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Edited Transcript of MCS.L earnings conference call or presentation 28-Jan-20 10:15am GMT

Full Year 2019 McCarthy & Stone PLC Earnings Call

London Jan 30, 2020 (Thomson StreetEvents) -- Edited Transcript of McCarthy & Stone PLC earnings conference call or presentation Tuesday, January 28, 2020 at 10:15:00am GMT

TEXT version of Transcript

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Corporate Participants

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* John M. Tonkiss

McCarthy & Stone plc - CEO & Executive Director

* Mike Lloyd

McCarthy & Stone plc - COO of Services & Customers and Director

* Nigel A. Turner

McCarthy & Stone plc - COO of Build & Director

* Paul J. Lester

McCarthy & Stone plc - Group Non-Executive Chairman

* Rowan Baker

McCarthy & Stone plc - CFO & Executive Director

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Conference Call Participants

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* Alastair Robert Stewart

Shore Capital Group Ltd., Research Division - Analyst

* Aynsley Lammin

Canaccord Genuity Corp., Research Division - Analyst

* Clyde Lewis

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

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Presentation

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Paul J. Lester, McCarthy & Stone plc - Group Non-Executive Chairman [1]

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All right. Good morning, everybody. Sorry, we're starting a little bit late. I think the Crest Nicholson one ran over a little bit. We've got a presentation that will last about 45 minutes and then we'll do Q&A for probably a maximum of 30 minutes. But if it finishes earlier than that, then that's fine.

You can probably see from the photograph here that we found a new way of keeping our residents happy, ply them with alcohol. Actually, it is one of the things we're doing is we've just applied for a license, a liquor license at one of the developments to try it out, where we actually sell alcohol because it seems, funny enough, quite popular.

So if John, can you just turn it forward? Yes. So this is the running order, a brief introduction from me, then John, Rowan obviously going through the figures. We've got the 2 COOs, Mike and Nigel, who some of you have met, but they have been a key part in the turnaround and the reshaping of the business. So you'll hear from them.

I think all I'd like to do at the introduction is say that last year, remember, it was a 14-month year. It was a pretty tough year in terms of our particular marketplace, no Help to Buy, difficulty for people to sell their properties. The secondary market was a tough market. We have to discount more than we would have normally expected to encourage people to make that jump.

But the good news is our rental offering took off. And we only really pushed that for the last couple of months because obviously there's a lot of retraining of the sales force, et cetera, but we have to trial it. The good news is it's continued to grow in this financial year. Having said that, as we said in the statement, the first 2 months of this particular financial year have been tough because they led to the election.

We're taking a view that this year, apart from the first 2 months, which (inaudible) has picked up, and John will go into more details on that. But personally, I worry about the Boris factor still that he will dangle the hard Brexit in front of Brussels to try and get better deals. And I think that could make people nervous then. So we've assumed that it will be a continuing tough environment.

We've taken advantage of this lower level of activity to make all the changes. And I keep saying to the team and external people, "If we were going like that in terms of sales, I suspect we'd have probably not changed the strategy as much as we have." So I think what we've created is a business model going forward that will be significantly more robust in terms of the rental, co-ownership and some of the things that John and the team will take you through that gives a totally different business model to the one we had when we were just a builder. And I think I've always said we're going to move into very much a lifestyle business. And I think we've made good progress.

So John, over to you.

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John M. Tonkiss, McCarthy & Stone plc - CEO & Executive Director [2]

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Good morning, everybody. If I can, before we get into the financials and the new strategy, I just wanted to take the opportunity perhaps to highlight that, over the past 14 months, we've helped over 3,000 customers enjoy the benefits of Retirement Living. In doing that, we've addressed loneliness, we've created peace of mind for them and their families and we've helped with their happiness and health over the period. We've created over 50 new retirement communities. And alongside that, we've helped in a much broader sense with housing supply and the unlocking of housing to get the right people living in the right types of housing. And we've supported the health and social care system, reducing the costs and burden on the taxpayer in their area. And as I mentioned, we revitalized many, many towns and city centers as part of that process. So by any measure, I think, it's been a good year in that regard. And we're very pleased naturally with the positive impact we're having on our customers and society in a broader sense.

Looking back at our plans for FY '19. Again, we're pleased with what we've done. We've achieved almost everything we set out to do over the 14-month period despite, as Paul said, extraordinary political and economic backgrounds and a very difficult and challenging secondary housing market. Our sales increased in the period to 2,301 and our ASPs also ticked up to GBP 308,000. We generated more cash and our underlying operating profit was in line with expectations at GBP 68 million.

We're proposing a consistent dividend of 5.4p per share. And importantly, and we will continue to stress this, we delivered a 14th consecutive year of 5-star customer satisfaction unlike any other housebuilder in the industry. We are incredibly proud of that accolade. And we're close to the 15th year just coming around the corner.

And we've made significant progress with the new strategy in all areas. And Mike and Nigel will pick on some of this shortly, but there's 2 areas in particular I want to flag, the progress with our build cost reduction programs and particularly our rental proposition. Rental is providing new ways for customers to buy into the McCarthy & Stone lifestyle in ever-increasing numbers. And we see that as an attractive investor proposition pioneering the work that we're doing and in time, I believe, developing a new asset class in Retirement Living.

Paul made that point that this work has put us in a good place. We've been a much more resilient business over the past 14 months. But it will also provide a springboard to growth in future years. Thankfully, the political backdrop has stabilized. We now have a government with an overwhelming majority and a mandate to get on and do what they need to do, which is to govern. But I believe, as Paul said, there will be a number of twists and turns and ups and downs over the weeks and months ahead.

And while we're keen to see positive sentiment in the housing market, we really need to see that convert into consumer confidence, the broader economy, and underlying performance in the housing market. Overall, our forecasts are in line -- they remain in line with expectations that we set out at the start of the year.

If I can briefly talk about current trading, it'd be fair to say that current trading has been mixed over the first 12 weeks of our new financial year. We've seen very strong levels of new sales leads partly as a result of the new marketing approaches we've taken and also increased marketing spend that Mike will talk to later on in the presentation.

But like many businesses, or perhaps your own personal experiences as well, the lead-in to the generation -- the general election, we saw a slowdown in commitment activities from customers. So the reservation rates slowed down markedly in the 5 or 6 weeks leading up to general election. You can see that effectively across the channels at the bottom, the sales leads, the visitors, but the slowdown here with the red circle on the right-hand side.

We've used a number of new tools to make sure the market continues to function, kind of self-help measures, you might say, part-exchange and the rental has certainly helped. And in many ways, it's improved our conversion rate and our conversion cycle time, which is obviously good news.

All metrics across the bottom here, you can see the green lines, have improved as we've come back to the new calendar year in January. And particularly, we're interested in the rental levels are now running at about 12% per week through the month of January. This kind of slowdown, I guess, because of the general election, is going to impact our half year numbers, our H1 position because of the slow start. So while the full year remains in line with our forecast and expectations, it is going to be H2-weighted.

If I kind of step back and recap on the new strategy, the new strategy that we launched in September 2018, I guess, I should stop calling it the new strategy now. We're 16 months into the new plan. There are 2 parts to the strategy, if you can recall. First and foremost, optimizing our returns, which is all part of the 3-year plan to FY '21; and then secondly, leveraging the strategic opportunities as part of the 5-year plan.

The first part has 4 work streams: rightsizing the business, getting a more efficient sales and operating -- marketing and operating model, the build cost reduction plans I talked about earlier and balancing our workflow. And between myself, Mike and Nigel will talk about all of these shortly.

The stage 2 bit is all about these 3 keywords: affordability, flexibility and choice. Affordable, contemporary range of design of products that opens up our market to a mass market pricing. The flexibility of services, future-proof services that evolve with the needs of our customers and payment options that can flex around those needs in a much more agile way. And then choice of tenure, more routes to customers and markets through multi-tenure offerings. This is all part of the game plan to transition the business from a retirement housebuilder to a retirement housebuilder plus a developer, manager, owner of retirement communities.

I'm delighted to say that the rightsizing work is now well and truly done and it's behind us. We have a far simplified business, simplified structures in place. And what you can see on the schematic is an important part is that we've aligned the organization to the new strategy through our newly appointed Chief Operating Officers. So you can see Mike and Nigel's responsibilities spanning across the page. Mike and Nigel will update on their bits later on, following Rowan's natural update on the financial numbers.

There's 3 bits that I want to zoom in on a bit more detail. I'd like to talk about how we're progressing with our improvement targets towards FY '21. I'll provide a broader overview of our build cost reduction progress. And as you would expect, I'm going to zoom in on our rental proposition and how we're progressing in that very important part of the strategy.

So our Stage 1. To remind you all, 15% return on capital employed, 15% operating margin by FY '21. And then a couple of important numbers we talked about 16 months or so ago, GBP 40 million cost savings in P&L terms in FY '21 and GBP 90 million of cash savings over the life of the plan. We're making good progress on all of these areas. We delivered so far GBP 15 million of the P&L target against the GBP 40 million and GBP 20 million of the cash savings. The majority of that, as we always anticipated, has come from the rightsizing activities, GBP 10 million in that area, and a circa GBP 2 million in the sales and marketing structures. And the BCR initiatives, while they're starting now, will peak as we go into FY '21.

So moving on to the BCR program, the build cost reduction program. Our teams, our suppliers and our partners have worked tirelessly over the last 14 months or so reviewing over 120 schemes to derive GBP 48 million of BCR improvements in this plan. The lion's share of this, as we always anticipated, is coming through from the development redesign activities, getting more efficient use of space and more efficient designs, without in any way impacting on saleability and our customer-buying decisions.

The vast majority of that work now is done, it's behind us, an enormous undertaking to reengineer all of our products over the last 14 months. And importantly, Nigel will talk later on about how moving forward, those new practices are embedded into our future working practices and our future pipeline. We've standardized our prelim packages, and we are more readily undertaking competitive tendering to drive value through the subcontract supply chain.

If you look at the top right, that GBP 7 million and GBP 16 million number, GBP 23 million of savings either delivered or baked into live construction projects that are on-site at the moment and the balance subject to planning in our pipeline moving forward. And importantly, the bottom right-hand side from your perspective, you can see, as we always anticipated, the bulk of this to be coming through 50% in the P&L in FY '21, which is completely consistent with the strategy that we talked about in September of 2018. Importantly, we have baked in these margin improvements into our site land appraisal hurdle rates from FY '22 onwards. So we see that being much more assured in the medium- to longer-term pipeline.

From a rental perspective, I think we are gaining real momentum with our rental proposition. You can see the updated numbers here in the center of the page, where we were at the 31st of October, you'll know that 101 rental completions. And then we've updated for completions and reservations up to the weekend that has just gone, 175 rentals in total now, 43 rent to buy. These are really interesting options, giving customers a 6-month lead-in to either rent and then decide which way they go to -- at the end of that 6-month period. I think a good way again that people moving into the proposition.

And 75 cumulatively shared ownership. I think we're really excited about shared ownership. We haven't spoken a lot about that over FY '19. I think shared ownership will be an important part of our toolbox through FY '20 as we're developing some new solutions that we'll look to communicate on in the weeks and months ahead. Importantly, now this is live as a rental proposition on all our developments across the country. We have a specialized team in place, all the new propositions and all the new processes established. And we see an increased proportion of our overall 2,100 reservation rate coming from rentals in the weeks and months ahead.

I mentioned volumes have picked up. You can see the right-hand side from our end of the last 3 months of our previous financial year. You can see the drop-down as we saw the general election start to bite in terms of reservation activity but then a really strong pickup to 12 rental reservations per week on average through the course of January.

Average pricing, we've shown down in the bottom right-hand side on a per calendar month basis, excluding ground rents and service charges, as it were. So that range is from a 1-bed Retirement Living proposition at the one end of the spectrum, about GBP 1,100 per calendar month, to the other end of the spectrum, a 2-bed Retirement Living Plus an extra care product at around GBP 2,600.

Importantly, the pie charts tell a kind of mix as to where we're at. Geographically, all regions are pretty well represented. We're slightly underweight in the Midlands. But the Midlands was one of the areas where we launched the rental proposition towards the end of the rollout. So I think in a sense, we're seeing all parts of the country enjoy the benefits of renting. There is a bias towards the Retirement Living Plus the extra care. So 56% in favor of that versus 44% of our Retirement Living.

And of course, our portfolio is the other way around. So on a per outlet available basis, it is much more skewed towards the Retirement Living Plus. Again, that makes complete sense and is in line with our expectations. And there's a predominant 2/3, 1/3 split on 1 bed to 2 beds, again which makes absolute sense.

We see the whole rental opportunity giving choice to the customers. It allows them to defer decisions and make different options around their family home, whether it's a sell that at a later date and release capital or to rent as we see many customers doing. And if you look at the alternative with an extra care proposition, the alternative is a care home. And we have a far better proposition. Your own independent living, a 1- or 2-bedroom apartment, 24-hour care and support and a much more economically viable platform than going into a care home.

So we think this is a strong proposition to the customers. We're seeing strong rental levels and then back to the right-hand side, gross yields that range between 6% and 8% for the Retirement Living and Retirement Living Plus. And slightly a kind of technical term but a very strong low gross to net leakage. And that's because we're building on our existing operating platform. We already have our skills and resources and capabilities in place. So this is a kind of marginal element on top of our core business. And we think it makes it a very competitive and compelling investment case.

Which moves me on to from an investment perspective, we're making good progress with discussions around prospective investors. We've been working with Rothschild to attract high-quality funders -- funding partners, where McCarthy & Stone will maintain a minority stake in this vehicle moving forward. We see this as a sector-leading opportunity, really is a groundbreaking opportunity to follow in the footsteps of other asset classes. My personal experience with student accommodation is a good indicator of that.

Our aim is to develop a portfolio of around GBP 300 million of assets over a 3-year period and giving customers choice. The choice of tenure allows them to rent or buy. And then from an investor perspective to take a stabilized asset with stabilize income into the vehicle, low occupancy churns because of the nature of our customer base, best-in-class gross to net because of the platform that we've talked about. And I think what it provides, if you think about some of the alternatives perhaps in the world of care is -- the case study, I guess, if you compare ourselves to a Retirement Living Plus to a care home, there's a really attractive yield proposition because there's such an acute shortage of alternative offers available.

The schematic in the top right is really how we see this potentially working moving forward. We have an agreed portfolio, agreed pipeline of development assets that we are building as we go. We're developing a seed portfolio that will ultimately then transfer into the rental fund; and then subsequent tranches on a quarterly or half yearly basis then being rolled on into the fund at pre-agreed prices. McCarthy & Stone co-investing at the top of the page here, in line with or in parallel to the investors; and the management services business supporting the platform and making a management fee in the process.

As I said, we're progressing well with conversations with a number of prospective investors. And in addition, it's a line at the bottom of the page, but I think it's something we're really excited about. We are in parallel delivering, off the back of the learning we've undertaken, a full build-to-rent proposition. There are certain markets where we believe we can rent 100% and following the footsteps of the BTR investment model and create that proposition in this space. And we think that's again another complementary opportunity for the months and years ahead. Behind the scenes here, under the rental proposition, we are developing a more robust business model that will have long-term incremental benefit to our return on capital employed.

So hopefully, I'll give you a chance to understand the overview of the strategy, where we're at trading-wise and those 3 areas in particular, I'll hand over to Rowan, who will in turn hand over to Mike and Nigel. And I'll come back with a summary at the end. Thank you.

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Rowan Baker, McCarthy & Stone plc - CFO & Executive Director [3]

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Thanks very much, John. Good morning, everybody. So I'm going to talk you through our financial results for the 14-month period ended the 31st of October 2019. And I should just mention that all comparatives are for a 12-month period.

Now these numbers are very much in line with what we said on the 7th of November. So no surprises here. But as John said, we've delivered a solid performance this year in light of what has been a fairly challenging market backdrop.

So just to run through some of those key headlines. So legal completions were at 2,301, at a strong average selling price of about GBP 308,000. Now our revenue, that number was stated in our 7th of November update. It was a slightly lower number, our revenue is GBP 725 million, and our gross profit was GBP 104.9 million.

Now gross profit margin and underlying operating profit margin have been impacted, really showing the secondary market there, the challenging market conditions resulting in increased use of PX. So those stood at 14.5% and 9.4%, respectively, and our underlying operating profit stood at GBP 68.1 million.

We had a statutory profit before tax of GBP 43.4 million. And the difference between our underlying measures and our statutory measures are mainly the exceptional costs. We get a little bit of amortization in there as well. But it's mainly the exceptional costs, which stood at GBP 17 million for the period, which is again in line with what we flagged when we introduced our new strategy back in September '18. Only GBP 11 million of the GBP 17 million had a cash impact on the business.

Further headlines then, our return on capital employed was 10%. And a couple of new items to talk you through or more emphasized items to talk you through. So our on-balance sheet part-exchange holding was at GBP 93.8 million. And I'll talk you through some more on how part-exchange has been going and progressing for the business in a moment. And then we also have investment properties and investment property revaluation uplift.

Now on the 7th of November, we flagged in that trading update that there would be an uplift for those rental properties that would be booked to underlying operating profit. So that's what you can see there. They've been revalued -- professionally revalued to GBP 27.6 million. And that involved a revaluation uplift of GBP 5.9 million. I'll speak a little bit more about that when we get to the balance sheet.

We ended the year in a strong net cash position of GBP 24.7 million. And we are proposing a total dividend of 5.4p per share, which reflects the Board's confidence in delivery of the new strategy.

So let's have a look at margins then in a little bit more detail. So prior year margins, so FY '18 margins, operating margins stood at 10.1%. And if you look at the first two bars, that really represents what we think of as being our site margins in the business. So you can see we've got some negative impact of sales mix there. And then we've also got some positives coming through in the build cost reduction work stream. As John said, the majority of that benefit won't come through until FY '21. But we have seen a little bit of that benefit during the current year, so FY '19.

The following 3 bars, the 3 negative bars, you can then really see the impact of the external market there. So increased incentive costs. We've had more of an injection of sales and marketing spend and also the stockholding costs. Now if you recall again at the beginning of the year, we had a higher level of finished stock than we would have had at the prior -- at the beginning of the prior year. So we had 1,779 units of finished stock as we opened the year. So that has cost us more to hold.

Then the green bar there, the 1.7 percentage point uplift, that's the impact of the rightsizing head count reductions that we've made in the business. So there are circa 200 heads there included. And that has created some benefits, which you can see the previous offsets to as well, giving us a total for the year of 9.7% on the margins.

Now I've stopped there and split out the final 3 bars because I really wanted to just illustrate what the position would be at our normal 2,100 run rate and then take on the end the additional rental because that was incremental to our -- to what we would consider in FY '19 to be our normal 2,100 and our volume. Now going forward, rental will be brought into the 2,100. But in FY '19, it was additional.

So volume impact of 1.1 percentage points, rental valuation uplift of 0.8% and then you can see the impact of the additional costs, fixed and variable costs of the additional 2-month period. So that brings us to an overall margin for the 14-month period of 9.4%.

Moving on then to the balance sheet. So a little more on the investment properties. So a couple of key items here. Investment properties, that is the 101 rental properties and the 47 shared ownerships that have been revalued -- professionally revalued and there is an uplift there reflected of the GBP 5.9 million that I've already mentioned.

So what really happens there is the value of the start-out life of stock, so pure land and build costs. And what you're seeing there is the difference is the uplift to market value, which is broadly similar to what we would normally get in the market, it has been revalued on a net initial yield basis, but it is broadly similar to what we would expect on a normal selling price.

Total net stock, you can see we made good progress in reducing our net stock to rightsize the balance sheet and release cash. So you can see a lower level of land exchanges, lower level of land completions and the 40 build starts against the 53% in the prior year, so a lower amount of sites in the course of construction value there. And our finished stock balance importantly is coming down. So we're heading towards our 1,100 target, which we set to the end of FY '21. And that now stands at 1,628 units.

In addition to that, we've also got the part-exchange value, which sat at GBP 93.8 million on the balance sheet. So let's look in a little bit more detail at part-exchange. So this should be a familiar layout for the slide, we've used this quite a few times now. So just to navigate you through it.

So part-exchange continues to be a really helpful, valuable and cost-effective tool for the business. It helps us to keep the volumes coming through in what we've seen as a pretty challenging market. So in terms of total volumes, we've seen 49% of all transactions involve in some form or other of part-exchange. Now if you take you to the pie chart at the bottom, bottom left pie chart, you can see 34% of all our transactions involved our own balance sheet part-exchange. So that's quite a significant uplift on the prior year when it stood at 15%.

Now it's a very cost-effective tool. And we can measure just how effective it is when we compare it to the third-party offers that we get for customers on our -- using third-party rent. So that saving we've calculated to be 13.4%. And if we take that over an average capital employed during the period of GBP 52.6 million, that really indicates a 25% return on using the balance sheet for that activity.

Now it's important because we're doing more of it, that we control it well on the balance sheet and we have also centralized part of the capability for dealing with on balance sheet part-exchange to include -- sorry, to increase that level of control. And you can see there that we've managed to sell down those properties well within our target at 12.3 weeks, is the average sell-on time.

Now because it's a cost-effective tool and because we're controlling it well, we have increased the amount that we're doing of part-exchanged. And so that increase has now -- is now at 15% of tangible net asset value level. And we do expect that to continue to be utilized during FY '20.

Just on cash then. Now we are continuing to exercise careful cash management here, a focus on cash generation as well and maintaining a strong balance sheet. Just one thing really to draw your attention to here. And that's the net revenue bar. Now that net revenue would normally be just about in line with our true revenue that we have as a business. But because of the additional use of part-exchange, that number sits slightly lower than our actual revenue in the business. Because [we don't] take cash revenue from customers when they complete. So PX is what you can see as being the difference there.

We've got a lower level of land and build spend during the year, all the other bars pretty much as you would expect. You can see the exceptional items at GBP 11 million. And that leads us to a closing net cash position of GBP 24.7 million. Also just to mention, I said at the half year as well that we extended our revolving credit facility to March 2023 during the period.

Finally then from me in terms of FY '20 guidance and outlook. We are expecting our volume to remain at the previously indicated level of 2,100 per annum at an ASP of around the GBP 300,000 mark. And we're also expecting an increased proportion of the 2,100 target volumes to come from our rental offering during FY '20. And we will continue to allocate a proportion of the balance sheet to that rental activity until we have the rental investment partner secured.

And importantly, the cash and profit impact of including that additional rental, we're expecting to be similar to sales because we'd expect to be able to sell those rental assets into a vehicle during the year. So we will provide further guidance as to exactly how that will work in terms of accounting standards, et cetera, as we go through and secure that rental investment. But for now, there's no changes required to models, et cetera, because we're expecting it to be pretty similar to a sale.

We're expecting around 37 first occupations in FY '20 with all sites under construction. FRI sales, house price inflation and build cost inflation remain as we see them today. And total exceptional costs, as we flagged when we initially launched the strategy in September 2018, will be going to the GBP 25 million level potentially and with the so-far incurred GBP 19 million on that. Continued focus on cash generation with our FY '20 year-end net cash position expected to be in excess of that seen in FY '19.

And just to reiterate a couple of points that John made earlier. Our Half 1 outturn is expected to be lower than the prior year, impacted by that slower start that we've seen with reservations as a result of the general election. And our full year outturn remains in line with market expectations weighted towards half 2.

And with that, I will hand you over to Mike Lloyd.

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Mike Lloyd, McCarthy & Stone plc - COO of Services & Customers and Director [4]

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Thank you, Rowan. Good morning, everybody. I'm going to update you briefly on sales and marketing and then cover 2 of the 3 longer-term strategic initiatives we've got. Nigel will later pick up the third.

So starting on sales and marketing. Our strategy has been very much about driving substantial efficiencies, taking those as cost savings and underpinning it with technology. We have landed a lot of that in the past financial year. We centralized marketing, taking cost savings as part of that. We have reduced our headcount in sales and marketing by 20%. We've introduced sales force and we put a new web platform in place.

In of itself, that's a lot to land and get right. But it would have been insufficient last year to deliver the numbers that we've had. It has been a tough market, the one that we've been in. And it's been gradually getting tougher without it falling off a cliff. We've had to respond to that. And we've responded with some quite significant actions, one of which you can see in the diagram here.

So on balance sheet exchange, we've expanded and doubled the amount that we're using there, which has increased the number of completions we've got and increased our cycle time. We found we needed to react on the marketing front with a number of additional promotions during the year. And also we've taken the opportunity on rental as well, which has helped us deliver the numbers, too.

So looking ahead to this year, I think there's 2 things. One has been mentioned already in terms of what we're looking at is we've got off to a sluggish start for the first 2 months of the financial year with the general election. We now have a good degree of political certainty. But it is too soon, I think, to be confident of exactly where that will take the housing market to.

The other piece that I would point out is we've got a lower level of first occupations this year. Our sales model is such that we sell at 3x the rate off-plan than we do when we first occupy. So that just means that we have a challenge to deliver a similar level of units this year with the first occupation mix that we do have.

But we are responding to that. I'll pick up on rental in a second. But we're going to use part-buy-part-rent significantly more that will actually help both volumes and address some of the increased discounting that we've seen and Paul talked about earlier. We are very much focused on an off-plan initiative. Our off-plan rate dropped below 50% last year. And we have a plan to get that back above 50% again. And we are adapting and changing our marketing model at a site level, and as part of that, looking to spend more upfront before we sales launch to support that off-plan initiative.

And then the final piece I wanted to just draw your attention to. Longer term, from a sales and marketing perspective, we're adding something else to our strategy. What we do is muddled up in many people's minds with care homes, sheltered housing. There is then a perception that what we're offering is for people who can no longer cope in their own home. And as a result, you see a 95-year-old, and there has been a 95-year-old come and see us, who said, "I'm too young for McCarthy & Stone." And what that really is doing is them saying, "Look, I think I can still cope in my own home. I'm going to do my damndest to do that."

What we hear a lot from our existing residences, "I wish I'd done this 10 years earlier" because they realized that the perception -- that perception is wrong. So we are going to start addressing that. And I think there's a big opportunity for us to start addressing that in the market by pulling our product apart from those misconceptions. And that is a new marketing strategy that we are going to invest in this year. That investment plus the investments shorter term in lead generation means we're looking to spend GBP 3 million more on sales and marketing this year.

So moving on to the first of our longer-term strategic initiatives. We've labeled this choice. It's all things multi-tenure and particularly rental. In my experience, it's quite rare for a long-term strategic initiative to rapidly and substantially start improving the P&L. But this is what we have here. We planned last year to do a trial, it's about a dozen sites, to learn, adapt and hopefully by the end of financial year, have a model that's working that we could roll out.

In the event, we launched in March a trial. We immediately started getting some traction. So we rolled it about a bit further and then we pushed and pushed and pushed. And by year-end, we had rental available at the majority of our sites. We've got a new multi-tenure team fully up and running. Most of our sales consultants nationwide have been trained on how to do rental. And some of our initial marketing campaigns on rental have been very successful. And you saw some of the results earlier.

That agility has been fantastic. But equally, it's been built off a platform that was designed for a trial. And that is ultimately what is holding us back now. So this year is all about embedding rental fully into our business. So we need to roll out the rest of our sites. But ultimately, we need to fully embed it into our sales operations, into our marketing, into sales force. We need to start reletting. We need to start looking at the implications for land buying. And last, not least, we also need to land a fund to and some long-term investment to support us. But rental is just going to become this year a part of the way we do business. And it's going to be a substantial part of our sales.

So finally from me, our second long-term strategic initiative, flexibility. This is all about our service operation and expanding that. We have a real opportunity for our residents to make their lives richer and in doing that, create a valuable operator that today is a relatively small part of our business, at least commercially. So we make 98% of our profit building and selling houses and less than 2% from our service operation.

We started this journey last year, trialing 21 different services. John updated you on some of that at the half year results. Paul highlighted some of the alcohol that we're serving as part of the food and drinks initiative at the beginning. We've got a lot of good learnings from those trials. The -- I think the key summary for me and what I take huge heart from is that I think at least 2/3 of those services were taken up strongly and on an ongoing basis from customers. So there is real demand there.

Our biggest challenges are essentially how we make a commercial return from all these services and the scalability. On the first of those, there's an opportunity with our care to expand that with the model we have today. But the others, I don't believe a one-off charging model or being a managing agent as we are today is the way that we are ultimately going to make a commercial return from those. And then from a scalability point of view, we have a lot of manual processes and systems today. And we really have to upgrade our operating platform in the services business.

So then building on that and laying some more foundations for this change last year, we did 2 other things. Firstly, we've taken full control of our service operation. So our RLP developments, of which there are about 100, was run through a joint venture with Somerset Care called YourLife Management Services. We have now fully brought that out. We're fully in control. That makes us actually the largest private operator of extra care now in the U.K. And then the other thing we did last year is we put some new leadership in place to allow us to start making a significant change in transition in our services operation.

So this coming year is all about us taking a big step forward in building a more valuable services business. We are working through a new charging model, addressing what we learned from the trials. We are putting new technology in place to allow some of our operations to scale. We are expanding care, which is the most immediate opportunity that we have found. And then building on the trials, changing our food and drink offer and also looking at a platform for social events. And all of this will ultimately, I think, mean that we will accelerate a journey, which will take time, towards being a valuable or having a valuable services business.

And with that, I'm going to hand over to Nige.

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Nigel A. Turner, McCarthy & Stone plc - COO of Build & Director [5]

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Thank you, Mike, and good morning. So I want to quickly walk through our affordability work stream. And in particular, I'll have a quick canter through build cost reduction and then workflow alignment and then the implications of how some of that standardization will help with our affordability work streaming.

So build cost efficiencies. So our operational review has focused on creating standardization across our portfolio. Two years ago, we didn't have that. We set in place quite an efficiency drive in order to drive consistency in everything that we do. And this is a good example at the bottom, the illustrative layout, that is the sort of thing we were building 2 years ago.

The circles, the red circles indicate extremes of inefficiency in terms of how we operate and build and design the space that we do. So through reducing complexity, through increasing communal areas and making things standard throughout the business, we've managed to achieve quite a significant impact.

Design has a 70% bearing on the cost savings that we're achieving in the current run rate. I think John's slide earlier gave you some indication of numbers. I have line of sight on over GBP 23 million worth of benefit. And I can see into '21 on the schemes that we're now in planning and designing and working through. I have line of sight on the numbers that we can achieve.

And then through value engineering and the tendering exercise, we just increased our standardization of how we deliver our product. This is about quality control, it's about optimization and it's about working with our supply chain in order to make sure that they understand our workflow. And interestingly, as we move into a more standard model, our supply chain, the people who actually supply the bricks and the product for us, they're finding that they get greater visibility, so they can price more effectively. Instead of pricing one scheme, they might be pricing 3 schemes, which again is resulting in a tendering advantage in terms of how we drive that forward.

So we can see line of sight on the priorities for the year and into the 3-year plan in terms of how we deliver those savings. I've got real line of sight on those. And then through integrating an in-house design team, effectively our quality and standards team, through ways of working consistently in accordance with compliance and our processes and the way we deliver and then through tighter analysis of, for example, gross to net ratios and department signs, we can start to see a very clear opportunity to drive that further and will result in some quite significant savings coming through the business in terms of the numbers that you've seen.

So really good progress in terms of our 3-year plan, and as I say, line of sight in terms of what we're doing. And that has an absolutely massive impact on what we call workflow. Workflow is effectively how we land schemes into the business, how we then sequence their delivery through the planning and build process and how we then optimize our sales performance.

Workflow realignment is about effectively taking quarters in the year and delivering consistent volume broadly of equal measure as we go through each of those quarterly cycles. So we have been traditionally very back-end, year-end weighted. My ambition, the ambition for the business is to get that into a far more sequenced approach, equal land exchanges, equal build starts, equal delivery in terms of buildings in order that I can then safely hand to Mike high-quality product, standard product on a quarterly basis, and he can then work really hard to achieve our off-plan sales targets.

So through optimizing the process of what we're doing, we're actually then driving that equalization across the business. That then starts to reflect in the land bank in terms of optimizing again the land bank to get us into a steady state. And you can see that as we work through the process, we will end up with an equal target of delivery through the year. And the land bank in terms of the supply reflects our rationalization undertaken over the last 2 years. We're now working on equal identification of new sites coming forward and working towards the new margins, both reflecting sequencing, build cost benefit and also just enhanced profiles, which gives us a delivery stock of circa 2 years in terms of sales.

So through increasing our land activities and through delivering equal workflow, we can really start to see how that will benefit the business into '21. We haven't quite landed the workflow profile yet. It will take time to embed that through the business. Obviously, the sites that we're working on today are schemes that were roughly purchased 2 years ago. And sites that will be landing in the kitty next year are sites that have been in the hopper for the last sort of 18 months. So it takes a while for that to regularize through the business, but that is a real key focus in terms of how we drive that through. And in terms of the rationalization of the broader business, as we've now got 4 equal teams, it's much easier to control steady state and to get consistency in terms of how we drive that through the business.

And that has a real part to play on the affordability work stream. So this is about how we create consistency in our build product, but then how we start to look at different ways of delivering products, different methods of development to try and avoid reliance on wind and water-tight buildings being built in the winter on traditional methods.

The key to delivering a different way of working in the business is to standardize and create unit supplies. So what we've done here, you can see, and there's more detail in the back of your packs in relation to this, we've effectively spent through the BCR and the workflow alignment, we spent a lot of time working on effectively creating standardized [chassis.] So the colors at the top indicate we have 5 standardized chassis. And a 1-bedroom, for example, you can put [chassis] A and C together or chassis A and D together. And again, a combination of those chassis for apartment type 2, but that creates the ability to repeat -- almost repeat and reuse effectively the same designs throughout the business.

We'll obviously need to maintain a degree of articulation externally in terms of external design through planning. But fundamentally, almost as you walk in through one of our facilities, you will find pretty much a standard operation as we drive through. So that drives our then ability to push through alternative methods of construction. And we're looking at both the volumetric partners, so this is effectively a complete unit designed and built within a facility, within a warehouse in a secure environment and delivered on-site on what I call plug and play through to a light-gauge steel panelized system, which gives us a quicker water-tight building that still rely on finishing trades to drive that forward.

So our first scheme in terms of light-gauge steel will land in the business in the spring. We have planning permission on our scheme in Hexham. That will be signed off fairly shortly for a start later, as I say, in the spring, with then a very strong order book following through later in the year. And then volumetric, we've identified a delivery partner to work with and we're working through our first schemes in terms of optimizing those through the business. And that will become a key part of our strategy as we walk through into '21. So good progress in line with strategy and a good degree of standardization, which is giving us a visibility in terms of the opportunity across the business.

And I'm going to pass you back to John. Thank you.

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John M. Tonkiss, McCarthy & Stone plc - CEO & Executive Director [6]

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Thanks, Nige. Thank you. So finally for me, if I can, 3 topics that I want to cover in the summary. I just want to reiterate the difference we make more broadly to society and to our customers. I want to talk about government engagement and then if I can just summarize with where we're at and where we're going.

Looking at the difference we make. I started by flagging the real impact we have on the quality of lives of our customers. We address loneliness, we keep them independent and we help with the peace of mind of both them and their families. But we do much more than that.

From a societal perspective, we help in a number of areas. We help with housing supplies. We unlock housing change by people moving and then allowing in typically 3 further change in the housing market. And we ultimately allow the right people to be living in the right type of housing, which is critically important as we have a national housing crisis.

But we also save the health and social care system significant amounts of money. We've done some research in the summer of last year that we save on average about GBP 3,500 per person. That's about GBP 600 million to GBP 700 million for the health and social care system and will be even more if we could deliver all of the schemes that we think the country needs. And of course, we bring activity back to town centers. The vast majority of our sites are redeveloped in town centers and bring commerce and trade back to our town centers, which we much need of support as the retail high street changes significantly.

From an employee perspective, we have a caring and engaged workforce that is really passionate about the positive impact we have on our customers and society. And that's epitomized, I think, with our recent fundraising activities. We had an event earlier in January. Some of you guys were there in the audience with Beanstalk, our charity fundraising partner. We raised over GBP 200,000 for a charity partner that is all about children's literacy. We have many of our customers and our staff supporting young kids helping to read better. I think that was absolutely in line and typical of what we believe in as a business.

From a development perspective, environmentally, 97% of what we do is in those kind of redevelopment opportunities, brownfield sites. They're high-density developments in brownfield sites with a significant amount of construction recycling. So I think we have a business that has very strong ESG credentials. And we're going to continue to build on those in the weeks and months and years ahead.

From a government perspective, those themes are particularly important. And we continue to engage with government on a number of important policy themes. Planning of cohorts is critical to all developers. We are absolutely looking to increase supply of retirement communities across the country. There were some recent guidance in the summer of last year about planning policy for retirees and disability schemes. They talked about critical need and encouraging plans to think about what we need. And it talks about thinking about viability in a different way. I have to say that well intended, but I'm not sure it's really delivering the outcome that we expect and need. What we really need is a definitive use class for retirement communities to really build the retirement homes and communities that the country desperately needs.

We've also, as you rightly said, made a strong case for the continued role of ground rents in the retirement industry community as it were and having a transparent, economic and fair ground rent with customers having the choice is something that we've strongly argued for. Government absolutely understand the positive impact we have as an industry and the role ground rents play in the viability of our proposition. And we're seeing the legislative process move forward. The latest commentary on that and certainly what's been published talks about the government seeing the need to ban ground rents on mainstream housing though continuing where they are necessary. So in a sense, we're confident and positive that we can understand their case. And we look forward to the legislative process moving forward.

Stamp duty reform is another opportunity where we think the government could in the forthcoming budget make a bold statement and help the market facilitate by having a downsizing incentive and a stamp duty relief. Again, that not only frees up housing, but it also -- it ultimately creates a better SDLT land receipt for the government. So again, we think that's a win-win.

And at some point, the government is committed to publishing a social care green paper that is long, long, long overdue. And importantly, we continue to explain that social care and housing are 2 halves of the same kind. We cannot address one without the other. And there's a critical role for retirement communities in that regard as well.

So finally for me to summarize, we do have -- make a big, positive impact on many people's lives and indirectly support the housing market and the health and social care system. We delivered a solid performance in what was an incredibly challenging FY '19 year from an economic, political and housing market perspective. We made, I think, really solid progress with all stages of the new strategy, particularly the BCR programs and the rental initiatives.

We see rental volumes increasing substantially over the years ahead. And we believe it makes the business far more robust in terms of the recent economic backdrop but also allows us to capitalize on any future market recovery. We will continue to focus on optimizing our returns, driving those steady state volumes and generating more cash through the life of the plan in line with the targets we talked about earlier.

We're delighted to see the political stability take shape and a new strong government are getting on with governing the country. We don't want to get ahead of ourselves on that. I would be delighted to see that translate into consumer confidence, the underlying core economy and ultimately the secondary housing market. But we are looking forward to deliver and remain on track to deliver our full year numbers. But as I've said and as Rowan said, that will be weighted towards H2 as a result of the particularly slow market conditions during Q1.

I hope that you will go out and talk favorably and also write favorably about the progress we've made. And I also look forward to reading your reports and, of course, your questions. Thank you.

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Questions and Answers

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Paul J. Lester, McCarthy & Stone plc - Group Non-Executive Chairman [1]

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Right. We'll move on to the Q&A. If you want to address any question directly to one of the team, fine. If it's general, direct it at me and I'll try and sort it out with the team. Ladies first. That's you. You didn't recognize the term lady, did you?

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Glynis Mary Johnson, Jefferies LLC, Research Division - Equity Analyst [2]

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Glynis Johnson, Jefferies. Three, if I may, though, the first one has a couple of components on it. Rental, you're doing 12 a week as of January. That's, over 52 weeks, would give us over 600. Is that what we should anticipate in terms of the potential for rental, that 12 over 53 releases -- new occupations rather is, I would argue, still quite a low number. Actually, what is the scale of upside from that?

In terms of the demand on rental, you showed us one bedroom, the Retirement Living Plus. How are you changing what you are buying and what you are planning for to fit that? And then obviously the return on capital employed in build-to-rent moves up very substantially if you do forward funded more rental. Are we going to move towards seeing that as a much greater part? That was all one question, you'll be glad to hear.

Stock. Your stock numbers haven't come down a huge amount year-on-year, given how much it costs you each year for the service charges on those units, why should we not see that come down even more than your target of the 1,100 by '21? So not an argument to say, actually, you need to be pushing more aggressively particularly given the rental potential.

And then lastly, in terms of the government interactions. I think what you gave us was a wish list. What actually do you have confidence on? You showed us a lovely picture of the Housing Minister at your site. Stamp duty, for example, have you been given any indications that you may see help to move a package?

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Paul J. Lester, McCarthy & Stone plc - Group Non-Executive Chairman [3]

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I suggest Mike answers the number of rentals, your 600 point. It's not that for the year, but Mike can explain that. And then move to Rowan on the financial implications that you talked about in the stock. And then John will finish on the government. Is that okay? Have you got any more questions?

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Mike Lloyd, McCarthy & Stone plc - COO of Services & Customers and Director [4]

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So on rental numbers. I think first thing, though, those 12 per week are 3 weeks. We need to be a little bit cautious. And potentially, there's been a bounce back from November, December and people delaying decisions. But that said, it would probably come out to similar set of numbers. I think 20%, 25% of our business potentially being rental feels a sensible place to land.

And then in terms of buying land and developments, it is -- we're certainly seeing a higher 1-bedroom mix. So it's probably going to be best towards a higher 1-bed mix in what we build, and the RLPs as well. So it will probably support us buying more land for RLP developments.

And then we are in the midst, actually, of some work, just having a look back at what's getting towards 200 rental reservations and just understanding particular patterns, what local rental prices look like, where we're selling better or not to start directing where we might get better returns from rental.

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John M. Tonkiss, McCarthy & Stone plc - CEO & Executive Director [5]

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I think you mentioned the BTR. The build-to-rent opportunity as well is quite significant for us. And clearly, getting to markets where we're confident in 100% rental, it's all about chimney tops, really, the larger accommodations. So it will provide an opportunity for us to enter what you might call larger cities in those preferred areas and get, I think, a BTR model up and running as a supplementary part of this plan. And we're quite excited about it.

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Paul J. Lester, McCarthy & Stone plc - Group Non-Executive Chairman [6]

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And then I think it was -- part of the question on forward funding. So do you want...

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John M. Tonkiss, McCarthy & Stone plc - CEO & Executive Director [7]

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Well, it will -- I mean it's affecting the BTR model but...

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Rowan Baker, McCarthy & Stone plc - CFO & Executive Director [8]

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Yes. So as you say, I mean, that is quite ROCE accretive when you move to a forward-funding model. Essentially, as John said, we've got to try and exactly work out the strategy there. We're pulling that together currently. And it really -- it's about supporting it with the inherent demand that there is in certain locations. But I don't see anything really to stop us from going forward with a full build-to-rent strategy once we've refined and really bring home what we need to do, and we will and are starting to feed that back into the land buying process, the 1-bed, 2-bed mix, the affordability points, all the data that we get makes us all the riches for feeding that back into the land buying.

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Paul J. Lester, McCarthy & Stone plc - Group Non-Executive Chairman [9]

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Build-to-rent. There's a big opportunity, I think, for our supported living with the carers, where we actually don't sell that at all and just say, sorry, it's a fee per month. And if you then bring Nigel's fast modular build, which cuts the build cost by about 50%, then you've got perfect alignment of building something very quickly and renting it or charging a monthly fee, which John mentioned is GBP 48,000. That would be very strong.

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John M. Tonkiss, McCarthy & Stone plc - CEO & Executive Director [10]

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There's an alignment of things. Exactly, yes. The affordable products we're offering being built in a modular way, in half the time with the BTR solution is usually ROCE accretive.

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Paul J. Lester, McCarthy & Stone plc - Group Non-Executive Chairman [11]

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So I think -- it's actually one forward, that I think is going to be a really different model.

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Rowan Baker, McCarthy & Stone plc - CFO & Executive Director [12]

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It cuts the build time by 50%, not the cost by 50%, yes.

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Paul J. Lester, McCarthy & Stone plc - Group Non-Executive Chairman [13]

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Not just yet.

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Rowan Baker, McCarthy & Stone plc - CFO & Executive Director [14]

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Yes. That would be nice.

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Paul J. Lester, McCarthy & Stone plc - Group Non-Executive Chairman [15]

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Did you want to talk about stock or...

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Rowan Baker, McCarthy & Stone plc - CFO & Executive Director [16]

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Yes. So just to -- you were talking about, yes, why aren't we targeting a higher reduction or a lower level of carrying stock? Well, I think we've looked at this quite carefully to come up with the 1,100 number, and it really all comes down to the number of sites and the sales rates on the sites because if you model this through, essentially, you've always got a faster sales rate on your off-plan compared to your actual finished stock sites.

So we've looked at that. We've done the data and essentially 1,100 or about half a year's worth of stock spread across various sites is about right to keep the right rate of sale coming through the business. So in theory, you're right, we should drive it further down, but because we've got it spread across more sites, it means that the sales rate doesn't quite work for doing that.

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John M. Tonkiss, McCarthy & Stone plc - CEO & Executive Director [17]

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And that's on a traditional build model. As you start to use MMC, accelerate your delivery cycle time, you can start having a different view on that. I mean the obvious point, of course. And we've been obviously relatively cautious on how the market may play out. But if and when the market does pick up, we have a reasonable amount of stock to sell, and then the challenge will be on Nigel and his team to build and convert in a much bigger way, which is a good position to be, I think.

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Paul J. Lester, McCarthy & Stone plc - Group Non-Executive Chairman [18]

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Do you want to talk about governments, John?

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John M. Tonkiss, McCarthy & Stone plc - CEO & Executive Director [19]

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Yes, the government. Let me go in a -- so wish list. I mean we -- I think the 4 themes I've talked about are in kind of different levels of maturity and probability. I would say, if I go kind of through the ones that I think are closest to happening, I'm absolutely convinced the government in the social care green paper will link housing and social care. They've actually understood that. We've labored. It's just the general point. At some point, they're going to land that paper. And that will be, I think, a big opportunity for us to link these things together. So I'm very confident on that front.

I'm also confident the government has understood our case from an economic ground rents perspective in the way they talk about banning unnecessary ground rents. By definition, there are some necessary ones then. And I think our industry, we've put forward the case. They understand why and how critically important it is to have viability. So I think, again, without -- the government's ultimately going to legislate on that, but that's the direction of trouble that they have consistently indicated.

I think the stamp duty part has actually been understood, which has taken some time. And we talked about stamp duty. And we've also talked about tax relief in terms of rent-to-rent. So if you're renting your home, are there ways to facilitate this? Now that's a bit more challenging for the government because it's an intergenerational transference. You're looking after retirees versus first-time buyers, and that kind of goes against the grain, but it is for the greater good of the housing market. And we think it's been understood about the impact we have.

Planning, I have to say, probably still in the wish list. I would be delighted to see a use class for retirement communities. We will be arguing that for probably another few years. But if we are going to build the homes and retirement communities this country needs, we have ultimately got to tackle planning. And 30 years without an update to the use class system is just long overdue.

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Paul J. Lester, McCarthy & Stone plc - Group Non-Executive Chairman [20]

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More resource would be a good start.

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John M. Tonkiss, McCarthy & Stone plc - CEO & Executive Director [21]

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And more resource. I mean, yes, the planning system is not functioning as we would all want in the country. That's my 1, 2, 3, 4.

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Clyde Lewis, Peel Hunt LLP, Research Division - Analyst [22]

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Clyde Lewis of Peel Hunt. I think I've got 4 for me as well. Firstly, maybe starting with probably one of the easy ones. Implications for site sizes with rental sort of picking up and obviously, you flagged build-to-rent there. Should we expect the average site size to change over the next 3 or 4 years? Are you going to start taking on some bigger sites? Part-ex, have we now hit a high watermark in terms of that percentages? Presumably with the rental coming through, you're not going to be part-ex there. So is that the high watermark and it now drifts back? And what are you sort of modeling going forward?

The other one I had was going back to rental. I think on John's slide, I think it was page -- sorry, Page 8, the differences in rents between RL and RLP is quite stark, so 50% to 60%. I'm sure the sales rates are not as much as that. Why do you think there's such a gap? And is there are an opportunity to drive up the RL ones through, I think, Mike mentioned sort of again, increased care provision. And can that gap be sort of closed ultimately within RL?

And the last one I had was, I think, sort of I think Mike probably mentioned it, RLP. As you go forward, how much do you think RLP will become as a percentage of the group? With that rental model, is that going to drive a much bigger percentage going forward?

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Paul J. Lester, McCarthy & Stone plc - Group Non-Executive Chairman [23]

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Well, it is a solid model.

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John M. Tonkiss, McCarthy & Stone plc - CEO & Executive Director [24]

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Yes. I think we've got showing there...

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Paul J. Lester, McCarthy & Stone plc - Group Non-Executive Chairman [25]

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Of course, we won't use it here. The model is just a hallmark so you have to (inaudible).

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John M. Tonkiss, McCarthy & Stone plc - CEO & Executive Director [26]

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Yes. We've done some really interesting work on what you might call our rental, our village model, I should say. And Nigel and Mike, we've been talking about how we trade larger schemes. We don't mean villages there are 250-unit schemes, but the integration of Retirement Living Plus, Retirement Living bungalows and apartments. We've got some exciting plans there. So we will, over time, increase the kind of number of slightly larger schemes. We're talking going from 40 and 60 units to around 100 mark. We're certainly not talking about probably producing 250, 300 units. But we think there's a real market there, and where the mix product and the mixed mode work in a true integrated village.

But the BTR auction, back to kind of chimney tops, probably would be more the 2/3, 1/3, 1-bed, 2-bed and probably high-density is a real opportunity, again, to get into those areas that are more an affordability challenge. So we've got some exciting plans. We evolved the product mix and shape from this point.

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Paul J. Lester, McCarthy & Stone plc - Group Non-Executive Chairman [27]

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Do you want to give the percentages Retirement Living, Retirement Living Plus, (inaudible)

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John M. Tonkiss, McCarthy & Stone plc - CEO & Executive Director [28]

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Yes. I mean I think that is almost going to come out of that strategy as it were. I think we are seeing a biasing. And we've gone from 30-70 to 60-40 RL-RLP. I suspect we will be pretty much 50-50 over time. But it ultimately has to be based on the need in the market. So I mean I think the good thing is that, that is ultimately being driven by market uptake, the opportunities and how we link that to on-the-ground. But we are clearly seeing, as we always thought the Retirement Living Plus proposition as a very strong option for rental. But also with the care and support that Mike's talking about, you -- really good for customers.

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Paul J. Lester, McCarthy & Stone plc - Group Non-Executive Chairman [29]

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And I find that's the big pickings. It is uncharted territories, isn't it?

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John M. Tonkiss, McCarthy & Stone plc - CEO & Executive Director [30]

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It is.

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Paul J. Lester, McCarthy & Stone plc - Group Non-Executive Chairman [31]

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I think, Mike, you can come in now and talk about the menu of choices that people will have in using Plus, which changes the monthly fees and perhaps address the PX, the use of PX and relative spend.

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Mike Lloyd, McCarthy & Stone plc - COO of Services & Customers and Director [32]

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So on the use of PX, I think our current plan is probably to have it as it is at the moment. It was probably at the end of last financial year, we could have even used a little bit more. But with rental, that does bring the demand down. Equally, we've got a lot of first occupations at the end of this financial year. So I think probably at the moment, looking at where we've got to, it'll be similar this year. But we need to see how the year pans out.

And I think from an RLP point of view, we -- and the services there, we are looking at selling different options in terms of what we can put into RLPs in terms of services and therefore, whether it's a -- tiered service models, but potentially something, it's -- particularly if we've got a village, we can put additional services in that scale more easily. We can scale back a basic level of service that we get and have additions on top. And I think that's something we will talk about more probably when we talk later this year.

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Paul J. Lester, McCarthy & Stone plc - Group Non-Executive Chairman [33]

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Rowan, any comment on that?

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Rowan Baker, McCarthy & Stone plc - CFO & Executive Director [34]

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Yes. So the part-ex limit. So as Mike said, really, the usage would remain similar, but you're sort of referring to the hard limit, the hard stop of 15%. So we've -- again, we've sort of run the numbers on that. That should be sufficient for what we need in the business.

So if we make good use of it, because you think about that, that you can effectively turn it 3 or 4x in the year, that gives you a good number of sales that you can get out of that. So it's all down to the efficiency of use of it.

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John M. Tonkiss, McCarthy & Stone plc - CEO & Executive Director [35]

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You asked a question, Clyde, about the delta as well from RLP to RL. So this -- the numbers' on Page 8, as you were. I mean I think there's 2 factors going on. There's a danger of summarizing those as averages. There is a mix bias towards the South East, which is making that more acute than it is. So there's underlying pricing premium because there are more physical facilities in the Retirement Living Plus, but this is much more acute because we probably saw bias-wise, more to London in the South East in Retirement Living Plus and more Retirement Living up north. So we probably should try to normalize the numbers and get a better view.

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Rowan Baker, McCarthy & Stone plc - CFO & Executive Director [36]

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There's a naturally slightly higher square footage in RLP as well.

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Paul J. Lester, McCarthy & Stone plc - Group Non-Executive Chairman [37]

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So there's some product premium and then there's the mix. We probably anticipate that as well.

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Aynsley Lammin, Canaccord Genuity Corp., Research Division - Analyst [38]

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Aynsley Lammin from Canaccord. Just 2 new questions, please. First of all, just remind us of the FRI income in the GBP 68 million of operating profit you just reported. And then second, on the third-party investor, just wondered if you could give us a bit more color in terms of how far are you down the road, your confidence of signing something. Should we expect then something imminent? And the GBP 300 million that you'd expect to invest in investment properties, how much of that do you envisage the group actually investing? What would be your share actually of that investment vehicle?

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Paul J. Lester, McCarthy & Stone plc - Group Non-Executive Chairman [39]

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Rowan, can you answer all those questions?

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Rowan Baker, McCarthy & Stone plc - CFO & Executive Director [40]

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Yes. So FRIs was about 29.5 -- no, it's GBP 30 million for the 14-month period. So it pretty much moves with our sales. So if you think about projecting that forward, that would come down for the -- on a pro-rated basis going forward. So that's about what that was.

And in terms of the third-party negotiations, you talked about how much we would take of that. So we're looking to potentially keep a minority interest in that. Now whether that's 10%, whether that's 15%, it -- I guess it probably wouldn't go as high as 20%, but we're currently in the thick of negotiating on those points.

So in terms of how we're progressing. So we had expressions of interest through numerous conversations and parties that we're talking to. It's obviously really important that we get the right long-term deals. So there's all sorts of details that are taking time to bottom out, but there is definitely the interest there, and we will seek to take that forward as soon as we can. And we'll update you as soon as we can on that.

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Paul J. Lester, McCarthy & Stone plc - Group Non-Executive Chairman [41]

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One here, then we'll go over the other side of the room, if you can. Thank you.

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Unidentified Analyst, [42]

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So a couple of questions. Firstly, on stocks. I think the numbers went down in units. But in terms of balance sheet, it's actually increased a little bit. So I want to understand the 2021 targets in terms of the 1,100 units of stock, how should we think about that? I think it's roughly 400 million, if I'm not mistaken, of balance sheet stock, finished stock units, where you see that figure trending, please?

And related to that, if you could elaborate at all on the WIP and land side of the business, so the rest -- the inventory, whether that was particularly low at this point or whether that's a reflection of the sort of workstream and the realignment that you've done. I just want to understand if we're sort of at a normalized level or not.

Another question, just perhaps briefly on the profit phasing. You obviously have flagged an H1 profit decline and sort of H1, H2 mix shift. Obviously, last year was a bit difficult to read for 14-month period. If you could just help us a little bit what's normal for you and what, I guess, this year will be a little bit less normal in that regard, it would be helpful.

And then just perhaps the elephant in the room, but obviously you've got a 15% operating margin target for 2021. I think this year, you're guiding implicitly to sub-10% because you're saying you're happy with consensus. We can obviously see some of the numbers on the cost savings, but it still strikes me as a very significant improvement. I think north of 500 basis points in 1 year to deliver. How confident are you that you can actually do this?

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Paul J. Lester, McCarthy & Stone plc - Group Non-Executive Chairman [43]

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Okay. Just a couple of questions is really at you, Rowan, and perhaps helped by Mike as well on that.

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Rowan Baker, McCarthy & Stone plc - CFO & Executive Director [44]

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Yes. So your question was directly really stock related. So if you look at Page 14 of the presentation, if we just compare those numbers. So you can see there's a green box around the total net stock number on Page 14. So that was at GBP 718.9 million in the prior period-end and has moved now to GBP 597 million on a net stock basis. Yes. So finished stock has come -- has gone up a little year-on-year, and is mainly in the sites in the course of construction and the land elements.

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Mike Lloyd, McCarthy & Stone plc - COO of Services & Customers and Director [45]

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I think what's going on in terms of the units have gone down, but the finished stock has -- value has going up by 2%. I think I suspect that's because to us, our most challenging market has been London and South East. So I suspect that, essentially, it's driven by the mix of that stock and us having a more -- more in London and South East, which is essentially higher cost and higher value.

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Rowan Baker, McCarthy & Stone plc - CFO & Executive Director [46]

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Yes. There's a marginal dial-in, yes.

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Paul J. Lester, McCarthy & Stone plc - Group Non-Executive Chairman [47]

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And the land question, John, do you want to pick that up?

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John M. Tonkiss, McCarthy & Stone plc - CEO & Executive Director [48]

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Yes. I'm not quite sure. The WIP and land?

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Rowan Baker, McCarthy & Stone plc - CFO & Executive Director [49]

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Oh, yes. So that's really the -- I've effectively just answered that question. So we've got a lower level of WIP and land coming through. So we had a lower level of completions, land completions and build starts.

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Paul J. Lester, McCarthy & Stone plc - Group Non-Executive Chairman [50]

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Which was part of the plan to kind of balance the WIP.

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Rowan Baker, McCarthy & Stone plc - CFO & Executive Director [51]

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And that's really part of the destocking, if you like, that's coming forward.

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Unidentified Analyst, [52]

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Are you saying that you're up GBP 600 million in net stock (inaudible) Because obviously there are moving parts with that 11.5.

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Rowan Baker, McCarthy & Stone plc - CFO & Executive Director [53]

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There are. So I'd say it would end up sitting a little higher than that. But broadly, the split would be slightly different. We'd keep it. Yes.

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John M. Tonkiss, McCarthy & Stone plc - CEO & Executive Director [54]

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I'm pretty sure we can handle that kind of WIP level.

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Rowan Baker, McCarthy & Stone plc - CFO & Executive Director [55]

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Yes, indeed.

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Mike Lloyd, McCarthy & Stone plc - COO of Services & Customers and Director [56]

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And I think on the 15%, if I give you my view on that. I mean that's a tough target we set ourselves 18 months ago. It will totally depend on sales picking up in that period. And we're very highly geared now in the sense, we've taken a lot out of overhead, what's the total figure we've taken? Just a...

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John M. Tonkiss, McCarthy & Stone plc - CEO & Executive Director [57]

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GBP 12 million.

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Mike Lloyd, McCarthy & Stone plc - COO of Services & Customers and Director [58]

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GBP 12 million out of our overhead. That's people cost. And by then, we'll get the full benefit of Nigel's cost reduction. But if the sales go up, our gearing in terms of gross profit goes up quite dramatically. So the answer is it depends on the level of sales to answer that question.

But yes, I think that's a tough target, but that's what we're going for, and it will totally depend on sales because the cost base is there, and our pricing and everything else is aligned to achieve together. So you need a certain level of sales.

Correct, Rowan?

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Rowan Baker, McCarthy & Stone plc - CFO & Executive Director [59]

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Yes.

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Paul J. Lester, McCarthy & Stone plc - Group Non-Executive Chairman [60]

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Did you want to talk H1, H2, typical?

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Rowan Baker, McCarthy & Stone plc - CFO & Executive Director [61]

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Yes. And so what we -- what I think we've always said, really, is that a 1/3, 2/3 type of balance for McCarthy & Stone is about where we'd normally sit. And in the prior year, we were a little lower than that. This -- during this current year, we'd expect to be lower than in the prior year. That's the guidance that we're giving due to the slower start that we've had during the period. So yes, a little lower than the split last year.

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Paul J. Lester, McCarthy & Stone plc - Group Non-Executive Chairman [62]

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Okay. One question and then we'll move over. The other side of the room has seemed a bit sour.

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Unidentified Analyst, [63]

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I just wanted to explore a little bit about the improvement in market conditions at the start of this year and how that kind of triangulates to the rental offering. You've given that helpful schematic on Page 4, which shows this year and last year running broadly in keeping with one another. But obviously, the rental included in this year's figure is higher. So it implies open market sales running behind this year if I kind of follow through the logic of that Page 4. I mean, maybe I'm missing something, but just some comments around that would be helpful. The 12 per week, if you -- it reduced it by 12 per week, we will probably be running out by 10%, 15% down in the month of January. So that was the first one.

And the second one really is just about how you're thinking about voids in the rental offering. Voids clearly are something which are quite material in terms of the uncovered service charge. What should we think about the gross to net if we were to try and bake in voids?

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Paul J. Lester, McCarthy & Stone plc - Group Non-Executive Chairman [64]

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John, do you want to pick the first -- pick up -- and Rowan, pick up the second?

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John M. Tonkiss, McCarthy & Stone plc - CEO & Executive Director [65]

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Well, I guess, the reservation rate. I mean, there's a view of that kind of cannibalization on how much the rental is impacting the core sales rate. We've discussed this in a sense of trying to get an underlying view of that. Do you want to talk about your view of how one is inferring or impacting the other? And then we can talk about the upside looking forward, I guess.

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Mike Lloyd, McCarthy & Stone plc - COO of Services & Customers and Director [66]

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Yes. I think there is a degree of cannibalization. We're trying to understand it better. So it certainly wouldn't be the -- perhaps the final word on it. But I think my best view today is potentially 1/3 of rental customers would have bought. So 2/3 are upside. I think then just to build on your question, our customers and our sales are -- can be quite a -- take quite some time to commit and reserve. It's one of the biggest decisions they make. And often, there's sons and daughters involved as well. So we don't necessarily see in the first 2 weeks of January and immediately committing to reservation, which might be a little bit different from the mainstream market. And what we may be seeing in rental is that that's an easier decision for people to make, a bit less protractive, which is why it's picked up.

So I guess all I'd say is, for me, it's early days. And until we see the sales reservations rates almost pick up to a certain level and sustained, it's a little bit hard to know where it's all going to land.

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Paul J. Lester, McCarthy & Stone plc - Group Non-Executive Chairman [67]

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So on the voids, Rowan?

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Rowan Baker, McCarthy & Stone plc - CFO & Executive Director [68]

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Yes. So we quoted some figures on the page that John talked about, which were excluding void, actually. And the reason it's excluding void is because we're going to have a decent length of tenure with these -- with making an initial investment in this portfolio. So you look at the average length of tenure for a customer in our business has been around the 8 years type of mark.

So it really -- so it's not necessarily so marked to be aware of it at the beginning, but if you were to add it in, that would take us more to the 20% to 25% of overall gross to net. But you wouldn't factor that in until later on down the journey, if you see what I mean.

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Unidentified Analyst, [69]

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(inaudible) you're saying it will take a little while?

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Paul J. Lester, McCarthy & Stone plc - Group Non-Executive Chairman [70]

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Correct.

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Rowan Baker, McCarthy & Stone plc - CFO & Executive Director [71]

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But yes, exactly.

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Paul J. Lester, McCarthy & Stone plc - Group Non-Executive Chairman [72]

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And you have to model that in to any returns, because we will have gaps. There's no doubt about it. But it's less gaps than you'd have in a Classic build-to-rent, which is about 3 years.

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Rowan Baker, McCarthy & Stone plc - CFO & Executive Director [73]

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And that's because of the tenure time, yes.

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Paul J. Lester, McCarthy & Stone plc - Group Non-Executive Chairman [74]

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That's 3 years for an average rent in the commercial market. So we're...

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Unidentified Analyst, [75]

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(inaudible) just any markets (inaudible)

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Paul J. Lester, McCarthy & Stone plc - Group Non-Executive Chairman [76]

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Yes.

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Rowan Baker, McCarthy & Stone plc - CFO & Executive Director [77]

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That's correct, yes.

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Paul J. Lester, McCarthy & Stone plc - Group Non-Executive Chairman [78]

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Okay. Can we get the questions over here now, please? Thank you. And then pass it along that row in front and then I think we're done actually on the Q&A, if that's okay. Thank you.

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Jonathan Matthew Bell, Deutsche Bank AG, Research Division - Research Analyst [79]

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Jon Bell from Deutsche Bank. Just got 2 actually. Accepting the Chairman's caution [in full,] if conditions do continue to show improvement as we go through the year, to what extent can you actually do more volume? Can you ramp up production in that time frame to do more volume? And the second one is, could you talk a little about your ongoing role as and when you sell that majority stake in the rental portfolio? Presumably, you've got a duty of care to tenants just as you would to buyers. Perhaps talk us through some of the considerations.

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Paul J. Lester, McCarthy & Stone plc - Group Non-Executive Chairman [80]

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John, do you want to take that?

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John M. Tonkiss, McCarthy & Stone plc - CEO & Executive Director [81]

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Yes. I mean hopefully, we see market kind of sentiment pick up, and that translates into secondary market. There's a lot of levers we've got to pull then. I mean we've got, as we talked earlier, the inventory, 1,600-odd units to sell. So first and foremost, we would see higher rates of sale on that. Because we got the rental running, we are tightening and working with our incentives and discounts in a different way. So that would be upside again because we'd see a less need to provide those intensive discounts. So they are slightly higher than the typical norm over recent years as it were.

And then back to Nige, really, it's getting the land portfolio moving forward with continued optionality. We want options in land that we can draw down. And I think the big game changer when we announce our progress on modern methods of construction to develop in half the cycle time massively change our ability to get stock to the market and whether that's BTR or traditional or around mixed tenure. So yes, we have many levers to pull. We just -- obviously, we'd like to see those green shoots turn into big rosebuds.

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Rowan Baker, McCarthy & Stone plc - CFO & Executive Director [82]

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Ongoing role.

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John M. Tonkiss, McCarthy & Stone plc - CEO & Executive Director [83]

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Yes, with the ongoing role -- I mean, since the point when we spoke about the really competitive, almost class-leading gross to net is because we have all our platform in place. So the ongoing role is looking after customers just like we would any other week or month or day of the year. So all the services being provided. But importantly, then we have a number of new capabilities, of course, the ability to re-rent, the ability to turn around the apartment, but we've already got platforms in place. We've got our rental business. We've got our resales business so they become closer linked. And of course, we've got services teams looking after the maintenance of the assets. So yes, we're well positioned to make this work to -- I think that's a real plus, how we take it forward.

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Alastair Robert Stewart, Shore Capital Group Ltd., Research Division - Analyst [84]

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Alastair Stewart, Shore Capital. A couple of quick questions. First of all, on the second-hand market, that's really important for your sales activities. The estate agents I've been hearing from [ranks] -- seems to show a quite marked pickup in interest applications and so on weighted possibly to the first-time buyer market. How long does it take to sort of filter up to your last time seller market as it were? That's the first question. And the second question is, were there any issues in sort of re-skilling or additionally skilling your sales team in terms of going from selling to renting?

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Paul J. Lester, McCarthy & Stone plc - Group Non-Executive Chairman [85]

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Mike, do you want to take both of those questions up?

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Mike Lloyd, McCarthy & Stone plc - COO of Services & Customers and Director [86]

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Sorry, what was the second question?

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Alastair Robert Stewart, Shore Capital Group Ltd., Research Division - Analyst [87]

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Reskilling from -- for your sales staff from selling properties to renting them out, have you had to reskill them? Is there a natural preference among them to sales and that sort of thing?

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Mike Lloyd, McCarthy & Stone plc - COO of Services & Customers and Director [88]

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Okay. I think on the second-hand market, most of our customers own a property that's in the upper third of the market. And I think it's a little bit hard to answer that. It depends, I think, on what's the dynamic of the market is. So the additional stamp duty some years ago under George Osborne, I think probably hit that part of the market hard.

Equally, you've had a lot of support with help to buy at the bottom end of the market. So I think it's a little bit hard for us to judge exactly how that flow-through is going to work from the bottom to the top. And ultimately, when we have a budget, whether that helps support the part of the market that we're in.

I think then in terms of reskilling, this has probably been easier than we anticipated. What I'd say about our rental customers is this is a different from the -- it looks different to, at the moment at least, to the mainstream rental market. You're typically either a renter or a buyer in the mainstream market, and that's not really how we -- this is working for us at the moment. People are -- we are selling the proposition and then rent versus buy is almost a finance option. So almost the best analogy is buying a new car.

And so really, what we'd have to train the sales consultants in is how to talk through and support customers in that financing option, but leaving a lot of the initial selling to -- in the way that it was.

What we did last year is we had a central team that was literally going out site to site, on the phone training sales consultants as we rolled out into sites. And what we're now in the process of doing, we have a sales academy, for example, you join, you spend 2 weeks in our sales academy. We're embedding all of that training into the sales academy, into our management teams, et cetera and as I said earlier, making it just part of what we do.

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Paul J. Lester, McCarthy & Stone plc - Group Non-Executive Chairman [89]

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And I think you're right, Alastair. I had a chat with Connells yesterday, Stephen, who's the CEO. And he said, they've seen about a 20% uptick. And I think we've seen that in our leads. If you saw the graph, I think it was on John's second slide, we have seen a lot of sudden interest. But whether that's short-term, short-lived, yet to be turned into reality. And I think our gestation period is a lot longer than the average person in the street, who is trying to buy a house, always wanted to. And as soon as they feel confident, they'll go for it. Our market is significantly more cautious in that but it's a positive move in the market.

We've got one more question, and then we're going to have -- and then we're going to finish and obviously welcome to stay and chat to the team.

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Unidentified Analyst, [90]

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Just a quick one, [Yusuf Samad] of Independent. On your finished goods inventory, could you give some idea of the aging of some of the stock that's there? I think you see some -- 1/3 of the units are older. Is there some sense of aging on...

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Paul J. Lester, McCarthy & Stone plc - Group Non-Executive Chairman [91]

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Rowan?

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Rowan Baker, McCarthy & Stone plc - CFO & Executive Director [92]

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Yes, I can. So we've essentially got 10% of the -- only 10% of the stock, or -- let me turn that around. 90% of the stock is newer than 2 years old. And then between that, between the other 2 of those, it is again about 1/3 of it is greater than 1 year and 2/3 of that is less than 1 year.

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Paul J. Lester, McCarthy & Stone plc - Group Non-Executive Chairman [93]

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But 10% is over 2 years?

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Rowan Baker, McCarthy & Stone plc - CFO & Executive Director [94]

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10%.

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Paul J. Lester, McCarthy & Stone plc - Group Non-Executive Chairman [95]

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Yes, okay. We're done. So thanks for coming, and welcome to stay and have a chat with the team. Thank you.