Earnings Transcript for PSMMF - Q4 Fiscal Year 2016

Executives: Jeff Fairburn - Group CEO Mike Killoran - Group Finance Director Nicholas Wrigley - Chairman

Analysts: Andy Murphy - Bank of America Chris Millington - Numis Will Jones - Redburn Gregor Kuglitsch - UBS Ami Galla - Citi Gavin Jago - Peel Hunt Jon Bell - Barclays Emily Biddulph - JP Morgan

Nicholas Wrigley: Good morning everybody, lovely to see you on this lovely Monday morning. Could I please start with the inevitable and ask you all to mute turn off whatever, your phones so that we don't distort the electrics. Welcome to our results presentation. We'll go through the same format as always. And Jeff will talk you through the review of operations and the outlook. Mike will take you through the financials. I'll give you a very, very brief overview. These are an excellent set of results which deliver in accordance with our long-term strategic plan which as you know is to deliver high-quality growth and generate free cash. In the year, we have nearly 600 additional new homes delivered. The margins up again to 24.8%. We generated 681 million of free cash and the return on capital employed is nearly 40%. So as a result, we have reviewed balance sheet, taken into account our outlook for the future and have decided to return an extra 25p a share at the end of March and this is on top of the scheduled 110p which will be paid in early July. And with that I’d hand over to Jeff and ask him to take us through these excellent numbers.

Jeff Fairburn: Thanks Nicholas and good morning everyone. Just looking at our long-term strategy for delivering shareholder value, everybody's familiar with this now, but just a recap. Clearly, we are keen on growing the business, which remain still in that mode. Cash efficiency is key to our operation. Investment in high quality land and any surplus cash to return to shareholders, so just in summary of our strategic intentions. Moving on to the group overview for the 2016 trading year. We're very pleased with the results. We've got a good strong outlet network. We opened 255 new selling sites during the course of the year. And we strengthened our infrastructure across the UK adding two extra businesses during the course of last year in North Scotland and Cornwall and an additional new office in Nottingham in January of this year. So now we've got 29 operating companies across the UK and that's five additional new offices opened in the last two years. So you can see our aspirations for growth and efficiency. We've also got the brickworks operation which is due to open this year and we've made good progress there. We're on target for producing in Q2. In terms of product, we are by design focused very much on the affordable end of the market. So we've got 48% of our private sales are priced below GBP200,000, so affordability is a key issue. And we're well aligned to that. And we're very much geared toward building houses for people to living. Customer confidence has been very resilient and we've got good support from the mortgage market with excellent rates and products available particularly for Help to Buy and as you can see we did nearly 7,000 completions in the year on Help to Buy. We're seeing further increase in the average selling price but still very affordable at just under GBP207,000. I think you know if you look at our unit completions, growth is something that we're keen to target particularly where the market is strong and we are meeting that demand. In the course of the year, we built nearly 600 more houses. So completions up to 15,171. Operating profits exceptionally strong with a margin at 24.8% for the full year, but actually I would point to the margin, the strength in the margin in the second half of 25.7% operating margin in H2 which we're very pleased with. Pretax profit of 782 million, obviously we're very focused on cash delivery and as you know we had GBP930 million of the cash in the bank at the year end. The culmination of all of that is a very strong return on capital employed over 39%. Looking at the general sort of trading position across the UK, I think the key issues to note here are that we continue to reposition the Charles Church brand a bit further up the market, so you can see that there's a lower volume of Charles Church but a much higher selling price. The strength of the market for us is in the Persimmon product and you can see good growth both in the North and South there and a very similar increase in the price achieved across the board there. So moving on and looking at our land. We've got great strength in the land bank as you know. Total plots owned and under control now just under 100,000. Conditions are still good and provide excellent opportunities for buying land in the open market. And during the course of the year in the open market we acquired 7,441 plots across 45 sites. That's an average of 165 units per site and we continue to be very acquisitive and we're ready to invest in good opportunities around the country. On strategic land, a good picture of this for 2016. Excellent pull through, so 11,268 units pull through from our strategic land bank in the period on 41 locations. So you can see the scale of those sites on average 275 units per site, high-quality land and that really starting to work for us as we manage the planning system to bring those sites through. We continue to invest in new strategic land, 900 acres added in the year and a total of 16,600 acres on our books at the period end. Moving on to current trading, as I’ve mentioned, customer activity has been very encouraging. Visitor numbers are up by 7% and we've got a good outlet network at 390 selling sites coming into the year is 4% up on the prior year. So we’re in a strong position to capture demand. Productivity is important and we work hard to increase that. Obviously there are challenges along the way but nevertheless we are very focused on opening new sites, 51 new outlets out of 90, around 90 for Half 1 already opened generating good levels of interest and we're making good progress on those sites bringing forward new houses facility. And I think on pricing. We've seen a pretty robust market there and seen some modest selling price improvement on sites around the country and also home part exchange we use selectively as required at a relatively lower level at 10% of our private sales. Looking at that forward sales position, as I mentioned we came into the year with a good sales position, up 5% unit sales on the prior year, 12% on revenue. And actually during the course of the first eight weeks we've sold the same number of houses as we sold last year. So we're in a strong position to move forward in good visibility enabling those to invest in those sites as we move forward. We'll have a bit of a look here at the return of surplus capital to shareholders which we're very pleased to announce a further improvement on that as Nicholas has mentioned. In summary, to-date we have returned almost 1.1 billion to shareholders. This year we’ll return circa 416 million and we still have a further 1.35 billion to pay 2021 taking us to GBP9.25 a share. So a very strong position there and the hard work in the business to bring forward that demand and accelerate production is generating excellent cash. In terms of the market, as we see it at the moment, clearly we're still mindful of the EU issues, which I'm sure will dominate the economic outlook going forward. But as I've mentioned mortgage lenders are keen to lend, lending is very discipline. We've got confirmation that Help to Buy continues which is very supportive for new home buyers entering the market. There are still challenges. But we grow - we continue to grow the business despite the issues in terms of bringing new sites forward through the planning system which still is quite cumbersome and time consuming. And we've still got challenges on resources in terms of skilled labor which continues to be a challenge for us which we are tackling. The outlet network is key and we do have good opportunities to bring new sites forward as we go through the year. But we do have a good platform for sales going forward. We’re keen to capture growth to meet demand in the market and we're working hard to do that, increase in build wherever possible. Space4 is a good support of the business enabling speed of build and increase in production. We continue to train more people in the industry. We're bringing forward skilled trainees all the time through traditional apprenticeships. Our Combat to Construction scheme trainee scheme various other mature trainee schemes. We continue to invest in new land including conversion of strategic land which we see strengthening as we go forward. And we continue to manage very closely our cost build which I think you can see from the numbers as Mike goes through you will see how tightly we are controlling our business and cost efficiency. We do have our employees and contractors and suppliers to thank which I'd like to say now. We are very pleased with the support that we receive. And that is enabling us to manage a very strong business. But I think you know to recap, the business is in strong position. We come forward with good forward sales, good outlet network, a very supportive market, a very strong land bank, strong cash and a good outlook for the future. With that point I’ll pass it over to Mike for a bit more detailed look at the numbers.

Mike Killoran: Thanks Jeff. So what we're going to do is look at the trading performance in a bit more detail and drill down into the moving parts in the margin, which I'm sure everybody is interested in understanding in a bit more detail. We'll have a look at the key features of the balance sheet and where the cash is coming from. So just again providing a bit more detail on the trading performance, 23% increase in underlying pretax profit for the year to just over GBP780 million for the year and I think that the topline growth is obviously very important. And as Jeff says we still remain confident in our ability to continue to grow the topline and meeting the demand that's out there in the market across the regions. But it's not volume for volume sake. We're only interested in high quality growth. And when you look at the profit bridge you can see that yes topline growth is an important contributor to the absolute profit pounds that we deliver year on year, but the gross margin improvement if you use that as an indicator of quality is something that we’re or a feature of the business that we're very, very focused on and will remain focused on in the future. So the gross margin improvement is a critically important feature of our model. 240 basis point increase in gross margin to 27.8% delivered in 2016. That is a little less, a little lower than what we achieved in ‘15 over ‘14, we achieved 320 basis point improvement in gross margin. So you can see this trajectory that we’ve talked about over the last sort of two to three years I guess in that you know the ability for the business to continue to step forward margins those become more challenging. The higher the ladder you climb so to speak, so. But having said that, in tempering your expectations for the future, we're very pleased with the 27.8% gross margin for the year. How have we achieved that? Well, land recoveries as you all know is a very important element to delivering the trading profitability in any financial period and that really is just a you know the manifestation of a huge amount of hard work that goes in identifying land in the first place right through to making sure the schemes are properly planned and all the work that goes into getting the right detail consents and then delivering those schemes in the right way on the ground in terms of our site processes. And it's gratifying to see that all that work comes through and continues to add value to the margin performance of 160 basis point step forward in land cost recoveries in the period year on year and that was delivered by a 5% reduction in absolute value of plot costs recovered just shy of GBP34,000 in 2016. So land recoveries and the improvements in margin coming from that elements of the business is set to continue and we'll see a little bit more on that as we look into the balance sheet and as Jeff says you know the platform we've got supporting the business moving forward. Complementing that we do a huge amount of work controlling our development costs and overheads there's a lot of effort around the country and all the teams bring a lot of focus and visibility to our development cost base. And it's again pleasing to see that we've added 80 basis points to the margin as a result of all that hard work. So gross profit per unit sold in 2016 around about GBp57,500 is about 14% ahead of the prior year performance which I think is a tremendous results. Moving on to the operating margin. Our operating expenses continue to be pretty lean. Again, we control the resource base in the business very closely, 290 basis point improvement to the underlying operating margin for the year to 24.8%. But as Jeff already highlighted we're particularly pleased with the further step forward in the second half of ‘16 to hit the 25.7% mark. I think the OpEx in the second half of the year is quite low. I think moving forward maybe taking the full year 3.2% sort of level is a more realistic view given the new businesses we've opened in like and a little bit of inflation coming through. Sales and marketing costs at 1.4% of revenue is as low as it’s ever been. Again it gets increasingly hard to squeeze an extra basis point out of the cost base on that. I think we are ever so pleased with the performance on the sales and marketing side. But there is only so far you can travel in terms of squeezing value out of that. But I think that is a reflection as Jeff's already pointed to that we do have a strong market and I think that it's reflective of that in the tower, our sales and marketing costs are at a lower level as a reflection of the strength in the market. And as I say you know as Jeff says that you know we're still keen to grow the business, scale opportunity is still there across regional markets. The housing need around the country only increases and we're very keen to do our bit in meeting and fulfilling the housing need that is there around the country. And how we're going to do that’s all about having the right land in the right locations and I think when you look at the land bank, we've got a very good spread; we've got a good breadth in support of our 29 housebuilding businesses. We’ve provided a little bit more detail there at the top end of the land bank if you will with respect to the plots owned. We split that into the plots with detail planning consent good to go today that we can crack on and deliver together with plots that we own that are proceeding to a detail ticket. And you can see quite a big step up just over 9,000 plots in that category year on year to 18,000 and that reflects the point that Jeff stressed earlier on that we are now starting to see increased success in strategic pull through and we're fortunate in 2016. The strategic parcels that we did get success on a large proportion were already owned which is the driver behind that step-up in the plots owned proceeding to planning in the period. And then you know casting you right across to the cost to revenue percentage I think that demonstrates the quality of the platform, the businesses got moving forward in terms of its future margin potential. And we're very keen to unlock that as we move forward, 14.7% cost to revenue percentage as of December ‘16 compares very well with the 16.4% recovered through ‘16 on the legal completions together with a further improvement if you use last year as a benchmark to measure that. So that reflects that the landmark as Jeff's already pointed out. The landmark continues to be supportive, deals that we do in the open market remain attractive. And I think a feature of the balance sheet demonstrates that the land payments side of the equation for us did slow down a little bit through last year. I think we were right rightly a little bit more cautious on the run up to the referendum and we were testing [indiscernible] in the market on the land side as we always do. It’s not the case that we sort of moved away from the market. It was just the pace of completing deals slowed down a little bit, but the difference year on year about GBP150 million lower land spend obviously does transmit itself into the cash performance which obviously resulted in GBP930 million of cash held on the balance sheet by the time we got to December. But again I think that we're very pleased the work in progress is stepped forward by around about GBP100 million invested December on December. That's a quite an important aspect, I mean Jeff's already mentioned the tightness around labor supply and resourcing. So we've been working doubly hard to make sure that all the businesses have got the right platform in terms of build in support of those forward orders that Jeff's pointed to as absolutely critical feature of the business in support of what we have to deliver, what we'd like to deliver in the New Year in 2017. Cash generation is still strong as we've seen before it's a combination of trading and balance sheet management. The working capital piece you know in overview we've got 100 million more in work in progress, 100 million less in land, carried land investment as a result of the moving parts that we've touched on. That's the switch if you will in overview on the balance sheet and as you can see there is a direct linkage between the cash from operating activities and the underlying operating profit that direct correlation is to be expected. And the cash generation as I say you know it is critically important to understand that the cash that we deliver as a business is a combination of trading performance together with that balance sheet management. And I know that we touched on the back in the capital markets day that we had last November and there's a few sheets at the back of the pack just to remind you of that relationship. It is critically important to understand where the cash comes from and how that translates into the balance sheet position on the cash held at any point in time. Suffice to say that it remains a key focus for all management teams to make sure that over the long term and through the cycle that the strong cash generation continues and we’ve given you a look back there in terms of the long term history in terms of cash generation to remind everyone of the performance in that respect. A key priority for the management team is to retain flexibility. Obviously, the market outlook is Jeff's already mentioned is a little difficult to read at this point because of all the different moving parts as we proceed to exit the EU. But I think the flexibility and liquidity is a primary important for any management team and we've worked incredibly hard to get the business in such a strong position where we can we believe react to changing market conditions as they unfold. Part of that is making sure that we've got the right capital structure; the return that we generate from that capital deployed in the business is a top priority for us hence the capital return discipline. That is an absolute critical part of ensuring that our capital structure remains fit for purposes as markets wax and wane through the cycle. So just to finish, cash generation obviously remains a key focus for the business and puts us in a great position to return and assess surplus back to the shareholders as we proceed through the cycle. So I’ll pass through to the Chairman now to wrap up.

Nicholas Wrigley: Lovely, thank you, Mike. Just quickly in summary. An excellent year in 2016. Cash generation talked about quality of our earnings is improved again. The volume growth is delivered as we increase output to meet the market demand. We've taken advantage of opportunities to strengthen our land bank. And this is enabled us to - with our strong capital discipline to increase the capital return plan again to GBP9.25 a share. And I think the important point with that is it reflects our confidence in the quality of the business and in the future. So what I'd now like to do is ask you for questions. Since I started I've noticed there's been this creep from one question to question with increasing number of parts, so I'm going to be very disciplined and that to my capital discipline. And if I don't like too many parts, I shall eliminate them and just let us pick two out of whatever number you come up with. So just be aware if you ask a tricky one and added into five we'll drop that one and deal with the other three or two maybe. So with that I will start and I'm going to start from right to left and say Andy you’re going to be the first question and then we'll move across the room. Thank you.

Q - Andy Murphy: Good morning, Chairman. Ten questions if I may. Andy Murphy, Bank of America. Two questions, first of all, I guess the first one is for Mike. Looked like the central costs came down about GBP15 million, a great performance, I was wondering if you could explain, give us a bit more color about how that was achieved And just second just looking at a landmark overall, what you saw perhaps around middle of last year and have you see I now just in terms of the level of competition and the amount of land coming forward that’s available to purchase. Thank you.

Mike Killoran: I mean on the first one, I think that given the strength in price - share price obviously we are taking charge through P&L for the ultimate for the team so that was accrued slightly more in the first half, visibly the second half. So that was the key driver behind.

Jeff Fairburn: And on the land front, all as we said through last year through the Brexit vote et cetera there was a bit of an easing off there really generally in the marketplace and while people sort of just caught the breath really just to see exactly how things were going to trend late. But actually the landmark has been pretty similar since then through into this year there are not - there are sufficient land for us to buy but there needs to be more sites coming through if that makes sense. So the plan is just to really is delivering largest sites in fewer locations. So hence you can see you know if you look at our land bank, our average site size has increased and really we hope that the planning system will deliver more sites in local areas but perhaps smaller size.

Nicholas Wrigley: Chris if you want to ask a question or [indiscernible].

Unidentified Analyst: Not quick enough Chris. Two, if I may and I'll may follow up with more later. Let me ask the big one, 25 pence additional dividend. Why 25 pence, why not more, why not something for later. You sit on 930 million of net cash. Then your margin guidance, you talk about being able to do more in terms of margin. Maybe a little bit more color on that, do we need to see a step up in costs for quality, have you done enough in terms of increasing the accuracy on site, is there anything more in terms of land price to ASP H2, full year, what kind of color can you give us on margin upside?

Mike Killoran: Well, I start with the dividend. We are returning 416 million. So it's a pretty chunky return. In determining that, obviously, we had the base of 110 and then we had a considerable debate about what we would deem excess at this juncture. And in looking at that, we look at our plans, expectations of opportunities in the land bank. We look at the market, Brexit and all other things and then I'd love to tell you and it's an exact science, but it's not - it's a judgment and the judgment was that, we had some excess, which we'll obviously determine to return. We brought that return right forward because of its excess. We might still get on with it and so effectively March is the earliest date. Could I hold my hand in my heart and say, could it be a few penny more or less, of course and that's the judgment. But we’re driven by the need to be - to secure the business and at the same time to reward shareholders. So it's that balance.

Jeff Fairburn: And I think on the margin, we've put a lot of effort really in to achieving the margin we're at, not just on the land front, because obviously the land is a big driver, but with their operational efficiencies and I think we've, on the operational efficiency side, it’s a little bit more we can do. But we've driven through our group standard health times, we've looked at building techniques, we've looked at our bill programs and we're well through that process, but there's a little bit more that we could probably drive through the business, but equally those cost increases to mitigate as well. So I think we could see a little bit more on that. I think really the main driver will continue to be land and I think that as you can see from the numbers that Mike outlined, there is a little bit more in there. Quite what shape that comes through and how it comes through over what period of time is difficult to anticipate. But if you think about land cost, ultimate land cost to revenue, there's only a level that you can actually achieve before you can't go any further and I think we're pretty much getting to that stage in our view. So a little bit more, more strategic land to bring through. So we’re quite excited by that where we can see good margin opportunities, particularly on that land that we own that’s in strategic land. And as Mike outlined, you could see the elements of owned land proceeding through to planning, which is able to deliver some good margins. But equally, some of those sites have got a high requirement for infrastructure and for planning gains. So it is a balance. There's a little bit more, but it's difficult to say exactly what that would be and what shape it would be Glynis. Chris? [Technical Difficulty]

Chris Millington: I just wanted to ask two obviously, and that was personally, you mentioned optimal scale on a few occasions, just kind of why you see that with the new office openings around the country. The next on really is just about the freehold land in the strategic land bank and how bigger opportunities are still to come there?

Jeff Fairburn: Okay. On the scale issue, we’re still optimistic and keen to continue to push the business forward as you’ve heard. We used to still see some opportunity for a little bit more market share in certain areas of the country. So we’re reluctant to say exactly what shape that would be, but I could think that if the planning system do show the improvements that we hope and that some of those areas that have been constrained in the past are unable to bring more land forward, then I think there are two or three opportunities that where we could open new offices in the future, difficult to really say what sort of timescale that could be and will depend very much on the circumstances. But I think, now, we've got a good infrastructure of 29 companies and we've always said that we can operate those businesses within a range of scale and quite a few of them are towards the upper end of that scale. Some of them have got a little bit more growth. So I think we can still anticipate some incremental improvement on the infrastructure that we've got. But it really does depend on more sites coming forward to make a difference, because the industry and certainly Persimmon is operating of the certain number of outlets that it’s had for a number of years now in overall terms. So it is the rate of sale and rate of build that’s been the key driver of volume increase. Going forward, we hope the planning system frees up and enables us to actually grow the number of outlets and therefore see some natural growth of scale in that way.

Nicholas Wrigley: On the strategic land, we own freehold about a third of the strategic land holdings, so just over 5,000 gross acres. I mean there are lots of interesting positions in there and I think the current period that we're looking at ‘16 reflects that because in terms of delivering plot cost to revenue, 11.1% is of really high quality. So I think that obviously this strategic land can take a while to come through. And as Jeff says, that's a bit of the frustration in the - you have to have the patience and tenacity to continue to pursue these positions. At a time when the plumbing backdrop has changed, both in our favor and against us from time to time. So it does take a lot of persistence and a lot of hard work in continuing to engage with all stakeholders to get these parties through. But as you can see that it is eventually rewarding to continue along that path and I think that there are some really quite interesting situations in the - I mean, there's - always there’s a mixed bag, but I think as Jeff said earlier, the opportunity there is the added value that that brings to the business is a very valid - it's a very valuable asset base for the shareholders for the future. And we'll be working very, very hard to bring as much of that through as soon as we can.

Unidentified Analyst: Thanks. Two for me as well please. Just firstly I wondered if you can give a bit more color on the 4% fall in private sales, reservations in terms of any regional differences and I think you said the trend was strengthening. So just wondered if that was actually positive in the last few weeks? And then secondly just on HPI, how much [indiscernible] and what your expectation is for ‘17 post inflation. Thanks.

Jeff Fairburn: Okay. I’ll do with the first one. So yeah, the forward sales is pretty consistent across the board in the usual sort of way. We have very much now managed to utilize our group house types right across the country. So if you look at the average selling price in the South for example, where we've managed to drive the size of the house down to get more affordability into that market, which is really for us where the strength of the market is for us, in terms of strengthening week-on-week, we've just had a very strong week last week and we see that pattern as we're now moving through into the spring selling period, which is encouraging. So it's been a more traditional shape of sales as we've come through these first few weeks in the year, rather than last year, which was particularly strong early and continued strong for those first few weeks. So we're quite encouraged by that. We've got good outlet network as I've said and we've got good interest on those new schemes coming forward. So I think that will - we hope that that will continue. Certainly for the first half of the year, we're confident about our sales and bill position. So that's positive. And we're keen now to build on that and as we move and look at the second half of the year.

Mike Killoran: Mike, on the HPI front, it's hard to be absolutely exact, but we would say that it's about 50-50 split in ‘16 in terms of the underlying strength of the market and what's that's delivered to the business as well as a slight drift to most of the base sales, which adds to the mix. So more or less a 50-50 split on that. We would say for our business and looking further out, I think the price, we’d expect some modest improvement through this year, perhaps 1.5%, 2% is a reasonable position in terms of an expectation at this point with again maybe a 50-50 split in terms of where the underlying market is and that continuing drift and why is that, because when you look at where housing need is most acute, then I guess you've got to look at most of the territories for a bit more housing to be delivered and I guess we will take our fair share of that action.

Will Jones: Thanks. Will Jones from Redburn. Three if I could please. The first just around, just to double check on the dividends and this extra, I thought there was loud.

Mike Killoran: I might drop the dividend one if I can.

Will Jones: I’ll do three and you can drop one. On the dividend, just wanted to double check, really, is this process now you'll look at every balance sheet date or is it more for the full year results in terms of thinking about any increment to the 110p. Second, just around product quality and customer satisfaction, which clearly is a very live issue for the whole industry, but I think last year, you slowed down your site openings in the middle of the year, you’ve added a few more people to customer care, do you need to do anything more or are you happy with where you've got the business to in terms of that side of the equation please. And then just the last one around shared equity, I think you still got about 150 million or so on the balance sheet at year end. A couple of your peers had talked about monetizing theirs. Would you look to do that for yours or are you happy with the free cash every year?

Nicholas Wrigley: I’ll take that last one first. Yeah, I mean the shared equity is really quite interesting sort of window into where the consumer is and I think we've been not surprised, but it's provided a decent cash yield. We've got - we've enjoyed about 45 million of gross cash inflow and that represents early contract redemption through choice because obviously they’ve got a term to run these second lien loans that we’ve provided to customers in previous times. So it is an interesting asset. It does give you additional entail in terms of health of consumer and it continues to work well for the business, not that we're looking to do anymore at this point, but we're quite happy holders. So we're not really looking to monetize that in a transaction. But I guess if there was a decent offer, we’d perhaps take a look at it.

Mike Killoran: And I'll deal with the dividend. I mean it's something we keep an eye on all the time, but it will be annually, we'll look at it.

Jeff Fairburn: And then the third question, I think we’re now in the third question. Customer care, product quality, yeah, I think it’s a really important issue. And during the course of the year, I think we’ve made really good progress. You're right we did hold on some of our sites to get a bit further ahead in terms of build, because it is important to recognize that the customer care issue is a wide area. It involves every contact with the customer through the process. So it's important to be able to give the customer a reasonably accurate date for completion, which is why we wanted to look at our bill programs and improve the ways that we actually forecast in that way, but then the quality as well which during the course of 2016, we introduced quite rigid structures in terms of inspecting and checking the houses prior to hand over and we're quite pleased with the progress that we’ve made on that, the quality of handover is now very good. So we’re happy with the progress we've made in that regard. And so we've looked at this from all angles right through the process. And generally, we're very pleased with the progress we’ve made during the course of the year. There's still more that can be done and the teams are very focused on making sure that we actually deal with issues that occur in people's properties once they’ve moved in quickly and promptly And again, that's about resource, making sure that contractors will go back to properties in a timely manner and actually deal with things properly. So we've reinforced our process and introduced more people into the customer care departments to do that check in. And the results have been very good. So please so far, it’s work in progress, but very good progression through ‘16.

Nicholas Wrigley: I mean I think it's important that understand that it's a serious focus of the board and it's something that we monitor very carefully and reflects the fact that we've delivered 60% increase in output and that comes with stresses and so we've got to ensure that the process is actually increased to meet that and we are pleased with it. But as Jeff says, it's a real focus as we go around, get around all the businesses. It's the key focus that I take up with them that they've got to understand that this is about ensuring our customers and are satisfied. In an age where people are increasingly ready to react if it's not right. So we've got to get it right. Gregor?

Gregor Kuglitsch: Thank you. Two and a half questions I think. So I’ll try to keep it simple. The first one is just on operating margins. Can you just be clear, when you're talking about improvements, are you taking the second half, the 25.7, that’s the starting point to build on or are we just maybe give us a little bit of a sense of the directionality there? The second question is just can you remind us on the LTIP. Obviously, you’re bringing the dividend forward and forward or increasing it. So the question is, does it still vest at 620 and therefore the vesting date is basically coming forward. And then the third question is can you just remind us in your thinking about inorganic growth, because obviously you've got - I think you've repeatedly said you’re going to, at some point, the margin improvement potential will level off and naturally to scale up would be a transaction. So if you can just give us a sense how you think about that versus land acquisition or whether it's something that you consider at all? Thank you.

Jeff Fairburn: You do the margin, I’ll do the last one and Nicholas are you doing the LTIP.

Nicholas Wrigley: I’ll do the LTIP. That’s my job.

Mike Killoran: Yeah. I mean when you look at the margin, obviously 25.7 is a high point for the business that we achieved in the second half of ‘16. I mean it goes without saying that we will try and achieve the best out we possibly can for shareholders. And as you guys all realize there's a lot of moving parts in delivering that sort of margin, but certainly I would tee off from that second half operating margin looking forward, it's a natural thing to do. And why is that? Well, it's because that a good number of sites that have delivered that performance continuing into ‘17. Some of those will be traded through and closed and replaced with the 90 or so sites that we've got out for the first half. But the pipeline is of good quality. And the focus that the management teams bring to that in terms of the land replacement activity, that goes hand in hand with the scale issue. It's a key part of the strategy, it’s fundamental to delivering the superior returns through the cycle in making sure that you take advantage of the conditions in the land market at the right time on the right Ts and Cs. And we're pretty relentless in testing where the market is in every respect of the business. And land is a key focus and will continue to be. And the management teams are very, very focused in delivering that platform for the future. So I could see - I mean we've talked about it before. I could see some further improvement coming through over the next year or two, everything else being equal. But that's quite an important last piece of that sentence, isn’t it, everything else being equal. And there are a lot of challenges and potential fluctuations in markets that could happen. But I think it’s a positive prognosis. Jeff do you want to talk about?

Jeff Fairburn: Yeah. I think on the growth aspect, Gregor, I think the - we’re very much advocates of organic growth. It’s a high quality. We can see opportunities for land acquisition going forward. That continues I think, we’re very strong in the land market. Our products and our processes give us an advantage in that regard as opposed to the acquisition approach of businesses, which isn't as clean. But as I mentioned earlier, we've got very good coverage across the UK. There aren't many parts that we're not covering. It is really consolidation and enhancing positions that we're already in where we see the opportunity for a bit more market share. And if opportunities present themselves on that front, yes, of course we’d look at them. But generally organic growth is our preferred approach.

Nicholas Wrigley: On the LTIP, notwithstanding the increase, the GBP9.25 that's over the ten years, but the LTPI itself still remains on the GBP6.20. And after July, we will return GBP4.85. Ami?

Ami Galla: Ami from Citi. Just two from me. First on starter homes, can you give us some color how that's working through the system? And the second one on material costs, could you talk a bit about the cost pressures there and are there any concerns around shortage of material that could potentially impact your business.

Nicholas Wrigley: Okay. Thanks, Ami. On your first question, starter homes, are you talking about the starter home initiative? Yeah. Well, that was one, like we’ve been waiting for more information on that for some time. It was mentioned in the white paper, as you know, but it really needs further clarification. And it has changed somewhat from the various announcements that we've seen so far. And at this moment in time, I'm not entirely sure how it's going to operate. So there's quite a bit of consultation I think really to see how that transpires. But certainly it's been pulled back somewhat from where it started in terms of the level of retention by the customer of the added value. There's a longer qualifying period going to be part of that process. But in terms of detail, I'm not sure. Cost pressures, yeah, I think we see a bit more pressure this year on materials. And we've done quite a few of our deals already for this year and beyond. So we can see that there is a bit of price increase, but it is manageable and bios in our process, we've got some further efficiencies that we can bring through. Last year typically, we saw a more increase on labor costs. That pressure has come off a little bit, albeit it's still, there is still a shortage. But this year, it’s more pressure on material costs. And we’ll see how that transpires over the course of the year. But as I say, we’ve got various things that we can do to mitigate that ourselves such as the bricks, which helps us in that way. In terms of shortages, yes, that's a constant concern for us because obviously if we can’t get the materials, it's going to restrict the ability to deliver the volumes of houses that we want to deliver. And we keep a very careful eye on that. There is a bit of concern around the supply of roof tiles at the moment, which is something that the market is aware of. So we just need to keep a careful eye on that. But generally, the market has responded pretty well.

Gavin Jago: Yeah. A couple from me. It’s Gavin Jago of Peel Hunt. Probably for you Mike on the strategic land. That third of the land holdings you've got in strategic. You guys feel for how that’s moved maybe over the last few years, i.e., what the intake has been over the last few years to see how that's going to be sustained for the margins going forward. And also just give us a maybe a range for expectations for the land spend or replenishments this year please.

Mike Killoran: Yeah. I think the - I mean just on the land spend - the likelihood is that it will be higher than last year. I mean, if you look into 2015, the cash out was about 630 compared with around 480 in ‘16. So I would say that it will lean towards - more towards the ‘15 performance. But obviously that with the caveat with quite a heavy caveat in terms of the continued assessment on the outlook, we’re watching carefully. On the strategic, I think the freehold, we're still acquiring freehold strategic land and indeed over many years, it's been quite consistent actually. The freehold concept of the strategic land has run around about a third of the total for many, many years. And I think that just reflects the consistency of approach that we bring to it. Not that it is a deciding factor. It's just that the teams around the country continue to operate on the broad front, looking at both the opportunity to acquire parcels freehold or tie them up under a longer-term option. Jeff?

Jeff Fairburn: Yeah. It tends to be a bit of a longer burn I think on the freehold. If you think of it from a land owner’s perspective, if it's got the stronger, the opportunity for planning, the better price they're going to want. So it’s quite speculative the owned land, but we're prepared to do that with the skills that we've got looking into the future if we see an opportunity. So as Mike said, it’s been pretty consistent to be fair. And we've found the planning system for bringing through our strategic land has been supportive, so that that’s encouraging and we hope that that continues and improves hopefully.

Gavin Jago: This isn't a third, it's more point of clarification, Mike. Sorry. Just on the house price inflation, that 1.5% to 2%, is that underlying or total, it was unclear.

Mike Killoran: I would suggest that it's a reasonable stance to take at this point for this year in total. And if you bring a view of a 50-50 split on that, I think that's a first dab at this point. Jon?

Jon Bell: Yeah. Thanks. Jon Bell from Barclays. Two from me if I can. On the land that you bought in the aftermath of the EU vote, where you perhaps took the opportunity to renegotiate some terms, what gross margins were you getting there. And then secondly just on this start land freehold element point. What's the typical gross margin uplift on that piece?

Jeff Fairburn: I mean just taking that last leg, typically you would be looking at sort of high-30% in terms of ex-strategic land that you've acquired freehold that you have success in getting a detail ticket on and deliver legals, you're looking at typically high-30% as a reward for running the risk and obviously the time frame.

Mike Killoran: And I think on the EU issue around the - after the EU vote, what did we do? We did a number of things. We look to enhancing the deals wherever we could, but the key thing was to limit the commitment or the exposure to new land acquisitions. So if you, for example, if you had a site of - a big site a 500 unit or Mike had committed to, a third of that, rather than all of it, with the rest on an option. So that type of arrangement or we may have managed to agree some better deferment in terms of payment terms, et cetera. So we’re all really around the edges of negotiation to give us more confidence to invest at that stage. So a little bit of improvement here and there, but wasn't particularly margin, it was more about cash and commitment.

Jeff Fairburn: Okay. Is that it? No. Emily?

Emily Biddulph: Good morning. Just a quick one. Emily Biddulph from JP Morgan. Just on the whip turn, I think this is the first time in years I haven't heard you say you would like a bit more whip on the ground. So I assume we can extrapolate this year’s whip turn to next year and have that just based on that?

Jeff Fairburn: Yeah. I mean we've managed to invest more in the work in progress, but it tends to be more in the infrastructure. So with the type of size that we’ve delivered over 2016, big infrastructure requirements, so actually, we've invested quite a bit in infrastructure, roads and sewers and other high expenditure areas. We've had a bit of an increase in terms of investment in unit build. So the actual building of the house is, but it still isn't enough. So we do still have a requirement for further investment there. It is the most challenging part of the business in terms of investment that we continue to focus on, but is quite restrictive. So we would like to build that position further as we go through the year and improve on what we came into this year on.

Nicholas Wrigley: Good. Thank you all very much indeed. Very nice to see you.