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Edited Transcript of TW.L earnings conference call or presentation 31-Jul-19 7:45am GMT

Half Year 2019 Taylor Wimpey PLC Earnings Call

Solihull Aug 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Taylor Wimpey PLC earnings conference call or presentation Wednesday, July 31, 2019 at 7:45:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Chris Carney

Taylor Wimpey plc - Group Finance Director & Executive Director

* Peter Redfern

Taylor Wimpey plc - Group Chief Executive & Executive Director

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Conference Call Participants

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* Alexander James Fries

Goldman Sachs Group Inc., Research Division - Associate

* Glynis Mary Johnson

Jefferies LLC, Research Division - Equity Analyst

* Samuel Berkeley Cullen

Joh. Berenberg, Gossler & Co. KG, Research Division - Senior Analyst

* William Jones

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

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Presentation

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Peter Redfern, Taylor Wimpey plc - Group Chief Executive & Executive Director [1]

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Welcome. Morning. Thank you for joining us. I get that there's quite a lot of competition for your attention this morning, so I kind of half expected an empty room, where everybody sat just at the back. So at least we have a few analysts here, but I'm sure we'll have everybody else watching it on the webcast.

And I'll go relatively straightforward brief first half of my sort of presentation, then handing over to Chris, and then coming back and talking about some of the more strategic pieces, which will include sort of how those strategic pieces have impacted positively and negatively on the first half. So I think that's where I see the more interesting pieces, but there are some highlights in the first half that I think are worth focusing on as well.

So first of all, an overview on current trading and just sort of talking briefly about how we've seen the first half environment. I think if I contrast how trading has been -- and I'm not talking about our sales rates here, I'm talking about underlying customer demand, pricing across the market sort of in the first half of 2019 against sort of expectations in the last quarter of last year -- if I look back, I would have absolutely banked where we are. It's been actually a pretty positive set of trading conditions against what we might have expected. Underlying interest has remained very strong. And as you can see on the sales rate, we've been able to execute our strategy. And we'll talk about which elements of that have been tougher than we thought, which elements of that have been sort of more successful more quickly than we thought.

In that broadly sort of stable and positive environment, pricing, I would say, has remained broadly flat overall. I think we're going to have to, through the course of these slides -- and Chris and I, I think, will both touch on it -- sort of be quite careful with our precise terminology on pricing because people tend to look at year-on-year pricing and how much it's moved since we were -- we last stood up in front of you and get sort of different phasings confused. I think my broad overall message is prices are about 1% up overall from a year ago, but most of that inflation we saw in the second half of last year rather than the first half of this. So when we talk about flat pricing, we're talking about compared to when we set our expectations for this year, but that doesn't actually contradict the fact that we've seen some sort of price increases, which you'll see on Chris's margin reconciliation slide. I would also say that our pricing has been slightly differentiated between the South East and particularly London and higher price points and the rest of the country, but the difference isn't huge. And if you took from that sort of London and the South East may be down 1%, everywhere else up 1% in the last 6 months, that's probably an unreasonable overall guide. So if we contradict ourselves at all on pricing, that's the overall backdrop, but we are talking about relatively small movements. So 0.5% either way is quite hard to measure.

And we've continued to see a meaningful divergence between new build and second half. There is -- sorry, new build and secondhand. There is a limited impact, but again it comes to those higher price points in the South East. You do see them slower because of that secondhand market. And when people -- we have those questions from the press as well and particularly around a new Prime Minister. Obviously the thing they latch onto is Stamp Duty. I think the direct impact of positive Stamp Duty changes for us is relatively small, but I think the impact on that South East market and particularly the upper ends of it is more significant. So the indirect impact might be more significant than we think.

The last thing I'll say, and you'll -- I'll come back to this when I go through the stats, we have seen signs of, I think, more confidence and more strength in the market in the last month or so. It's pretty early days, so I wouldn't want to make a big thing of that, but if, as I will touch on, you look at our sales rates in the last sort of month, they've been even further ahead year-on-year than in the period before that. And that's because the market is there and it's been stronger than we might have expected, and I don't think that's it. You will see yet through more external data, but we can see it consistently enough to at least mention it. Whether that continues through the second half, we will see, but certainly our short-term sort of view of how trading is, is more positive than it has been rather than less. For customers, a big driver of that is a benign lending environment. Monthly payments for mortgages remain very affordable. I think sort of the extended uncertainty over Brexit clearly has an impact on our share price, but actually for our customers actually ends up being a small net positive because it's kept mortgage rates low. And we haven't seen any meaningful decline in the availability and structure of mortgages. So that continues to be a very benign sort of backdrop. And no surprise, Help to Buy continues to be a big differentiator. I'm not going to spend a lot of time on what I think will happen to Help to Buy. I'm quite happy to have the question if you want to talk about it, but I don't think we've got any new news or anything new to talk about, so it's very speculative. I think no big change for customers, but our overall sense of stability remains.

From a regulatory point of view, government attention has very much been on Brexit and leadership. And you can take that as we've not seen a lot of change on other things. Even things like the new home ombudsman hasn't moved forward as much as we would have expected, and I put that entirely down to the focus of individual politicians on that leadership election. I think it will come back, and as we've talked about before, it's not something that worries us, but it hasn't progressed as much as it might have done. But we are seeing sort of, as you can see, more discussion around reputation, around quality, but not more than we were 6 months ago sort of -- and I think we see that as a positive dialogue and one that sort of plays to our strengths. So sort of overall that has continued but very much in the background. I would just mention that the build regulation environment post-Grenfell. That remains under sort of scrutiny and change, not the big driver of our investment in quality. And I will distinguish through the course of the presentation between customer service and quality. They are linked, but we see them as slightly different things. And when I'm talking about quality, I'm talking about build quality, perhaps things the customer doesn't see, but if you get them wrong it becomes an issue for customers and for us 3 years or 10 years in the future, as opposed to finishing quality, which is what impacts on an 8-week survey but actually isn't necessarily sort of particularly challenging to solve. But I think we will see a change in the build regulatory environment over the last 5 or -- over the next sort of 3 to 5 years. And so we're aware of that but, again, feel that it plays to our strengths. And land and planning environment, broadly unchanged.

Moving on to the financial highlights. I'm not going to pitch this half year as the strongest half year we've ever had. Clearly, on a sort of like-for-like basis, that margin pressure on costs has had an impact for us. I don't think there's anything else in there that we see as being particularly negative. On the cash conversion, we see it as just timing on a combination of land that you can see, the investments in work in progress that Chris will talk you through. We feel very comfortable on that. I know many of you will want a degree of reassurance on the second half; to a certain extent, we point you to that as the clearest evidence of our confidence. We didn't feel uncomfortable at this point last year with the second half, and we showed you that we could step up. We're actually in a materially stronger position in terms of build, which tends to be the biggest constraint particularly given the sales rates and the order book that we have. We're in a stronger position this year, so we feel pretty comfortable with that, but that obviously comes at a cash cost. And the impact on return on net assets purely comes from the operating margin. The capital efficiency has gotten slightly better.

Picking out our key operational KPIs, and many of these, we'll come back to, particularly the customer satisfaction one, so I'll just pick out 1 or 2 that we don't particularly come back to. We're pleased the employee turnover has -- having remained low, has actually fallen in what has continued to be a very competitive environment for employees. And we will spend some time on sort of our internal engagement surveys, I think, also just looking at the Construction Quality Review, seeing that gradually tick up. And under the surface, and I will come back to it, seeing sort of the key areas we've focused on and particularly making sure that our weaker sites perform well, which across all customer service and build quality measures that's the biggest issue. It's not where your average is. It's where the weakest is that has the biggest impact. We've seen things continue to slightly improve.

Moving back to the market, and I'll mostly focus on the post-half year trading period, but you can see sales rates well ahead. Outlets sort of continued to be sort of under some pressure but more than offset by those high sales rates. If you offset the two, actual absolute sales in the first half were about 10% up year-on-year, which more than underpins the growth expectations we would have for this year and for next year. I'll come back to why they're up in my second half and talk a little bit about price and about some of the other things that we've done to make that possible and to do what we think is the right way, but as I say, probably the main new news on this slide is the sort of July period. You see a sales rate of 0.9, and I put the comparative in the bullet point underneath, at 0.68. That's why I was saying it's sort of continued to be ahead of last year and actually by a higher proportion than sort of in the first half. You would expect July generally to be sort of one of the weakest months that we have. Over the course of the last sort of 10 years, that seasonality has shifted a bit. So July has never been a strong month, but it's not as weak as it used to be, but still that's a very, very strong July performance. And it's worth reminding you that that 2018 comparative we're trading against was not a weak comparative. It was a pretty strong comparative and was already ahead of both our historic sort of performance and -- sort of as I go back 5, 6 years -- but also against the sector generally.

We'll come back to outlets. We're definitely finding the quality of larger outlets, and the consistency of keeping them open helps us, but we do not have as big a bulk of short-term outlets that we're trading in and out of. That gives us, over time, efficiencies and the ability to get the quality right, but it does mean the outlets are lower. And you've seen -- and I would generally hesitate to mention a competitor and I wouldn't do it in a negative context, but you've seen one of our competitors really look at their outlet numbers and sort of test it. And I think what they're going through there is to a certain extent something we've been through over the last 5 years about actually when is an outlet a good outlet and when should it really be open, both from a quality and a customer point of view but also from a sales rate point of view. Making sure that the outlets you've got have a real -- have got show homes that are open at the right time, with the right information obviously helps customers. It also helps us in the end. And so as we have talked about several times, I will steer you away from hanging too much on that pure outlet number. The underlying quality, not just in terms of locations but how open they actually are and whether you've really got the build resources behind them to do the completions from them, is more important for driving spreadsheet numbers than a slightly exaggerated number that we've seen in the past.

And lead indicators on the U.K. market, a slide you've seen before, certainly nothing there that you should be concerned about. You see a decent step up on appointments booked in the course of the last few weeks. I would say that is a characteristic of the market that we've seen, but I would always steer you away from looking any one of those measures, positive or negatively, too closely. It can be driven by our own marketing effort as well, but I will say overall what it does is underpin what we think is a very stable, very solid market with no sort of meaningful change either post sort of the conservative leadership election or anything else. The market remains in a solid and stable place, and I think this slide just helps reinforce that.

Just talking about politics and its impact on the land market. It remains a competitive market but still, sort of as we've seen over the last few years, a sort of a fairly benign market for us to operate in compared to our historic expectation. I would say, and we'll come back to it sort of later on, we do see significantly more competition in small- and mid-range sites. And it comes back to sort of large sites versus small sites and the tradeoff. We would like to have a big -- a better mix than we've got, but at the same time we get better returns and better trading from the larger sites. And so we've continued to drive that way. We're finding land decisions in the London market pretty challenging at the moment, and I'm particularly talking about Central London. Land prices have come down in line with the market, but we're seeing both uncertain trading and political challenges from mayoral policies, and so the tradeoff of those two is pretty challenging. We haven't changed our view on London and wanting to be in that market, but you're well aware that we made a couple of larger purchases sort of now actually 2 years ago. Both of those are selling and trading well and we're very comfortable with those, but we haven't been able to find significant new sites to invest in that we really think work. It's a pretty uncertain environment. And we'd much rather [be in a place] where we decide we don't want to invest in the short term, but we are maintaining our presence there and we're still looking. Over time, that will change, but it doesn't feel like it's going to change in the very short term. It is the area, of course, though, where sort of changes to Stamp Duty do have a potentially meaningful effect. And that might actually -- it's the one area where sort of early signs from a leadership election might have a material impact on the underlying strength in the sort of upper end of the London market.

And on the strategic lands, not a big change. Sort of I think, if I look back over the last 3 or 4 years, sort of every 6 months we're saying promote it a bit more active or a little bit less active, so it's a fairly dynamic sort of environment, but not fundamentally changing. I think a bit easier now than 6 months ago but then it was a bit harder than 6 months before. It does come back to it's a long-term game. As you will see from the land slide that I'll put up shortly, actually we've continued to be a net adder to our strategic landbank. We continue to feel that it adds value to us. A lot of that is about control and getting those large sites through in the way that we want and set up to operate the way we want from the beginning sort of -- but we do think it has significant value.

And I -- this last point, I think, is right for us to make, but I wouldn't want you to draw a significant conclusion about sort of volume forecasts and outlook numbers for sort of the second half of this year or next year. We do think local elections inevitably have a short-term impact on sort of the very short-term and sort of final stages of planning permissions. That's true this time, too. I would say now, a few sort of few weeks or months on, probably the impact has been a bit less than we might have expected, but overall we would always have a slight degree of caution about short-term planning environment when we get elections.

Just touching fairly briefly on overall landbank. Not major changes, but as you -- as I say, continue to be a net adder to the strategic landbank, continuing to see it as a significant source of value. Short-term landbank, up a fraction. You can see that in the cash numbers, but not a big change and no big steer on a change in land policy but that -- there's continued discussion around large sites versus small sites and a mix.

You've seen this slide before. The sort of darker purple box is the sort of first 6 months of trading. Obviously, it's a small lot because it's only 6 months compared to 12 months for the others, but what you see most clearly is a bunching: the years before the referendum, sort of still very strong returns at the point of acquisition and margins, and then stepping up post referendum when we pushed up hurdle rates and very much sort of feels like it's the new normal. I don't think any of us can call with any certainty where it will be in 5 years from now, but it certainly doesn't feel like we expect any imminent change on the level of margin return on our land acquisitions.

So overall sort of summary. Market is stable and probably better than we would have expected given the wider uncertainty. Mortgage market is a big driver of that. Underlying forward indicators continue to be strong, and a [soft] flag that actually sort of the trading performance in the very near term has been better than we expected and better than the first 6 months. And I think I've touched on, when we last spoke, just a sense that, as we go through this year, there is some possibility of more meaningful price movement. And I mean the difference between flat and 1.5% to 2%, not kind of 5% to 6%, but I think as we go into the second half, I would still say that's possible. It's not in our guidance, it's not necessarily something we've flagged strongly, but it's certainly something that is perfectly feasible. Land market opportunities still good, but we have to watch the political situation.

The question that I've touched on and which we'll come back to and happy to talk about in questions. What we're very focused on is having a very strong strategy for large sites. We think over the next 10 years there is a huge competitive advantage in taking a different approach than to history and to our peers, and not passing them up, not selling them off, but having a real structure to how you run them effectively, get the sales rates that make them work, put in the infrastructure in the right way, run them professionally. We would like to supplement that with more small sites, but actually at the moment, with the uncertainty over Help to Buy and sort of the political uncertainty, investing at lower margin in more small sites doesn't feel right. So at the moment, many of our acquisitions are weighted towards larger sites. I don't mean sort of that our average sort of site size is going up to the sort of 500 to 1,000 range. Our average site size is probably about 300 on an acquisition, but the balance is higher than I would have expected. And strategic land remains a -- remains at a very strong sort of level of performance.

Chris?

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Chris Carney, Taylor Wimpey plc - Group Finance Director & Executive Director [2]

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Thanks, Pete. Good morning, everyone. So starting as usual with the summary group results. Overall housing revenues increased by 2.6% in the period as a result of growth in both volumes and prices, but a reduction in land and commercial sales meant that the overall increase in revenue was 0.8%. Gross and operating margins both reduced by 2 percentage points due mainly to build cost inflation and an increase in completions from Central London, causing the gross and operating profit to decrease by 8% and 9%, respectively. And more on that in a minute.

Net finance charges were slightly reduced to GBP 12 million, delivering PBT of just under GBP 300 million for the half. There were no exceptional items in the period, which means that the basic EPS and adjusted basic EPS were both 7.4p.

In the 12 months to June, we paid dividends totaling GBP 544 million or 16.6p per share. And in addition to that, our tangible net asset value per share over that same period has increased by a further 3.9p. Return on net operating assets has dipped slightly below 30%, reflecting the increased investments in both land and WIP.

In the U.K. volumes increased by 1%, with all of that increase coming from affordable homes which represented nearly 1/4 of all completions in half 1. That increased weighting towards affordable homes, which are obviously at lower prices, selling prices, than private homes, means that the average blended selling price increased by just 1.6% compared to first half of last year. And like last year, I'd expect completions in the second half to be more weighted towards private homes. There was a pickup in the volume of JV completions from our Chobham Manor site at the Olympic Park and our site at Bordon in Hampshire. The small loss relates mainly to our Winstanley and York Road JV at Clapham, which is due to deliver its first completions towards the end of 2020.

Looking in more detail at the movement in the operating margin, you can see that the income statement continued to benefit from some inflation on selling prices compared to the first half of 2018 as inflation worked its way through the order book. Build costs inflation at around 4% reduced operating margin by 2.3%, as build costs on average represent 59% of revenue. And whilst inflation was the biggest contributor to the increase in build costs, it wasn't the only one, and I'll come back to that on the next slide.

In the first half of last year, about 1/3 of our private completions came from sites acquired before the end of 2012. That reduced to 1/4 in the first half of this year as the proportion of completions from newer sites increased. And that dynamic is what we describe as landbank evolution: older sites with the benefit of cumulative inflation but lower input margins being replaced by newer sites with higher input margins but less historic inflation benefit. And at minus 0.5%, it shows that dynamic was reasonably finely balanced at -- in half 1, demonstrating that the improvement in acquisition margins largely offset the loss of historic cumulative inflation benefits as the landbank evolved.

So the average net land cost per plot was unchanged at GBP 41,000 as a greater proportion of affordable homes with a low land cost offset the impact of increasing completions from London and South East which, as you would expect, attract higher land costs. Build cost per plot increased by 6%, with market inflation, as I've just said, accounting for 4% of that and an increase in completions from London and the South East -- Central London in particular -- accounting for most of the remaining balance.

Just looking forward to the second half of the year for the U.K. business as a whole, there are some similarities to the second half of last year. Last year, there was a 260 basis point difference between the U.K. operating margins in half 1 and half 2. That difference was mainly due to the volume weighting -- 43% half 1, 57% half 2 -- and the greater affordable mix in the first half at 24% compared to 22% in the second half. This year, we have a similar dynamic. At the AGM we said we expected the volumes to be weighted towards the second half, a touch more than in 2018. And also, affordable homes for half 1 this year represent 25% of U.K. -- or sort of this half year represent 25% of total U.K. volumes. So 1 percentage point more than the first half of last year. And in February, I said that the affordable mix expectations for the full year were around about the 21% mark. That's probably more like 22% now, but that's still less than last year's mark of 23%.

So all of that boils down to expectations for the full year operating profits and PBT continuing to be in line with consensus expectations but probably with a little bit more volume than consensus, which is currently showing 1% up on last year, and therefore a slightly lower margin than consensus.

A lot of our costs and efficiency program is enabled by technology. And that sort of change can be tricky to deliver, so I'm really pleased with the amount of progress that we've made with that in the last 14 months. We've designed, tested and fully deployed changes to our core ERP systems to deliver WIP forecasting, which was previously a manual process. We've reconfigured elements of our ERP system to facilitate EDI. And we've also made progress with the development of some bespoke apps designed to allow our site managers to spend more time where it matters most on build quality and customer service. And that type of software development and systems integration is complicated and it's not been plain sailing, but we are getting there.

This time last year, I said there's -- whilst there wasn't a burning platform and there wasn't much in the way of easy wins, that there were clear opportunities for us to improve. The inflation dynamic, as you've just seen, has got tougher since then, and so what was a disciplined margin enhancement program has taken on a greater degree of importance across the business. And as we're making progress in line with our expectations overall, the timing of the benefits haven't changed. We still expect them to start from 2020 and increase gradually through to 2023.

I thought it might be interesting to show you some examples of the positive impact that the improved technology has on some specific job roles. I won't run through all of them, I'll just pick the first one because that's been recently delivered. When our ERP system was originally rolled out in 2013, the bill of quantities wasn't fully integrated, so it didn't automatically get updated with variation orders. And as a consequence, that involved quite a lot of reentry and reconciliation work for our QSes. And we've now fixed that, and the feedback is that processes that used to take hours now take minutes. One work stream that isn't technology enabled that I'm really quite excited about -- I probably need to get out more -- is the groundworks procurement training for our commercial teams, which is being launched next week. And this is going to bring more consistency and professionalism to how we estimate, we tender and we manage our groundworks contracts. And the groundwork is pretty much always the first trade that you need on site, which puts them firmly on the critical path. And as a consequence, there's more pressure on the QS to let the groundworks contract. And that dynamic can result in unintended outcomes that this training will help us avoid.

So turning to the balance sheet. Our gross investment in land has increased by 2% since December, with GBP 340 million worth of land spend in the first half, GBP 68 million more than the same period last year. That investment means that 88% of our completions for 2020 are already owned with planning, which is a strong position at this stage. Lands net of land creditors increased by 4% in the same period as land creditors reduced, with land creditors now representing 26% of gross land balance, a reduction of 1% since the year-end.

Our WIP balance at the half year has increased by GBP 67 million compared to a year ago, consistent with an increase in build costs. And build for this year's completions, as Pete mentioned earlier, is well progressed as we head into the holiday season. The other creditor balance is in line with year-end but reduced from what was a high 12 months ago. That reduction is spread across a number of areas, including customer deposits, repayable grants and trade creditors, which were high in June last year as sites strove to catch up from the bad weather and where we now have more consistency in our payment practices.

The pension deficit is reported as the present value of the future obligations to the scheme, and the movement is mainly spend against those provisions. The -- sorry, against the -- well, into the scheme in the period. And the provisions obviously relate to the leaseholds or mainly relate to the leaseholds and ACM cladding provision, and the movement is mainly spend against those.

So in line with our expectations, we ended the half with GBP 392 million of net cash, reflecting the timing of the increased land and WIP, together with the enhanced dividend and payments against the leasehold provision. And notwithstanding that increased investments in the business, we still remained within our target range on operating cash conversion at 71%. And our adjusted gearing, including land creditors, ended at 10.8%, retaining plenty of flexibility for the future.

There's no net change in cash guidance for year-end, which remains around the GBP 500 million mark, subject of course to the timing of land spend in the second half.

Today, consistent with our ordinary dividend policy, we are declaring an interim dividend for this year, to be paid in November, of GBP 125.8 million or 3.84p per share. And this, together with GBP 350 million special dividend paid in July and the 2018 final dividend paid in May, means we will return GBP 600 million to shareholders in 2019. We have also today announced a 2020 special dividend of GBP 360 million or 11.0p per share to be paid in July 2020, subject of course to shareholder approval at next year's AGM. And that, together with the ordinary dividend, generates a total dividend expectation of around GBP 610 million for 2020.

And as you would expect based on my presentation from February, we continue to have a high degree of confidence that the ordinary dividend will continue to be paid throughout the cycle even in the event of a reasonably severe downturn involving a 20% drop in price and a 30% drop in volume.

So looking at the results, there are some things that I'm really pleased with, some -- and others that I'm sort of less pleased with, but overall they represent good, solid early progress towards delivering that strategy that we set out in May last year. The margin dynamic is a challenge, and there's lots of moving parts within that, but we'll continue to work hard both on business-as-usual cost control but also in securing those productivity and efficiency savings identified as part of the cost and efficiency program. What we're not going to do is compromise on quality, because we know that delivering quality consistently for our customers is what will create long-term value for us.

But as I said, there's plenty to be pleased about in these results: a record sales rate, a 9% increase in order book value, a high-quality landbank and a very strong balance sheet, all of which gives us the confidence that we're on the right track to achieve those stretching financial goals that we've set for ourselves.

Peter?

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Peter Redfern, Taylor Wimpey plc - Group Chief Executive & Executive Director [3]

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Thanks, Chris. I'm not going to spend a long time on the first slide, which you've seen before, but yes, it's always nice to repeat one's strategy slide because it just reinforces that we haven't changed our strategy.

I will pick out a couple of words from the very final bullet point, that "highly professional, robust business model." What we're trying to do is create something for the long term that gives us a platform to deliver better for customers but also a platform to deliver more strongly. One of the biggest frustrations over the last 6 or 7 years is that we haven't as a sector been able to step up professionally our build capacity to meet what the market potential was. Land environment has been good. Customer demand has been good. And I've stood here several times through that sort of 5 or 6 years and said, "It's not selling fast enough that's our constraint." We can build the order book. What we can't do is match that with build. What we're trying to do is lay the groundwork so that we can actually match with build where the market is there. And we need to be able to be flexible. If the market hadn't been there in the first half, if we haven't achieved the sales rates that we had that we'd have to sacrifice significantly on price, then we'd have to use that capacity in a different way. So it does need to be flexible, but what we're trying to do is to build something that gives us the potential to move with the market when the market improves as well as when the market gets more challenging.

So moving on to an overview of some key areas. Customer service and quality. And I'll come back to the stats on a later slide, but sort of from a functional point of view in the business, the customers-facing side of our teams is very -- is fully in place, and we don't expect to change it. Where our focus has been is on what I term build quality improvements, which I will distinguish from finishing improvements. We're seeing some significant improvements in that, but we're into that process rather than having finished it. We are still seeing, and it's there in the stats, effects on customers from build delays. Last year was challenging from a build point of view because of weather in the first quarter. We're very confident in the quality of homes that we handed over throughout that year, including December, but there's no doubt that the timing of that handover had an impact on sort of customer service performance, not so much build quality but sort of timing.

And broader customer service -- customer-centric projects are in place or underway. So sort of there are some fairly near-term functional things like an online options configurator and sort of a scheme which lets customers stay in touch with us online and through apps rather than everything happening by phone. Our businesses has tended to seem pretty archaic to our customers, I think, as you look at the last sort of 4 or 5 years. We're also quite focused on development of some community-building schemes. That's really about how our -- we help our customers form communities as soon as they move in or actually even sometimes in advance of that, whether that be electronic communication or whether that be face-to-face resources. And so it's not a huge investment, but it's a thing that our customers said to us, over and above build quality, service, communication and trust, that they felt we can make a big difference to the fam [to the moment], helping them to quickly build a community as they moved into their new home.

The rollout of our new house types begins in half 2, fully designed and specified. You will remember, through the last 18 months, we were consolidating our house type range, but we told you at the beginning of the year that we were also working on the next phase of that. So having consolidated and simplified the range, we've now updated those core house types and give us a much smaller platform to work on to really move forward. And we think what we're delivering is a much better sort of home with some modern choices for customers rather than just a tweak to existing house types. And we're still looking at, and we'll come back to you probably with the prelims next year, different routes to market via pilots. So we've got a number of sort of investor-based, sort of, and sort of build-to-rent type schemes that we're looking at.

We've touched on it and I won't dwell on here, but that changed strategy on large sites is going well. You can see it in the sales rates, but what we can also see on the ground is just on those larger sites, which actually is probably about 60% of our portfolio, just a very different approach and feel around build. More forward planning, more infrastructure in place so that actually we can respond, more resources in site management. And actually it remains a challenge, not so much a cost challenge but just making sure that we can source the right quality of site management consistently as we try to grow the level of site management on individual sites. And as I will slightly come back to, we can feel real momentum in our investment in people and skills, both in terms of our engagement surveys and staff retention but also actually how those teams sort of are performing across the business and the consistency across the business.

Just sort of focusing in detail for a moment on the drivers of those higher sales rates. Quality of locations and products, we've said for years that our focus has been on higher-quality sites as well as larger sites, and you can see that. We think our products and also the breadth of our product mix at site level is very good. And actually as we went through the second half of last year, our businesses were very much focused on making sure that they had availability across the board sort of to step up towards higher sales rates. If we can attack a much broader part of the market in each location, that has a huge help.

The reputation, the strength of the sales teams and processes. I would also touch on our quality of specification. And we've been gradually working on that specification over the last 4 or 5 years. Across the sector, and we were no different, as we went through the downturn, we effectively de-specced. In some areas that was the right thing to do at the time. In some areas, with hindsight, we bear the costs for that, and our customers bear the costs for that later. We won't be going through that process in the same way again. We feel our specification at the moment is in the right place, and we see some of our competitors going in the opposite direction. And actually, if you talk to our salespeople, it's actually the area that makes the most difference. And I'm not talking about granite worktops on sort of an entry-level home. I'm talking about things that are at first sense imperceptible but give a huge impact to customers' reactions as they actually walk around their homes: the weight of doors; the quality of fixtures and fittings; the way that the home is designed, whether you actually sort of box in the consumer unit and how you design the home around that. So actually some areas of specification that individually are quite small but collectively make quite a big difference to the quality of the home, and that all makes a difference.

I'll come back to price, but why did I split off the bottom two? Because actually the first, the top sort of group of bullet points, mostly we were doing sort of through the last couple of years. What has changed is we stepped up the sales and production release strategy and our investment in WIP and the site management resource to be able to match those sales rates. That doesn't come through instantly, but it's why our guidance is towards more volume in completions this [sort of year], whereas in the past we've had the higher sales rates but then actually we've not been able to step up production without compromising on quality to match it. This time, we've done the two together, and that's probably the single biggest change.

Come back to price, which I consciously put a question mark against. Are we consciously trading volume for price? The answer is no. Actually the drive for slightly higher volumes this year is coming from our businesses as they implement the strategy and see that they can get the sales rates and they've put in the investment to get the build. You know that our pricing structure is a live one on every plot, so of course there's always a very active dynamic, but we are absolutely not driving them to achieve those sales rates or the volume on completions at the expense of price. It's very hard to be absolutely sure there's not some tradeoff. Of course, there is a small amount of tradeoff, but at most, if we look at the data and sort of analyze it as finely, at most, it's 0.5%, and our view is it's probably not that much. It might be 0.25% on price to actually achieve those higher sales rates. And it's impossible to totally screen it out. At the end of the day, we've got people taking local decisions. We guide them on the overall direction. And actually even on that sort of 0.25% it's probably weighted towards the South East, where the market is a bit softer, rather than anywhere else. So not a big driver. What we are -- if we felt we have to sacrifice significantly on price, then we would question whether we've got the right balance. Where the pressure on margin comes from is a combination of genuine underlying cost pressure and our investment in the future capacity of the business and trying to do this in the right way. That's the cost -- that's the margin pressure, not on price.

So on customer in terms of looking at the stats, it's obviously very disappointing for us, having sort of -- saying all we're saying about customer service, to see a dip in the short-term sort of 8-week survey. You can see from a quarterly perspective that dip effectively came in quarter 4 2018, and that goes back to my comments about timing. We're very confident in the quality of homes. And in fact, if you get under the skin of those surveys, you can see the issues were about -- and actually it wasn't even December completions, it was heavily weighted towards October and November and an impact of the weather conditions and its impact on build in the sort of first and second quarter. It's not where we would want to be. And the sort of 2% movement isn't particularly significant in its own right, but obviously the fact that that 2% movement is in the margin between 5 star and 4 star is uncomfortable for us. And -- but you can see from the performance as we come into this year that it's stepped up again. And we are pretty confident that's a blip, but we are sort of always going to sort of have a challenge, I think, managing that timing piece until we get real consistency on build delivery and you get back to the controllability and deliverability that we're trying to achieve. We can hand the customer -- the home over to a customer in very good condition and have no issues, but if we hand it over 2 months late, then we're never going to get a good return.

A couple of slides, and I won't put -- sort of talk about them, sort of talk about every detail point on them, about the investments in build quality. And I'm just going to pull out some stats.

So we've continued to follow through our investment in apprentices. That really has momentum within the business. If you remember last year, we were doing a series of pilots. We moved, in the tail end of last year, from pilots to full implementation. We have the structure in more than half of our businesses now to manage apprentices, and we're seeing the apprentice numbers sort of continue to increase. We're at about 400, as opposed to about 300 this time last year, and we will continue to see that increase. It's not -- I don't expect us to get to 2,000. If you do the maths, you actually need sort of about 800 to source the level of sort of internal direct labor that we would like to get to over a long term. That's our long-term measure, but at the moment we are bearing some of the costs of those apprentices as we grow that. I think as we go into 2020, that will start to sort of tend to net off as more apprentices come through into the direct labor pool. We're also implementing a quality manager role across each of our business units.

I touched on the changes in build regs that we expect to see over the next 3 to 4 years. We can't manage our business and not have consistency across the board. And whether you'll be looking at something which is incredibly important from a safety perspective, like fire stopping, or whether you look at issues which might cause us costs further down the line, like the quality of foundations, we need consistency. And actually the industry has tended to work historically from such a locally managed perspective that it's very -- been very hard to guarantee that. This helps get that consistency.

I won't touch on specification again because I've sort of covered it, but picking out just one of the example, the second bullet point down, on the fire barrier supplies, the kind of thing that we're doing. It's a good example. So 12 months ago, we implemented a color-coded installation system for fire barriers on our normal housing. What that means is our site managers can see from a distance the color of the fire stopping to make sure that it's right. They can -- they don't have to go in and inspect every [fine element]. It's a quick check that is easy for somebody to do without lots of technical knowledge. It makes it an enormous amount easier for our site manager to be confident that it's been properly installed. And therefore, we are not then dependent on a large body of subcontractors. We've now moved with the supplier to a kind of self-certification for suppliers, so every -- for installers so everybody who installs that fire stopping has to have gone through a clear training program which we can assess. I think we will end up on those key issues of having to be able to trace back to that fire stopping was installed by that person, who works for that business, and that was the system that they used, which you see across lots of other industries. And I think that will become much more of a feature for us. This gives us the groundwork to be able to do that.

Last thing on that, you can see the CQR that we set out sort of at the beginning of the year. The Construction Quality Reviews has continued to improve. I think, as I touched on before, the key thing for us is that the worst-performing businesses are the ones the improvement has come. That's what we care about most is being able to reliably know that the worst-performing sites are still very good.

I'm not going to go through all of these stats, I think the level of staff turnover, which has shrunk. And these give a sense of the mood within the business. It's quite a lot of change against an environment that's quite uncertain for people. And so we are very pleased and very proud of this performance in that context. And I think, if it gives you confidence that the people in the business believe in the changes that we've made, that's what we're trying to do by putting those numbers out there.

So just moving on to outlook. I think from a market point of view, our base case continues to be stability. As I said before, we see some potential for that stability to have positive price movement but not enormous positive price movement, just ordinary underlying inflation. But employment levels are healthy. We don't see obvious risks to the level of mortgage lending, which is key. I think current political uncertainty continues to push out the risk of interest rates, which I continue to believe is the single biggest risk to overall market demand and pricing. And it's a little bit dull, but structural undersupply continues to underpin the long term. But actually it's we're not probably as concerned about the second half of this year and the first half of next year as we were 6 or 12 months ago. And political, regulatory environment: I think focus will come back on to more normal issues, hopefully, as we go into 2020, and things like the introduction of the New Homes Ombudsman and general focus on quality and customers we see as an opportunity rather than a threat. And we'll watch Help to Buy closely.

And coming on to our guidance for this year and just reinforcing some of Chris's points, we are confident that full year results will be in line with expectations. We get the year with a lower margin in the first half and sort of the need for more of a second half weighting that, that would make people uncomfortable. That was true last year, but actually we have more confidence. You can see it in the build, and that's actually the thing that's the biggest limiting factor and the biggest risk. And you can also see it in the sales rates and the trading, but actually we've got quite a lot of headroom in the sales rates and the trading. It will be the build that will be the constraint, and we feel pretty confident with where that is placed. I think sort of you've seen the impact of flat pricing and build cost inflation, but we are not flagging that that means a change to our longer-term margin measures. And we're -- not kind of got our head in the sand. We've asked ourselves the question, looked in the mirror, does this change the dynamic sort of for the longer term? Actually, our forecasts still have us getting to the range that we set out for our strategy. It's been a challenging half year because of the balance of price inflation and costs, but nothing that we've seen over the last 6 months has changed our overall perspective. And we'll continue to watch what continues to be a stable market but with lots of external risks. Thanks very much.

Questions, which we'll start with Will at the front and move to Glynis and then move across.

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Questions and Answers

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William Jones, Redburn (Europe) Limited, Research Division - Partner of Construction & Building Materials Research [1]

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Will Jones from Redburn. Three, if I could, please. The first, just coming back to the sales rate improvement of, give or take, 20% year-to-date. I think, back in April, you highlighted that around 1/4 of the uplift had been due to what we might call the bigger bulk deals. What -- is that same figure, I guess, at 7-month stage, is that something you're still looking at? And -- or can you step back a little bit from that area, given the order book over the next couple of halves? Second one is whether you might be willing to just explore in a little bit more detail as best we can at this point how you might be thinking about margins next year.

Clearly, that all lies ahead, but just, I guess, early thoughts on the possible price/costs interplay and particularly bearing in mind perhaps some savings starting to come in on the build side and then what you know about the landbank evolution, I guess, that lies ahead next year. And then the last one is really just around the interplay of net cash and dividend, obviously the guidance for next year: Is the base case that you kind of chip in to the net cash balance at the end of 2020 as a result of the GBP 600 million-or-so dividend payments? Or do you think you can hold that net cash balance flat? And I guess, what is the preferred capital structure more medium term?

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Peter Redfern, Taylor Wimpey plc - Group Chief Executive & Executive Director [2]

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Okay. So if I definitely hand the cash one over to you, Chris. And I'll answer the first two and then give you a chance to add anything you want on the first two. There haven't been any more significant investor sales in the second quarter. So the major investor sales you know about. There was one relatively small one at the end of the first half but hasn't had a particularly meaningful impact. So the 1/4 of overall sales has probably reduced slightly, but it's in that same ballpark still because the bigger ones were in the first quarter. And will the order book let us -- or sort of will we choose to stand back from those? It's very much case by case; very much depends on the relative pricing, how we see that particular site. And there is a slight margin tradeoff in that, but of course it's also impacts on to how it comes through in terms of the balance sheet sales costs which we then save and sort of -- generally it's a slightly lower price. But we don't see them being a big feature of the second half, but we'll continue to look at them where sort of where they work for us.

Just on the price/cost interplay going into 2020. I think our overall guidance for this year, clearly the bottom line guidance is clear with guiding you towards sort of a slightly lower margin than you would have expected but slightly more volume growth. We do see the margin going up in 2020 over 2019. It's a bit early for us to guide you too strongly on quantum because it does depend on how pricing particularly goes into the second half. We're, I would say, slightly more sanguine today than at the AGM about costs. And if you think of the timing of the AGM, we were just off the back of what we think was more meaningful than I think others have pointed to in terms of the impact on additional stock sort of building within the supply chain as we went to the first phase of a no-deal Brexit. As we've gone through the last couple of months, we've seen some of those cost pressures ameliorate. We think, given the uncertainty around the second half on that, we'd be foolish to say, okay, that's all done, but that's kind of already built into our guidance, if that makes sense. So we think that's allowed for and we might get to the end of the year a little bit better than that. So we'll see as we look back with hindsight, but again, you're talking about 0.5% to 0.25% sort of tradeoffs, not huge numbers, so guiding you more finely than that is difficult. But our overall sense is, and I'll go back to, and -- whilst the first half margin is slightly lower than we thought and the volume is coming through slightly quicker, there's not something fundamental there that's changed things, that impacts on our view of where 2020 and 2021 get to. Probably 2020 compared to a year ago is the same sort of balance of a bit more volume than we would have guided to or a bit more confidence in that volume and a bit less margin, but actually the gap starts to close again, and we still think we'll get back to more or less the same trajectory we were looking at a year ago when we set out the strategy. And all of our guidance tends -- and always has been based -- on a broad assumption that selling prices and costs inflation more or less offset each other, if you see what I mean. And actually we've not quite had that environment in the first half. That's probably the only meaningful difference. And as we look forward, we think we more or less return to that world as our base case. And Chris, I'm sorry. (inaudible) comment on those bits and pieces...

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Chris Carney, Taylor Wimpey plc - Group Finance Director & Executive Director [3]

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And on cash -- yes, yes. That's all good. On cash, obviously the guidance for the end of this year of GBP 500 million, I think I said, is dependent on land spend. And certainly guidance for 18 months out is very much dependent on that and a whole heap of other factors and, not least, volumes. And if we had stable market conditions all the way through that period, then we would expect volumes in 2020 to be greater and therefore generate more cash from operations before land spend. So a massive amount of where we end up is dependent on the -- where the land market is and the quality of the opportunities. And obviously, we've got quite a substantial strategic landbank that is providing those opportunities to us, and it's a balance about how much risk we want to take.

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William Jones, Redburn (Europe) Limited, Research Division - Partner of Construction & Building Materials Research [4]

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And medium-term thoughts around -- philosophically around the balance sheet.

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Chris Carney, Taylor Wimpey plc - Group Finance Director & Executive Director [5]

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Yes. I mean I think it's a nice position that we find ourselves in at the moment with a very, very strong balance sheet. GBP 392 million of net cash is sort of arguably more than we need and -- but at the same time, that gives us a tremendous amount of flexibility as we navigate our way through uncertain times. So we're really pleased with the position that we're in.

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Peter Redfern, Taylor Wimpey plc - Group Chief Executive & Executive Director [6]

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Do you want to hand back to Glynis?

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Glynis Mary Johnson, Jefferies LLC, Research Division - Equity Analyst [7]

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Glynis Johnson, Jefferies. I'm going to brave four, if I may, actually. And the first one is on selling rates versus build. As you alluded to, the constraint over the last few years has been build rate rather than necessarily selling rates. Do you still think that's the case given how much you've stepped up your own build? Should we be asking you about stock levels in the future, whereas we haven't really concentrated on that in the past?

The second one is on the completions growth for next year actually. Given the step-up of volumes this year versus where we thought we might be, how should we think about next year completions? Is it growth? Is it an absolute number? Is it an absolute outlets number? I know you hate talking about outlets, but how should we think about that? Just give us a little bit of help, please.

Next, in terms of -- I hate to go reference it, but the HBF surveys. Can you just explain the differences between Slide 7 and Slide 28, the half year numbers don't seem to be tied to the Q1, Q2? And I suspect it's about the time period. And also, just the difference between the 8 week and the 9 month, is that just about, do you think, the weather and how that impacted delivery? Is it about bringing up the weaker sites? If you can just give us a little bit more color, because that 4 star versus 5 star is a big one. And I'm going to add one more in actually...

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Peter Redfern, Taylor Wimpey plc - Group Chief Executive & Executive Director [8]

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Which slide was it again, Glynis? Sorry.

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Glynis Mary Johnson, Jefferies LLC, Research Division - Equity Analyst [9]

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7 and 28.

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Chris Carney, Taylor Wimpey plc - Group Finance Director & Executive Director [10]

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7...

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Glynis Mary Johnson, Jefferies LLC, Research Division - Equity Analyst [11]

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And then lastly, just in terms of the build regulation step up that you alluded to. Are you talking about more than just the fossil fuel neutral 2025 targets? If so, what do you think it could entail? But also, how is that reflecting in your viabilities that you're doing now? Do you have enough clarity to add in, or is that something that may start to impinge later?

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Peter Redfern, Taylor Wimpey plc - Group Chief Executive & Executive Director [12]

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Okay. So sales rates versus build rates. I think the gap has closed, but the balance of constraint is still on build today. And it's probably close to a reasonably comfortable level, because given the overall broader sort of market uncertainty, I think you'd always slightly rather -- you feel you should be able to control the build rate. You know you can't always control the sales rate. You can be in a strong position relatively, but you can't control it, and so I quite like it to be that way around, but the gap has probably been 20% or 25% at different points through the course of the last 5 years, and that feels like you're not geared up and to take advantage of the market that's there. And when we've seen -- and we resisted sort of driving short term the build sort of through that period, but we have many conversations about some of our smaller competitors who were driving volume growth.

And you can see the pressures that that gave. What we're trying to do is get the structures and the investment right. We're going to do it properly. But I would still rather that we had a slight buffer between where we were on sales and where we were on build, because then -- so if you look at your question about sort of the level of stock, we still have very low levels of finished stock.

And actually sort of we're still very focused on the [roofs] that we're putting on now for sort of completions in November and December to make sure that they're really in line. We don't feel like we're playing catch-up, but it's pretty balanced. And so I will say still right now it's sales versus build, but I'd rather it was slightly that way around but just close the gap. Chris, if -- I'll go on to the HBF and the service issues but then leave you to come back on the completions growth afterwards, if that's okay.

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Chris Carney, Taylor Wimpey plc - Group Finance Director & Executive Director [13]

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Yes.

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Peter Redfern, Taylor Wimpey plc - Group Chief Executive & Executive Director [14]

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On the stats, you're absolutely right. It's timing. I haven't got the 2 slides open in front of me, so I don't know which is which, but sort of on the 8-week survey -- and obviously, there's time for the survey to -- surveys to come back, so we've got nothing like a full set of data for the first half. And so the 2 slides, one of them will be looking at completions in the period, and the other one will look at survey returns in the period. There's not huge gaps, but actually it does give you a sort of a discrepancy between the 2. And the difference between the 8-week and the 9-month survey there is far more structural. It's not just timing.

Obviously, if you are seeing an improving sort of set of kind of quality and customer service, then the 8 weeks scores at any given time will give you better results than the 9 months scores because they lag. But the bigger difference is always -- it's always been driven and it's true across the board -- people's level of satisfaction 9 months after they've moved in is different to 8 weeks after they've moved in. And that's one of the reasons we're flagging the 9-month survey [we show this on], because we think actually whilst -- we led people being focused on the 8-week surveys, how we see it, but we don't think it's by any means perfect. It's a decent measure, but you've got to look at a whole series of other things. And we want to see that gap close over time between 9 months and 8 weeks. They are slightly different questions. Sort of -- I think it's important to say they'll never be the same.

So the 9-month survey, it doesn't just mean that sorts of people have then got serious issues after 9 months they didn't have after 8 weeks. The 9-month survey asks questions about things like road and development layouts and things. But the work we're doing on communities, for instance, and placemaking on those larger sites, we feel, should help that as well. Historically, I think there's tended to be a sense of, "Oh, well they're different questions, so we can't do anything about that." I think we're trying to take a more proactive view of actually we should get under the skin of what can we do to make that different, but they do measure slightly different things.

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Glynis Mary Johnson, Jefferies LLC, Research Division - Equity Analyst [15]

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What's government focusing -- I didn't realize the 2 surveys were different. What's government focusing on?

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Peter Redfern, Taylor Wimpey plc - Group Chief Executive & Executive Director [16]

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Government focuses on the 8 week because that's what they can see and benchmark. Nobody else quotes the 9 months results. That -- like many things we've talked about over the last few years, I am pretty confident that will change. And so sort of we think it's right to be -- it's gotten to kind of what's really happening. I was there when the 8-week survey was put together 17 years ago, and sort of I know the background how it was put together and why. It's useful, but it's not perfect. And I'm not saying that because our results have dipped a bit. It's always been true. If you look back, we were sort of saying sort of 8, 9 months ago we want to look at a broad range of measures. We want to look at all of these. And it's uncomfortable for people to lift the lid on a 9-month survey score which isn't as good, sort of, but we still think it's right.

And just on the build regulations piece. No, I'm not particularly referring to a sort of environmental-related regulation. It is still a bit early for us to quantify that. It's a lot better conversation around environmental regulation and sort of climate change-related regulation than it was 10 to 15 years ago. It's a lot better educated and a lot more (inaudible) to the real issues, which is positive, but it's very hard for us to quantify at the moment because we don't quite know what the answers will be. But it's a much more real world rather than sort of box ticking-led exercise that it felt like it was sort of a lot -- sort of 15 years ago. What -- but what I'm talking about is, if you -- though government will not say this, it is very clear, if you look at the various different reviews post-Grenfell, part of the issue is that build regulations were not clear. And part -- and that's not the industry's sort of issue, but the industry's issue is a lack of consistency.

And so I think what will naturally come out of that is, as we get the next sort of wave of build regulations, they will be much clearer and sharper. They will have to be. I think, deep down, government knows that's the -- one of the big sort of failings is actually that the regulations are not clear and then therefore the way that they've been interpreted is very broad brush. That will get -- that is inevitably going to get tighter. And actually I think you have to be -- we therefore have to be in a world, and it's not just about regulations because we're learning from that as well, where we're able to guarantee that, just because of that fire stopping on that site -- and it's not just about fire stopping, I've used that as an example -- but it's across the board, particularly on anything safety related but actually anything about long-term resilience of housing, about foundations or anything like that, that we're able to look back and think not just which subcontractor we were using but which individual actually fitted it. And in the same way, as we see those regulations across gas safe and the electrical side of what we do, I think we'll see some of those in some other areas as well, because we will need them to be able to guarantee the underlying quality of what we're building. And it's not that I think that's going to dramatically change in the next sort of 6 months, but I think as you see in the next 3, 4 years, that will be the general trend.

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Chris Carney, Taylor Wimpey plc - Group Finance Director & Executive Director [17]

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And I think, yes, on volumes. If you'd asked me at the start of this year, you'd have got a different answer on 2020 volumes, because we came into the year obviously guiding to flat for 2019 and then with more growth in 2020. And you might have gotten from me, say, 5% in that scenario, assuming that obviously market conditions stayed the same. To the extent that we've just said that we're expecting volumes to be a bit more than the 1% that's in consensus at the moment, and let's say that's 3% this year, then you would expect more like 2% next year because that's the way it works.

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Alexander James Fries, Goldman Sachs Group Inc., Research Division - Associate [18]

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Alex Fries from Goldman Sachs. A couple of perhaps fairly obvious ones from me. First, on construction cost inflation, you've spoken to a 5% number. Pretty universally, most of your peers have been talking to a 4% number, so are you being conservative? Are they being optimistic, or is there actually an underlying difference there? That's the first one. And then the second one is on the HBF surveys. So only 1% or so in absolute terms. Perhaps not meaningful, but people will pay attention to the direction of travel. You've spoken a lot about build delays and delivery delays. Those delays have been a problem for every homebuilder for all of history, so is there anything you can actually do about it? And if so, how much does it cost?

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Peter Redfern, Taylor Wimpey plc - Group Chief Executive & Executive Director [19]

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Okay. On construction costs, I do think there is a difference in what we're saying and what our peers are saying. I have to say a 1% difference in what we're actually saying is kind of in the bounds of experimental error, anyway. So that bit. So the exact number is kind of sentiment, and as I've already touched on, I think, if we kind of came up with an honest number of our view at the time of the AGM, it would have been 5%. At the moment, it might be 4.5%, so actually it -- and we consciously decided, because of the uncertainty around Brexit in the second half, to leave it as it was. But I do think you can see in the numbers, sort of, and in actual P&L trading at slightly -- a slight difference. We're not trying to hide from that.

And it's very difficult for us to really pin down how much of that is some of the investment in build quality we're talking about, how much of it is real underlying inflation, how much of it is just the mix of sites. There is a slight difference. I don't think it's huge. And I think, as we look back over the course of the next 18 months, sort of we will see how big that difference that actually turns out. We are very confident because we've seen a -- the bigger part of that inflation in the first half of the year come from materials. We are very confident that what we are seeing on material price inflation isn’t that different from what our peers are. And you know I would say that we always tend to be more honest with you and more upfront than anybody else is about good and bad stuff, if you see what I mean. And history will tend to say we generally turn out to be right. So it would not surprise me if that changes over time, but I can't guarantee it. And we know we're spending more money on things that others aren't because for all the reasons that we've talked about.

So I think there's a few moving parts and a 1% difference. So I don't think it's that hard to understand why we'd be at slightly the other end. I don't think there's a dramatic difference in what we're seeing under the ground. What we really want to be confident on, and this to me from an investor point of view is -- and it goes back a bit to specification but also to the build quality piece -- that in 3, 4 and 5 years’ time, we're not dealing with some of the historic underlying build quality issues that we have dealt with and that actually we've seen some of our peers deal with. And we all have our own kind of particular areas where it's been a challenge, sort of, but the reputational impact of that is not good and not sustainable. It's not actually seriously damaged anybody at this point, with the exception of Bovis, but it could. And it's just not right either, yes. So a lot of what we're spending money on is to make sure that, yes, there is a cost now but actually that in 3 years’ time and 5 years’ time, that we're not facing that same set of problems. There does tend to be a short-term reactive strategy to that.

On the survey side, there's not a huge amount more that I can say. It is timing. It was a particularly acute impact on timing last year because of the weather conditions which were quite extreme. And so whilst we are more sort of June and December weighted this year than we want, we're actually much more sort of on top of the volume and the communication with customers because it's not half the big change through the process that we saw last year. I don't think there's a big cost to us getting that completion phasing, sort of, and our timing on site. That's certainly to getting it more consistent, more deliverable. That's what we're spending money on at the moment and we can see the benefits of that. It just takes time to get it right, but I don't think you can ever take it away completely either. It's always something you have to manage.

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Samuel Berkeley Cullen, Joh. Berenberg, Gossler & Co. KG, Research Division - Senior Analyst [20]

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It's Sam Cullen from Berenberg. I think you mentioned in your opening comments, Pete, you're seeing more competition from -- on small and medium sites. Can you just go into kind of what's driving that, first of all? Where is that coming from? And then secondly, I guess, on your expectation on the 2020, '21 on margins, what gives you the confidence that underlying price inflation, cost inflation will broadly net off? Are you seeing anything in the market, or is that just a kind of a gut feeling that you guys are going with?

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Peter Redfern, Taylor Wimpey plc - Group Chief Executive & Executive Director [21]

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I think, on small and medium sites, I'd point you to actually a very recent, I can't tell you exactly, but I think sometime last week, Savills' report on land prices. And that will actually give you an independent but reasonably good -- and I don't think I've ever before referred anybody to an agent's report on anything. And I hate the fact that we use it even though we don't really focus on it as benchmarking for land. It -- but actually, it is a pretty good analysis of what we're seeing, land market wise. On the larger sites, there weren't that many of us who can compete, and actually the choices that we make and the infrastructure and ability to be able to manage those large sites effectively is much more limited.

So it's a different sort of pricing and competition dynamic between smaller and large sites. So that's there in the background. I think it's more acute in the short term as well because we are all, as our investors and as are you, very aware of the broader uncertainty in the overall economy. So actually the number of people who want something that they can get on site and sort of deal with quickly and be off again sort of is probably more significant than it was a couple of years ago. I struggle with the idea of focusing our investment on things at lower returns actually, knowing that the majority of that return will be delivered in such an uncertain period. So it's a tradeoff on what you need to do and whether your view is short term or long term, but -- it's not a new dynamic, but it's probably just a bit more acute right now because of that wider market uncertainty.

I'm sorry. The 2020, '21 margin tradeoff. I think, yes, we think we saw a slightly unusual pressure of build costs in the first quarter of this year. And we touched on whether there's some chance that's there in the second half, and therefore we're not going to sort of wind back our guidance, but we don't think that's certain. And at the same time, we know we've seen a very flat pricing environment. I sort of touched on reasons why I think there is some chance in the second half, and particularly once we see sort of a bit more certainty around Brexit, why there is a bit of price upside. The fact that we've seen the stability of demand that we have over the course of the last 3 years I think is amazing. And it gives you a real sense of the depth of the underlying market. So there has to be some upside against that. Now that doesn't mean there isn't future downside risk, but I've touched on that, that's more about interest rates than anything else. So that's why we see actually a fairly sensible base case is the two net off. You could argue there's a case there's a bit of a catch-up relative on price, but I think that's a bit too sort of bullish. But I think it's a reasonable base case, but it's a base case. It's not a guarantee, sort of -- but I'll come back to nothing has fundamentally changed from what we set out a year or so ago. It's very unlikely that sort of build costs will continue to inflate meaningfully in a totally flat pricing environment. The competitive dynamic changes. And actually, our ability to source labor, more labor than materials, is probably better than it was 3 years ago, so that's why we see the pressure on materials rather than labor, I think.

Any final questions? No. Thank you very much. Thank you for choosing us over the various competing sort of options that you have today. And look forward to catching up again later in the year.