Taylor Wimpey's (TWODF) CEO Peter Redfern on Q2 2016 Results - Earnings Call Transcript

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Taylor Wimpey Plc (OTCPK:TWODF) H1 2016 Earnings Conference Call July 27, 2016 4:00 AM ET

Executives

Peter Redfern - Chief Executive Officer

Ryan Mangold - Group Finance Director

Analysts

Gavin Jago - Peel Hunt

Christopher Millington - Numis

Gregor Kuglitsch - UBS

William Jones - Redburn

Glynis Johnson - Deutsche Bank

John Messenger - Redburn

Peter Redfern

[Indiscernible] by the end of 2015. Prices in that period, I would say, have gone up fractionally, no major change and largely gone up because new sites have tended to come in at slightly higher price points than is the trend rather than we have been pushing them hard, but there has been no change in our sort of tactics on pricing.

We might have sort of put a hold on new price increases if we had seen transactions fall. We wouldn't have at this point reduced pricing, but at the moment, we haven't changed that – the direction at all on that. As I said, we will show you a bit more granularity, and I will split each of these graphs out, but if you remember over the course of the last probably three years, we tend to show you one graph showing a hash total of different customer interest measures.

What we have done this time is split that hash total out, so you can see four customer interest measures. These are lead, lead indictors ahead of sales rates, ahead of cancellation rates. I am going to blow up each of these graphs and just briefly talk through each one, because I do think it gives an overall story. And it is not black and white, you wouldn't expect it to be, but on none of those graphs do you see a precipitous change either before the referendum or at the point of the referendum.

You see some, sort of churn in some of the numbers and these are weekly data that you are seeing, and so the volatility is weekly, and you would expect some volatility. What I would say before I move into the individual graphs is you will see some underlying trend differences, so you would expect website visits to be up year-on-year as we shift from a more paper-based way to selling to more electronic-based. So it shouldn't concern you that brochure requests are generally down over the course of the last sort of few months, but probably more of a trend in the fact that website visits are actually flat with last year rather than down over the last few months.

So, some of the movements going on rather than just short-term trading. As I said, I think we see the appointments booked as a particularly interesting data point. Now looking at the website visits you can see 2014, 2015 and 2016 data, we would have expected to see 2016 everything being equal to continue to be above 2016 – sort of 2016 to be above 2015. So that is down a bit, don’t put too much [store] into the sort of one week’s movement, that will bounce up against its pendulum when we do exercises to drive traffic to the website.

We can see overall trend slightly down sort of when where we were in the first quarter. If you look at website calls, it follows a similar pattern. Not surprisingly, no major change but slightly down, but tracking last year. Brochure requests are generally down, but again no major change. But we would expect that and the key measure of appointments booked, was probably the one we saw the most stark change on in the immediate week after the referendum. You can see that spike down, but then it spiked up above where we were last year, running roughly at that same sort of level.

So overall those forward indicators, you could say are showing total activity down maybe 5% if you adjusted out all of the noise factors, seasonality, of the trend towards more electronic sales. They are flat, but you would expect them to be up. But in true terms, down 5%. That 5% pretty much whole London and Southeast centric, towards the top end of the market. And I would estimate over the course of the last three years and certainly as we look forward on our plan for 2016, 2017 we have been constrained by our ability to build to the tune of probably 10% to 15% or less than we could sell at.

So a 5% movement in demand doesn't really change our expectations and our plans whatsoever. And it certainly doesn't change pricing expectations, which is probably more fundamental to this. So nobody is saying it is exactly the same, but the changes are actually quite small and those small changes come through all of the data that we have got. Why is that? I think we were concerned about two things. On the 24th of June, one most mortgage lending, one was confidence. I will talk a little bit more about confidence in a second, but mortgage lending has been surprisingly robust, both the signals from the banks and what they have actually done in practice. There was much speculation about the cost of lending going up, actually it has already started to come down slightly, which we never have predicted.

We don't necessarily need it to come down. In fact I wouldn't necessarily argue that coming down is a good thing in the long run. I think we would like it to stay pretty stable, sort of it is at an all time low. And we don't pick up any signs either from the banks or the government or the Bank of England about anything that is going to change that in the near future. And that makes a massive difference, for our customers and touching on that customer confidence piece, actually lesser in Central London in financial services, what they care about is is my job secure, and can I borrow reasonably cheaply on a long enough term deal that I think it is worth the risk. And probably do I think house prices are going to go down long-term? Most of them don't.

So, that confidence piece is also linked into lending and we don't really see that trend changing in the short-term. That makes quite a big difference. And I think if you also look through our customers’ view, you have that long-term trend and this is new data in the way that we are showing what we try to do is look at the cost of buying versus renting with that significant steady drop in interest rates and the real interest rates that customers are paying over the course of the last sort of two years.

The rent versus buy choice particularly if you are supposed to buy helped by to enable you to get on the ladder in a way that you couldn’t two to three years ago is a pretty stark one and there is no doubt that combination of factors, low cost of debt plus [helped] helping new build property in relation to secondhand, which I will come onto in a second.

Things we should be aware of. I don't think we should necessarily be deeply concerned but be aware of the second hand market is likely to be slower. I think what is interesting is that is actually more driven by new instructions and sellers than it is by buyers. Confidence among secondhand buyers isn’t too different to confidence amongst new build buyers. I think it is the sellers that are making a bigger difference, and that is impacting on agents’ confidence, particularly central London agents. You can see it in their statements, you can see in its impact on net profitability, and that we need to be aware of, we do see it occasionally having an impact on the confidence of people in the market overall, because our buyers will talk to agents as well and you can see that flow through sometimes, so definitely one to watch.

But because actually the level of supply in the secondhand market is being quite tightly restricted because of the confidence of sellers, we don't think that is likely to have a particularly significant impact on price unless something changes. In fact actually the pressure is the other way because there are slightly more buyers than sellers still. I think one thing we were concerned about in a detailed way if you roll the clock back a month was that valuers would tend to prejudge a fall and therefore create the conditions for a fall is one area that we didn't have a discussion with government on and actually there had been some quite strong instructions, and I think [Indiscernible] a strong job in secondhand values. It is not your job to create a fall in the market. Your job is to say what is happening at the moment and that is the action we see.

We see very isolated incidences of valuers down valuing on the basis of where prices are going to fall, aren’t they? And I think that is encouraging because we saw that has got a big concern in 2009 and 2010 as valuers were sort of prejudging where they thought the market will go rather than valuing on the basis where the market is today. So overall, the secondhand market is something to watch.

It will be very surprising if summer transactions were not materially lower than the second quarter, but I don't think we should prejudge that that means that there is a lack of demand in the marketplace. It is a lot more about supply I think on that side than it is about the demand. So overall, the underlying long-term fundamentals remain good. The demand and supply imbalance has not changed I think sort of – I think you have to be very brave to say that immigration drops to a level where it has a material impact on the supply demand imbalance that we see in the long term.

Customer confidence in the housing market does remain strong. Recent data show people thought that house prices have probably gone down in the last month, but would be higher in a year’s time than it was today. And that is actually the mindset we tend to pick up from customers in the field. Outside London, people have stopped talking about it, which is surprising, but it is true pretty much everywhere, certainly in the context of the housing market.

It is far too early to work on the full impact. We are telling you what has happened today and giving you some sense of what we see in the near future about the flow through of those impacts. But the initial signs are encouraging, and we will keep monitoring the data and you probably will get a sense in our actions that we are not sort of saying, oh, no, all risks have gone. We are saying this is what we are seeing at the moment.

I think there are other potential long-term implications. There is the labor and material questions. On the labor side, we don't expect any short term movements. We are certainly not seeing any changes at the moment and the signals from government are that people already working in this country are likely to continue working in this country and that is not likely to change.

What you may see over the course of two, three, five years is a degradation in the number of [Indiscernible] material prices. So again, you got a couple of degrading issues there that we want to watch, but certainly at the moment, your views are probably as clear as ours. We don't see either immediate impact or any major long-term impact that pressure points we have been dealing with in different ways for the last sort of four or five years.

And so, what actions have we taken? They do speak louder than words. As I said at the beginning, we were bearish as anybody else on day one. [Indiscernible] 24th of June, we pulled back from most of our major investment decisions. Don't think we pulled out, we pulled back. We didn’t exit the market, but we pushed up our hurdle rates and we said, well, let us review everything that we have already signed off, and we sort of raised authority levels. So, different I was seeing every piece of conditional land, as well as unconditional lands, every planning application in terms of triggering conditionality. That particular control we have already started to relax. We haven’t changed the hurdle rates back down, and I have to be honest we will probably use the opportunity as a way of pushing up our hurdle rates past the level that we are at because strategically that would have made sense for us anyway. But we are not out of the landmark yet, but you should probably expect us to buy less land in the second half as we assess what is actually going to happen, medium to long-term.

But with the length of land bank that we have got I don't think that changes our plans for the future. It is mostly just timing. We reviewed our major work commitments. I don't think there is a single less person working in one of our sites today than they would have been if we had voted to remain in the EU, but particularly when we talk to [May] about those large sites, where we might push up volumes those would have been infrastructure commitments we will be making in late 2016 going into 2017 and 2018.

It is likely that not all of those will be quite as big as they would have been without this risk because they depend on high sales rates in particular locations. I don't think we can have quite as much confidence in that in this world as we did before, but they are relatively small changes at the moment. And we did say on day one that we will maintain all of our investments and apprentices, graduates, management and development roles. We look to new overhead recruitment roles into new sort of very cautiously and [stellar] today. But again it is kind of an opportunity to get an extra level of discipline that we were talking about anyway.

So not major changes but still cautious on land. Sort of we have not bought any and we have certainly progress things we work on anyway, but we have slowed things down quite a lot at the moment and gradually releasing that as we go through the summer.

So overall summary on the outlook, the underlying high demand grounds remains good, mortgage lending is absolutely fundamental and remains very good, government policy continues to be favorable and I don't see I think the chances of that changing lower than they were before the referendum than higher is certainly a clear signal that they don't want to see sort of real volatility and negativity in the housing market. Initial signs are encouraging. There are some risks remaining. Secondhand is one of them and the data around that; business confidence is another.

We definitely saw the sort of withdrawal of sales from the property investment funds as being a big signal of confidence and those things do make a difference to people. There hasn't been enough that our customers are really been affected by it. But they could over time, and prime London does remain a risk.

Land environment is very encouraging, but we are not filling our boots, we are being cautious doesn't mean we are out of that market at all, but we are progressing strategically and particularly, and materials and labor supply under control, but we can’t say that there aren’t any long-term impacts that are slightly degrading to the sort of pressures on that.

I will hand over to Ryan, so I will come back to about the more sort of strategic things on our dividend plan at the end.

Ryan Mangold

Thanks, Pete, and good morning ladies and gentlemen. I’m going to be covering the financial performance in the first half, review some of the key drivers of value, and balance sheet strength and quality of the underlying business.

Just a reminder, the Group results, includes our Spanish business, and it is the only time I really comment on that and implications for our P&L and balance sheet. Spain made a very small profit in the first half of the period, but the strong high-quality order book, which now stands at 123 million pounds positions them really well for the second half and the years ahead. The comparative figure in the prior year was 75 million pounds and there is some more detail in the appendix on the Spanish operations as we normally include.

And it is very pleasing that almost all the KPIs for the group have increased and got growth in all of them. We have booked a 10 million pound provision in the period relating to remediation costs on two specific sites, which has dampened some of the performance measures, notably the operating margin, but despite that we have achieved a 9.1% growth in operating profit to 279 million pounds and with lower finance costs means a 10.2% growth in earnings per share to 6.5 pence.

Return on net operating assets at 25.2% is 2 percentage points up on the equivalent period of the prior year despite the higher balance sheet lockup that we normally have as the June period ends and ends a little bit softer than the full year 2015.

From a UK performance perspective, the volumes are up by 3% year-on-year. We have implemented a far greater focus on customer services as you would have heard in the May presentation and their focus on customer services mean there is a bit more time for delivery and getting the street scene absolutely right and the immediate environment that customers move in immediately right.

We are expecting a volume profile fairly similar to 2015, so it is approximately 55% in the second half and 45% in the first half, and that volume growth into the second half is underpinned by the very strong forward order book that people talk about. Private average selling prices continue to trend upwards being up by 7.3% year-on-year to 266,000 pounds and thus benefiting both from the market fundamentalists being positive over the past 18 months to more recently as well as the benefit of mix improvement in terms of the quality of locations that we are trading from which continues to improve.

Total ASPs are up by 5.8% with affordable housing staying largely flat year-on-year. Gross operating profit margin for the UK business at 25.1% that is dampened a little bit by that provision for remediation costs I spoke about before, which takes approximately 0.7 percentage points of that performance. So year-on-year relatively a strong progress.

We have used this chart in the past, which is our indicative movement of operating margins to give you a sense of some of the key drivers. Bear in mind that this is just an indicative movement of margins and it is quite difficult for us to do it 100% scientifically, and the operating margin in the UK moved by 0.2 percentage points.

What we compare here is our performance relative to the marketplace. So both from a sales pricing perspective where we use an average of nationwide and [Halifax], as well as what we think the [build costs] have changed year-on-year from a market inflation perspective. Now there is no true [build costs] inflation measure that we can benchmark to externally, specifically for homebuilders, and so we strike that above 3.5 percentage points, which is slightly above in terms of what we are seeing on the ground.

Land overage, which is a concept that creeps in particularly on deferred payment terms on large long dated sites, and has resulted in a slightly bigger increase and land cost to the P&L in a period, and we will talk a bit about the growth on the balance sheet from a [land credited] point of view as a consequence as well that takes a small amount of margin out of the market indicators, clearly more positive market environment resulting in a slightly higher land cost if there is overage attached to the contract, which then obviously doesn’t mean you capture as much of that market uplift.

But that being said, the total net market impact we think in the period we are being able to capture is 1.4 percentage points. The specification improvements in [build costs] little bit about further commitment ahead onsite in terms of physical delivery of costs have taken out 0.5 percentage points in margin, meaning that the net land improvement because there hasn't been really a material change in mix effect in the period, which is at zero. So the net land improvement is a 0.5 percentage point change.

Slight increase in profit and the sale of land in the period, albeit at the quantum relatively small in the pound note and the overall affordable housing pricing, while it is broadly static in terms of absolute units, the way the model works in terms of the link between [build cost] and actual delivery means there is a slight improvement in margin from affordable housing.

Overhead slightly negative in the half and as we commit more to people and other initiatives in terms of improving efficiencies and other negative variance of 1 percentage point that includes the remediation provision that we have made. So this is not quite a gross margin to operating margin reconciliation. This is the total margin reconciliation.

If we look at our overheads on a go forward basis, as Pete noted before we expect that to largely stabilize, and so the increase we have seen in the second half we are not expecting that trend of increase to occur going forward.

We have got a small exceptional item booked in the period following the detailed review of our net realizable value of our inventory. It is a net release of 2.2 million, which is a release of 4 million offset by 1.8 million pound booking on specific sites that are currently impaired. Just a reminder, there is a 142 million pounds worth of inventory that is carried at the balance sheet date that is impaired covering approximately 4% of our short-term land bank.

The taxation charge for the period at 20% largely reflects the UK statutory rate. And the UK tax charge is predominately current tax following the full utilization of our deferred tax assets during the course of 2015 and the early part of 2016. And with that being current tax, we are now starting to pay cash tax from July onwards for this year.

If you look at the balance sheet, the operating assets for the group have grown by 306 million pounds, clearly predominantly into inventory, higher land and work in progress. That is partly funded by growth in payables including land creditors, as well as the business scale overall from a delivery point of view. However a large portion of the growth in net operating assets is just simply done through profitability.

Tangible net asset value per share before the accrual of the 300 million pound dividend paid in July of this year has increased by 7.8 percentage points. If you take out the implicate, the accrual of that dividends £300 million, net assets year-on-year have essentially grown by 21.9% which is effectively a reflection of the return on equity, which has either been returned to investors by way of dividends or I mean invested into the business.

From the UK landbank perspective on balance sheets, as at the balance sheet dates, we have a continued low plot cost average selling price ratio and remaining at 16.3%. We have an invested capital in our UK landbank of approximately £2.6 billion covering the 78,000 plots in our short term landbank with planning permission, which covering an estimated £20 billion with future revenues. We have an invested capital of a 174 million in our strategic pipeline, which covers a 104 potential plots with a very attractive valuation fundamentals with an estimated potential revenue of £20 billion.

The strong fundaments of both the short term landbank in terms of quality as well as the strategic landbank is a significant underpin of our confidence, of delivery of our medium 10 targets. If you look at our commitments with regards to that landbank, we continue to fund land acquisition with land creditors on a very selective bases and deal specific to enhance returns not done in order to make returns work for us. Defer payment terms are generally agreed on the larger longer dated sites which takes slightly longer to get through the planning permission or slightly more infrastructure heavy upfront in order for this matured return matrix to be a more positive.

The UK land creditor balance has a balance sheet date of £614 million of which £338 million payable within one year of balance sheet date and is a further £50 million with of conditional contracts within that number. Included within land creditors as I mentioned with regards to set overhead, there's an accrual now of a £147 million as a consequence of the more bound marketplace and that compares with £77 million in the prior period.

If you look at the management of our working capital, we continue to have a great level of working progress spend than what we are recovering through to the P&L, as we expand our footprint from a delivery perspective as well as sort of investment, great investment into the London business, which has had another £80 million effectively invested year-on-year. This is also combined with a slightly stronger sales rates. If you think of us delivering homes at the pace of sales, almost as suitable to over-the-top measure, the consequences of that in hung sales rate does mean that there's more work in progress committed.

The improvement initiatives on customer services and the customer journey in terms of getting the home quality right and the immediate street scene and environment that we're delivering customers into, naturally takes a fraction more time to deliver that and that itself also consumed as more amount of work in progress. However, the majority of the business have made strong progress in this regard and so we're not expecting a trend of additional consumption of capital as a result of customer services change, I mean, future periods.

The stable land cost a square foot in the period of £39 per square foot, it's partly offset by slightly higher build costs, which is a combination of both the specification we mentioned before, a little bit about mix, particularly coming from the London market which is slightly more expensive, build cost inflation but as well as high infrastructure cost that come with a greater proportion of sides traded on from strategic land. And the pensions, the deficit had stayed fairly stable year-on-year, which was at the end of June. This is primarily driven by better performance from assets as at the period end but also benefitting hugely from the hedging program that the trustees are put in place to mitigate interest and inflation volatility with over 60% of those liability drivers being hedged by the end of June.

The counting deficit states broadly static and we contributed £14.1 million to the scheme during the first half of this year in line with last year's first half. The next triannual valuation is of the balance sheet date, 31st of December 2016 and we will agree that with the trustees we're funding perspective during the course of 2017. Turning profit into cash, this chance reflect on a trailing 12 months spaces at each of the half year periods. Total working capital investments to the first half 2016 is broadly somewhere to the first half 2015 despite investing additional sort of 80 or £1 million pounds into Central London business, year-on-year as well as the greater working progress as a consequence of the custom services that I spoke about four.

The greater level of profitability and cash generated has been returned by way of dividends and despite all of that we ended net cash £29 million higher than the first half of last year. They favored acronym of mine on EBITLA, earnings before interest, tax depreciation and land amortization, haven’t advanced any new acronyms for this half of your presentation. We're pleased to know that the EBITLA is slightly softer in this first half relative to the previous year, and most of that is a consequence of the booking of that £10 million provision as well as slightly higher overhead spend.

The cash generation and profitability remained strong with greater investment in the first off in both land and working progress producing the correct total cash generated and in the 12 months period to the half year. And we expect a stronger second half delivery based on the quality of the order book which is 90% full sold for the year as well as that waiting of more second half being 55% that I mentioned before in terms of completion. The group ended the half and net cash of a £117 million during the period on the 28th of June, we issued a €100 million 2.02% profit placement modes fixed for seven years as principally as a hedge for our investment in our Spanish business.

The average net cash balance for the half was £3 million and that compares with a £44 million net debt in the equivalent period of the prior year. Barratt, Fitch and Standard & Poor's have recently maintained on investment grade rating with both of the stable art look recognizing the strength and the quality of the business. The groups ordinary dividend policy has announced in May, is an ordinary dividend of 5% of net assets with a minimum return of a £150 million. This policy struck of mid assets avoids any kind of volatility from the P&L due to say for example market disruptive events, and this dividend policy has been stress tested with a 30% decline in volumes and a 20% decline in average selling prices.

So, it's a fairly robust policy that we believe that we can pay throughout the cycle. The ordinary dividend declared for 2017 at a £150 million announced in May, we paid an equal tranches both in May and November. And the board also remains committed to the £300 million dividend announced in with the May results. So, its £450 million return for next year in total. And the method of return of that £300 million with a capital and remains under review with the share buyback or so a possibility and we will update in due course. The total cash dividend and cash return paid for 2017 will therefore be 450 million versus the circle 356 million that we're going to be returning during the course of 2016. Both the ordinary dividend and the special dividend will be subject to shareholder approval at the AGM next year. For the interim next year, we have declared a maintenance dividend for 2016 of north £0.53 and that will be paid on the 7th of October.

So, in summary, we've continued to make good progress against our medium term targets that we set out in May, covering years 2016 to 2018. The groups strong balance sheets and operational business execution and performance positions us really well for delivery of our targets and our strategy. And in this uncertain times, as Pete noted, this balance sheet discipline and focus in the short term remains a high priority. And I'll hand back to Pete to cover strategy and conclusions.

Peter Redfern

Now, in conscious of a couple of things, I'm going to sort of say that repeat what Ryan said and particularly touch on the dividend. I think they're important and I think it's actually quite important for you to have sort of thoughts from both of us on that particular issue. But in terms of strategy, nothing has changed. We built the strategy five years ago and when we reviewed it this year, sort of having the ability to manage through a cycle built into it, rather than a base we decided what we do. And we got the was always fundamentally important. So, at the course of the last month when we have been more cautious and look to downside scenarios, we knew what we were planning to do.

And so, nothing has really changed in that. And I think the balance sheet structure with as Ryan has touched on, low or no debt, timely online creditors, making sure that we don’t sort of over stretch on that, tightening our land policies around hurdle rise but also the whole trend towards major developments type size with that full line commitment. All of that is about managing the cycle longer term. And so, nothing has happened in the last sort of months. One of the things that could have happened in the last month, I think would have particularly faced is, yes, for the first time it's actually a chance to got to pull things that we thought about in theory and then planned to do into kind of operational practice.

And sort of the business responded very well, very quickly to us pulling the leaders, which I think is very important. But we are in a very strong place. And I'm not going to label this slide. I know you know it and I say a couple of things throw in your notes, the position for us as a business and for the sector as a whole is fundamentally different to 2007, 2008. Whether you look at debt, whether you look at how many has locked up in land, whether you look at the length of the landbank and the flexibility that gives us and the input from strategic land is a totally different position. So, even if the conditions were significantly tougher than current trends are starting to suggest, then we're in a good place to work through that and still create value. And we do think that dividend places a cool part of that value.

In terms of our land in our land strategy, you can see in first half of the year, our landbank went up not massively but sort of back to the 77, 78,000 units, we still see that as a reasonable level. I don’t expect it to dramatically change in the second half as I said they'll probably be. So, delays on land purchase that we would otherwise have done, so second half acquisition numbers maybe a bit lower. But I don’t think it's going to have a particularly significant impact on sorts of the level the end of the year. And you'll probably say in even greater waiting of the new acquisitions that come from strategic land than you've been seeing. And you can see from the numbers on the bullet points at the bottom, the strategic land conversion continues to be strong and the conversion of that completions has continued to be strong.

I'm also not going to label this slide but we still believe that in tougher conditions, paying in places where people want to buy home is a significantly stronger strategy. We've tracked since 2004, the number of sites that we have haven’t sold in the last week, in the last two weeks, in the last three weeks, as well as sales rights. And it gives you a level of granularity because what you find is you couldn’t disguise by a particular local business unit level, an underlying softness of performance in, 25% 30% of your size by an up performance on others. And in the end that captures up with you because you're still left with a land in those size. And we're trying that closely.

What that shows you very clearly, is the number where we have those sort of low sales rights for a longer period of time has reduced year-by-year as this land strategy has shifted. The quality of location makes a massive difference to your strength and any kind of softness of condition.

So, as it was said, I think the dividend is okay, but we try to give you runs, giving you some uncredited numbers to give you numbers to model yourself. And just got of -- this is almost a plot-by-plot version of Ryan's EBITLA target, just cash generated by unit and different market scenarios. We become a very cash generative business when we start buying land. And we can turn that tap off very quickly. And that means that combination of where we are as a business, that we do remain fully committed to that dividend policy. I think the thing add up to what Ryan said on the ordinary dividend days, well, so over the last month, we've checked and tested everything to make sure we haven’t missed anything to make sure that where set up as well as possible for tougher conditions.

We don’t think that we didn’t actually have or you will need to go back and check was the ordinary dividend. We did test it through a whole range of scenarios. We've given you one worse case example to give you a sense of it but actually could still be worse than that and we still have confidence in that ordinary dividend. In a way, it hasn’t been something that we have to challenge ourselves on particularly and strongly. And you can give that sense to investors as you talk to them and then unites. Of course, the special dividends are always kind of the next level of certainty by having retested and looked at different scenarios again, we remain fully committed to that. Something would have to change significantly, not just over and above where it is in the last month, but over and above the sorts of market scenarios that we've looked. And I think most of you have tested. We don’t expect that to change.

And that's really a dividend target, I would stress still it's a target, it's not the same as an announced dividend, but we still remain of the view. And I'll talk about our views and all the targets that are as a sensible target for us to go through. And that actually, we don’t need the market to be at the level or it's been in 2014, '15, to still achieve that target on dividends. We remain of the view that's a sensible target for the business to go through. And talking about the targets, so we were all including that one, it's a same sort of scenario, clearly things have got slightly tougher in the course of the last few weeks. And we said to you in May when we announced these targets, that we felt particularly the operating margin averaging over three years at 22 was a stretch in target. We still think it is.

Gladly, so with the headwinds are a little bit greater. But we're not planning to change those targets any time soon. So, we'd have to significantly change in a way that we haven’t seen it. We remain of the view there are -- that are our measures and we remain of the view that if we do the right things and if things go to plan, we can achieve them and nothing in conditions has changed that perspective on returns or margins or this scale of dividends. They're not absolutely no down with the targets, there shouldn’t be absolutely no down with that stretching but we think we can get that, unless things change more significantly than we've seen.

So, overall, market outlook long term, both thing anything has fundamentally changed short term better than we all expected. The value proposition for shareholder remains high and its quality, we'd still believe chasing a high margin over volumes scale is absolutely right. We've been pretty disciplined. I do think you'll see some slightly different levels of confidence from people with stronger growth plans that have been underpinning. The value of the business is tougher today in a slightly lesser environment and tougher to see through every single site as a land acquisition. And actually it’s a good place for us to be and that we don’t need to. We'll take six months out of the land market and it wouldn’t face us at all in terms of our future growth.

We still thing there are potential improvements on capital efficiency and that they can come through. And in underlying performance by which I mean margin, we still think there's growth in a stable market. It's clearly, around the high 20s -- sorry the low 20s, it gets tougher to add every incremental piece. But we still think there's a way to go if conditions are stable. And that your dividends streamed towards, I think is your underpinning value. In tougher conditions but also in and positive conditions as well. And just kind of summing out with sort of updating our guidance for the balance of 2016, overall not a lot has changed. And when we said right at the beginning of the year, 50 to a 100 basis points of margin growth. And I think I stirred you towards the upper end of that with that full year results.

I still say 50 to a 100 basis points, I wouldn’t necessarily stay you towards the top end, and there are few risks out there. You've seen sort of one off cost that we're taking into first half, that will make a big difference but sort of it still feel that is a reasonable range for our guidance, and not really changed. I see it was a similar level and volume growth, sort of 5%, we've set in the beginning of the year. Fraction of downside against that but not much or no real change. On an average selling price, I think it's a bit of upside. You have stated towards 7% to 8%, I'd say today 9% to 10% and it actually if London completion see through in the order book is upside about nine to 10.

So, overall you put all together, perhaps amount of fraction softer on margin, a fraction sort of more bullish on selling price and you're more or less at the same place. So, we're always certainly comfortable with where consensus is today.

We could go on for questions. Sure, from this side and then go across.

Question-and-Answer Session

Q - Gavin Jago

Yes, morning sir. Gavin Jago from Peel Hunt. A couple of a good please. First one just on the outlet numbers be, as one of you can give a bit of a color on what's going on that, and dime by picking up 6% 7%. What plans were off the second half and what's been driving that you still have issues with the planning there, would it be more of a conscious move? And secondly, just on governments been lot of chaos over the last month, as to what the government could should or will do in terms of helping the market. Given what you've seen over the last month, helped to buy as clearly very important but it has been holding up the second hand market obviously. It's been slowing considerably.

What do you think the government is more likely to do at this point, is it more like to have you pull a lever on the stamp duty holiday run and hoped to buy or a bit of both?

Peter Redfern

Yes. I mean outlook numbers know new story, really. You had the first off sales rise continue to be strong viewed, the book has continued to build in that tense to sort of mainly close out was early. Our openings are pretty much in line with what we expected. I think it's likely in the second half, both because the sales rate is naturally a bit slower in the second half, and you'd expect is it 5% or five overall over the course, I don’t know if you'd expect it that to help a little bit in our numbers by the end of the year plus slightly more opening plan. So, it's a sort of up closer to 300 rather than that sort of high 280s at the end of the year.

But as I've said before, it doesn't really effect completion volumes, sort of because as it come into the order book just that bit earlier, come out with outlook numbers, it just shifts the balance of those two numbers rather than change the position. But as aside, probably more upside in the second half than we've seen because I think the dynamic will be slightly different. On government, I mean, we've had as has been, sort of certainly in the early stages recently well publicized, some pretty high level earlier June conversations with government. What our risk would be today is be ready to monitor. Monitor the statistics, listen to our statistics, listen to the second hand, but I actually don’t think on both on more way saying that we could go for significant changes to where, sort of helped buy us or in a more in a general sense to stamp duty.

I think the one thing that over time I think needs to be looked at is the impact on stamp duty on the upper end of the market. I think, sort of the double whammy of the changes to underline levels plus this 3% on the upper end of the market and not just prime Central London. I think, sort of more general London family housing in London, sort of is slowing things down more than it should. It's not particularly effecting prices, it may affect prices in prime Central London, and it's not particularly effecting prices. But I think anybody should want that sort of resistance to movement in that market where you are seeing at the moment. So, I hope they take the chance over the next sort of six 12 months to kind of look at that within, a different group of people, people in par.

But right now, I think it's monitoring and be ready look at the stats, but excessive reaction actually kind makes people think but why did you need to do that. So, we won't be pushing for anything particularly strongly. But there is a good dialogue in an open conversation. So, it's not sort of that that kind of saying we are not doing anything. There is a sense of you then watching it quite closely and being alive, those sorts of things we might suggest if conditions were softer.

Actually, should be forward in the moment, move across.

Christopher Millington

Morning. Christopher Millington, Numis. A couple of straightforward ones. First of all, the percentage of the order about which is contracted at the moment or exchanged, second one is just really about capital employed in London, and maybe just a quick comment about recent experience on overseas buyers. And then the final one for me is really kind of net cash trends in H2, just in line with this slightly more cautious approach to land acquisition and maybe why you'll end up with net cash from your view?

Peter Redfern

Yes. If I take London, just give my kind of overview on net cash from a land point-of-view and then maybe Ryan if you round up net cash and gives you a chance to check the number on contracts, I can't remember the percentage. On London and particularly Central London, we actually saw as I'm sure you will see reported elsewhere and some new additional sales we wouldn’t have expected from overseas buyers in the first kind of week because of the movement in exchange rates. Those are flush of that and it still impacts on those buyers decisions today but to a certain extend people thought that we're jumping in because exchange rates might bounce back, whereas now it's going to balance. So, they are what they are. So, it's not bringing forward decisions but obviously it's a positive for overseas buyers.

And what we're seeing is a large amount of interest in Central London, actually more interest I would say than before the referendum. There's an awful lot of conversations. You always get a few opportunistic, yes, sorts of potential buyers who are purely price. But even those buyers in Central London at the moment who are genuine underlying buyers, or they're be investors or potential land occupiers, are concerned about price in those prime markets, understandably. And so, there's a lot of conversations but it's hard to pin them down. So, there's a lot of action, there are sales. But so, as well as I say that rights are definitely slower but it's not a total lack of interest, it's people trying to work out well what's the right on the line price to me to invest that.

And it's not kind of yes you do get the large investors who want big boat discounts but it's more it's not just that, there's plenty of ordinary small investors. And it's just they're trying to work out where it gets to. If they're confident, prices might move by 5%, they'll probably buy at a discount of 5% but they're not quite sure where it pins down. And I do think there is a bit of a sense building of always see what happens in September, would have expected to be saying that to you on the whole market. The only place where it's true is in that prime London market.

And then on that cash, I think the trends will be more positive in the second half because of what's happening, I think land is the biggest one that I think. Yes, we will probably lose a few completions in London, a handful because of, sorts of that mix of sales that we would have taken but not only that makes a big difference to cash coming in the door. I don’t think working progress then will be fundamentally different, it might start to tail off a little bit on the big size at the end of the year but it think it's here. But there will be a bit of a slowdown in land. So, you should say a more positive net cash balance than you would have seen. But I don’t think that immediately flows or into add dividend plans that we'd announce next year because it would depend on how we see the market overall about whether that's just a short term timing difference or whether that's long term. But certainly, sort of the caution I'm talking about in land should flow through that.

Ryan, I do think I think you'd add on cash?

Ryan Mangold

Yes, would do. Yes, on the cash, completely agree with Pete. We started at 223, we’d expect to end the slightly stronger than that despite with the change to sort of operational execution for the land commitment. And we can progress commitment in any event, get based on profitability and profits generated. But to slow down a whip and slow down of land is naturally going to manifest itself into cash, we should end up in a slightly stronger position. But I agree with Pete, as much as a timing issue as opposed to payment issue. And we will need to just judge what the markets doing at that point before we decide to commit more capital to the business or have surplus to return to shareholders from a strategy point-of-view.

In terms of the order book, that's divided between affordable housing and private housing. The affordable housing is generally all contracted and says it the timing of delivery and that makes relatively significant quantum of the total. For the order book on the private side, we generally are getting from reservation to exchange of contracts within about five to six weeks and that's what our kind of business model is from a turnaround perspective. And so as a consequence, it's probably only about 10% of the private order book. I don’t got the exact number but I would say approximately 10% is not contracted but is actually reserved.

What I should say on cash, just Chris just tying up the length between landbank won't necessarily change that much but cash probably will be better. I do expect to see more conditional deals in the South East. Most of the business sources have waited all conditional deals anyway. The only place where it's hard to drive is many conditional deals on planning tends to be in the South East. And the environment we're talking about where softness is more London weighted and then at the moment what we're seeing is you're more able to drive those terms. And from my point-of-view it's not just about cash, I guess its control. So there is things are significantly softer. So, tying things up that you could work through the planning but if the markets softer you got choices as, it's a sensible place to be. So, you could say landbank relatively stable and cash back as a result.

Christopher Millington

And likely and for about London, capital employed?

Ryan Mangold

So, London capital employed is pretty much to the level that we wanted to take it to in terms of overall commitment. They are trading effectively from the eight outlets which is broadly the kind of scale that we put on to the market in terms of our intentions in Central London and sets it approximately £350 million, with a substantial number of schemes that complete in December this year, which what we're expecting. I mean, then one or two they might just lunge over into January 2017. But principally looking to complete this year.

Peter Redfern

Yes, okay. Just hand across some more, just move across the front.

Gregor Kuglitsch

Thanks. Gregor Kuglitsch from UBS. Also got a few questions, some I think are simple. The first one is on the reservation rates. Just to be clear, it's net of the 17% cancellation rates in other words?

Peter Redfern

That's right.

Ryan Mangold

Correct.

Gregor Kuglitsch

Your gross is actually dropped a quite a bit less than the headlines, okay.

Ryan Mangold

Yes.

Gregor Kuglitsch

I suppose, the second question I think if I look in the segmental reporting, its visible that the London and the South East margin has come down quite substantially in the first half. I want to understand is that 10 million is booked in that particular segment or whether there's something else going on there. And then the third question is on investment. I think you've hinted obviously a lower land buying recent pull back in whip. I just want to understand, say, in the scenario where sales rate holds steady from here, as you look into 2017, obviously the sales rate is the big variable. But would you actually expect volumes to be flat or even down because obviously there's an element of self-fulfilling from a volume perspective.

I was just wondering to understand where you head out, even if sales rates are flat and obviously then we can flex for around the assumptions on sales rights. Thank you.

Peter Redfern

I might need you to repeat the second because I was thinking about the first when you were going through.

Gregor Kuglitsch

Yes. So, the London margin or London South East I think your segmental reporting is by geography. So, I think the profitability was down on similar revenues. And I just wanted to understand if the one the 10 mil one off was in there or is it something else?

Ryan Mangold

Yes. Profit is in there, yes. That is a scheme in East London business, is part of the provision one of the 10.

Gregor Kuglitsch

But it's also down on an underlying basis, therefore?

Ryan Mangold

What?

Gregor Kuglitsch

The margins are still down on that?

Ryan Mangold

Yes, and you got a bit of a got to be a minus well the recoverability particularly in the Central London business being completion is far more second on way to which does cue the overhead recovery. I'm just going to be remind as well in terms of the margin trajectory.

Peter Redfern

Yes. And if you look at the selling price guidance that we've give you, that the 5.8% in the first half going to 9% to 10% in the second. You can see the recoverability in the Central London business is weighted towards the second half contracted sales and their cancellations but that drives that mix. So, yes, that has quite a big impact in Central London and East London to a lesser extent as well in sense of timing.

Just on the reservation, right, the answer to the question is absolutely, yes, it's after cancellations. That you meant on certainly is the gross rate is down more and --.

Ryan Mangold

No, less.

Peter Redfern

No, less. Yes, that's right, so I also misheard what you said, do the gross rate is down less, that's absolutely right. In terms of investments and I think where you were really driving out was the 2000, where do we see 2017 volumes if in the mix of sales rights and investments and everything else. I think if sales rates are flat, volumes will be up. And it goes back to what I said going through the presentation, that we've been constrained more by built than by sales. We said our order book has continued to be ahead of where we expect it to be, volume in volume terms. So, we flag sales rights, effectively what will happen is they will just catch up in our order book which is six months out on ordinary sites, which is more than we would chose it to be, sort of all the pure balance but we acquired comfortable. As long as it's over about four, we're pretty relaxed about it giving us not enough of a site to the market.

So, even with flat sales rise, it's still volume growth, and that's why a year ago I was pretty sanguine about exact balance of outlook numbers and sales rights because there's a lot of flex in there. If you were chasing your volume growth at the maximum possible rate or if you weren’t constrained by build, then it's harder to have that sort of flex. But along order book and not having been chasing, it gives you quite a lot of flex. So, a volume expectations today, we're not going to give too much guidance for 2017 but stay they haven’t really fundamentally changed. The only bit I'd steer away from and noted really put it in that forecast says, where we said there's actually a bit extra that was in the are under original underlying assumptions on these large sites.

We'd be a bit more cautious about that today as I said earlier because that assumes quite high sales rates on a small number of larger sites. And it's harder to be confident, that's right. But where forecast generally are in volume today, actually by somewhat we know today is still pretty sensible.

Gregor Kuglitsch

And I'm going to be ticking, and then similar on the sales pricings. Obviously, you've got a lot of London schemes in the second half. Do they roll off and does that sort of it or is there stuff coming back?

Peter Redfern

No, no. I mean you wouldn't expect to see that same sort of 9% to 10% overall selling price uplift into 2017 but there is still so mix or mix driven sort of uplift into the next year. There is not a big distorting effect. Now full on the market you may sales and some of the schemes coming forward don't have that, then that starts to make that tougher because obviously for this year we are totally contracted for next year. We are substantially contracted in Central London but not completely. So, it's sort of there is no zero risk against that into 2017. But I think going beyond that, we got to get through the next couple of months get into sort of trading up day later in the year and we will talk a little bit more about how we see 2017. But right now nothing fundamentally has changed. Well, probably the one visible risk is around Central London and it's not a kind of balance sheet value risk, it's just about trading and where that sort of pans out particularly into '18.

Gregor Kuglitsch

Thank you.

Peter Redfern

Yes, pass it forward and the we'll go on to Glynis after a while.

William Jones

Thanks. Will Jones; Redburn. Just firstly making sure definitely understand Slide 21, the land commitments correctly. I think there is about 820 million there combined in the two lines over the long term. Is that including the 650 of land creditors?

Ryan Mangold

Yes. So, one of them is an almost way to look at volumes of fair value which is the present value calculation, the other one is an absolute value and that's the difference between the two if you add them up. So, it's the time where it mainly gets both taken into account, from a counting stand, its point-of-view.

Peter Redfern

But the 650 and the 675 are the same number expect for that fair value piece Ryan is talking about.

William Jones

Yes. So, then just thinking about, I think you got 17,000 control plots, which I would guess is 700 million or 800 million of plot value potentially which I doubt maybe some small deposits for those we haven't paid for them. To what extends the obligations on top or is that the second line.

Ryan Mangold

That would be subject to. So, depending on where it is on from a control point-of-view whose control is it's under with the subject to vacant position then generally it's under the, that the landbank is controlled, it's for subject to satisfactory planning, then it's under our control.

William Jones

So, there is some numbers above and beyond?

Ryan Mangold

There will be some, yes.

William Jones

In the sellers.

Ryan Mangold

Yes.

William Jones

Yes.

Peter Redfern

I am not sure where you got your 700 million or 800 million, I will. Yes. You pay more for the land the way are, I think.

Ryan Mangold

It's 100s of millions but it's more like 400 or 500.

William Jones

Right, okay.

Ryan Mangold

You are talking probably about 500 give or take. And yes, which includes that 146 but that what I say conditional contracts gives us a lot more control they give us a lot more controls. So, if what we tend to find historically, things soften dramatically, we have more control than we expect at the time of the 675 that actually even that has degrees of conditionality and timing impact at it. We have a lot of control over the 146 and but it just depend when you take the decision or when do you submit. Before you submit planning application you have got absolute complete control. So, if you look at those number and it's why they're not inline creditors, it's why they are things at the moments that we'd expect to pay and if we decided actually no things are terrible those are bad deals, half of them we'd re-negotiate because we can't walk away. And the other half we'd walk away from. So, yes, but it gives you sense of where the flex is on sort of land spend, what's in, sort of what's in the landbank already and what’s committed.

William Jones

Yes, okay. And second one just about the dividend and the special components of that. I think the message in May was more or less look operating cash flow less maintenance dividend gives us our scope essentially to pay the special. Does that policy or that approach change in an environment where profits are sort of I think lower because obviously we could have a scenario of profits full of fair bit free cash flow on that that it doesn't fall as much. Would you think about the special in the same thing in that scenario? Would you actually then so actually we might want to build up some more net cash in the balance sheets?

Ryan Mangold

Yes. I think in that scenario that you're positioning, I suspect we would overshot quite strongly on cash generation and if there is a strong overshot on cash generation as there is release out of inventory as a consequence between investing as much in a falling market, then the logical item for us behaviorally would be to invest slightly less as a quantum coming out of the cash flow and the operating result onto the balance sheets, effectively release from the balance sheet. We would have to take a view as to what we would want to do with that surplus cash whether we would keep some for the time and right do we invest in the business or to return that surplus to shareholders. We make judgment, with the four options. We either do share buyback, we do non-special dividend or invest in the business or we sit on the cash. I mean those are the four options and we need to make judgment depending on how the cycle potentially evolves.

Peter Redfern

I mean we sort of see the cash invested on our landbank has been a long term pretty sensible stable number. So, we throw off excess, we'll give it back. If we're reducing it significantly as a timing difference we won't necessarily unless we say struck truly something has changed.

William Jones

And the final one is more hypothetical one, hopefully won’t come to this. But when you think about if sales rates were to fall by a certain amount and significant amount, at what point that triggers (NYSE:A) a change in incentives and (NYSE:B) then your actual underline pricing. And I guess so while you be governed by the secondhand market as well and lots of things going in there but if you thought about just big picture how that might play out?

Peter Redfern

Yes. I mean of course you think about it and it's a really hard question around because it's never about one trigger. It depends how much sales rates fall, where they fall by how much, what impact you think price would have and what the balance is. You remember Malcolm Harris standing up and pointing out that they make more money if they didn't let sort of if they held on to price and then about three months later realizing that that math really didn't work. Of course if the market changes, struck truly in terms of pricing, you change your pricing. Because making no sales over the course of three months is not going to work and you are just delaying the inevitable.

But I think the balance is and I think this is generally true across the sector. Everybody is a strong enough place not to spot that often to create it. So, that to a degree becomes a bit of self-sustaining prophecy, if everybody is kind of holding in a reasonably well. But if the market is changed and the secondhand market price has change significantly, then you just and of course yes the obvious area where you look at the moment is in Central London. There will be in some of those prime size. So, we have some degree of price moving. It's happening a bit around incentives that sorts of but not massively but there will be something because that's just quite hard to work out what. But I think we would be following rather than leading on this occasion.

Glynis Johnson

Morning. Yes, I'm Glynis Johnson; Deutsche Bank. I have four if I may but hopefully very quickly. The first one is on those lovely four charts that you gave us. I am just wondering if there are any other influences that we need to maybe just be aware of whether site openings and make a big difference in terms of any of those matrix that we just need to keep an eye on.

Ryan Mangold

Yes, so right. No, no, carry on.

Glynis Johnson

Okay. The second one was just in terms of you gave us the stats of how much build constraint had restricted or how much that had been below you thought you could sell. I am wondering how you came to that number, is it the number of people that sign up with interest? So, I am just wondering how you can measure how your build rates has constrained your selling. And thirdly, just in terms of land buying, you talked about moving up the hurdle rates, I am just wondering how the land vendors reacting, are their expectations starting to move? Are you starting to add conditionality in terms of viability when planning comes through, are you increasing the number of and types of conditions? And then lastly, overhead, how much of your land buying has overhead on it and is that increasing?

Peter Redfern

Okay. You are okay to take the last one, Ryan? I guess for this.

Ryan Mangold

Yes.

Peter Redfern

And influence on sales tax, there is nothing unusual as I said before in the July data. So, we have some site openings but we had site openings and it's not particularly significant number. We're tending to see sales rates higher on site opening, still with when Redrow reported he's run that they around the building, I could show you photos of he's ran the building on a couple of sites that I did last month. But I don't think it helps you if you see what you mean because it's a couple of sites and its local interest. It's not a fair reflection overall. Yes, when we open a new site, we got lots of interest on the site. We are finding a climber in which we can move prices slightly out of where we thought that would be but it's not distorting that data particularly.

Yes, the only bit of data in those all those comparables in previous years and this year that is a bit odd is the sales right in July 2015. I think if we went back we would probably find that was a record for any July ever whether that was because of the general election or whether we did have a particular mix there. We did certainly have one Central London site. When we launch, we'll often have pre-solds right sometimes on the Central London site when we launch it then we end up booking a lot of sales, yes, sort of mechanically at that point. And so, that could have just pushed that. So, that one is ab it odd but the others are all sort of pretty reasonable reflections of what’s happening overall.

On build restrictions, it's not that our ability to build has particularly constrained our ability to sell, although there is a bit of that because if we don't have plots to release sorts of then we can't sell any more on that side. So, we tend to release some more rates. So, we have always got something to sell but that will naturally slow it down. But our ability to build has restricted our ability to complete and therefore the order book gets longer, outlet numbers go down and that we can measure very precisely because we know what we've sold and what normal time would have expect you own it. In a sense, the mass is just about the order book is lengthened from probably what we say is a normal four and half months to close as to six months on ordinary sides, on the right side. You would expect more than that on a so sort of an apartment side but not on an ordinary kind of sort of detached product or smaller build product.

On hurdle rates, yes our initial step was push hurdle rates so that you are not out of the market, you are still having the conversation, but we didn't want to immediately contract on any land. Sort of we’re in a couple of ways you, we kind of move to, well, actually I want to contract on land if we can find that hurdle rate but it's too early to say what sellers reactions are to that. I think sort of sellers and I would be the same if I were them, we will wait and see things pretty much. And in terms of terms we have already seen those change. So, over the course of the last month and it varies massively from site to site. There is no one set pace but the ability as a site to move from one conditional deals in the South East to sort of a prime sites to more conditional deals, definitely is greater.

The ability to put in under reach or well over reach, which I've seen before is I have always talked about it well if you got over it you've got have 100, but it's never actually happened; that actually I have seen on couple of sites as we talked about. So, sellers want to sell. They want, yes, but they are prepared to accept that things might be tough and therefore they need to get something kind of tends to be in the terms. And terms doesn't just mean the credit terms it can mean the risk we take in the balance. Where that will be in the six weeks' time where hurdle rate and this is why I'm not giving you a number of hurdle rates because yes as I say we will probably use it as an opportunity because it's works strategically to push apparent line hurdle rates anyway but where else such then we'll probably know September or October. Right now it's a bit too early to say. It feels right to be cautious to be pushing things out. We don’t think we're losing anything and we will see what happens.

Ryan Mangold

In terms of sites with overhead, out of there 438 sites we have got in our short term landbanks, approximately 10% would have overhead attached to them.

Glynis Johnson

Is that increasing in general?

Ryan Mangold

No, I wouldn't say that the trend is necessarily increasing. The quantum is increasing because it's the length of time that those sites are being on the balance sheet that we have had this more positive environment, okay in the scenario which is not as positive. You only pay the average once you get to the end and that trigger is to what causes that averages therefore completed. And it does give you a bit of down side protection actually arguably from the cash flow demand point-of-view.

Peter Redfern

Yes. If you can just pass it back comes two rows behind?

Unidentified Analyst

I have got two and I will try for three but just as just first on point of again clarification on the slide on the short term landbank, you're quoting 438 sites, this is calculated form and obviously you have referred in the statement to 287B in the end June selling outlets. Is that a normal relationship between active and sites that you are or is that actually stretched down a bit? Second question I had was around your comments on the secondhand market and I assume what’s going through your mind there is the reliability of change and to what extent they may affect your ability to complete rather than reserve. Is there I mean if you look at measures like PX and that sort of thing, have you already seen a degree of stress in that relationship or is it something that well as you said you just need to keep an eye on.

And the last one I had was sort of picking up a number of questions there have been around the July data. Without wishing to ask you specifically what the nominal numbers are, can you just give us and a broad indications of the relevance of July in the context of months of the year as it were?

Ryan Mangold

Yes, okay. So, its 287 outwards to 438 sites have recently no relationship. Yes, it is. There is one caveat that, there is one trend for us that's been different from the sector end up in dire strait in the 287. We've talked a lot over the last sort of three four years about not pushing out with numbers. We have touched on as well. We just do not double head outlets and also don't compete directly with our competitors on motivate as to anything like the degree. I mean, our level of double heading is tiny and it tends to be sized where we have got either a totally different product or different access points. It's where as others in the industry will tend to drive up their outlet numbers by putting two phases on the same side. We do that significantly less and use significantly lesser than any of the major players.

So, that means you would expect our outlet number to our sort of number of sites to be proportionately lower. But on that side outlet we may be doing more from that one outlet, so you would expect our sales rate to generally trend above and our build rates to generally trend above. We just think that double heading as we look today and it's kind of continued kind of push and pull unless you can really offer the customer something different in terms of it's like you have seen the site a dead buy, so big that actually got different access points at different places, there we have a couple of outlets. But they are the exceptions rather than the role. And you have seen one of our competitors reduce that quoted outlet that I mean, effectively that kind of moving in the same direction.

We fell into the trap back in 2008 of chasing an outlet target of 500 sites and then local businesses kind of become obsessed about the number of outlets rather than the quality and what it actually means and how it impact. So, yes, we do think it gives us more robustness in the other numbers but has many outlet numbers rather to be softer. And we pretty relaxed about that. And it sorts of so it's a normal relationship for us in the last four or five years, it's not changed planning, yes always got sort of arguably easier or yes but the final stage you get an outlet and arguably hard, hasn’t massively changed in timing terms to change that relationship. But there is that kind of dynamic of how we consider an outlet opening in the plan of what we're doing on our side. We put less emphasis on it than we used to. We've got a lot of homes, some get share homes are being able to sell out in the right quality but not on can't we report an outlet or not, if you see what it means, so it does shift the balance.

In the secondhand market, there is three things that sort of that interests us in a way directly for our business about secondhand market. The first is those direct pieces that you talk about but it's probably also the least. So, it is about change and it's about PX and we see very isolated instances over the last month where our cancellations and you have seen the cancellations right so it's included in that are driven by something happening in the secondhand market. So, and it's generally somebody pulling from their own sale further down the trail. And often because of their job positions, it's often about somebody who's in financial services or a business with a strong European overseas link. But you are talking about three or four. So, you see them but they are very isolated.

The other two I think are more significant that we do worry a little bit at the moment about the impact of secondhand data on confidence; its agents can be very bullish and very negative. They tend to swing a lot in their comments and that worries us, so that actually sends a signal about what’s happening in the market; that's potentially a little bit distorted or short term. And it does flow through into sort of what sort of buyer expect to see and what sellers expect to see. So, we worry a little bit about its confidence in that. But also does the long term pays. I don't think you can have long term a really healthy in new build sector without a healthy secondhand market, helped buy is making a big difference but actually I don't like the industry being as reliant on how to buy as it is.

So, unless you get a strong secondhand market over the recovering and rebuilding and not just the last months down term but in fact that's the secondhand market has been quite slow in transaction volume terms in the recovery over the last few years. I don't think that's an ideal sort of market conditions for us. So, yes there are three levels. But I think from a referendum point-of-view the only one of those is that's material is confidence one. The long term one was there anyway and it really is long term. And the specific data but they are actually quite small for us but it's the potential to impact on confidence.

And then is July an important month, July. I think what we have seen through this cycle is the difference sees no pattern, I mean, then really talked about it today but if we did go back and show you those sales rates graphs through sort of the previous cycle in really good years, July 2016 is a stonking year. So, it's in terms of sales rates. We used, we go back kind of long term memory we used to say July and August is being 0.4 and not point 0.55, 0.65 or 0.8. So, historically July has not been particularly relevant as a sales month. But if you look at the last five months and you look at what has actually been sold in absolute number terms in July, it is much more relevant because we have not, so the only time we see a seasonable down turn really of scale, is in the last three weeks in December, when people really are focused on other things.

I think a lot of the reason for that change in seasonality on sales is simply people buy electronically although they go through a lot of the phases electronically. So, they can be sound on a beach somewhere on holiday looking at right move, looking at our website and thinking what house do I want to buy. There is not kind of I will go away for the summer and not come back. So, the seasonality has moved. But just roughly and it kind of gives you a bit of a sense; we sold 750 houses since 24th of June, give or take. In the context about a year, that's a pretty sizable number of houses. So, it's not 10s, 20s, it's sort of it's significant.

Unidentified Analyst

It’s very helpful. Thank you.

Ryan Mangold

Yes. Just pass it across and then move. We'll get back to John.

John Messenger

Sorry, it's --. And I've two and half I think. The first one is the improvement in ASP guidance for the year, is that due to London delivery in the second half and if it isn't why is the margin guidance slightly softer. And my second question is when we look at Slide 34, you obviously performed that analysis on price declines and the cash generation per unit. Have you done a similar analysis on volume declines and build cost per unit and I suppose the question really is does build cost speed vary if you reduce your volumes?

Ryan Mangold

I think I missed the second one. I got the improvement in the average selling price guidance. I got the sort of build cost guidance.

John Messenger

Yes. So, sort of the second part of the first question really is if the ASP guidance improvement is not due to London kind of rate. Why is the margin guidance slightly softer?

Peter Redfern

The improvement in average selling price guidance is largely because I was pretty cautious with the guidance I gave you before and what we are saying now is what we would have hoped would happen at that point. And yes whereas the margin guidance sort of probably have what we were already seeing in it a bit more clearly. London delivery is not massively different between those two periods but we were looking at sort of some quite bullish numbers at the beginning of the year with lots of other potential risks out there. So, giving you all of the up size letting that getting to forecast and then having to want something back because something bound to happen and we don't know what.

So, yes it's that quotient that just really be pretty robust now that we are actually our underline guidance hasn't really changed. On the build cost sensitivities on the sort of end market down turns, I think whilst were pretty sanguine about the build cost risk in a reasonably stable market, yes there will be some pressure we can absorb them. It's a lot harder to work out if we have a short term down turn how quickly this time around the build cost corrects. It's really quite hard to know the dynamic that we have got. Clearly if housing volumes in the UK drop off, then build cost come down; the environment we have been in switches significantly.

But if housing values remain relatively resilient in an area where we have had supply constraint particularly on the labor side, it's harder to cause and really it's quite difficult to know what the down side protection on build cost is. It's quite easy to calculate on cash on build cost of the sites has had a massive impact on sort of the cash drivers. But it's hard for us to work, it really give you good sense of what would happen to build cost in that environment is clearly some savings. But I do suspect that the relative savings are less than we saw in sort of 2008 where we had such a dramatic fall off in numbers but we have never really recovered totally from the resulting side. So, sort of it's a slightly different balance.

Okay. I just want to pass it back Clive and then we will go back to mister messenger.

Unidentified Analyst

Just one for me please maybe more Ryan, but in terms of net realized more value?

Peter Redfern

Definitely, more on.

Unidentified Analyst

Yes, definitely, exactly. It's an accounting one but I mean the market the industry that your business is obviously is in better position margin wise than it was back in '07, '08, I mean, margins were peaked in 2004 I think, didn’t they? But at what point do you think your business needs to start looking at net realize more values in terms of how is price declines? Is it 300 basis points 400 basis points higher than it was back in '08 '09? I am just trying to get a little bit of guidance from you to where it starts to kick in. And I suppose maybe just tidying up that loose end of that small write down as well in the first half what was going on, was that particular site issue rather than I think some other wider issue, so.

Ryan Mangold

So, I mean if you take out a landbank and you categorize it into its heritage. We have got a fairly small element, now only 4% of the landbank is at that sort of cusp of pressing sensitivity and now clearly we do this to a gross margin as opposed to an operating margin. And so, we're therefore quite cautious on our assumptions in terms of doing in all the, in terms of some of their recoverability. So, 5% price decline for example wouldn't result in any further impairment on those sides, broadly speaking one or two sites might pop out as with there's one or two that popped out this half year. 10% price decline you start eating a little bit more into that impaired sites because that's level of cushions almost gone by that at point.

And then it's a quite a wide range to sort of a 20% decline if you think about margins from investment perspective gross margins being sort of 20s and outperforming those, gross margins plus to a 1.7% in the period. We've actually got quite a large level of headroom before any of those sites then become subject to impairment, not to the extent that we have got something slightly wrong on our site. For example expectations of planning gain or for example the ground conditions or the technical challenge or the build cost being bit more challenging. There will be few sites that we ever bought post 2009 that could be somewhere between a 15% to 20% range.

But the majority of it is actually 20% to 30% as price decline between NRV. And in that circumstance, I suspect assuming that the land market is more open for business, we would still be substantially more cash generative because trading art of the site where the plot cost, historical plot cost of say £40,000 per unit, I think we will be replacing it probably a 20%, sorry 20,000 -- £10,000 to £20,000 a unit. So, the cash generation lost margin and quite low, the cash generation is actually incredibly strong.

Peter Redfern

Just to be clear, Clive. The -- it was the write back in the first half, not a write down.

Unidentified Analyst

Yes, so I assumed it right. Thank you.

Ryan Mangold

Yes, that this one specific site. Yes those one specific site that we had a write back on which the performance is just being stronger than our expectation and then there were few sites. I think there is two sites of actually, net write down of the 1.8 million.

John Messenger

Thanks. John Messenger, Redburn. Two if I could. Almost just the 10 million remediation, you'd normally think of that as kind of in the context of your build cost incurred in the six month period is kind of not really being that relevant, obviously you've drawn it out. Can you just give us a bit of a flavor as to what these London sites with some very specific things that you didn't identify when you bought the land, just have a bit of a understanding there. And the second one, with just on the pensions and obviously post Brexit, obviously fantastic control of that at the half year, are there any kind of corridors or caps as to the insurability of that pension kind of position, if we think about inflation rate at the end of the year or any further shift on corporate bond deals?

Ryan Mangold

And retention goes first and I'll pick up the 10 million? Yes. I mean we have got a very active hedging program to hedge that interest rates and inflation rate volatility. We have achieved 60 in all the scheme and achieved 60% by the time we got to June but the plan is to fully hedge that exposure by the time you get to the year end to take out the volatility. But if you think about it mathematically, the biggest exposure we have got is that our ability themselves. Clearly we need to ensure that the assets are invested appropriately to give us the reasonable amount of return at the expected risk profile that we're willing that the pension trustees are willing to run which is naturally going to be more conservative than ourselves but in terms of how the trustees would look at this.

And so, to the extent that we can hedge the liability and that reduces the volatility and we are fully supportive of the scheme continuing to do that. But at the same time and the expectation of a reasonable return on those assets that are invested which are in excess of £2 billion worth of assets, we have done a small slice of mortality hedging when we did the buy end about 18 months ago with the top slash of the pension scheme deficit has been hedged from the mortality perspective. But arguably, we have got a natural hedge against mortality; the longer people live the more houses the country needs. So, have this constant debate with the trustees, as to say we are the mortality hedge for you, which they struggle to get their minds around but are continued to push the point.

Peter Redfern

Yes, and on the 10 million, I think there is a slight confusion that John and the use of the word "remediation." These are sites that are closed and done and historic construction issues go back and put right rather than the remediation of ground conditions if you see what to mean, then you're absolutely right. They would have, yes, they're not things that would have ever been picked up in a land exercise. One of them is the now Kings side, that's been very painful to us along the other one, it's not a Central and in site but that sort of historic apartment site going back to a close business unit from yes sort of the mid-2000s.

And there are things that are natural in the nature of our business, it's just in a half year, sort of a two of them falling in one period that tend to have a slightly bigger notable effect, which is why we pulled them out so you can see the movement. And if we'd have felt it right to take them in the full year but probably not drawn them out because are fairly natural underlying things. We have a long tail of sites but there is not anything particularly significant. I mean, that -- Kings has been painful for us because it's sort of it was non-familiar product build and it's just getting the balance right between the exact remediation cost on issue in it and the insurance and sorts of claim recoverees. And it's actually more the latter that changed in the first half than the former.

John Messenger

Thanks.

Peter Redfern

I think we are pretty much now with questions.

Peter Redfern

And thank you very much for your time this morning. And happy to be around for a few minutes and take questions afterwards but thank you.

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