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Edited Transcript of CRST.L earnings conference call or presentation 28-Jan-20 8:30am GMT

Full Year 2019 Crest Nicholson Holdings PLC Earnings Call

Surrey Feb 4, 2020 (Thomson StreetEvents) -- Edited Transcript of Crest Nicholson Holdings PLC earnings conference call or presentation Tuesday, January 28, 2020 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Duncan Cooper

Crest Nicholson Holdings plc - Group Finance Director & Director

* Iain G. T. Ferguson

Crest Nicholson Holdings plc - Independent Non-Executive Chairman

* Peter Truscott

Crest Nicholson Holdings plc - CEO & Director

* Tom Nicholson

Crest Nicholson Holdings plc - COO & Director

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Conference Call Participants

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* Anastasia Solonitsyna

UBS Investment Bank, Research Division - Equity Research Analyst of Emerging Banks

* Aynsley Lammin

Canaccord Genuity Corp., Research Division - Analyst

* Charlie Campbell

Liberum Capital Limited, Research Division - Housebuilding Analyst

* Clyde Lewis

Peel Hunt LLP, Research Division - Analyst

* Glynis Mary Johnson

Jefferies LLC, Research Division - Equity Analyst

* John Fraser-Andrews

HSBC, Research Division - Global Equity Head of Building Materials & European Building Materials Analyst

* Jonathan Matthew Bell

Deutsche Bank AG, Research Division - Research Analyst

* William Jones

Redburn (Europe) Limited, Research Division - Partner of Construction & Building Materials Research

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Presentation

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Iain G. T. Ferguson, Crest Nicholson Holdings plc - Independent Non-Executive Chairman [1]

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All right. Good morning, everybody. I'd like to welcome you all to the Crest Nicholson 2019 Preliminary Results Presentation. It's very nice to see you all here. Thank you for all coming along. I'm standing up here as the new Chairman. I'm Iain Ferguson. I joined Crest Nicholson in September and took over as Chairman on the 1st of November.

So I'm just starting to get to know the business. I've seen quite a few of the sites, I've met quite a lot of the people, not necessarily the same thing, and I've seen a lot of very good things happening around the business. We're an all-new team this morning, as you will recognize, so I thought we might just do some very quick introductions.

Sitting immediately to my right is Duncan Cooper, who is our Chief Financial Officer, who joined in June last year. So he's quite long service, really. He has a great background in Deloitte, Sky, GlaxoSmithKline and lately, J Sainsbury's. He's got fantastic experience in some really great companies, and we're seeing the benefit of that very quickly.

At the far end, we've got Tom Nicholson, our Chief Operating Officer, who joined in the middle of the year and joined us on the Board at the start of January. So he's our newest Board member. Tom has 30 years of experience in housebuilding at Berkeley and then Galliford Try, of course, Linden Homes. In many ways, he is absolutely the right man for us at the right time, and he's got the right name to do the job as well. Mr. Nicholson.

Then sitting between them is Peter Truscott, who's our Chief Executive. He joined in September 2019, just a week before I joined, so he's slightly longer service than I have. He's got 30 years of experience as well, most [lot] in housebuilding. Most latterly, he did 3 years as the Chief Executive of Galliford Try. And prior to that, he worked with Taylor Wimpey and CALA Homes.

So a very experienced team. And what I see is them settling down really well working together, and they've achieved a huge amount, which they're going to tell you about just in one moment.

I just want to cover one other thing this morning. There were 2 RNS that we issued this morning. One was about the results, the second was about a Board change. The Deputy Chairman, Leslie Van de Walle, has decided that he's not going to stand again at the AGM. So he will step down from the Board in March. We'll not replace Leslie. Octavia Morley, who is our Rem Co Chair, is going to take on the role of SID. But it also gives me a chance just to thank Leslie publicly for all that he has done for this business. He's been an absolute tower of strength during what has not been probably the easiest time for any business.

So that's all you're getting from me. I'm going to get out of the way now and hand over to one of the real professionals. Peter?

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Peter Truscott, Crest Nicholson Holdings plc - CEO & Director [2]

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Thank you very much, Iain, and good morning, ladies and gentlemen. Absolutely delighted to be here this morning with what is my first full year results presentation for Crest Nicholson.

So the agenda for this morning, I'm going to do a brief overview, a little bit more about market conditions and first impressions of the business later. So this will be very brief. And then Duncan will come up, and Duncan will give you the financial numbers for the last year.

In terms of the strategic review, this is the bit that I'm really interested in, really excited to be presenting to you today alongside Tom Nicholson. And we will be outlining our updated strategy with our 5 strategic priorities underpinned by our 4 foundations. We'll then summarize, and there will be an opportunity afterwards for questions and answers.

The session, probably about an hour, plus the Q&A. I am conscious that there is a accounting stone presentation this morning that follows. Unfortunately, we're going to lock the door so you can't go.

So brief overview. A year of considerable change for Crest Nicholson. Indeed, a year of considerable change for Peter Truscott. Market conditions, very variable. I think the second half of last year, the macro was very challenging. And also of course, a lot of management changes at Crest Nicholson itself, number of senior long-serving people retiring, and the new management team now being brought in into the business from the summer.

Our updated strategy is being launched. And what I would say is that this is actually already being implemented on the ground. We illustrated at the time of our October trading update some of the areas that we'll be looking at, and we've already got underway in the business around this new strategy. So this is well underway.

The time of the trading update in October, we set out a guidance on profit for the year, pre-exceptional, between GBP 120 million, GBP 130 million. We've come in today at GBP 121.1 million, and Duncan, of course, will give you the granularity on that in a moment.

The full year dividend has been maintained at 33p per share. And I think you can take that, at some degree, of the Board's confidence in the prospects for the business and the strong balance sheet and cash flows that we have.

So I'll now pass on to Duncan to run through the numbers for the last financial year.

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Duncan Cooper, Crest Nicholson Holdings plc - Group Finance Director & Director [3]

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Thank you, Peter. Good morning, everyone. So I'm pleased to present my first set of preliminary results as Group Finance Director for Crest Nicholson.

Before I go any further, I would like to take the opportunity to introduce you to Jenny, who sat in the front row. Jenny Matthews, who I know many of you will know, who joined us as Head of Investor Relations in January and was previously Interim Head of IR at Barratt. For those of you who don't know Jenny, please do introduce yourself to her after the presentation and her contact details are at the base of our RNS.

So my section of today's presentation is going to form 2 parts. I'm going to relatively quickly move through as we've got a lot to cover obviously in Peter's strategic review. The first part, we'll have the usual financial KPIs and guidance that we've supplied during the past. And in the second part, I'll attempt to give a little more disclosure about the underlying profitability of Crest, particularly in the last 2 to 3 years.

To manage expectations, we won't be giving you this at every reporting cycle, but I think it provides useful context. Or I hope it provides some useful context and insights to the strategy that Peter and Tom will come on to talk about and some of the decisions we've made in respect of that.

So coming on first to the face of the income statement, I'll walk you down the key items. Revenue of GBP 1,086.4 million, down 3% on last year, and adjusted gross profit of GBP 201.9 million, down 18% on last year. Contained within that adjusted gross profit number is a GBP 7 million charge in respect to us reducing the selling prices on 5 of our London located schemes to reflect the tougher sales conditions in London and the consequent effect that has on the carrying value, what I'll refer to going forward as our NRV provision.

Administrative expenses, up slightly to GBP 65.5 million, and I'll come on to later to talking about some of the decisions we made in respect of overheads that will lower that in full year '20.

Impairment losses on financial assets principally comprises of GBP 3.2 million provision for future expected credit losses on the group's intercompany loan with our Bonner Road joint venture, the scheme contained therein being the London Chest Hospital. Again, this is a reflection of our latest valuation for that scheme. The GBP 7 million NRV provision in adjusted gross margin and the GBP 3.2 million impairment, together, being the approximately GBP 10 million charge relating to valuation changes in London sites that we communicated to you in our October trading update.

Adjusted operating profit, down 12.2%. Interest costs and share of JVs broadly in line, bringing us down to adjusted operating profit before tax at GBP 121.1 million at the lower end of the GBP 120 million to GBP 130 million range we guided you to at the October trading update.

Income tax charge of GBP 23.7 million. That's an adjusted effective tax rate of 19.6%, and that's principally a lower charge than last year due to the lower profits. And we would expect a similar statutory effective tax rate this year as well.

We then come to an GBP 18.4 million exceptional charge in respect of fire risk following the issuance of the new government guidance notes in this area. The GBP 14.9 million on the face of the P&L, being the tax-affected figure. This can be broadly split to GBP 7 million in respect of where Crest is still the freeholder. The building is over 80 meters tall -- or is under 80 meters tall and has balconies. And GBP 11 million relating to buildings where we are no longer the owner but have subsequently identified the need for further remediation costs.

For the purposes of your notes, the cash utilization of that -- sorry, for the purpose of your models, the cash utilization of that provision is found in Note 22 to the accounts, which then finally brings us to EPS at 38p per share, down mainly because of the lower profits; and full year dividend at 33p per share, as Peter has already alluded to.

Coming on now to sales metrics and on to volume. Full year outlets, up 7% to 59. [As per rate] ex Bulk of 0.45 and inc-Bulk, 0.76. Total home completions in the year down to 2,912.

We shared some of the color on trading with you in October. The second half was tougher because of the ongoing political uncertainty and our customers' relative sensitivity to that in the geographies in which we operate. We saw that coming through in customer verbatims, elevated cancellation rates versus our normal run rate, particularly in the last 4 periods of the year, and volatile visitor numbers to sites depending on the changing news flow. The encouraging sign within that was that we delivered a consistent stream of bulk units through full year '19, and I'll let Peter come on to talk about our ambitions in that area in more detail later.

Coming now to average selling price. Our ASPs for open market has actually increased slightly by 2%. That is a mix effect, as we've delivered an increasing proportion of bulk units in the year. As a general rule of lower-priced parts of the portfolio is they had the effect of obviously driving those sales that we do make through open market private, the ASP on that up. And we also continue to see the effect of the London sites wash through here as well.

The reassuring stat, however, in here is that the inc-Bulk number is down. In addition, both reservations and forward sales at the end of the year also continued to trend down, reflecting our intent to continue to reduce our higher ASP exposure.

On to the cash flow statement. I won't walk through all of these lines, but of note would be the decrease in inventory levels. That reflects actually an increase in the number of completed homes year-on-year, largely because of the lower sales rate in H2 more than offset by lower levels of WIP as we have slowed down land spend to adjust to current market conditions.

We do think there is a significant further opportunity and better WIP in working capital management generally, and Tom will touch on that in his section later on.

Tax cash of GBP 24.2 million, and we would expect a similar amount in full year '20. Although we have the 2 extra payments that you'll be aware of, that will be offset from a timing perspective by the significant exceptional deductible and other items.

So coming on to the balance sheet generally. Net cash at the end of the year of GBP 37.2 million, up on the GBP 14.1 million last year. Average net debt down to GBP 144.2 million. Net debt and land credit is GBP 179.3 million, down from GBP 195.6 million. Inventories, I've already touched on and explained, and then the pension deficit of GBP 6.2 million versus a GBP 2.5 million surplus last year. That's the IAS 19 accounting. Obviously, we continue to pay GBP 9 million cash contribution to the defined benefit scheme annually, and the movement here is principally driven by the change in the year-end discount rate. Finally, we extended our GBP 250 million RCF facility by a further year to June 2024.

Overall, as a new FD coming into the business, I feel the balance sheet is in good shape. It's well financed, and we do have a number of self-help measures in respect of better working capital management and disciplines that will be additive to that position.

On to the land portfolio. On short-term land, 16,960 plots, down from 19,507 last year. That's principally comprising 2,912 home completions I've referenced. 1,290 plots through land sales, including 419 passed into the joint venture with Sovereign Housing Association, which you may have heard us refer to as Harry Stoke. And we added 1,655 plots either from our growing Midlands Division, transfers in from the strategic portfolio, the benefit of replans and then other site additions all at an overall lower average selling price than last year.

In our strategic land portfolio, we secured 3,774 plots on 8 sites, including over 1,000 plots in Grazeley and Berkshire.

I'm now going to come on and talk about the underlying profitability of the business and try to explain why we've taken some of the decisions we've taken in respect of the new strategy and some of the immediate decisions we've already implemented as a leadership team, that hopefully, as I said, provide some context for Peter and Tom's update sections to come.

If you look at this waterfall chart and I -- it's busy, I accept, so please bear with me as I walk you through the key points. It walks 2017 operating margin to 2019. And these bars represent the change in contribution to rate. The first bar in both parts of the walk, '17 to '18 and '18 to '19, refers to our open market business. And you can see it declines in both years, and indeed, would have declined in the previous year if it were illustrated on this graph as well. That's a function of both structural and self-inflicted factors.

Structurally, as house price inflation has come off in our operating geographies and build cost inflation continue to come through, that's naturally led to some of that compression. But it's also self-inflicted. Our input cost has been too high, whether that's through a lack of operational discipline and execution, number of house type variants, procurement efficiencies, the way we buy land and having some of the highest selling cost ratios in the industry.

In addition, we've also seen significant one-off overruns on costs, such as those in London last year and also in Midlands this year. Tom will come on to talk about how we'll be tackling these issues later on in his section, but these have all served to place pressure on margin.

Our response has been to hold prices up in a bid to maintain gross margins and a belief that our brand carries a significant premium. In a market seeing increasing incent -- number of incentives to entice customers, this has naturally hurt our volumes. And then finally, when you overlay no material reduction in central overheads, you naturally have significant operational deleverage over our P&L.

If you then come across the page to the next 2 bars on land, we did GBP 66 million of the land sales in 2017. We actually did more in 2018 but actually at a worse rate, causing a drag on margin. And then 2018 did a higher number again.

The NRV/ECL bar refers to the 2 charges I told you about at the outset to correct future pricing. And the one-offs bar in the '18 to '19 walk reflects the fact that we took a number of multiyear write-backs on promotional costs that had previously been amortized and strategic deferred income in full year '18. These were then not repeated in full year '19.

Finally, and as I've touched on already, the standout feature for me on this walk is that no material reduction in company overhead was identified or implemented across the timeframe presented.

If you now come on to the future guidance. And hopefully, some of that content is useful but more importantly tells you about some of the challenges that continue to flow into 2020's P&L.

Just to start with, you continue to see further open market rate erosion as the remainder of our London sites and other poor performing sites continue to work through the P&L. And obviously, that's a relatively benign level of house price inflation, coupled with continuing build cost inflation also is felt as well.

We said we'll do less land sales this year. I've explained the financial logic on that, not always being accretive to rate. But more importantly, I'll let Peter explain to you the strategic rationale for that decision in his section later. We don't see the NRV and ECL charges repeated next year and the impact -- and then the impact of our identified cost reductions. And these -- in this year are principally the sales-related costs and central-related overheads, central overhead reductions at this stage starting to be felt.

We will see further cost reductions coming through in build costs and specification optimization. Some of that will start to flow into '20, but much more of it will start to flow into '21 and beyond as there's a natural lag time to ensure that goes into our property that we build. This will then walk you to the bar on to the right and to an outcome that is somewhere in the middle of our GBP 110 million to GBP 120 million guidance range we gave you in the October update. The bps year-on-year increase with absolutely lower levels of profitability year-on-year, naturally indicating a lower level of expected turnover.

If open market conditions were stronger than these assumptions, then that would need to be overlaid on this walk and GBP 110 million to GBP 120 million guidance.

The takeout I hope you take from this slide is that in order to return Crest to profit growth and in the first instance, we have to have a cost-led recovery.

So in summary, we have a robust balance sheet with adequate liquidity and a significant opportunity to improve working capital. Our land portfolio has a good strength -- great strength, but we must ensure this great store of fuel is put into a much more efficient engine. Otherwise, we'll continue to experience poor performance. And as I've reaffirmed, we expect to derive lower levels of land contribution -- contribution of land sales in the future.

We continue to see the impact in our open market business of London and other sites in full year '20 and won't have seen the full impact of our operational efficiency program bite by that point. As a result, we have to start this recovery initially on a cost-led basis, and we've already acted decisively to do so.

And finally, I reaffirm our full year '20 PBT guidance of GBP 110 million to GBP 120 million.

And with that, I will hand you back to Peter.

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Peter Truscott, Crest Nicholson Holdings plc - CEO & Director [4]

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Thank you, Duncan. So a little bit about market context. Towards the second half of last year, market conditions were particularly challenging. I don't think any of us can forget those scenes in parliament in the late summer, the early autumn, which certainly wouldn't have given the average homebuyer a lot of confidence when visiting show homes and wanting to reserve a property. But nonetheless, the interest was there. We're pleased with the outcome of the general election in the sense that we now have a strong and stable government for the next 5 years. It's a strong majority. And also of course, the near-term Brexit question is about to be answered, indeed, this week. We are, of course, conscious about the need for the trade deal to be implemented later in the year.

So the fundamentals of the market, those remain good, particularly the imbalance of supply and demand and particularly so in the core markets that we operate in: London, the home counties and the south of England. There continues to be a low interest rate environment. The lenders still have lots of appetite to lend into this market at very competitive rates, and employment levels are stable. Indeed, they remained stable even during that political crisis at the back end of last year. Now that is important and, along with consumer confidence, is what actually holds up volumes for private housebuilders.

Selling price inflation is more related to wage growth. Wage growth last year was okay. It was moderate, but we will need to see a more significant pickup in wage growth if we are to see any significant pickup in house price inflation.

In terms of this year compared to the second half of last year, it is very encouraging. We're seeing greater visits, the website, more footfall to our show areas, interest in buying Crest Nicholson's products and, indeed, those reservations now starting to come through. But of course, we're not getting carried away. There is still the trade deal to be done with the European Union. But a pretty good start to this year and the spring selling season.

First impressions of the business. Well, this was interesting. I mean firstly, thanks to Galliford for giving me the summer off, which enabled me to jump in the jalopy and go and visit all of our sites and our regional businesses, meet lots of people, have lots of discussions and try and get an informed view about Crest Nicholson, the business that I'd be joining. And what did I see? Pretty much what I expected to see, some really positive things there. The land portfolio is great, our placemaking ability really good, passionate, enthusiastic people all over the business, a lot of positive things to build from.

But there were things that were not so good. There was too much bespoke as far as design was concerned, and specification, pretty much everything that we were building felt like a prototype. That would be difficult to sustain in the long term.

Also it wasn't just that it was different from business to business as it was, but often from site to site within the same business. There was premium pricing. And I think Duncan has alluded to this, whenever we were in competition with somebody else on the same site, we were always the most expensive house, and it's difficult to get that volume when that is the case.

And because of the above, we really are failing to achieve the benefits of scale as a 3,000 unit per year housebuilder. We're not getting the leverage that we should from our buying. Overall, unsustainable levels of build costs, operating costs and overheads, which need to be addressed.

The organizational structure is also fairly complex. On one hand, there are 5 regional business units operating in a geographical area, with 500 to 600 dwellings each per business unit, which is what you would expect to find in a volume housebuilding business. That was good. We also have 2 other businesses, Crest Strategic Projects, who deal with strategic land, good business with good assets, but not wholly aligned to the divisional business units in terms of strategy all of the time. And then secondly, Crest Nicholson Regeneration. This is our largest and most complex business, and this business operated across the whole of the geography, overlapping with the divisional business units, building the more complex projects there but not necessarily with the same level of market intuition and knowledge or, indeed, the knowledge around the supply chain.

So overall, I found a business with many strengths but not realizing all of its potential at present.

This is a really interesting graph because I think this illustrates why it's been necessary to review the strategy going forward. This is a business model that has relied upon inflation in recent years. So following the flotation, the asset revaluation, Crest Nicholson came into the period around 2013, second half of 2013, when Help to Buy was introduced, with margins which were higher than the industry average, higher than most housebuilding volume peers.

But during those first 3 years of Help to Buy, there was house price inflation in our core areas of between 8% and 10%. Our margin ticked up a little bit, perhaps 1%, 1.5% at the beginning. But other than that, through that 3 years, all of that benefit was lost to build cost increases and inefficiency. And then following that period of high inflation, as that inflation fell away, so did our operating margin. And in fact, if you reference back to Duncan's waterfall chart, the buildup of some of that margin with an overreliance upon land sales and a few one-offs, the underlying margin deterioration was probably worse than this. So a reset was necessary to reshape the business, such that it could maintain its margins as to most -- as to some extent most of our peers have without the benefit of house price inflation.

So this detailed strategy review. It is about retaining the strengths that we have, the strong brand position that we've got and our ability at placemaking, which I think is second to none. We've got to realize the maximum value from our land portfolio, and that's to develop it ourselves where possible and to create value for our shareholders by growing the outlet capacity and having a very clear prioritization of what our development options are and a more joined up approach between Crest Strategic Projects and our divisional operating business units.

Huge focus is needed on the operational efficiency, standard house type range, full review of specification, and sales-related costs and overheads have already been reduced. We need to be a 5-star customer housebuilder. With the brand that we have, the markets we sell into, the people that we're trying to attract to our products, this is a must. And I also want to build upon something that we've started to do in Crest Nicholson, which is to develop this multichannel, multitenure capability that we have in terms of buying land and selling dwellings. We have a reputation, a really good reputation as a trusted partner to build upon. But this will also enable us to have a more diversified income stream with better capital efficiency.

Now I've touched upon Crest Nicholson Regeneration, the complexity of that business, our most complex business covering the whole geography without necessarily having the sales intuition or supply chain experience. So that business is being restructured. It will now become 2 businesses: Crest Nicholson Southern Counties and Crest Nicholson Partnerships and Regeneration.

Crest Nicholson Southern Counties will be focused on building and selling dwellings within its own dedicated geographical area. Crest Nicholson Partnerships and Regeneration will be, going forward, a business development function only with 4 main areas of focus: major projects procurement, owning the partnerships and relationships that we have, sales facilities, specialist facilities for selling into the PRS market and to registered providers, and undertaking the commercial development that we have as part of some of our larger sites. A new leadership is now in place for these 2 businesses. David Brown has joined from Berkeley Group. He will lead as Managing Director of Southern Counties. And [Kieran Dyer] has joined from Galliford Try Partnerships, and he will lead the Partnerships and Regeneration business as Managing Director.

So this is illustrated in the strategy will, and I'll go into this in some detail. As for strategic priorities, I will touch upon the first 2 here, placemaking and our land portfolio. Tom Nicholson will then present on our plans for operational efficiency, and I'll come back and pick up 5-star customer service and that multichannel approach.

These 5 strategic priorities are underpinned by 4 foundations: safety, health and environmental; sustainability and social value; people; and our financial targets.

So starting with placemaking and quality. Creating attractive and vibrant communities with a distinct design and a focus on sustainability, this is what we already do very well. It's an imperceptible thing. But I always believe that it's about a customer driving up to a site and the very first thing that customer thinks is this is a place that I'd like to live. And I think we do this really well. We do need to maintain our reputation for the build quality and the specification. And indeed, Tom will explain how our specification will actually be enhanced. And we need to focus that investment when we put it into our development, where customers really value it and will pay us for it.

We have flexible opportunities with our land portfolio. It's a real differentiator for us. We have 37,000 plot land portfolio, but there needs to be much better alignment between our Strategic Projects division and the regional business units. We, as an organization, need to have a clearer understanding of what we want to do with this land portfolio.

So first and foremost, going forward, we will always have a Crest Nicholson outlet. That will be our first priority. The second priority will be to have an additional outlet where the site is large enough or the opportunity exists for some differentiation. And that might be that we build the smaller dwellings on one part of the site and the larger one on another, or it might be where there is a differentiation in terms of elevation stop, perhaps traditional elevations on one part of the site and a more contemporary feel and look on another. That will always be our second priority.

We do want to continue the work that's been done with the private rented sector in a long-term, sustainable, consistent manner we'll be a better business for it. On one hand, there is a wall of capital out there looking to invest in the south of England with this long-term PRS product. On the other hand, we have 37,000 plots in our land portfolio. We have the ability to match those 2 entities and be a better business for it and provide more value for our stakeholders. And we will continue to work with the registered providers.

There are new entrants into this market, new private registered providers. This market is also evolving. More of that later.

Selling land is sometimes also the right thing to do where we have a surplus, but we also need to prioritize how we will do that.

Firstly, our first priority when selling will be to sell into a joint venture, therefore introduce a financial partner. After that, where it's the right thing to do, we will sell land to competitors. It's not always the wrong thing to do. It's only a question of the priorities.

This is how I like to see a land portfolio demonstrated. Visibility of control land is really important. I think it's right that a short-term land bank, the bit that you've -- that you own, should be around 4 to 4.5 years, but having a wider visibility of a lot more land, which is light on the balance sheet and capital-efficient, is good for the organization. But that land portfolio, however it is structured, must be capital-efficient. The margin in the land bank at present, 24.4% gross. And this is how Crest Nicholson illustrate the gross margin, which is before the deduction of selling expenses and overheads, which, currently, would be about 9%. So the underlying margin at an operating level is about 15.4%. And of course, as you will see with the strategy and the numbers that we're presenting today, the opportunity is there for us through self-help to significantly improve the value of that land portfolio that we have.

And as an illustration on the left, this is how the business wants to see its land portfolio, with years 1 and 2 and to some extent, year 3. This is your short-term owned land bank that comes immediately into production but with visibility all the way to year 5, but without having paid for that land, having the land held under option or some other form of tenure.

This is the sort of project that we do well. This is Kilnwood Vale, just to the west of Crawley, on the outskirts of Crawley and Horsham district. 2,750 dwellings, partly owned, partly held under option. You -- I've visited the site, I think, 3 times now, 3 or 4 times. It really is the sort of site that when you drive up to, you think this is a place that I'd like to live.

This was, however, an example of where we will prioritize differently our development options. When I joined the business in September, we were about to sell the next phase of development, adjoining our sales center to one of our competitors, and that would have left us without an operating outlet selling for some period of time towards the end of this year and the beginning of next, which wouldn't be the right thing to do, and that land sale was stopped.

So at this point, Tom Nicholson will present on operational efficiency.

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Tom Nicholson, Crest Nicholson Holdings plc - COO & Director [5]

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Thanks, Peter, and good morning, everyone. Unlike Peter, I didn't get the summer off. So I started at Crest just at the end of May. So I think actually today is currently my eighth month anniversary, and the old adage of when you're having fun, time flies certainly true because it only seems like yesterday that I started with the team.

But like Peter, I found many strong elements within the business, but also a significant opportunity for some self-help, both in strengthening our market offering and achieving operational efficiencies, both to deliver in the immediate and longer term.

So Crest is a great brand, some really strong teams and also some fantastic developments. But what was missing was a structured and focused operational platform. So there was no ability to develop or share best practice. The tendency, as Peter referenced, was to overcomplicate and a lot of time, cost and effort spent actually just doing things for the first time. So the solution was actually quite simple: provide a standard operational platform that removes inefficiencies and allows a focus on the important things. So the first-stage implementation is achieved and GBP 9 million captured towards the required target that Duncan referenced earlier.

Over the next few minutes, I'm going to highlight the actions taken, initiated and targeted over the plan period. And for the divisional, which will include the divisional restructuring that Peter referenced, the introduction of the operational platform to increase effectiveness across WIP control and other key delivery matrix and the rollout and adoption of the new standard house type range and specification.

So because of the tendency to overcomplicate delivery -- one-off specifications, bespoke branding and local team house types -- we had an unnecessary complicated staff structure. We've simplified the structure and undertaken a wider review of -- and reduced -- wider overhead review. We've reduced our head count by 14%, and that's in line with our target to reduce overhead and admin costs of 5% in the plan period.

Sales costs have typically been -- well in excess of 3.5% of open market sales GDV, and I'm expecting this to be materially reduced. To achieve this, we've already concluded a review of our long-term agency partners and captured an immediate GBP 1.5 million saving and at the same time, increasing the scope that they are working to for us.

So further efficiencies targeted, and this will be through the rollout of our standard brand guidelines and that will capture and cover all of our discretionary marketing as well as our media spend.

So this has already started to achieve the savings that we're looking for, just actually through just good practice. So typically, our average development brochure cost has been reduced by GBP 15,000.

So I'm pleased to say that our new leadership team at an operational level is now in place, with 5 new managing directors in post, all experienced and all understanding and knowing what good looks like. Through a newly structured managing directors' operation Board, we have a collective ownership of driving performance. And we've put in place operational forums across the key disciplines chaired by the managing directors, and these forums provide a structured route to develop procedures, establish best practice and, importantly, ensures full adoption and implementation.

There is a real focus on our current costs, so we've introduced visibility -- visibility through benchmarking, and that will provide the targets that we've started to deliver against, in relation to WIP control, a reduction in build costs, a reduction of prelim costs and in delivery times of our units on-site as well as reduction in our fees.

So returning to the self-help theme. Procurement was an obvious target. And our supply chain was not recognizing Crest Nicholson as a 3,000 home -- volume housebuilder, and our disjointed approach limited the procurement benefits that we secure -- we could secure.

The key objective in the exercise was to reduce costs but maintain and actually add quality to our specification.

I'm pleased to say that our rollout of our standard specification has been completed, and the supply chain rationalization commenced. We've already realized significant savings, and we've got further savings targeted. For example, before I started, we had just reduced 15 kitchen suppliers to 8 on a slightly different aspiration, and we just concluded a solus agreement with one of our current supply chain partners. And that negotiation has now delivered the same kitchen, but at an average selling reduction of GBP 1,700 saving to each plot.

But also key was to remove wastage. So for example, we had the provision of a wardrobe frame, an enhanced wardrobe frame, to accommodate a purchase or upgrade that we never offered. So a review of that, and our supply chain meant that we actually achieved the same wardrobe, but again, at a GBP 300 saving per unit.

In summary, we've been able to enhance our standard offering to our customers, increase the robustness of our supply chain, increase the importance of Crest as a customer to our supply chain. And whilst giving our delivery teams greater control, improved quality and service levels and, therefore, reducing our teams' frustrations, our own goals and mistakes and reducing significantly their wasted time.

So those who have seen me present before would know that a key element to drive highlighted and further efficiencies from a business is to -- and to drive enhanced value from our site is the implementation of a new house type range.

We tried to roll out a standard house type range previously, utilizing the Aurora house types. And whilst it had many strong elements, it had some fundamental flaws and fundamental constraints. Commercially, it was not efficient. The style offering was restricted. It had limited perceived differential within the range for our customers, and the customer feedback was often marmite. So naturally, we weren't the aspirational or preferred choice for the whole of our potential target market. And as a standard offering, it failed as we allowed 40 house types to become 128. And therefore, there was no procurement or operational delivery benefits.

So the priority was to establish a new range, ensure that it responded to market demand, had choice for our customers and be commercially efficient and effective in all of our operating geographies.

In November, we rolled out the house type range, 24 core house types with a defined toolkit, providing an optimized house type range for our teams to use. Delivered on customer aspirations and an efficiency for our delivery teams. We've had full buy-in from the teams, and all see the opportunities add value to their sites.

Our target is 80% of all of our new planning applications will include -- will be made up of these standard house types, and that compares to our previous aspiration with the Aurora house types of 50%. We've already got nearly 2,500, 2,460 of the house types being plotted across our sites. And these are on our existing sites, either through plot substitutions or, indeed, future phases, where we're able to do a full -- a more optimized replan. This will obviously flow into our controlled sites and into our new acquisitions enhancing margin.

Working drawings are well advanced, and that will start being rolled out in February. And I'm expecting the first construction of one of the new house types in April. The house type range will realize further supply chain benefits as we deliver further design and engineering efficiencies as well as the operational enhancements that all of the departments will get through the acquisition process and at the end of the sales process as well as through the delivery teams. And importantly, we'll be able to continue to improve on a consistent quality delivery to our customers.

So the street scene here shows the flexibility of the new range. It can -- elevationally, it can embrace either contemporary or traditional elevation or, indeed, any other local vernacular style. The new range aligned with our key strategy of great placemaking. It delivers on our customers' aspirations and an efficiency to ensure we are effective in all of our markets.

Always like a good case study, and this is one. So this is our Ludlow development. So this was secured by the Midlands team. They secured a consent at appeal for 137 homes. We started on site with our 2 -- Section 278 works. So this is quite a high-profile and sensitive site. The team are looking at this for a wider optimization. But also identified the opportunity of a first-phase optimization of the first 25 homes without impacting our delivery program.

So utilizing the new range, they were able to identify efficiencies in road and infrastructure, so therefore, reducing cost; deliver a more appealing street scene and increase value through change of mix, removing some detached 3-bedroom properties, introducing an entry-level and a range of 4-bedroom detached properties as well as some additional 5-bedroom properties. The application was -- the pre-application discussions were held with an officer, explaining the benefits, and we received a nonmaterial amendment approval within 7 days of submission. So as you can imagine, the team are trying now to manage my expectation and whilst the timescales may be exceptional, the opportunity to optimize from our current sites is certainly not.

So this final slide provides clarity to the shape of the more effective divisional delivery platform that Peter referenced earlier. By replacing the inefficient delivery regeneration business with a southern counties division, we retained 6 operating divisions. All our teams are now focused on an operating geography. This structure is better aligned to our land portfolio and delivery of our current developments.

The structure allows for more efficiencies from our supply chain and an increased productivity from our cost base as well as an optimum platform for future growth.

So in summary, actions to achieve operational efficiencies are well advanced. Initial implementation has delivered first-stage cost base gains towards our required target and with further efficiencies and value-add optimization identified.

I'll hand you back now to Peter. Thanks very much.

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Peter Truscott, Crest Nicholson Holdings plc - CEO & Director [6]

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Thank you, Tom. So in terms of our 5 strategic priorities, I've picked up on placemaking and our land portfolio. Tom has now done operational efficiency. So I'll pick up the final 2, which are around 5-star customer service and that multichannel approach. So 5-star customer service, a business such as ours with the brand positioning that we aspire to, the customers that we're trying to attract, this geographical area that we operate in. And also with increased government focus in this area through the new homes ombudsman, we must be a 5-star housebuilder all of the time.

David Marchant, the Group Production Director, has led a review of how we deliver customer service in the organization. And this, again, has been implemented. This will focus far more of our concentration and resources on getting it right first time, which is more efficient from a cost perspective.

So our site teams will be focused upon better houses first time, better service from the point-of-sale and also delivering the aftercare service predominantly from the site teams.

There will be a better link to remuneration. What's good for our customers is also good for our site teams.

In terms of where we've been, the last few years, we've been 4-star house builder in the sort of mid- to late 80%. This year, we're trending around 90%. So a couple of weeks still to go in terms of counting. We're just on the cusp of 4- or 5-star, but going forward, we must be a 5-star housebuilder all of the time.

So what do we mean by a multichannel approach to buying land and selling homes? Well, let me start with land buying. There are effectively 3 big buckets of land buying opportunity. The first is strategic land, and of course, we are very big participants in this market. This is where you hold land under option. When you get planning consent, you go through a technical one-to-one negotiation and you buy that land at a discount. So it tends to be your highest margin land, but it is the most uncertain in terms of its delivery. You can't rely upon this land coming through at the pace that you always want it to.

Second is major projects. This is typically another area of strength for Crest Nicholson, and this is where we work in partnerships with a landowner, who will put the land in, and we will usually pay for this land as and when we legally complete each dwelling or at least later in the development phase, so it becomes more capital efficient.

Typically, the margin is a little bit lower here, but it's more capital efficient. So the return on capital employed tends to be far higher. It has some of the characteristics of strategic land in that the delivery is often uncertain.

Open market land, the most certain in terms of delivery, but you do have a lot more competition for short-term open market sites. And this is where that efficiency that Tom has been talking about is really important because if you want to achieve your hurdle rates without relying upon inflation, you have to be ruthlessly efficient when buying your short-term land.

But there is another element here, which does help. If you are efficient at buying short-term land, all of those benefits also are brought to bear on your major projects and your strategic sites. So it becomes a virtuous circle. So we will continue to participate in all of those markets for land but we do need to be more efficient, which is going back to that efficiency piece that Tom has been talking about.

So selling homes, there are, again, 3 main buckets: first one, and this will continue to be the larger part of our market, which we'll be selling individual homes to individual buyers. This is where you would expect to get the best price, the best margin, but of course, there is some cyclicality, which overlays this market. Some of this market will always be discretionary.

So we will be a more robust and more resilient business and a business that can better navigate more smoothly the cycles if we also participate in other sectors of the market, one being the PRS market, where we already do participate but we see this as a long-term strategy for the organization to develop this part of the business as one of the 3 strands of selling homes to customers. There is that wall of capital that wants to invest in this market. We have a strong land portfolio in the areas that that market is interested in. And we need to better understand how that market works. And typically, housebuilders tend to sell into this market, bulk sales more generally at times of distress. When the market is difficult, when you built up WIP positions which are unsustainable, too much stock, you then tend to sell. And those sales take the characteristics of fire sales. So the margins tend to be a lot lower.

Now they will always be lower than private home sales, but they will be better if we better understand the right product, the right locations, the funding model that worked best for us, and this will certainly give us a better return on capital, albeit with this particular market, a slightly lower margin.

The RPs, this is also a part of the business that we currently undertake, as indeed all of our peers do as well, selling affordable homes, predominantly as a result of requirements under the Section 106 agreement, but this market is also evolving. There are more participants coming in, privately funded RPs who also have different models and different requirements. And again, we need to be much closer to understanding what the characteristics of those models are and how best we can navigate those and get the best returns for our business and for our stakeholders.

So that's the what, and this is really around the how. So our partnerships and regeneration business will undertake a lot of the work in this area. It will work with these strategic partners of ours to procure these major projects as it currently does. The main difference will be that their role will be a procurement and management role, but the build in sales will be undertaken by the divisional business units who are much more aligned to those markets in terms of the customers that we're selling to and the supply chain that we're working with.

The management key relationships is fundamentally important to us. Across government, in terms of this evolving regulatory framework that we've got, particularly sectors of government such as Homes England, which will be a key provider of land that will service some of our major projects. And also of course, funding into the RP market. Partners such as the DIO, who we already work with. And then importantly, these PRS funds and RPs, which we need to better understand how those models work.

So the third strand that our partnerships and regeneration business will undertake will have specialist teams who will be responsible for delivering these PRS sales.

Typically, these sales tend to be more relationship-led at the moment, whether or not it's a member of the senior management team that have those contacts with those providers or the regional business units do. This has to be professionalized in the future, so we have a much clearer understanding of the right product that gives us the best returns, in which location, at which stage of the development process and take this as a long-term plan as opposed to the characteristics of a fire sale.

And similarly, with the affordable housing market. Again, this will be a specialist team that specialize in this area to make sure that we maximize those opportunities and those returns, including, again, that interaction with government around the right financial model to get the best grants coming into the sector.

And commercial development. On our larger sites, major projects, strategic land, we often have commercial elements. Again, that specialism, we want to be centralized and form part of our partnerships and regeneration business. The bill will, of course, be undertaken by the divisional business units, but the clear understanding and expertise in that market, we want to be retained in the center in our partnerships business.

This is a good example of that multichannel approach. This is what we already do, and it's building upon what we do in the business already. The Arborfield site, south of Reading, 1,000 units in partnership with the DIO. We deliver private sector homes a number of outlets that we currently have there. We also deliver PRS homes scheme -- 2 schemes. In fact, we've completed with M&G Real Estate investment, continue to do that. And of course, we also provide affordable housing on this site. So this is an example of what we would continue to do going forward.

There are 4 foundations that also underpinned our strategy. Firstly, safety, health and environment, which will remain our #1 priority. David Marchant has, again, undertaken a full review in this area, and we have rolled out some changes, but this will remain our #1 priority. It's something that we already do well, but any business always should continue to review how they deliver this.

Sustainability and social value is another area of strength historically for the business, and particularly, around those relationships that we already have. Homes England, for example, this is something that we do well and we want to build -- and we want to build upon. There is, though, a much wider regulatory framework change coming around a whole raft of areas, including climate change and the sustainability agenda.

So we need to continue to focus upon that and be actively engaged in that political agenda because there is the possibility that this becomes disruptive if it is not controlled and regulated well by government. But this will only become a more significant part of the housebuilding sector and our business in the coming years, and we must be fully aligned to that strategy.

I'll just touch on [off-site] manufacture very briefly because there has been a significant part of the company's strategy in recent years. It continues to be important because it is going to be a big part of the future of housebuilding. But until governments set clear targets in these regulatory areas. It's very, very difficult to be big participants in this area. We will continue to be up with events, but not ahead of them until we get a much clearer direction from government in this area.

People, fundamentally important to any of our businesses, particularly housebuilding businesses, where the number of people to turn over is very leveraged. And we do have a really strong track record of developing good people in Crest Nicholson. Just anecdotally, I've met a large number of the graduate trainees since I've joined the business and this group of people are as good as any that I've come across anywhere. We have real talent in Crest Nicholson. If we can just get the right strategy, the right direction, we have great people to help deliver that.

Diversity and inclusion is a key priority. It will remain so. We've rolled out our agile and flexible working program to make us a more attractive employer to a wider group of people. We already pay at or above the national living wage. And our new values have been launched. This is about working as one Crest doing things -- doing things one way across the businesses. And this considered decision-making. We can't make all the decisions in the center. They have to be done at the regional business unit level. We have to set tramlines to work within, but we want considered intelligent decisions all of the time.

Investing in our people. We will continue to do, and we'll continue that positive legacy for our customers and our communities. But lastly, we have to be committed to success. We want to be good at everything. We've got to be top quartile performers at everything that we do in Crest Nicholson.

And finally, our financial targets. Now I'd be the first to acknowledge that we have disappointed the market in the last few years. We haven't achieved our targets. So this is about resetting numbers that we will deliver to the market. But this is just part of the path that we're setting today. This is only to 2022. The features that we're putting in place in this strategy are for the longer term and will deliver over the longer term. This is just the staging post. So these targets, in terms of house completions, well, we're looking to build up the number of outlets through the land portfolio that we've got, and that will deliver around 3,500 dwellings per year by 2022. The margin from a low base, we will deliver a minimum of 250 basis points improvement from self-help.

Obviously, if market conditions are better, the opportunity is there for more. Admin expenses at the moment, too high at 6%, they have to be around 5%. Return on capital employed will be a real focus for us in the longer term and beyond 2022. So currently, 15.9%, we have to be at least 20% by 2022 and then continue to improve thereafter.

Net cash, the balance sheet is already strong. GBP 37 million of cash at the end of the period. We will, through the implementation of this strategy, drive strong cash flows into the business. That gives us choices as to whether to invest in the business or to return or a combination of both.

As far as dividend is concerned, we're committing to the 33p this year. And from 2021, that will also include RPI inflation. And that multichannel approach, which, broadly speaking, by 2022, will be about 60% private dwellings; 20% to 25% affordable; and 15% to 20% bulk, will make us a more resilient business, a better investable business, and we will increasingly be focusing on return on capital employed in the business.

So summary and outlook. So good early progress has been made on this strategy. I can't reiterate enough that this is not just something that we're launching today and we'll be doing. This has already started in our regional business units. We are already doing most of this stuff, and it's starting to reap the rewards as Tom has demonstrated and some of those numbers that Duncan has put up as well. The new senior management team is in place, not just executive team level, but in the regional businesses. We now have 5 new managing directors. We're pleased with that political outcome in the sense that there is a strong, stable government for the next 5 years. Of course, we acknowledge that there are some risks ahead with the exit from the European Union in terms of dealing with this trade deal. But we are seeing, at the moment, those first green shoots compared to the second half of last year. We are seeing more visitors to our sites, more footfall and the people interested in buying Crest Nicholson products. And also we are seeing more reservations being taken.

And finally, again, let me reiterate, we do need to rebuild trust with the markets. We have disappointed the markets in recent years. We've set targets that we can deliver, and there is an opportunity for us to outperform against these self-help measures as we move forward. And of course, this is the strategy to 2022, and we will continue that focus beyond this strategy period.

Thank you. So we'll now move to Q&A.

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Questions and Answers

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Glynis Mary Johnson, Jefferies LLC, Research Division - Equity Analyst [1]

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Glynis Johnson, Jefferies. Three, if I may, though the first one has a number of parts to it, so forgive me. If you can talk a little bit about your selling price on your land bank. It hasn't moved much from the half year. I suspect there's all sorts of moving parts. Your new housing range, the examples you gave us actually showed house prices moving up in absolute terms. But also I'm interested in what kind of price discount you're putting in terms of bulk. And if bulk is an intention, are you going to change that product? Because, actually, the 24%, 25%, you did in bulk the year that's just gone was not necessarily intended at the start for that.

Second of all, just try and putting your new target for '22 margins in perspective. How many completions at that point in time will involve the new product range? Because it does take time to roll out and you've talked about the time of the first build. But what is actually anticipated at that point?

And then lastly, one for Duncan. Cash-outs, what should we expect in terms of pension cash-outs? They're cutting 5 cashouts. The outlets going up to 70, the WIP cash-outs, how should we look at that for the next 2, 3 years? If you could just give us some sort of color direction.

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Peter Truscott, Crest Nicholson Holdings plc - CEO & Director [2]

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Okay. So Duncan picks up the last of those questions. Just in terms of selling price in the land bank, other than in the London market as we just washed through those, we are actually at quite a consistent price now. It's unlikely to fall much from the current level. Most of that high-priced product that we did have in the London market has started to wash through. So wouldn't expect to see any significant change to that.

The second question, the discount on the bulk product, there's a little bit of what was and what will be. We might go into specific details because it's commercially sensitive. But some of those bulk sales that we would have done, will have had the characteristics of more of a fire sale in that period. Going forward, we expect through a better product, which is more aligned to that market, to see a reduction in that discount being given. And of course, at the same time, you do make the savings on the sales marketing costs and some of your interest costs at the same time as you get a better return on capital employed. So we need to look at it in the round. It is dilutive, but the dilution I think is sort of in that sort of 7% -- 7% to 10% range as opposed to probably a little bit more at the moment on average.

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Duncan Cooper, Crest Nicholson Holdings plc - Group Finance Director & Director [3]

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Just on your cash point there. And so you referenced upfront the pension piece up to a GBP 9 million cash contribution to the pension scheme. Wouldn't want to comment beyond the next triannual date in terms of whether that were to change obviously it's a conversation with the trustees.

In relation to the other items in the bridge, I'd think of it as you've got to generate around GBP 130 million of free cash flow to keep net cash consistent year-end on year-end to cover GBP 84 million on the dividend, circa GBP 24 million on tax, GBP 11 million on interest and the GBP 9 million on pension, which we touched on. I would see us spending a higher amount on land this year. I'm not going to give you the exact number, offset by a very similar consequent reduction in a lower level of build spend through both some of the benefits of the WIP optimization, which we've talked about, but also some of the spec benefits starting to come through there in early form.

Obviously, we've guided to a lower level of absolute profitability at the top of that reconciliation. So we do think there's further working capital opportunity for us to work through, and we're setting about looking at that as well.

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Peter Truscott, Crest Nicholson Holdings plc - CEO & Director [4]

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And just on that house types question, the completion by 2022, probably in the 25% to 30% sort of range. It's quite difficult to predict because it depends on the flow-through of the existing product, but probably in that 25% to 30%. But that will then accelerate quite rapidly beyond that point.

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Glynis Mary Johnson, Jefferies LLC, Research Division - Equity Analyst [5]

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I'm sorry, just one little bit at the product range for bulk. Are you changing what you are building, what you are putting on-site for those bulk sales? Because what you showed in Arborfield was 1-, 2-bedroom apartments. What you have in your land bank, I suspect, is not necessarily that kind of product. So bulk going forward, will it be more medium rise? Or will it be the traditional Crest product?

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Peter Truscott, Crest Nicholson Holdings plc - CEO & Director [6]

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I think it will be increasingly a mixture. Predominantly at the moment, it's apartments, but there is an opportunity for more 2-, 3- and 4-bedroom houses as well. So I think the mix will change, but there will still be a large proportion which will be 1- and 2-bedroom apartments.

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John Fraser-Andrews, HSBC, Research Division - Global Equity Head of Building Materials & European Building Materials Analyst [7]

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It's John Fraser-Andrews, HSBC. Three for me, please. The first one, just a follow-up, Duncan, on your answer about the release of cash from land. And I mean it's not specifically to you, Duncan, but generally, how quickly will that land length come down to sort of 4, 4.5 years within the 3-year piece?

Secondly, the guidance you've set for the current year, the GBP 110 million to GBP 120 million, that was obviously set at the end of October. So in that guidance, what house price inflation and build cost are you -- were you building into that -- or are you building into that guidance?

And perhaps, finally, perhaps you could say a little bit more about current trading, how things have panned out over and above the visitor levels and activities, visitor activity that you've seen?

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Peter Truscott, Crest Nicholson Holdings plc - CEO & Director [8]

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Well, I'll take the first part of the first question and also a bit on current trading, and then I'll let Duncan add to the release on cash and the inflation. So it's just in terms of the land bank quantity, and Duncan will talk about the financial element of it. Four to 4.5 years gives you a short-term land bank of somewhere around the sort of 15,000. We're currently in the 16,000. So the winddown of that is gradual and it's not huge. I don't think that we should be looking at that as a massive opportunity because I actually think that the balance sheet, as far as land is concerned, is actually pretty efficient as it currently stands. There's a relatively small amount of capital locked up on that 20,000 plots that we control and hold under option. So there is a bit of unwind on the short-term land bank, but it's not huge.

Just in terms of current market conditions, we're not really giving any more information than that. Quite simply because we're only 3 weeks into the new year, which I don't think yet constitutes a trend, but certainly, there's been a pickup since the election and our customers out there are feeling a lot more chipper about life than they were just in that period leading up to the election. Duncan?

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Duncan Cooper, Crest Nicholson Holdings plc - Group Finance Director & Director [9]

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Yes. I mean I wouldn't add a huge amount for the response to Glynis on the cash piece. So I'm not going to give you the exact land spend number other than to say we will end up spending more on land this year, all things being equal, and that's just a function of timing in relation to the unwind of the land creditors and the planned spend. But I think the bigger point actually to focus on is where we think we've got a significant opportunity in our build spend, which we think needs to come down, and you would expect that to be the case on the basis that as well a number of completed stock units is higher this year. And if we carried on building at that rate, we'd have a significant working capital problem. So we've identified that and we know that's where the focus needs to go.

In relation to the guidance for last year, you're right. We obviously set the plan for -- or the guidance for GBP 100 million to GBP 120 million at the end of October. Clearly, in the midst of more uncertainty than we -- suddenly we find ourselves in at the moment. And I think I said to you at that point that we had struck next year's plan of a broadly similar SPOW rate for the last 4 periods of last year. We'd assumed relatively benign to 0 levels of house price inflation and circa 3% to 4% of build cost inflation continuing to come through. So we don't -- if the market conditions are stronger than that this year, then as I said in my financial slide and Peter said in the overlay, there is an opportunity to overlay a premium to that guidance. But we are 2 to 3 weeks in and would consider that to be hasty to be making that call, given where we sat at the end of October.

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John Fraser-Andrews, HSBC, Research Division - Global Equity Head of Building Materials & European Building Materials Analyst [10]

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Okay. A couple of quick follow-ups, if I may. This year, how outlets and I know you start the year with your forward sales down quite substantially. But in terms of outlets and gearing up for growth, where are you positioning the business? Or is this a year of consolidation, and that's the next year the outlet growth?

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Peter Truscott, Crest Nicholson Holdings plc - CEO & Director [11]

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Yes, it's more likely to be the next year. The outlets are not going to decline, but there won't be a significant tick up until 2021, '22, as more of these sites start to deliver more outlets for us.

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John Fraser-Andrews, HSBC, Research Division - Global Equity Head of Building Materials & European Building Materials Analyst [12]

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And build cost inflation, we've had 3 or 4 builders now say that there's been a deceleration in that inflation rate of you being from that 3% or 4%. Have you seen that as well?

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Peter Truscott, Crest Nicholson Holdings plc - CEO & Director [13]

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It's a more difficult one to judge for us because it's not a like-for-like product that we're comparing against because going forward, a lot more of our product will be the new house type range with a new specification and also with a lot more of the efficiencies and buying power that we have. So what is pure inflation is more difficult to judge. But we probably would say, like-for-like, it's probably around that sort of 3% to 4%. I think some of the pressure is coming off, but of course, in the event that the market starts to become fairly hot again, then some of that pressure will come back on again.

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Duncan Cooper, Crest Nicholson Holdings plc - Group Finance Director & Director [14]

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The other challenge for us is, again, cited back to the last couple of years, and I referenced it at the outset is we can't afford to have some of the London and Midlands type site experiences again if this comes back to operational discipline, which is the bigger piece for us.

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Jonathan Matthew Bell, Deutsche Bank AG, Research Division - Research Analyst [15]

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Jon Bell from Deutsche Bank. I think I've got 2. The first one, every indication suggests the government wants to level up the economy or the U.K. economy. You're a Southern housebuilder. You started to tease us with the last bullet point of Slide 35 by extending your geography. Could you just elaborate on that point for us?

And then the second one, your 3-year targets imply flat or even slightly lower open market units. Presumably, the increasing share of affordable and bulk has been baked into your operating margin target guidance. What are you assuming on HPI in that period?

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Peter Truscott, Crest Nicholson Holdings plc - CEO & Director [16]

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Yes. Okay. Let me pick those up. You're right with the teaser. I mean I think in the long term, we would be a better business for having a wider geographical spread, but we've got a shed load of things to do with the operating area that we're already in. We have a great land portfolio already here. At some point, yes, we would like to expand possibly into these Midlands and then in the longer long term, a little bit further afield, but one step at a time on that, if we may.

Yes, the assumptions are baked into those numbers on. And it is only a subtle shift, by the way, it's not a huge shift in the period to 2022. This is only part of the pathway to getting to industry standard margins, which currently, I suppose you'd articulate at the sort of 18% to 20% operating level. And that's where, clearly, we're going. And the mix that we have will give some indication of sort of which end of that range that we might be at, but it's a gradual process.

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Jonathan Matthew Bell, Deutsche Bank AG, Research Division - Research Analyst [17]

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And HPI assumed?

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Duncan Cooper, Crest Nicholson Holdings plc - Group Finance Director & Director [18]

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On that in terms of you have to look at more than a 5-year view for us, you would see some running down from '19 to '20 as some of the London effects, as I say, continues to come through. Relatively -- we've received a relatively flat line level of ASP inflation going forward on open market units, and the volume increase, therefore, coming from an improving SPOW rate in the future.

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Peter Truscott, Crest Nicholson Holdings plc - CEO & Director [19]

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But as a general answer, selling price inflation wipes off build cost inflation is the assumption, but we have then got our build cost efficiencies to come through, but there are also other headwinds such as the new building regulations. So in the round, we have baked in what we think is about right.

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Clyde Lewis, Peel Hunt LLP, Research Division - Analyst [20]

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Clyde Lewis at Peel Hunt. Two as well, if I may. Given all the changes that are going on, are you tempted to sort of maybe level out the sort of completion profile at all during the calendar year so we don't get sort of month 6 and sort of month 12 in terms of those completion peaks?

And the second one was on the London drag. Obviously, you've taken those exceptionals. Can you give us an idea as to either the number of units or the sort of margin drag that those sites will have for presumably the next couple of years?

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Peter Truscott, Crest Nicholson Holdings plc - CEO & Director [21]

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Sure. I'll ask Duncan to pick up the second one. I mean clearly, aspirationally, we would want to level out the completions. Tell you a very brief story. When I was at TW, at one stage, we did enormous number of legal completions in December. Pete went mad, and he said, "Next year, you're all going to be bonused on how many you do in January and February. It's going to be 1/12 of your production in each of those months, and then you'll get your bonus," and we did. We actually exceeded it, and then we've done -- we didn't do any in March and April.

So yes, it's definitely an aspiration and it is partly how the business and the industry operates. But we do need to level it out. Certainly, it was too weighted towards our period ends in our organization last year, and we need to improve there.

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Duncan Cooper, Crest Nicholson Holdings plc - Group Finance Director & Director [22]

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And Clyde, just on the London point. So just once more a correction on the point you've touched on it being exceptionals. So just to remind you, we took the GBP 7 million provision into gross profit. That wasn't exceptional in terms of the NRV provision. We think we've set those London schemes, which relate to 5 schemes at the right price going forward. Time will tell, obviously, relating to the London market conditions. But based on our forecast, we'd expect the vast majority of that to wash through by this year and some remnants into '21, but will be pretty small by that stage.

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Anastasia Solonitsyna, UBS Investment Bank, Research Division - Equity Research Analyst of Emerging Banks [23]

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Anastasia Solonitsyna from UBS. I have 3 questions. Firstly, on margins. You said 15.4% implied operating margin at current cost in the land bank? And how does it screen versus your target of implied bottom of 14.7% by 2022? And also accounting for the fact that you will have some cost efficiencies in the next few years. So this is the first question.

And the second one is, what's the average margin level of land sales of GBP 100 million this year, if you can provide it?

And the third question is, what's -- what's sustainable level of land creditors in your land bank? How do you see it changing? Yes, that's pretty it.

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Peter Truscott, Crest Nicholson Holdings plc - CEO & Director [24]

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Well, Duncan will pick up the second and third of those points. As far as the margin is concerned, unfortunately, it tends to be a case of jam tomorrow in that the better margin sites are the newer sites that come through and they just gradually come through into the P&L in the latter part of that development cycle. So we do have to work through a lot of our existing lower margin sites and outlets at the moment. But let's be clear, there is the opportunity, if things go well, for us to outperform against them, some of these targets.

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Duncan Cooper, Crest Nicholson Holdings plc - Group Finance Director & Director [25]

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Yes. On the second and third, I know I think I've given as detailed a disclosure as we've given recently in relation to the margin walk. So I'm not going to break out the land margin number exactly. I mean you can engage from the walk on '19 and make your own assumptions around that.

And then the land creditors, look, I think we're comfortable with the current magnitude with where we're at and certainly feel with a great degree of certainly political certainty and backdrop generally in relation to the balance sheet, would -- don't feel uncomfortable with it at that level. But I'll come back to stress the point, again, for us, I think the bigger liquidity and opportunity is in the build cost and the WIP management. That's where our focus has got to be. And that's what the initiatives are underway to try and address.

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Charlie Campbell, Liberum Capital Limited, Research Division - Housebuilding Analyst [26]

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It's Charlie Campbell at Liberum. Really just one question for me. In terms of strategy, certainly, in a previous situation you find yourself in, you did talk about kind of trying to reduce selling prices to move away from the upper end, where things [work sort of] more slowly. That seems to have happened kind of organically here, that the London sites take care of themselves. So why not kind of more on replanning sites to move away from the upper end? I mean it's not just a London thing for Crest. It's everywhere in the Southeast really. So I just wondered why that isn't part of the strategy. You said you're happy with selling prices. But you have still got a lot of exposure in parts where things are selling quite slowly still.

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Peter Truscott, Crest Nicholson Holdings plc - CEO & Director [27]

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Yes. Those tend to wash through, Charlie. In terms of the newer sites, we are aspiring to be in the middle market, mid- to upper mid-market, that's where we think the natural home for Crest Nicholson and its brand is. And just in the geographies that we work, the average selling prices are reasonably high when compared to a national average. If you're comparing with a Bellway, a TW, a Barratt or a Persimmon, who have more of a national focus, even a Redrow, they are going to be lower because of that. But in the geographical areas that we operate, this is about the natural level once we work through the existing product at the higher level, which won't be replicated.

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Tom Nicholson, Crest Nicholson Holdings plc - COO & Director [28]

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That is extremely promising, the houses.

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Peter Truscott, Crest Nicholson Holdings plc - CEO & Director [29]

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Yes. Sorry, just to pick up on that point, Tom has also mentioned that at the moment, there's a higher proportion of apartments. And in future, the mix will include more housing, which, of course, also has a effect of slightly higher average price.

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Charlie Campbell, Liberum Capital Limited, Research Division - Housebuilding Analyst [30]

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Delivery?

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Peter Truscott, Crest Nicholson Holdings plc - CEO & Director [31]

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Yes. So it's more about the product as opposed to the price.

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William Jones, Redburn (Europe) Limited, Research Division - Partner of Construction & Building Materials Research [32]

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Will Jones at Redburn. Three, please, if I can. First, you made several references in the presentation to the perception of premium pricing from the previous team. And how that was out of kilter with reality. Did you actually have to go around a number of sites and just physically take down price to adjust for that in the early days? And if so is that reflected, I guess, in the land bank gross profit and gross margin that you presented today?

The second was just picking up, I think it was 0.45, that sales rate in the open market last year, which I presume was lower in the second half than the 0.45. I mean I can probably do the maths on it, but what number does that need to be, I guess, to support the 3,500 units a couple of years out?

And then the last one was just, I guess, what confidence you can provide us within getting to 70 outlets in terms of the open number? Because, I guess, we've seen the business at 50 to 60 in the last few years with a higher land bank plot count in the short term. So that's come down by 10% plus last year. And yet, we're being guided to a 20% increase in sites. Is that all about size of stuff coming through? Do you need to buy those smaller sites from here? Just I guess what helps us there.

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Peter Truscott, Crest Nicholson Holdings plc - CEO & Director [33]

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Okay. Well, I'll pick up 1 and 3, and I'll ask Duncan to answer on the sales rate. So on the premium pricing, I mean it's not a criticism of previous management because the business has, for a number of years, managed to attract a premium price for its product. But what you tend to see is the characteristics of these markets is that when buyers are very confident, when you've got high house price inflation, it's a lot easier to just get that extra premium over and above the normalized price per square foot that perhaps your competitors have because buyers will always reconcile in their mind that, well, it will catch up next year, I'll have what I want today.

When the markets become more difficult, buyers still like the additional features that you provide for them, but they're just not willing to pay you for them. And when you go on to a site, and your product is significantly more expensive than your competitor next door, where the competitor next door is probably just had a look at its costs, specification, prelims and being able to rightsize its price to the current market, but we're still holding on to price. And in some instances, actually increasing specification and increasing price to increase the differential, that has an impact on selling rate. Quite often, you still eventually get something like that price, but the rate is -- it becomes a problem.

So I think there is -- there has been some impact in terms of the margin in the land bank because it's been continuously refocused, but that work has been done.

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Duncan Cooper, Crest Nicholson Holdings plc - Group Finance Director & Director [34]

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Yes. Well, on the SPOW rate. So yes, I mean I wasn't going to get into breaking out individual months of '19, but you're right to say and it's what we said at the October guidance that we'd largely constructed this year's number off a continuation of a similar level going forward.

In part, recognizing the continuing ongoing executional change. We also continue to have to put through the business for this year. I think that's something we do need to make clear. We think we've done the right things to stabilize the business. I wouldn't underestimate the amount of fixed work that's going to need to go in, in the next 12 months in relation to that.

And then to your point around where does it go beyond that? Look, I'm not going to give into -- give specific forward rate SPOW guidance. But needless to say, by 2022, still lower than some of our peers in that respect to the market. So it is a modest level of increase. But such as the level of the cost reduction in the bottom part of the P&L and the efficiency piece, which will be additive to that margin piece.

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Peter Truscott, Crest Nicholson Holdings plc - CEO & Director [35]

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And we've got to be confident about the outlets number as well. We do have the land to do it, we have the land portfolio. And with more focus, we should be able to increase the number of outlets through a combination of that land that we already have. And of course, some targeted short-term land buying as well. But it is a real focus for us.

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Aynsley Lammin, Canaccord Genuity Corp., Research Division - Analyst [36]

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Aynsley Lammin from Canaccord. Just 2 for me as well actually. Firstly, on the admin expenses, GBP 65.5 million, I think you said there's GBP 9 million of annualized cost savings. For FY 2020, just how much of that do we get all of that in this year? Or is it a different number?

And then secondly, just interested to hear your thoughts on the dividend policy obviously kept at a 33p and then up with kind of RPI. Are you kind of -- did you think about maybe paying down some of the average debt, strengthen balance sheet for the growth because you still only be building 3,500 units. So just interested in your thoughts around that kind of dividend policy?

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Peter Truscott, Crest Nicholson Holdings plc - CEO & Director [37]

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Yes. I mean the 2 things, the GBP 9 million is a combination of overhead reduction and some of the selling expenses as well. And yes, a large proportion of that is captured in the first year. I think on the dividend, we're already very confident about the balance sheet and also our ability to improve our cash flows, particularly around the work in progress and other operational efficiencies that we can have. So frankly, the opportunity is to do both, which gives us an choices as to what to do with that additional cash flow, whether or not to reinvest in the business or increase the dividend or pay down debt. Those are choices that we haven't yet articulated as to which priority we would give. It depends on market conditions at the time, I suppose.

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Duncan Cooper, Crest Nicholson Holdings plc - Group Finance Director & Director [38]

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Aynsley, just on the cost point, specific in terms of when you come to model it. So that blue bar, I touched on in terms of the '20 [award], yes, you get all the GBP 9 million, and indeed, there's some further cost savings assumed in that that we need to deliver over and above in this year, but we've got well-developed plans on those and have good line of sight to executing them.

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Unidentified Analyst [39]

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Okay. One quick question. It's for Peter. On Slide 37, you said that, "If you want to meet hurdle rates without inflation, you have to be ruthlessly efficient in buying land. Most housebuilder -- actually, all housebuilders swear blind that their hurdle rates in land prices they pay is based on today's build cost today, selling prices. " Is this an implicit admission that under previous management, they may have factored in -- hoped for house price inflation into the price? And does that help explain why the margins have fallen off so markedly from the other housebuilders in the last 2 years?

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Peter Truscott, Crest Nicholson Holdings plc - CEO & Director [40]

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Frankly, I don't know because I wasn't there, but the evidence, if we go back to the slide around the deterioration in the margin without the inflation and the implication that we've needed the margin -- sorry, we've needed the inflation to hold up the margin can tell you a number of things. It could be significant cost increases, a leakage through things going wrong or perhaps an overoptimism in selling prices or an undercooking of build costs at the time of the land investment proposal. So I can't say which of it is those. It may even be a combination of all of those things. But in terms of the go forward and under our tenure, it will always be based on selling prices today, build costs today. And you really do need to put the pressure on the businesses to be efficient to compete in the open market for land.

I think that's probably all we've got time for, but I also think that that's about the lot anyway.

So thank you very much for your attendance and interest in us. And if there are any further questions that you want to take offline, please feel free to contact Duncan or myself.

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Duncan Cooper, Crest Nicholson Holdings plc - Group Finance Director & Director [41]

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Thank you.

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Peter Truscott, Crest Nicholson Holdings plc - CEO & Director [42]

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Thank you.