Persimmon PLC

LSE:PSN

Earnings Call Transcript 2021-Q3

[Operator]

Hello, and welcome to the Persimmon trading update analyst conference call. My name is Molly, and I'll be your coordinator for today's event. Please note that this call is being recorded [Operator Instructions] I would now like to hand the call over to your host, Dean Finch, Group Chief Executive, to begin today's conference. Thank you.

[Dean Finch, Group Chief Executive & Executive Director]

Thank you. Good morning, everybody. I'm joined by, as usual, Mike Killoran, and also Martyn Clark. So I will begin by making -- picking out 1 or two key points, then hand over to questions, as usual. So the business 0 continues to trade very well with strong sales rates and good build rates. We're on track for the year-end, with completions expected to be about 10% ahead of last year. Despite cost pressures, margins remain resilient. Build is coping with the supply chain difficulties and is strongly supported by our off-site manufacturing capabilities and build rates in recent weeks have been particularly good. Selling prices remain strong. Reservation rates remain strong as well and are up about 16% on 2019, which we're taking, really, as the more comparable year. And on that token, forward sales for '22 are up overall 20% by value on 2019, with private up 26% by volume and 37% by value. Our land acquisitions continue well. We bought 16,200 plots year-to-date with excellent embedded margins. Despite planning delays, we expect to open 60 new outlets by this spring. Build quality continues to improve, with the business now trending above 92%, and with 26 out of 31 of our opcos, when I checked yesterday, above 5 star. We continue with our ambition for 0 carbon future and our 3 projects, which we mentioned at the half year are progressing well. And we continue to make progress with cladding with 3 of our 30 high-rise developments now remediated, and we're sticking to a guarantee of ensuring that the leaseholder doesn't pay. So thank you very much. I'll now hand over to any questions you might have.

[Operator]

[Operator Instructions] The first question comes from the line of Arnaud Lehmann calling from Bank of America.

[Arnaud Lehmann]

Dean, Mike, and Martyn. A couple of questions on my side, please. Firstly, I've seen your statement this morning. A couple of times you expressed frustration around the planning system. I think Michael Gove, this morning, made some comments in the press or somewhere around, potentially giving up on any reform. So I guess it looks like it could remain a constraint going forward. Do you believe -- what do you believe should be done to make life easier for the industry? I guess, is my first question. The second question is on the build cost inflation. I think you mentioned 5%. I think last time you reported, you were talking about 4.5% to 5%, so broadly consistent. Are you seeing signs that build cost inflation is starting to fade? How much of the plus 5% should we carry over into 2022?

[Dean Finch, Group Chief Executive & Executive Director]

I think, look, I'm not getting into the reform area. I mean, I think it's about the system we've got. The system we've got at the moment has been impacted by, firstly, COVID; and now increasingly, resource shortage. So if I had a magic wand or I had a special ask of Mr. Gove, it would be, "Please, can you resource up the planning departments across the country, so they consider the applications that we've got in."And look, for us, we're just highlighting it as a frustration. Really, this is just a timing issue. We've got some really excellent sites that we purchased are just in the system, and they will come to fruition, and we'll do very well when we get on to them. But we are experiencing delays. I think everybody in the industry is experiencing delays, all the chief execs that I talked to us saying the same thing. And when I met with Housing Minister a few weeks ago, we all expressed the same point to him. And when asked, "Well, what you want us to do here?" It is, "Well, resource up, please, because that's what we need."But look, what it means is that there will be a bit of pent-up demand for product when it eventually does come, which should prove good for us. So it's about resourcing rather than reform. I mean, we can speculate all morning about what may or may not be reformed. I mean, I think as an industry, we work with whatever system's in place. And if it looks like we're sticking with the existing system. Fair enough, we've learned to work with it over years. So this is really not about policy, it's about resource. On build cost inflation, look, I think ebbs and flows across what component you're looking at. I mean, I think what people tell me, who have been in the industry all their lives, is that we've really seen across the entire supply chain this year. What's been unprecedented is that everything's been under pressure. Yes. I mean, as you will know because you follow these things, some of the commodity prices, in particular, have come back a bit since the spring and early summer. But there are still some spikes out there. And we expect it to be a feature of what we've got to live through during the course of 2022, though also anticipate that eventually, supply chain will recover and that should ease some of the pressures.

[Michael Hugh Killoran, Group Finance Director & Executive Director]

I think the other dimension, Arnaud, is -- we referenced in the statement that we're fortunate to have the build and -- the brick and roof tile facilities together with the space for support because that is helping ease some of the issues and some of the restrictions on availability. It's all about security of supply. So that is -- that is helping us through these pinch points, as Dean references.

[Arnaud Lehmann]

Is Phase 4 -- as you mentioned it, is it scalable? Can it make a meaningful difference to your national business?

[Dean Finch, Group Chief Executive & Executive Director]

Yes, it does. And we will be expanding it over time. I see it as a key resource for the business. As Mike says, I think our vertical integration is a competitive advantage for us. And candidly, it's made the difference between us being able to hit our numbers this year or not. So it's -- I'm deeply impressed with that capability we've got within the business and want to strengthen that over the coming years.

[Michael Hugh Killoran, Group Finance Director & Executive Director]

And I think, Arnaud, just thinking about, as Dean says, the space for construction system, we are doing quite a lot of work in terms of R&D, in terms of further developments of that process and manufacturing approach with a site on sort of '25, '26 and decarbonizing, helping to decarbonize the products that we -- the homes that we build. So there's -- it's a really interesting space at the moment, which will, as Dean says, continue to be quite attractive for us to explore in terms of providing the right solution in support of the future home standard and achieving those requirements.

[Dean Finch, Group Chief Executive & Executive Director]

It really takes 4 boxes for us, quality, growth, 0 carbon, and skill shortage, so it's a key part of what we do.

[Operator]

The next question comes from the line of Charlie Campbell calling from Liberum.

[Charlie Campbell, Housebuilding Analyst]

I've got 3, if I may, but they are all pretty quick, actually. So just on land, I mean, you talked about being very successful in land purchase, but some of the agents are starting to note kind of land prices going up a bit. Is that something to worry about as a concern? Or is that something that you're not even seeing yourselves? Just some color on that would be great. Secondly, you mentioned in the statement that you were looking forward to spring. And I wondered if there's any kind of forward-looking indicators that you might sort of highlight to sort of underpin that confidence in spring. And then the last point, really, is around Help to Buy and low-deposit lending is what your impressions are of the Deposit Unlock scheme? And whether you think that might kind of fill the void that's been left with -- that will be left with Help to Buy as of sort of towards the end of next year?

[Dean Finch, Group Chief Executive & Executive Director]

Okay. So I'll have go at the first 2, and Mike wants to answer the third one. On land, well, we suspect, prices have always gone up to some degree, but we cope with it. I mean, yes, we are in a competitive market. But we bring the Persimmon -- great Persimmon capabilities of land buying and build to that. We've got particular strengths in terms of the scale at which we can buy and the size of units that we can buy in a trade-off. So look, we really are pleased with the progress we've made in the last 12 months, 16,200 units, as we referenced in the statement this year, great margins. There are some really super, super developments out there that we want to get through planning and bring into construction. So lots of people ask me that question all the time. But candidly, I think we're just dealing with it. It's just market, and we're taking it in the stride. You referenced spring, well, you can see our forward sales position is strong. And I'm sure Mike will touch on this in a moment. But as we've seen the Help to Buy numbers change in terms of proportion of demand. We're not -- our sales rates remain very strong and they're continuing in recent REITs to be very strong, notwithstanding the fact that we've now passed the end of furlough, notwithstanding the fact we're in post tapering of stamp duty relief. There is a very strong demand, some product out there. And it's hard for us to tell what impact the pandemic has had on demand, but working from home and demand for green space, all of which I think is a feature of product we supply. And so whilst mortgages remain affordable, demand remains strong, and we expect that to continue in the spring as we sit here at the moment. Mike, I don't know if you have any more to say or answer on the Help to Buy question.

[Michael Hugh Killoran, Group Finance Director & Executive Director]

Yes. I mean, I think it goes in hand in a way, doesn't it, Charlie, in the -- obviously, the Help to Buy scheme for the industry overall has been supportive. I think the change to it, we anticipated a lower take up for the changes that have happened and came into effect earlier on this year. In terms of -- since that change from, let's say, the start of April, we've seen customers, about -- around about 30% of our customers have chosen to use the Help to Buy scheme. So yes, that is a reduction on historical levels. But as Dean's already said, the sales rates we're achieving despite the changes to Help to Buy and stamp duty window tapering and then shutting demonstrates to us the resilience in the market. And thinking about spring, obviously, we've got some exciting developments in the pipeline. We're already out marketing a few of those, which will be released into spring, the other side of Christmas. Because, obviously, we're now reaching a stage where we start to think, well, is there any point in opening up a new development, this side of Christmas, so we probably start to hold them now. Just to get, as Dean says, tap into that pent-up demand in the spring season, which is always the better season to sell. So I think that we're seeing good early interest in these developments coming through our website, good levels of inquiry, which supports our confidence in terms of the outlook for spring. And then when you look at our forward sales in terms of reservations already taken, they are particularly strong. Dean's already mentioned that our PD, our private sales into the owner-occupier market for next year are already sort of 26% ahead of where we were in '19, just shy of 2,700 homes sold. So I think there's a number of points there, together with the new outlets that are to be opened into that spring season, which we're sort of confident that we'll be in a good position to meet the demand that's there. I mean, obviously, interest, there's been a lot of chatter around interest rates, et cetera. But we're still seeing good support from lenders. Okay, they did pull a few deals, in anticipation of last week's decision. But I think that generally speaking, the lenders -- the major lenders we talk to are very keen to support customers in the market. So I think that's going to continue to be the case. So yes, as Dean says, we are confident that spring would -- should be good season again for us.

[Charlie Campbell, Housebuilding Analyst]

And just on the Help to Buy piece. Just -- do you have any specific comments about Deposit Unlock? Obviously, it's now kind of a broader scheme, isn't it, and some more national take up. What was your first impressions of that?

[Michael Hugh Killoran, Group Finance Director & Executive Director]

Yes. I mean, I think from our point of view, it's what customers are recommended to do by their independent financial advisers and their legal advisers. They are -- customers are very well advised, as you know. And obviously, their relationships with their advisers, they would -- their advisers would always recommend the best deal for the customer. I think, still, as you know, Charlie, the Help to Buy scheme provided by the government is a particularly attractive opportunity for first-time buyers. That doesn't mean to say Deposit Unlock hasn't got a part to play. But I still think, in terms of the priority order, advisers [ aren't ] advising customer -- the Help to Buy, if they're in that first-time buyer position, would be using it.I think for others, existing homeowners, well, they tend to have equity. So we're not seeing a lot of demand for that type of product at the moment. But it's another bag in -- it's another club in the bag, isn't it, that we can play if we need to. And certainly, we are participating. So yes, I mean, we'll see how we go.

[Operator]

The next question comes from the line of Gavin Jago calling from Barclays.

[Gavin Andrew Jago, Analyst]

I just wanted to -- more just on the planning comments, really, and maybe get a bit more granularity on the outlook numbers. So just, I guess, looking back to the interim, I think you were talking about maybe 300 average for this year and looking to open 85 in the second half. Now you're talking about opening 60 by spring. So just trying to square all of that, really, into your comments around issues around planning.And then maybe, Dean, just about to your point on kind of the resource shortage. Have you got any sense from your discussions with, I guess, with ministers around whether you've had talent leaving that industry. Because looking back to where we were prepandemic and the site numbers across the whole industry were, in some way, higher. I'm just wondering whether now it's just slow to come back or whether actually there have been people leaving on the cusp of the year. Is going to be a longer-term issue?

[Dean Finch, Group Chief Executive & Executive Director]

So I think, look, of the 85 we referenced in the second half, probably about 2/3, 3/4 of those are opened by now anyhow. So I'm now looking forward to what we might open in the spring and -- as another 60 by spring. I think we're talking about another 85 in the first half of next year. So we really do have a good pipeline of developments coming through. The timing of that is inextricably entwined with what's going on with planning authorities and whether that opens in January, February, March or June, July, August is governed, to some extent, by factors outside of our control. I think the planning departments have suffered a turnover of staff that they are struggling to replace currently, and in the short term, that is an issue, but it's really timing. The opportunity and the revenues for us are out there, and they would eventually come. So it's hard for us to give you complete precision about days, week, months when we're going to be opening up outlets, but we've got extremely good visibility. And we will do everything we can to keep pulling those through.

[Gavin Andrew Jago, Analyst]

Okay. And just in terms of, I guess, the outlook numbers for this year are met. I think you're looking at 300 for this year. Would you -- given, I guess, the land buying and -- that you've done, you got to move north in FY '22, would be looking to hold...

[Dean Finch, Group Chief Executive & Executive Director]

No. Yes, we're definitely going north. We're -- first half of next year, I think we're targeting an average of 310. We're still on -- well, that's still our best guess. And our long-term target is still 350, and that's what we're moving towards. And we definitely have got those in the pipeline, subject to planning when they come into construction.

[Operator]

[Operator Instructions] The next question comes from the line of Glynis Johnson calling from Jefferies.

[Glynis Mary Johnson, Equity Analyst]

Apologies. The signal from [indiscernible] isn't very strong, so I may ask you questions you've already answered. But I just have a few, if I may. The first one, just in terms of, you talked about your build program being on track, can you just talk about, potentially, where build equivalent units could be at the year-end?Secondly, just in terms of the order book in. I know you talked about volume and value of that order book, but I missed it as flicked in and out of signal. What is the HPI in that order book? What should we be thinking about in terms of ASP for next year? And then just in terms of that margin resilience comment, I wonder if you can just maybe give us a little bit more granularity in terms of what that really means, either relative to your land bank margin or relative to first half margins? And then lastly, just given that build program that you've got in place and the work you're putting on board, how should we be thinking about year-end net cash?

[Michael Hugh Killoran, Group Finance Director & Executive Director]

I'll just jump in and do the cash, the last one first, Glynis. Yes. I mean, I think the cash is -- cash gen is still very strong. We'd love to be, as we said before, investing more in work-in-progress That's what we're sort of striving to do. Obviously, that goes hand in hand in opening up the outlets and starting the construction of the development. So that's still very much our focus. And I think that to what degree we succeed in that, we'll have to wait until -- sorry, end of December to find out. But I think the cash generation will remain very strong. In terms of EU, we are -- our productivity is good. We're building sort of prepandemic levels as we've been saying through this year. We're continuing to do that despite the materials challenges that we're seeing in the supply chain. So again, it depends on the number of outlets that we get into construction, et cetera, to give you a definitive view on EU . So I think we'll best wait to find out how much success we've had on that. But the focus is on achieving a very strong -- as strong as possible platform on building to next year come the end of December and obviously, into spring as well. So that is very much our focus. And our rate of build at the moment would be, on average, around 1 new home per site per week, which is our rule of thumb sort of rate for the group, which were there or thereabouts. So yes, we're pleased with the productivity that we're seeing on the site.

[Dean Finch, Group Chief Executive & Executive Director]

Yes. Just to jump in on that. I mean, look, since, really, obviously, pandemic impacted on build during last year. But really since March of this year, we've been building ahead of sales. So we've been recovering that position, albeit not maybe as fast as we want to, but we're still staying ahead of build. In terms of HBI, it really was -- well, it remains strong and it is where it was at the half year, and that's what's embedded in the forward order book. So selling prices do remain firm. And that -- to touch on a previous question earlier, that also gives us confidence about looking forward into next year. And also is underpinning margin resilience. We continue to see margin is good. We're able to absorb cost inflation, whether it's materials or labor cost inflation and protect bottom line and expect to report a good second half.

[Glynis Mary Johnson, Equity Analyst]

Can I just -- previously, you talked about positive margin spread, house price inflation, the build cost inflation. Is that still the same case now? Or is it more now absorbing that build cost inflation?

[Dean Finch, Group Chief Executive & Executive Director]

I think on balance, we're expecting a positive spread, but we'll see where we get to...

[Michael Hugh Killoran, Group Finance Director & Executive Director]

Yes. I mean, it's not going to be hundreds of basis points, but there may be a little bit of a tickle northwards, but we'll see when we get there. I mean, obviously, we're only partway through the second half, as Dean said. So there's a bit of water to flow under the bridge. But the weekly margins we're seeing, as Dean has already said, are strong, and we anticipate that -- I think we did an EBIT margin of 27.6% in the first half of the year. And there may be a little bit of betterment, but it'll only be marginal, given everything that's going on. So -- but yes, I mean, we're managing that balance well.

[Glynis Mary Johnson, Equity Analyst]

And the HPI, you're seeing in the order book, should we just assume that flows through in terms of private ASP next year? Or is there a mix effect in private next year?

[Michael Hugh Killoran, Group Finance Director & Executive Director]

Yes. I mean, I think, again, with the new sites opening, old sites closing, et cetera, in the different geographies. It's very hard to predict where the ASP is eventually going to land. But underlying, I would say, [ I ] agree with Dean, in the -- we are seeing solid pricing conditions. So we are achieving -- nudging our prices forward week by week. So -- I wouldn't want to predict exactly where the ASP is going to be next year because, obviously, there are a lot of moving parts. But we don't see any major change to mix between private and housing association sales, particularly at this stage. I think that's something that will evolve.But obviously, as these new developments come through, we've got the opportunity to sell into our housing association partners, the new product that will be available, which will be great for the affordable business that, typically, we deliver in any 1 year in a normal year, around 3,000 new homes into the social housing space. So we are one of the larger providers.

[Glynis Mary Johnson, Equity Analyst]

Can I just check how far forward your order book goes? Are you selling into April now? Or you're still selling through March?

[Dean Finch, Group Chief Executive & Executive Director]

Yes, we are.

[Michael Hugh Killoran, Group Finance Director & Executive Director]

Yes. Yes. Obviously, it's different for different sites. But yes, we'll be selling through the first quarter and touching the second quarter now, yes.

[Operator]

Thanks the next question comes from the line of Jon Bell calling from Deutsche Bank.

[Jonathan Matthew Bell, Research Analyst]

Yes. Dean, Mike, Martyn, I think I've got 3. The first one is a bit of a follow-up to Charlie's question. You've described them as great, but what are the embedded margins on your new land acquisitions? I can hear you chuckling, Mike. So yes, good luck on that one.

[Dean Finch, Group Chief Executive & Executive Director]

Do you want the amount to the decimal point? Or was that just...

[Jonathan Matthew Bell, Research Analyst]

Let's start with any kind of answer, but anyway, the second one would be...

[Dean Finch, Group Chief Executive & Executive Director]

Well and good.

[Jonathan Matthew Bell, Research Analyst]

Great. Okay. The second one would be, you're referencing, in the statement, growing the outlook -- sorry, the outlet network. I just wonder at what stage does that morph from new sites to new divisions? And the third one, just wondering what's the latest on finding someone to dance in Mike's old shoes.

[Dean Finch, Group Chief Executive & Executive Director]

Look, I think the -- it's a good question about what stage do growing outlets morph into the new divisions. And some of the businesses actually are quite big now. And so that is something we've got to keep under review. And I'm watching that very keenly. And certainly, I think I can think of at least 2 parts of the country at the moment where they're beginning to get outside and scale where you could justify opening another office and bring a bit more focus. So we'll watch how that develops in the course of the spring and see where we go with that. But yes, it's a good question. And I guess I feel where there is that demand and there's opportunity and we've got the resource to do it, then with that focus, bring us even opportunity. So yes, very much front of mind for me at the moment, that one, actually. On CFO search, look, we've got some great candidates, internal and external. And I hope to be making an announcement soon, and I will do that just as soon as I can.

[Michael Hugh Killoran, Group Finance Director & Executive Director]

I mean on the margins front, Jon, obviously, we are holding our discipline around land replacement. That's the important thing. So what you've seen in the past, everything else being equal, you'll see in the future for a little while yet. And we do give visibility at the time of our half year and full year announcements in terms of some insight in that. So I think that it'll be a similar sort of picture based on the deals that we've been doing.

[Dean Finch, Group Chief Executive & Executive Director]

The rigor that the business has brought to focus on margin will not change when Mike leaves.

[Operator]

The next question comes from the line of Andy Murphy calling from Edison Research.

[Andrew Murphy, Director of Industrials and Financials]

Dean, Mike, Martyn, some of my questions have been answered, but -- or asked and answered, but I got couple left. Just going back to the original question around cost inflation. Can you talk a little bit about the balance between labor and materials? One of your peers was talking, this morning, about pressure on materials seems to be easing, but therefore, labor seems to be sort of remaining at a higher inflationary. I wonder what your thoughts are around that and into next year.And the other question was around about sort of the carbon sustainability measures. Just thinking about that whole sort of slice of the action at the moment. Can you just talk a little bit about what the next kind of milestones or measures might be that we'll see coming out of the company?

[Dean Finch, Group Chief Executive & Executive Director]

Look, I mean, I think, certainly, I'm not sure we're seeing things are getting that much easier on materials at the moment. But I guess it's all relative. And maybe -- I don't know, maybe we've been spoiled with our own capability, brick and tile and off-site manufacturing capability, so I don't know. It's hard to answer what -- comment on what somebody else -- is in somebody else's head.I mean, I think logic would say to you that eventually, supply chain pressures brought on by COVID and all the other things that have impacted it during the course of this year, which have -- let's face it, have probably been some of the most turbulent times anybody -- most of us have seen in our lifetime outside of war, will ease. It just stands to reason it will ease eventually. But I don't think that's immediately around the corner.I do think it's fair to say that you think that labor pressure will continue to be an issue. But having said that, I have -- as I referenced at the top of the call, I have been incredibly impressed in the last couple of weeks as how well the business has done in terms of build rate. It has done extremely well, and normally, that continues. Mike?

[Michael Hugh Killoran, Group Finance Director & Executive Director]

Yes, just to remind you that the inflationary effect around this, you've got to always bear in mind the way raw material content, broadly speaking, in terms of the cost of sales, where, as you know, labor would typically account for maybe 60% weighting, maybe a tad more in terms of the overall cost that a housebuilder incurs. So yes, the materials have been more difficult for a little while, a little bit more inflationary, but their impact on the overall cost base is obviously less of a weighting than on the labor side. So that's something just to bear in mind, Andy.

[Dean Finch, Group Chief Executive & Executive Director]

On 0 carbon, look, as you know, we've got 3 developments of our own across the country at the moment that we are progressing with. And this -- I mean, I suppose it's quite a very dynamic situation with us learning all the time how to improve and supply chain catching up with demand out there. I think what's increasingly apparent is that whilst perhaps as an industry, we've been focused on the -- what the consequences of 0 carbon cost is going to be for new build. Maybe we should, whilst continuing to be mindful of that, think about the competitive advantage it might eventually give us against secondhand stock.Because what is clear to me is that new build is going to solve this problem well ahead of secondhand stock. And that, I think, will become increasingly attractive to buyers, lenders and investors as we solve the 0 carbon challenge in our industry. I mean, obviously, Part L is -- we're now building towards and compliant within '23. After that, it will be waiting for government to finally decide on what future home standard will be. But I think that's probably well-known and well-publicized now. And so the issue really is supply chain catching up with what that will mean for us as an industry.

[Operator]

We have no further questions coming through on the phone line. So I'd like to hand the call back over to your host for any concluding remarks.

[Dean Finch, Group Chief Executive & Executive Director]

Okay. Well, look, thank you. It's just a trading update. Business is performing incredibly well despite it being very challenging times, and we're looking forward to report back to you at the year-end with a good set of numbers. So thank you for your interest, and speak soon.

[Operator]

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