises, is particularly build in any kind of strategy-led price difference. I think it changes our land buying strategy because we are far less likely, for instance, to back-to-back deal with a competitor of a large site if we have confidence that we can generate the kind of sales rates that can make that site work for ourselves in isolation. What we do not want to do is pass any benefit of that back through the land piece.
That has to be retained. How you work that through your own businesses is a bit of an art form. Actually, we don't want to see that end up in land pricing and particularly in financing and deal structures. It has to be part of the upside that we retain.
Just one follow-up on the first question. On the material side, is there a difference? I get the point in the contractor costs coming down in London, but on the material cost inflation in London?
No. Not particularly. I would say if you're talking about exactly the same commodity in London compared to in Stoke, then the price pressure's quite similar. For us, those are generally nationally priced deals. That's not true across the board, but it is generally the case. Even where they're not, we're not seeing a material difference between London and the regions. There's probably slightly, certainly on the, as I say, the contractor-led piece, there's definitely more availability. Even on the subcontractor piece, I would say there is a slightly easier level of availability in London for ordinary build than there is elsewhere.
Sure. That's answered. Thank you.
Thank you. Your next question's coming from Kevin Cammack from Cenkos. Please go ahead.
Yeah. Good morning, gents.
Hi, Kevin.
Morning.
Just like to pursue Clyde's last line of questioning regarding the build rate requirement and quality and all those other issues around that. Have you, in any sense, when you look at that fantastic sales rate in the opening quarter, have you been releasing earlier or selling further forward? Is it possible, for example, to quantify how much of the order book is for delivery beyond this year to maybe give us a better feel for things in that way?
Yeah. Have we been selling further forward? I think the broad answer is no. We have not been selling further forward. The point of sale for the delivery of the plots isn't materially different. If anything, I'd say it's probably marginally shorter, but very marginally than a year ago. Actually given where we were with outlets and where we were with releases, I'd say actually, we see a little bit of the sales rate as a catch up in the order book of where we'd have liked to be at the beginning of the year. That probably, we've worked through that by late January, early February. The sales rates over the last few weeks have been very much more about completions. The line of questioning isn't in any sense an unreasonable one.
Of course, we've been releasing more, but there is a difference between releasing more and we're releasing earlier. If you think back to a year ago, we said, one of the reasons this is going to be a longer term shift that's going to take us some time to really work through is we need to get all of the parts of the business and the parts of our supply chain to actually understand, buy into, and plan properly for that strategy. As we planned our budgets for 2019, most of our businesses were putting into their sales plans, sales rates that were not quite at the level we're at, but which were more bullish than we'd seen historically as they bought into that strategy. They were resourcing up their sites to meet most of that demand.
It's why the comment that actually, across the board, the people within the business are starting to think, "Actually, no, this works. We can see it. This works in our patch," actually, then people really follow through with the plan. That takes a bit of time. I would say the resourcing on the build side to really meet those sales rates has been at different pace in different regions, gradually working its way into the business over the course of the last 12 months. I'd say it's still not quite there yet, but it's definitely progressed. That, in a sense, is why we talk about a bit of volume upside at this point, because the sales rates we can see in the evidence, but the most important bit is that people And that includes, as I say, our supply chain start to have faith that that's real.
The materials are called off and the bricklayers are actually physically there on site and building, and it's not just a theoretical plan, it's actually happening. That still takes time to go through. That doesn't mean that Clyde's question about the balance between build pressures and customer service isn't a reasonable one. It does keep us awake at night because we care about it a lot and we're very focused on it, and it's not about the five-star rating. We're not worried about the difference between a 90.5% score and an 89% score. It's about the actual quality of the homes that people hand over. It's also about the process and the communication and the timing with customers. Making sure we get that right is really important to us.
We don't think we're compromising on it, but we're having to make sure that we keep that at front and center of everybody's mind as we go through that shift.
All right. The profile of the order book this year.
Sorry. Yeah.
Next.
I haven't got that. Yeah, happy to give you a number. I don't know if, Chris, you can sort of pull it out. It was how much of the order book goes into next year. Certainly not materially different.
Yeah
to the last year.
It's no different, Kevin.
Okay. That volume underlying X, the bulk, that increase in sales, in effect, a chunk of that will be in this year or into the first half of next year. There's not a longer tail that you've been.
No
Taking into the order book.
No. If you look on private sales, Kevin, we're still, I would say as we went through a tougher set of trading conditions in the back end of last year and order books shortened a bit, not hugely, but they did shorten a bit by the end of the year. We've probably got to a point where the average site was four months selling ahead from a point where it had been five and a half months. It probably wasn't that big a shift, but that's what it felt like. We're probably now at five months. Five and a half's a bit long. Four's a bit short. We're about where we want to be. We don't need sale. To fulfill our expectations for this year, next year, and the year after, we don't need sales rates to remain at this level.
It is surprising us, I would not say build is at a level that it satisfies consistently these sales rates. It's why we're not flagging a more significant increase in volume. Yet we still got to do the work to make sure build is up there. What it does mean, which is why, I've mentioned it a couple of times, it's why I think at least in your mind, as you think about what the pressures and the risks and the upsides are, having in mind that if we're ahead on sales and affordability is improving, actually, I didn't think I'd still be talking about this, I do think as we get to the back end of this year and into next year, there's slightly more price upside than I thought there would be.
Okay. At this stage, you're probably what? 75%, 80% secured?
Lower than that. I haven't got the-
Well, actually, we tend to look at that, Kevin, on a private basis.
Yes
including affordable. That number that you've got is probably not a million miles away when you add in the affordable, which clearly is all already contracted.
Yeah. That's fair.
Okay. Thanks ever so much.
No problem.
Thank you. There are no further questions on the line. That concludes our Q&A session for today. I will now hand over back to Pete Redfern for his closing remarks.
Thank you, and thank you for the number and level of questions. I look forward to catching up with you again at the half year, but don't at this point have a lot more to add. Thanks very much.