U.S. Markets closed

Edited Transcript of CSP.L earnings conference call or presentation 21-Nov-19 9:00am GMT

Full Year 2019 Countryside Properties PLC Earnings Call

BRENTWOOD Dec 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Countryside Properties PLC earnings conference call or presentation Thursday, November 21, 2019 at 9:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Ian Calvert Sutcliffe

Countryside Properties PLC - Group Chief Executive & Executive Director

* Michael I. Scott

Countryside Properties PLC - Group CFO & Director

================================================================================

Conference Call Participants

================================================================================

* Christopher James Millington

Numis Securities Limited, Research Division - Analyst

* Clyde Lewis

Peel Hunt LLP, Research Division - Analyst

* Gavin Jago

Peel Hunt LLP, Research Division - Analyst

* Glynis Mary Johnson

Jefferies LLC, Research Division - Equity Analyst

* Jonathan Matthew Bell

Deutsche Bank AG, Research Division - Research Analyst

* Adam Patinkin

================================================================================

Presentation

--------------------------------------------------------------------------------

Ian Calvert Sutcliffe, Countryside Properties PLC - Group Chief Executive & Executive Director [1]

--------------------------------------------------------------------------------

Well, good morning, everyone. My name is, I'm sure you know, is Ian Sutcliffe. I'm the Group Chief Executive of Countryside Properties. And I'm joined today by Mike Scott, our CFO. And together, we will take you through the highlights of our performance for the 12 months to the 30th of September 2019. As usual, we'll go through a short presentation, and then there'll be an opportunity to ask questions at the end.

I am delighted to report another excellent year for the group. We've maintained our sector-leading growth in completions with strong earnings growth in both divisions. Our capital-efficient business model ensures our balance sheet remains robust, and we entered 2020 with another record forward order book.

We have continued to increase our visibility on future work by winning several new sites in Partnerships and securing further land in Housebuilding. Our modular panel factory, which opened in Warrington in March, is already in full production, delivering 376 homes in the first 6 months of its operation, and we expect this to rise to around 1,400 homes in the coming year.

Finally, I'm delighted to say our customer satisfaction score has improved as well, to 92.5% of our customers being prepared to recommend us to a family member or friend. This puts us firmly in the Home Builder Federation 5-star range.

And with that, I'll pass you across to Mike to take you through the financials.

--------------------------------------------------------------------------------

Michael I. Scott, Countryside Properties PLC - Group CFO & Director [2]

--------------------------------------------------------------------------------

Thanks, Ian, and good morning, everyone. Let me talk you through the financial highlights for the group after another very good year. 2019 has delivered sector-leading growth in completions, which were up 33% to 5,733 homes, with the full year effect of Westleigh which contributed an incremental 760 homes this year, around half of the total increase.

As we discussed at the half year, the impact of changes in our tenure mix and geographical footprint resulted in a lower operating margin at 16.5%, but this was still ahead of our expectations for the year and helped us to deliver an 11% increase in operating profit to GBP 234 million.

Our balance sheet remains strong with a 37.8% return on capital employed, and our strong cash generation in the year meant that we've been able to invest in further growth, increase the dividend to 40% of adjusted earnings and increase our closing net cash position.

So on to the summary of group income. And as a reminder, our numbers are presented on an adjusted basis, so including our share of joint venture and associate results, and they also exclude nonunderlying items, which in 2019 was a GBP 7.4 million impairment of inventory in the first half, and acquisition-related amortization, remuneration and integration costs of GBP 9.8 million. The majority of these items were noncash in 2019, and a breakdown is included in the appendices to your slides.

Revenue was up 16% to GBP 1.4 billion driven by a 33% increase in completions. And as I said, that was in part driven by the full year effect of the 2018 Westleigh acquisition and the 760 incremental units. Operating margin at 16.5% was slightly better than expectations for reasons that I'll cover shortly. And as a result, we delivered operating profit up 11% to GBP 234.4 million.

Our net interest cost was similar to last year at GBP 10.9 million, of which GBP 3.4 million related to our net borrowings, which averaged around GBP 60 million in the year.

The tax charge for the year of GBP 41 million reflected our effective tax rate of 18.5%, and that was slightly lower than the U.K. statutory rate as we received some R&D tax credits during the year. So our after-tax profit of GBP 182 million resulted in earnings per share of 40.8p per share, and that was up 13% on last year. And as I mentioned a moment ago, we've increased our dividend payout ratio to 40% of adjusted earnings. And as a result of that and our profit growth, the final dividend is 10.3p per share, and our total dividend has increased by 51% this year to 16.3p.

So moving on to the balance sheet. And as you can see from this, we've continued to invest in further growth for the group during the year. As you may remember from the first half, we finalized the acquisition accounting for Westleigh. And we increased goodwill by GBP 10 million in relation to some inventory fair value adjustments. And as required, we had to restate the 2018 comparative.

Our net investment in joint ventures was broadly flat on last year as the joint ventures paid out their retained profits and dividends to members. And overall, the JVs contributed around GBP 47 million of operating profit, which is a similar level to last year.

So we invested across the business to deliver our growth plans, and that's reflected in the increase in stock and work in progress. We invested around GBP 30 million in the growth of our newer regions in Yorkshire and the South Midlands, and they started construction on 8 new developments during the year.

In the Southern Partnerships business, we continue to develop the large sites at Beam Park and Fresh Wharf in London and Rochester Riverside in Kent. And in Housebuilding, we acquired a number of large strategic sites during the year, including Rayleigh and Tilbury in Essex and also a site at Paddock Wood in Kent, with an investment across the 3 of GBP 53 million, of which GBP 46 million is also included with the increase in land creditors.

In addition, with the expansion of Partnerships, we've crystallized land value on a number of developments during the year, and that contributed to a GBP 40 million increase in land creditors there. Our land overage decreased by GBP 17 million during the year as we settle the overage due on Canning Town and St Paul's in London, and we mentioned that at the half year.

Our other net liabilities reduced substantially, and that was driven mainly by an increase in receivables on the affordable and PRS contracts. And really, that was driven by the growth in construction during the year and some year-end timing differences.

So moving on to look at cash. And our GBP 234 million of adjusted operating profit generated GBP 190 million of cash during the year. And as we continue to increase our investment in Partnerships growth, we invested GBP 37 million in working capital, and this included the investment of GBP 40 million of additional work in progress, which went into the new growth regions and in those large sites in the South I've already mentioned.

In Housebuilding, there was a net investment of GBP 13 million in working capital this year after a reduction last year, and this was driven by an incremental GBP 30 million investment in the strategic sites and a number of others, including Harlow in Essex and Paddock Wood and Marden in Kent, and that was offset by some other working capital movements.

After tax, the EBT share purchases and the dividend, we ended the year with net cash of GBP 73 million, an increase of GBP 28 million on last year. And we ended with gearing, including land creditors, of 9.4%, which is slightly lower than last year's 10.4% and in line with our prudent approach to managing our balance sheet.

Now in FY '20, we expect to continue that investment in working capital across the group. And we also, additionally, have 2 large one-off cash outflows in the year, and that's GBP 18 million in relation to the payment of Westleigh deferred consideration in April and also the impact of a change in the tax payments regime, which means we make 6 tax payments instead of 4, and that will result in an acceleration of GBP 20 million to GBP 30 million of cash payments in the year. So when taken together, that means that our guidance on net cash at the end of FY '20 is somewhere in the region of GBP 75 million to GBP 90 million.

So moving on to look at Partnerships, where completions grew by 47% to 4,425 homes. The majority of this growth came from the new Yorkshire and Midlands regions following the acquisition of Westleigh. And together, they contributed 1,225 homes in the year. Now excluding the impact of those new regions, completions grew by 25%, so still a strong performance.

Driven by those newer regions, affordable completions were up 64% on last year to 1,760, with the majority of that increase coming from the East Midlands region as we built out the sites that we acquired from Westleigh and also the growth of our existing West Midlands region, which is now in its third year of production.

In addition to those, our PRS completions increased by 63% to 1,329. And again, the increase there was in similar geographies to the other tenures I've just talked about. Private average selling prices decreased, and that was mainly the result of the geographical mix of the business during the year. We continued to see house price inflation in the regional businesses outside London, which meant that house price inflation was slightly positive for the Partnerships division as a whole.

Operating margins decreased by 210 basis points, in line with our expectations, with the regional businesses now contributing around 78% of completions, up from 70% last year, and they now account for half of Partnerships' gross profit.

Operating margins recovered in the second half, in line with our guidance, with a higher proportion of delivery coming from both private for sale homes and the Southern regions. And we were able to mitigate some softening house prices in London through procurement and operational efficiencies. With the reduction in operating margin, return on capital decreased by 910 basis points despite a small increase in the assets owned in Partnerships to 5.1x.

Now we've included the margin bridges again here just to explain some of the main moving parts on margin during the year. And it's worth noting that FY '18's operating margin of 17.4% was ahead of our long-term expectations for the Partnerships margin. And also, the split of profit in Partnerships this year was heavily weighted to H2, with a greater contribution of profit coming from private for sale product in the Southern division in the second half.

The largest impact to margin was the impact of developments which significantly outperformed in FY '18, and particularly at Bow in Canning Town in London that we've talked about before. And there was significant profit delivery from those sites in the second half last year, and they were delivering margins well ahead of normal levels by the time they finished. And there were no comparable developments in the division this year.

The impact of the Westleigh acquisition was 40 basis points, which reflects the additional 6 months of ownership this year, with production still focused on affordable homes in that legacy business. And the tenure mix of Partnerships, excluding the impact of the Westleigh acquisition, is also slightly more affordable in PRS base this year, which made up 61% of completions compared to 57% in the prior year. And finally, we saw some operational efficiencies coming through, which helped us to end with margin of 15.3%, and that's more in line with our target model for Partnerships going forward.

So moving on to look at Housebuilding, and the Housebuilding division saw only modest growth this year, with completions up 3% to 1,308. Private completions were actually slightly down on the year, but we've made a conscious choice not to chase completion volume at the expense of margin, and Ian will talk more about that shortly.

Affordable completions were flat on last year, and we completed our first PRS homes in Housebuilding with 48 homes completed at the development at Harlow in Essex. Operating profit was up 5% at GBP 114.8 million with a strong performance in operating margins, up 120 basis points, which I'll walk through in a moment. Return on capital employed was broadly flat at 25% with assets owned in Housebuilding of 1.28x. That's slightly down on last year, but was offset by the stronger operating margin, and that's in line with our target return on capital for Housebuilding going forward.

And then just looking at the margins in Housebuilding, they were up 120 basis points on 2018. And you can see from the bridge here, the impact of the completion of legacy sites at Harold Wood and Mill Hill in 2018, which had been a drag on margins historically. In addition, the operational efficiency program continued to benefit margin with around 50 basis points improvement year-on-year, although the impact of this was lower than in half 1 as the program is annualizing some of last year's initiatives from H2, and there has also been some impact of negative house price inflation at the higher price points.

The impact of land and commercial sales for the full year is modest at 10 basis points, and that's lower than half 1 due to the timing of land and commercial activity year-on-year and the recognition in half 2 last year of GBP 4 million of overage receivable. Our other land sales in half 2 this year have all been at more normal margins.

The remaining 20 basis points was made up of various net benefits, including the underlying site mix, but also includes a 10 basis point negative impact of the change in accounting standards and revenue recognition, which means we have to recognize additional revenue and part exchange sales of around GBP 9 million in the year.

So finally, I'm moving on to the summary. 2019 was another year of very good performance for the group. We delivered sector-leading growth in completions and earnings, which grew by 33% and 11%, respectively. Earnings per share were up 13% to 40.8p per share, and we continue to generate cash as well as continuing to grow the business and increasing our dividend by 51% to 16.3p per share.

Now as we look forward into FY '20, we'll see geographical expansion gather pace in the Midlands and Yorkshire. Margins in both divisions are now at their sustainable levels going forward with 19% in Housebuilding and 15% in Partnerships, although we do remain mindful that we need to remain focused on running our business efficiently to offset the impact of cost price inflation.

We expect further investment into offsite construction in 2020 with additional investment at the factory that is already operating in Warrington and also a second factory that we're looking at acquiring in the Midlands. And as I said earlier, we expect to have net cash on hand at the end of the year of somewhere in the region of GBP 75 million to GBP 90 million.

And with that, for the last time, I'll hand you back to Ian to talk through the operational highlights.

--------------------------------------------------------------------------------

Ian Calvert Sutcliffe, Countryside Properties PLC - Group Chief Executive & Executive Director [3]

--------------------------------------------------------------------------------

Thank you, Mike. Let me just start by refreshing on our strategy. Our strategy continues to work well and, unsurprisingly, remains unchanged, focusing on growth, returns and resilience within our business. And I'm pleased to say that all 3 have performed and improved significantly during the year.

Our differentiated business model of Housebuilding and Partnerships is providing both accelerated growth and resilience through our mixed-tenure delivery and while our low capital business model ensures that our capital efficiency leads to industry-leading returns.

As Mike said earlier, we've had another strong year of growth for completions, up 33% in total. And our growth is largely being driven by the regional expansion of Partnerships into the North and Midlands, which is up 47%, with a more modest growth of 3% in Housebuilding, reflecting its higher private selling price.

We have seen growth in all 3 tenures as well: private, up 9%; affordable, due to the expansion in the Midlands and a framework agreement with Midland Heart there, up 46%; and PRS, largely on the back of the previously announced agreement with Sigma Capital, the PRS rate is up 70%. As I've already mentioned, it is the delivery of mixed tenure that is driving our growth. And with only 38% now of our delivery being private, we don't feel that we're reliant on any one form of tenure.

We continue to strengthen our land banks in both divisions, adding over 17,000 plots in total. In Partnerships, we secured 10,492 plots during the year, including significant wins at the Cambridge Road Estate in Kingston and at Camden Goods Yard in North London, a joint venture for 342 plots with one housing group.

The controlled land within Partnerships is now 34,842 plots, which is over 8 years worth of work at current volumes. And the opportunities in Partnerships are not reducing. They remain significant. With over 90,000 plots on our bid radar, we continue to be selective in terms of the proposals we put forward.

We've also expanded our Housebuilding land bank by 6,975 plots, including 2 large option agreements: one at Tangmere in West Sussex for 1,300 homes; and a second one at Marden in Kent for some 2,000 homes as well as securing 2 large sites at Burgess Hill and Milton Keynes through the Homes England Delivery Panel. In total now, we have 24,303 plots in the Housebuilding land bank, which remains highly capital efficient, with only 19% of that land bank being owned outright and some 81% being sourced strategically through long-term options.

Now moving on to sales, it's been another strong year. The net sales reservation rate has been above our expected range and ahead of the previous year at 0.84, stronger in Partnerships at 0.98 and in line with other major housebuilders at 0.7 in the Housebuilding division. And these numbers exclude a small number of bulk sales that we made during the year. We have increased the number of active sites under construction at the year-end to 137. And while it's true that not all active sites become open sales outlets, they have risen from 53 to 56 during the year, and the active sites give us great visibility going forward.

Average selling prices have reduced to GBP 367,000, in line with the change in regional mix and our strategy for targeting first-time buyers, which now make up over 52% of the private completions. With our low dependency on private for sale, we utilized Help to Buy on around 20% of our total completions. And the use of part exchange is not a significant tool within our incentives, having not increased year-on-year and being used on less than 2% of our private completions.

While our average selling price has fallen due to the expansion of the North and Midlands, underlying house price inflation has decreased slightly, but with continued strong growth at lower price points and some discounting at higher price points. Our focus on first-time buyers means that 90% of our private completions are under the GBP 600,000 mark. And overall, house price inflation, while being marginally down, is up in Partnerships with a corresponding fall in Housebuilding.

Overall, the total forward order book is up 30% on the prior year to a record of GBP 1.166 billion, of which almost half is due for delivery in financial year '20, with the rest in later years. The strongest growth, unsurprisingly, has come from Partnerships due to the regional expansion, up 40% on the prior year, while Housebuilding is still up a healthy 10%.

Our strong sales rate and continued growth in sales outlet numbers has allowed the strong growth in the private forward order book, which is up 12% on value on the previous year. The PRS order book is up 29%, again, on the back of the relationship with Sigma Capital. And the affordable order book is up 37% due to the expansion into the new regions.

Now with little help from house price inflation, we've had to work hard to drive operational efficiency. Underlying build cost increases have moderated slightly, but still remain around 3% to 4%. This increase is made up from 3 factors. Materials, such as bricks, roof tiles and sanitary wear, particularly where there has been a foreign exchange component in price, have increased. And we've also seen increases in labor rates across many trades, especially in the North and Midlands where there isn't a wider availability of European labor.

Additionally, however, there have been increases from changes in build regulation, particularly due to fire safety. And we have included these increased costs on our current developments, modifying both design, specification and construction where required. We've also engaged a third-party fire consultant to verify all design, materials and construction to ensure a full compliance audit trail is available.

During the year, we've also addressed some of our historic developments, those that are over 18 meters and included ACM cladding, and we've addressed them. We did not have a significant exposure to ACM, but have extended this review to all tall buildings with potentially combustible materials to ensure fire safety. Again, we don't anticipate this being a significant exposure, but we will report back further at the half year on this matter.

Whilst build costs are increasing, it's worth recalling in the Partnership business model, these factors are already costed into the appraisals of developments with phased viability. And overall, in both businesses, we're around 80% procured for the current year.

Now finally, I'm pleased to announce that our modular panel factory in Warrington, which opened in March, has already completed, as we've heard, 376 homes in its first 6 months, rising to around 1,400 homes in this coming year. The use of modular off-site construction ensures faster build times, less waste and, we believe, higher quality as well as mitigating some of the other build cost inflationary factors by improving efficiency. The factory is already operating on 2 shifts, producing 20 homes per week, and this will rise to 30 in January. And we are, as Mike has said earlier, we're already underway planning a second facility in the Midlands, which we anticipate opening in 2021.

We've maintained our focus on quality as our business has grown substantially over the past 5 years. Our 3 key qualitative measures all remain better than industry benchmarks. Reportable items on the NHBC key build stage inspections have improved by 5% to 0.21. This means 1 reportable item per every 5 home inspections.

Our health and safety accident rate, while slightly higher than the prior year, remained significantly lower than the industry average and almost half of the health and safety benchmark of 405. Finally, again, I'm pleased to report our customer satisfaction scores, measured by the NHBC Recommend a Friend, has continued to improve, standing at 92.5% and, as I said, within the 5-star HBF category.

Now moving on to more personal matters. You will have seen in this morning's RNS that I will be retiring from the group at the half year in March next year. And I'm really delighted to say we've achieved many years -- many things in the past 7 years, and I believe the business is in truly great shape.

Iain McPherson, who is in the room today, will take over as CEO on the 1st of January. And Iain has 23 years of industry experience, working in both our divisions, currently leading our Partnerships South division. He's also a member of our Executive Committee, and I believe we're fortunate to have somebody of Iain's caliber to succeed me. And we will begin a structured transition over the coming months.

So just moving right up today, current trading. Trading in the first 7 weeks of the year since the end of September has remained good, with open sales outlets, visitor levels, net reservation rates and cancellation rates all better than last year. Average selling prices are also higher, but in line with our expected geographic mix. And underlying house price inflation is also slightly better than last year.

So with a record forward order book of all tenures and continued demand for private homes, particularly at lower price points, we can feel confident that we can continue our growth trajectory. Even without house price inflation, we believe we can mitigate any pressures on margin from build cost increases. We remain mindful, however, of any further macro and political uncertainty, but at this point, remain confident of delivering further earnings growth in FY '20.

That concludes the presentation, and I thank you for attention -- your attention. And we'll now take any questions that you may have. But please, as this meeting is being broadcast, please wait for the handheld mic to be brought to you before asking any questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Jonathan Matthew Bell, Deutsche Bank AG, Research Division - Research Analyst [1]

--------------------------------------------------------------------------------

It's Jon Bell from Deutsche Bank. I think I've got 3. Could you just flesh out your expectations on working capital movements for this current year and maybe just split that out between Partnerships and Housebuilding?

The second one is -- I think you referred to some small bulk sales. Is any of that in the forward order book? And can you quantify?

And then thirdly, the customer satisfaction score seems to have gone up pretty significantly. What specifically have you done this year or last year that was different to achieve that score?

--------------------------------------------------------------------------------

Ian Calvert Sutcliffe, Countryside Properties PLC - Group Chief Executive & Executive Director [2]

--------------------------------------------------------------------------------

Thanks, Jon. Let me take the second and third of those questions, and I'll let Mike come back and explain in more detail on the working capital, if I may.

Firstly, the bulk sales, we don't go out and sell to individual investors. The bulk sales that I'm referring to are to sales to councils, where councils have bought properties for shared ownership directly from us. And the others are for sales to Sigma, where on some of our larger developments, we sold some additional units for private rented to Sigma. In total, our sharing, including share of joint ventures, it was 177 units during the year. And you'll see a similar number, I think, transferring into the forward order book for next year.

--------------------------------------------------------------------------------

Michael I. Scott, Countryside Properties PLC - Group CFO & Director [3]

--------------------------------------------------------------------------------

So just on the working capital point, Jon, I think the shape of it will be quite similar to this year. And we've guided that cash will be broadly flat to maybe slightly positive over the year. And basically, any surplus cash that we're generating will be those 2 one-off items. We'll sort of solve that up.

In terms of the split between divisions, I think as we put more private for sale product into the Midlands and really grow those regions, we'll probably have a slightly higher impact in Partnerships than in Housebuilding. But I think, broadly, the shape will be similar to this year.

--------------------------------------------------------------------------------

Ian Calvert Sutcliffe, Countryside Properties PLC - Group Chief Executive & Executive Director [4]

--------------------------------------------------------------------------------

And then coming back on customer satisfaction, Jon, we put a real focus on this about 2 years ago, Executive Committee level. We appointed a lead Executive Committee to make sure we standardized our process right across the business. We made sure that we planned our sites with adequate time because the issues that we face on customer satisfaction, they're not major structural or build quality issues, they're about finishing details, making sure houses are completed on time and making sure that when a house is handed across, it's in absolutely pristine condition.

So we instigated a more formal sign-off process for making sure that all homes were ready. We communicated clearly about the timing when those houses were going to be complete. And we've been pretty tough on not letting anything go that wasn't ready. So we haven't forced product in at the end of periods to go across the line. We've let that flow, but we've maintained our build programs to make sure we don't get behind.

--------------------------------------------------------------------------------

Adam Patinkin, [5]

--------------------------------------------------------------------------------

Adam Patinkin -- is this on? Adam Patinkin from David Capital Partners in Chicago. We're a long-time shareholder with a substantial position in the shares. I guess 3 things. So first, Ian, congratulations on your retirement, and thank you so much for all your leadership and your service to the company. I think these are another set of outstanding results, and it's a great credit to you and all the hard work that you've put in, in leading this business. So on behalf of a grateful shareholder, thank you very much for all of your service.

--------------------------------------------------------------------------------

Ian Calvert Sutcliffe, Countryside Properties PLC - Group Chief Executive & Executive Director [6]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Adam Patinkin, [7]

--------------------------------------------------------------------------------

The second thing is I wanted to ask and maybe -- as there is a transition in leadership, maybe I'm not asking the right person. But I guess there's the long-term question about whether the Partnerships business and the Housebuilding business, which are kind of run separately, whether they should continue to be together? And so I'd appreciate any thoughts on that.

And then the third point is the one disappointment here is we are really disappointed to see you guys increase the dividend. I just think that that's bad capital allocation policy. Right now, with the business that's growing at the extraordinary rates, you are printing this much money, net cash, trading at less than 8x earnings, it is a no-brainer that you should be buying back shares. And we've been communicating this to you for a while. And to see the decision to increase the dividend, I think, is a really deep disappointment to us and to a number of other shareholders that we are aware of in the name.

And so I'd be really curious to understand how the Board got to that decision and why you guys decided that the right capital allocation strategy was to increase the dividend rather than to buy back shares when you're earning 80% returns on invested capital and the share price is trading at a level that doesn't at all reflect what a business at this growth trajectory with this return on invested capital should be trading at.

--------------------------------------------------------------------------------

Ian Calvert Sutcliffe, Countryside Properties PLC - Group Chief Executive & Executive Director [8]

--------------------------------------------------------------------------------

Thanks, Adam. Well, let me just start with the big one. We have talked about our business operating in 2 different business models. We agree, the business is largely operating independently now. We have done a degree of work over the last year to understand what barriers would stand in our way to split the businesses, and there really aren't any in terms of structural barriers internally to be able to do that. Other than the timing of the macro environment, we've lived under a cloud of political uncertainty and Brexit uncertainty for the last 3 years that really have probably held back a number of business decisions across the U.K. through that period. But we think that the business is now in really good shape. We think both businesses are of scale. We think both businesses have got great stories behind them going forward. So it remains an option for us going into the new year.

I think in terms of the dividend and the buyback, and I'll give you just the decision-making base, then I'll just ask Mike to talk a little bit about where the money is going to go at the moment because, again, in part predicated by my first answer, we have been performing really well. We've got a great asset turn in Partnerships. It's over 5x as the asset turn, and the asset turn in the overall business is 2.2x. So you're kind of right to say, look, we're throwing off a tremendous amount of cash. We believe that our capital allocation policy was, firstly, to reinvest in organic growth; secondly, to invest in new geographies; thirdly, to invest in new businesses, M&A; and then fourthly, to give it back to shareholders. We don't think we've fully exhausted the first 3 of those 3 things. And as you saw from the working capital chart, we've been plying money back into the business.

The decision on raising the dividend payout rather than doing a share buyback, really, we took a straw poll of positions on this. And you guys have been consistent on this for some time now. There are other shareholders that were equally adamant, they didn't want that. And that was maybe a difference between U.S. investors and U.K. investors. But there was a strong push back the other way from some of our other shareholders. So we took a decision at this point to say we had some surplus cash, we could afford to pay a higher dividend, and we did. But I don't think that's the end of the capital return story. I think, as Mike will talk in a minute, we see the business continuing to grow and we see the business continuing to throw off cash. And where we go on the next steps, I think, will be the next part of the journey. And you're right, that will be Iain McPherson and Mike rather than me, but I don't think that story has run its full course here.

--------------------------------------------------------------------------------

Michael I. Scott, Countryside Properties PLC - Group CFO & Director [9]

--------------------------------------------------------------------------------

Yes. I mean Ian has touched on the capital allocation policy that we have. I mean the organic growth of the business you've seen, we've continued to put investment into both sides during this year. We don't feel that we're constrained in doing that by the current cash that we're generating.

If you look at the growth regions where we're investing, in the Midlands, for example, which are really strong areas of demand for us, the new South Midlands region will deliver about 750 homes next year. So that's coming on stream really well, and we've chosen to put cash to work in the Midlands to do that.

As I said to Jon a few minutes ago, I think we will have a similar investment this year. There's lots of opportunity for us to continue generating strong returns in Partnerships. And even in the South, which is maybe slightly more mature business for us, the big sites at Beam Park in Dagenham, at Fresh Wharf and outside London in Maidenhead and Rochester, we're still able to grow those. And remember, the business model, the reason the assets are in this 5x in Partnerships is we're able, with the affordable in PRS and the tenure mix, we're able to almost self-fund some of those developments as they go. And we expect strong growth to come through in Partnerships again next year.

--------------------------------------------------------------------------------

Ian Calvert Sutcliffe, Countryside Properties PLC - Group Chief Executive & Executive Director [10]

--------------------------------------------------------------------------------

But Adam, it would be useful for us to have an offline conversation after the meeting to set up a chat with...

--------------------------------------------------------------------------------

Adam Patinkin, [11]

--------------------------------------------------------------------------------

(inaudible) talk to any board member or any other shareholder, to me, it's not a gray area. It's obviously invest in the business first, right? Every dollar that you can put into this business, put it into the business. But if there's going to be a capital return, like I think it's pretty much black and white, and it's just disappointing to see it go up to a 40% payout ratio. That doesn't make any sense.

--------------------------------------------------------------------------------

Ian Calvert Sutcliffe, Countryside Properties PLC - Group Chief Executive & Executive Director [12]

--------------------------------------------------------------------------------

Okay. All right. Thank you.

--------------------------------------------------------------------------------

Gavin Jago, Peel Hunt LLP, Research Division - Analyst [13]

--------------------------------------------------------------------------------

It's Gavin Jago, Peel Hunt. Just a couple if I could. First one is a boring one, I think, but just a picture on the average net cash or debt during the year, please?

And then the second one was just to dig a bit more down into what's behind you on the current trading. I think that the sales rate in '17 was similar, wasn't it, at 0.77 or so. So you're up on kind of both years. Can you give us an indication of kind of what's driving that mix? Are there more new sites that have opened in the last 7 weeks? Is there a higher weight into Partnerships by geography, just to get a sense of what's driven that increase there, please?

--------------------------------------------------------------------------------

Ian Calvert Sutcliffe, Countryside Properties PLC - Group Chief Executive & Executive Director [14]

--------------------------------------------------------------------------------

Well, I'll let Mike come back on the debt piece, Gavin, thanks. I've got to say, if you'd have said to us 6 months ago, would you have taken the current trading position that you're in now, we would have snapped people's hands off. I think that the final quarter of our year up to September and, certainly, the first 7 weeks has been perhaps stronger than we anticipated.

I think one of the reasons behind that, setting aside the macro climate, is that our outlet numbers are increasing, but the bit you can't see in the numbers is the quality of the outlets and the size of the outlets are increasing. So some of the smaller Millgate and Westleigh private for sale outlets are dropping off. And we're replacing them with really big sites like Beam Park at Barking and Dagenham, our Fresh Wharf also in Barking, Rochester Riverside that we mentioned earlier, the Alma Estate at Ponders End. There are big sites coming on that are churning off big volume. And just to give you a anecdotal feel around that, we sold 60 private units on Beam Park in the first 6 months of operation there just to individual purchasers. So that's a much stronger performance than you would get off a small Millgate or a small Westleigh site.

--------------------------------------------------------------------------------

Michael I. Scott, Countryside Properties PLC - Group CFO & Director [15]

--------------------------------------------------------------------------------

And then just on debt, so the average for this year was just a touch over GBP 60 million of net debt, and I think next year, maybe slightly higher than that towards the GBP 70 million on average.

--------------------------------------------------------------------------------

Glynis Mary Johnson, Jefferies LLC, Research Division - Equity Analyst [16]

--------------------------------------------------------------------------------

Glynis Johnson, Jefferies. Still 4, if I may. The first one, just in terms of active sites, your active sites also stepped strongly in the year that's just gone. Should we anticipate the same kind of growth to come to your open outlets as we go into '20 and maybe '21?

Second of all, in terms of cash returns, I'm not going to push your dividend versus share buybacks. But 2000 -- in the full year '20, you have the extra going out for tax. You have the deferred payment for Westleigh. You have the step-up in working capital going out. If I look into the future years when you don't, in theory, have that tax and you don't have that deferred payment extras, it implies that actually your net cash will increase quite substantially. And so I'm just wondering what is the right level of net cash in your business, appreciating that you do go into your debt through the year?

Thirdly, just in terms of guidance margins in Partnerships, given that regions are becoming a bigger part of your business and they tend to have a larger part of the PRS, particularly because of the Sigma arrangement, should we anticipate that guidance on margins will start to edge down, reflecting that mix?

And then lastly, again on Partnerships, your targeted margin, this 15%, you're at it this year, yet you made a return on capital employed of 78.3%. If that target margin remains unchanged, does that imply your 50% to 70% return on capital employed in that business perhaps should be revised up?

--------------------------------------------------------------------------------

Ian Calvert Sutcliffe, Countryside Properties PLC - Group Chief Executive & Executive Director [17]

--------------------------------------------------------------------------------

Well, let me take the ones on active sites and target margins, and I'll let Mike do the cash returns and the evolution of the Partnerships margins, if I may.

You're right, Glynis, 137 active sites, those sites under construction, big leap forward. And that's what gives us some confidence about the growth for the coming year because we're already in the ground on many of those sites in all of the divisions. So that's coming off the back of the regional expansion, but it's also coming off the back of some big sites starting to come through in London as well. So we have confidence in the outlet numbers growing through the year.

I think on outlet numbers, because the faster sales rate, we probably closed a few more outlets quicker than we anticipated towards the end of last year. But I do think you'll see a steady growth in open sales outlets through this coming year to a number that probably by the end of the year will be in the mid-70s in terms of open sales outlets.

As far as target margins and return on capital are concerned, we've laid out a position on Partnerships that we believe an operating margin of around 15% is really the sustainable level over time. Now the one thing I would say is, as we're continuing to invest in Partnerships and putting more working capital in the ground, that does put a little bit of a break on the return on capital going off into the sky. But the guidance we've previously given is 50% to 70%. We've never been less than 70% in the 5 years we've been giving that guidance, and I don't see that materially changing in the medium term. So I think the top end of our guided range, 50% to 70%, remains good in Partnerships.

--------------------------------------------------------------------------------

Michael I. Scott, Countryside Properties PLC - Group CFO & Director [18]

--------------------------------------------------------------------------------

So just thinking about cash then, so you're right that in future years, we would expect a bit of a tick-up in net cash. I think we've been very clear on the 4-step capital allocation policy in terms of organic growth, then sort of geographical expansion, and then M&A and potentially returns in whichever form they would come. I think we wouldn't want to grow net cash off into the sky, certainly.

And as I said earlier, we're reasonably comfortable, at the moment, the net gearing, including land creditors, sits around 10%. So we're pretty comfortable with the shape of the balance sheet as it sits today. But as we start to generate that incremental cash, it gives us more flexibility in terms of growth options for the business and what we can do with Partnerships going forward into the future. So I don't think we've seen that cash really coming through into the sky.

In terms of Partnerships' margins, I mean we've been consistently guiding on the medium-term margin for Partnerships being around 15%. And you're right in what you say, the Midlands and Northern expansion has a higher degree of PRS and affordable. But what we'll be doing on those developments as we come through is bringing more private for sale into the mix, and it's not really in there at the moment. So we're comfortable that net-net, we think we'll still be at 15% going forward.

--------------------------------------------------------------------------------

Christopher James Millington, Numis Securities Limited, Research Division - Analyst [19]

--------------------------------------------------------------------------------

Chris Millington at Numis. I'd just like to ask, firstly, just about kind of this evolution on the price point in Housebuilding and whether or not you feel you kind of achieved what you want to achieve, particularly in light of the Help to Buy caps coming in, in '21. That's the first one.

Second one, I just wondered if you could put a bit more flesh on the bones with regard to your point about fire safety and kind of what that means for you and how you kind of build it into your viability.

And the final one I'd just like to kind of explore is London trading more recently. Had a couple of people say it's been tricky. I appreciate you're kind of the lower end of the market, and your numbers certainly seem to kind of suggest you've been good, but just a bit more detail there.

--------------------------------------------------------------------------------

Ian Calvert Sutcliffe, Countryside Properties PLC - Group Chief Executive & Executive Director [20]

--------------------------------------------------------------------------------

Thanks, Chris. Well, look, let me start with the Housebuilding price point. We made a play probably about 3 or 4 years ago now to say that we felt that the average selling price in Housebuilding was too high. We needed to keep our product affordable for the local owner-occupiers. And to do that, what we needed to do was to produce product that was 3-bed houses rather than necessarily 2 big 5-bed houses. And that's kind of what we did in terms of moving through the piece. That's sort of positioned us to a price point that's in the high 400s, touching GBP 500,000 at the moment. And I think that's probably a number for the geographies that we operate in that we're going to stay at in Housebuilding.

Now just to reiterate with Housebuilding, we're really not in London at all in Housebuilding. We have a couple of sites, but we're really not in London. We're more in the Home Counties, immediately around the M25. But when you're in Chelmsford and when you're in Maidenhead and some of the towns around there, you're going to hit our sort of average selling prices along the way. We obviously are conscious of keeping our product affordable. But I think in terms of modeling this, I think you shouldn't be thinking any higher in terms of house price, even if we got some inflation coming through.

Now just let me lead that into the London trading position because having said that, and even with Partnerships, we're not exposed to Zones 1 and 2 in London. So we don't see the price pressures that some people building alongside the river and at Nine Elms and the like are seeing because we're just not in those markets. Our markets in London are Zones 3 to 6, the somewhat less fashionable. They're Enfield, they're Acton, they're at South London, they're in places like Barking, that they're not the higher-value areas. But we are changing the environment considerably there and at lower price points. So if we're selling flats and even houses that are in the GBP 300,000 or GBP 400,000 range, there's an incredibly strong demand for that product still in London. So we feel very confident about the positioning of our product in and around London.

Secondly, we also see that the hedge of having the private rented and the affordable means that we can create a sense of place just that bit quicker. Places like Beam Park and Fresh Wharf, we have over 500 homes under construction in each of those sites, and 2/3 of them are already pre-sold to either PRS or to affordable. So we create an environment that bit quicker, and the private sale market is responding well to that.

Moving on to fire safety, 2 big areas here. I mean look, following the tragedy at Grenfell, everybody's focus is making sure we go back, we check, we diligence and we can audit that we've got absolutely the right design, the right materials and the right construction in place to ensure fire safety, particularly on tall buildings. Regulations are changing and they'll continue to evolve. And whether that means simply the degree of certification that's required or whether it means things like sprinkler systems in taller buildings, I would envisage that depending on the type of product, that adds between about GBP 1,000 to GBP 5,000 to the cost of the build of a unit. And we are building that in as part of our build cost inflation to make sure that we do build our properties safely, we do build them in accordance with regulations and we've got third-party verification of that if there is ever a challenge on it.

As far as the historic piece is concerned, clearly, we focus, like everybody else, on checking that all the tall buildings that we have with ACMs, aluminum cladding materials, that they were safe. And we've replaced those where there was a question about them. What we've done voluntarily is extend that now to look at any potentially combustible materials on the outside of apartment buildings. So we're looking at things like high-pressure laminates and an AC decladding or wooden balconies because we want to make sure that we've got complete fire safety integrity around those buildings. We didn't have a significant impact to the results this year. They were just in the P&L of the work that we did. And we don't expect that to be a significant cost going forward on the remainder of the buildings. But I think it is important that we draw a line around that and make sure all the buildings we've built are safe.

--------------------------------------------------------------------------------

Clyde Lewis, Peel Hunt LLP, Research Division - Analyst [21]

--------------------------------------------------------------------------------

Clyde Lewis at Peel Hunt. Two, if I may. One really is, I suppose, following on a little bit from Chris' point there, not on fire, but on future home standard. Obviously, the sort of consultation document's gone out, and the implication for that is obviously sort of extra insulation, possibly no gas boilers, et cetera, et cetera. I mean I'd be interested to hear your views on how that might evolve and how you're starting to plan for those sort of changes coming through, particularly obviously in terms of your very long land bank and the implication for sort of cost, I suppose, on land values.

The other one I had was local authorities versus housing associations. Obviously, that sort of evolution, that makes us suspect of what's coming through and where the demand might come from for working with the Partnerships business. Can you maybe just update us as to what local authorities are doing? And are they as green as we suspect they are in terms of their dealing with you guys and their understanding? Or are they again sort of expecting too much at early stages and haven't yet learnt the lessons that the housing associations have probably learnt in sort of working on sites and how they develop them through?

--------------------------------------------------------------------------------

Ian Calvert Sutcliffe, Countryside Properties PLC - Group Chief Executive & Executive Director [22]

--------------------------------------------------------------------------------

Yes. Thanks, Clyde. I mean clearly, on future homes, I mean it's undeniable that sustainability generally, whether it's on the minds of consumers, the investors or indeed people like local authorities, is going to be high up the agenda going forward. And we will consult fully with that both directly with government and through bodies like the HBF to make sure we find a solution that's practical to be able to implement.

Historically, we've been up 1 or 2 blind alleys on this in the past that we've had to go back and retrofit. So I think there is an experience and an advice that we can bring to things like zero carbon and some of the other measures that will be put into buildings. But we do anticipate the regulatory burden on the cost of housing increasing. I think that's going to be part of the journey going forward.

And our challenge is to find ways to mitigate that by building more efficiently. And one of the big benefits of the modular panel factory in Warrington is a lot of that certification of what needs to be done can be done in the factory, can be certified in the factory before it ever gets to site. So we've got a greater control over it, and we believe that we'll be more efficient doing it. But we're under no illusion that, obviously, standards are going to tighten, and the awareness of sustainability generally is just going to increase. So we're anticipating that along the way.

Housing associations and local authorities, let me just split the 2 apart because I think there is a greater ambition in local authorities to become more involved in the -- in housing ownership again, a little bit on the building it themselves route, but there are significant challenges to that. And we think, as a partner, we can help them with that. But when I talked earlier about seeing opportunities to do deals with local authorities, I mentioned 2. We've done one with Waltham Forest and one with Enfield, where we've sold them product direct to them, so they want to maintain it for shared ownership. They want to be part of the ownership change -- chain going forward, and that's absolutely fine. And I envisage we'll do more of that as we go forward.

The housing association is slightly different, I would venture. I think 3 years ago, all the housing associations were wanting to get into development. They were going to be the guys that were going to develop the volume shortage and fill that. I think having had a taste of the challenges of development, I think the appetite has diminished in the big housing associations. So I think there is a further opportunity there. And again, we work in partnership with these guys on developing out sites across the country. But I don't think they're quite as eager and their balance sheets are quite as full as they were 2 or 3 years ago to develop it themselves.

--------------------------------------------------------------------------------

Christopher James Millington, Numis Securities Limited, Research Division - Analyst [23]

--------------------------------------------------------------------------------

Sorry, it's not a question. It's more a follow-on from what Adam was saying there at -- from David Capital. But I think for most of us in the analyst community would like to thank you, Ian, for the help, the guidance, the incredible drive and energy you've brought to Countryside.

I think one thing I was quite impressed about, just looking back through one of my old spreadsheets there, but the business when you joined it, GBP 13 million of EBIT. You're departing on the back of GBP 233 million, so an absolutely incredible performance. I won't say any more, but thanks so much, and wish you the best for the future.

--------------------------------------------------------------------------------

Ian Calvert Sutcliffe, Countryside Properties PLC - Group Chief Executive & Executive Director [24]

--------------------------------------------------------------------------------

Thank you very much, Chris. Well, if there are no more questions, then we will draw this to a close. We will be around to talk individually afterwards for all of you.

I would just like to say in conclusion, this will be my last results presentation, and I'd like to reciprocate the thanks that Chris has just shown, for the support we've had from the analyst community, particularly to the investors who stuck with us right through the story, pre-IPO into today. It has been a tremendous journey, and we couldn't have done it without your support going forward. So thank you very much.