Persimmon Plc (PSN) Earnings Call Transcript

Good day, and thank you for standing by. Welcome to the Persimmon Trading Update Analyst Conference Call on Thursday, the 12th of January 2023. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Dean Finch. Please go ahead.

Good morning, everybody. Thank you for joining us today. I'm here with Jason, Martyn, Mike and Julia. And look, today's update sets out that the team, I think, did really well last year against the backdrop of some incredible challenges. And it also confirms the challenge that we, like the rest of the industry, are currently facing on forward sales. But before I say more on sales, I want to reflect on what this team has achieved. In Persimmon's 50 years, we've not delivered this many new houses with so many happy customers. The business performed very strongly in the second half of last year, and I'm pleased to report year-end completions that are towards the top end of our expectations. H2 completions were 15% up year-on-year. Pricing remained robust throughout the period. We did see more use of incentives in the second half, but not by a material amount. In November, we told you that incentives were running at around 2%. And this had crept up to about 2.5% by the end of the year. Cancellation rates increased in Q4, but the risks on the conversion from reservation to completion on existing orders was nowhere near as bad as I feared it would be. Also, use of Part Exchange to [ sure of ] change was less than I anticipated with its use continuing to run well below historical norms. While we'll obviously update further at full year with construction teams performing so well in the second half, our legal completions came in towards the top end of our guidance. We anticipate this being reflected in a strong profit performance crucially at 5 star. This combination of 5 star and strong profits represents real progress for the group and is the first time we have done it in our history. You'll note from our statement that cash finished the year higher than we expected as a result of us doing better on completions whilst at the same time, reacting quickly to the downturn in demand and taking a very controlled approach to the land market. My colleagues are doing an outstanding job to deliver this excellent performance. I see how we are improving operationally as I told the country. Having personally visited well over half of our sites last year, I see our operational improvements coming through. Our developments are being built better, they're looking better, and we're providing much better customer care. It's great to see Persimmon combining operational excellence alongside its traditional commercial excellence, whilst providing great value homes to happy customers. Our teams have delivered despite the most difficult supply chain and labor availability constraints anyone can remember. Add to this, the effects of the Russian invasion of Ukraine and the political instability at home alongside the economic challenges caused by last year's September budget. As we look into 2023, clearly, the picture is much more challenging. This is why we expect profits in 2023 to be down on the current year we are reporting on now. At this stage, it's not possible for us to give much more guidance than this. As usual, we'll be in a better place to update in March. All I can point to at this stage is that we start the year with a forward order book of roughly 1,600 PD reservations and roughly the same number of HA orders that are practicable to build this year. The ASP in the order book for PD at 31st of December was 11% up year-on-year, and HA was 9% up year-on-year. From this, the sales rate of 0.4 is required to hit 7,000 units and a sales rate of 0.5 is required to 8,000 units. Incentives, I think, are likely to rise, and the reality of overheads this year is that they are mostly fixed. As we alluded to in our statement, with mortgage costs for our average customer doubling over the course of the year, it can come as no surprise to anyone that we expect profits to [ pull ] this year. Clearly, it's very welcome to get past the debacle of last year's Q3 and see mortgage rates coming down. But without greater availability of affordable mortgage products at high LTVs, first-time buyers are finding that particularly challenging. But we're not panicking about this. As has long been the case, Persimmon is focused on the quality of the return rather than chasing volume. We've also responded, of course. We're taking a highly selective approach to any new land investment and are carefully managing our outlet and work in progress position to meet current market demand. When we saw this downturn coming, we took immediate action to cancel uncommitted land deals and as a result of the actions we've taken, we now plan to open 33 fewer outlets in '23 than was previously the case. We're already operating from a very lean fixed cost base, and our well-established disciplined cost control processes will continue. Our [ Boxing Day ] campaign has seen an increase in interest in the early days of this year. Whilst it's clearly too soon to tell, the response has been encouraging, and I hope we can successfully convert the interest. Persimmon's great strengths remain. We've got an excellent and highly experienced operational management team with great products to sell on the right sites across the country. The balance sheet remains strong, and we are protected by the strength of our margin. I remain very pleased we adopted such a disciplined approach to land investment and our land bank's embedded margins remain industry-leading. This not only provides protection in the downturn, but will provide a strong platform for future growth. Whilst '23 will prove to be a challenging year with us adapting to a tougher market as well as implementing the new homes quality code for the first time, I'm excited by the opportunities that this more challenging environment is likely to bring to us. We're working to strengthen our key capabilities to deliver 5-star homes consistently and respond with agility to the market as it returns. Persimmon's watchword is discipline, disciplined investment, disciplined [ efficiency ], disciplined cost control. And it's this discipline that will secure our continued success in years to come as we manage the cycle. Thank you for listening to me. I'll open up to any questions.

[Operator Instructions] Your first question comes from the line of Rajesh Patki from JPMorgan.

Happy New Year all. I've got 2 questions, please. You mentioned cancellations to be at elevated levels in the second half. Can you provide some more color on the more recent trend? And if there are any monthly variances in the fourth quarter? Second one is on incentives. You talked about incentive levels moving up from 2% to 2.5% at the moment. Can you give us an idea how high could these go before headline prices need to start moving down?

Good morning, Rajesh. I'll have a go at this. Cancellation rates during the year were running -- ever since I've been here been running about 16%, 17%. They did spike up in Q4, particularly towards the end. And at the very end, we're running, I don't know, around just over 1/3 of sales. What has encouraged me though is opening up in the New Year, that number has returned back to a more normal level. So yes, it's been quite volatile. First few weeks of the New Year have been more encouraging though, but clearly early days. In terms of incentives, while you're talking about 5%, 6% really before it starts impacting on headline prices, as I'm sure you fully understand.

Your next question comes from the line of Will Jones from Redburn.

A couple from me, please. First, I think you mentioned the -- in the opening comments, a couple of volume outturns based on, I think, 0.4 and 0.5 sales. I think it was 7,000 or 8,000 volumes. Perhaps if you could just repeat the numbers there. And was that reference to private volumes or total, including affordable? And what does it assume around the order book or how many weeks you sell for during the year as it were before you build for '24? And then the second one was really just a clarification around private ASP in the order book. If we take -- you're saying the GBP 0.5 billion of private forward sales, obviously, we don't know the exact number, but if it was GBP 500 million, then that would imply, I think, around GBP 295 million of private ASP. But perhaps you could give us the private ASP in the order book please in terms of what you start with. And maybe just following on from the comment before about encouraging signs on cancellation rates, would you say -- is that just a cancellation rate comment? Or are you seeing a slight cause for encouragement from a low base on other stuff?

Good morning, Will. Private ASP in the order book at year-end was GBP 282 million. So look, I mean, I'm resolutely not guiding. I'm just pointing out arithmetic. We have 3,000 forward-sold HA [ MPD ]. We've got more HA sold, and that I think is about 4,000. But what I'm guiding you to on HA is, clearly, we're going to slow down build this year, and I'm not expecting we're going to build all of those 4,000 because it would be impracticable given that HA is [ potted ] around sites. So you're starting with a forward order book of 3,000. We have really 40 selling weeks left this year. At 0.4, it's 7,000. At 0.5, it is 8,000. I'm not guiding you to a number. That's where we are. In terms of the first few weeks of the year, yes, look, I mean, of course, you expect the spring to open. I think there was a real buyer strike, who can be surprised at that. It was chaos going into the year-end in terms of the market. And there are any manner of predictions floating around of house price collapse. It seemed to compete to me from day to day in terms of how far it could go. I don't know whether there's a book running for a price or something. So I think that can come -- it can come as no surprise that buyers stopped buying in the run up to year-end. But our interest increased threefold on Boxing Day on the 27th compared to the previous week. And I think we saw the highest days -- those 2 days were the highest days of all of 2022. And we started '22 pretty well. So that is encouraging. But of course, we have -- and it has continued into the new year. But of course, we have to see that convert into sales. And it's encouraging to see mortgage rates coming down. But we point to and I pointed to the lack of an LTV product with the end of Help to Buy for first-time buyers. There will always be a market for first-time buyers. And our position is that by improving the product, we want to grab more of that. But it's pretty tough for first-time buyers at the moment. But it's not just mortgage availability. I mean the other thing that we saw, particularly towards the end of last year, that eligibility for securing mortgages became much tougher. Banks were being much harder than we've seen for some time in qualifying people for mortgages. And I think that was the real issue that certainly impacted us in terms of sales. I mean there's all sorts of stories that come to my desk, but people failing to qualify for mortgages because they didn't pay their parking ticket, that sort of thing was going on. So we do need -- we're desperate to see that position change.

Your next question comes from the line of Glynis Johnson from Jefferies.

Good morning, Two, if I -- three, if I may, maybe one lastly. When you look at your balance of volume versus price at that order book level that you've got, is -- are you starting to roll out larger price increases in January? Are you already cutting less prices, where does the sensitivity come? You previously talked about you don't mind -- you would accept volumes down 40%, 50% in order to preserve pricing. But are we getting near that inflection point where actually price cuts really do start to become more of a requirement. Second of all, what are the lenders telling you in terms of mortgage eligibility, their desire to land? Are you starting to see some of those issues start to alleviate? Is conversion slightly easier now than it was perhaps even just a few weeks ago? And then just what you build with, when do you start to adapt your build to your reservation rates? Obviously, all housebuilders are [ sitting ] with very low inventory levels, your build equivalent units are down, what could we see in terms of WIP reduction as we go through maybe towards the middle of 2023, just in terms of your own business and how you contract that build rate is what you're seeing?

Thanks, good morning, Glynis. Let me start in reverse order. What I was -- we've already put WIP control in place, and we've begun to do it before the year-end. And I mean, as you can imagine, we were going like an express train. We were building over 300 EUs a week over much of Q3, Q4. And we had to do that in order to hit year-end, and I'm delighted we did. It was the right thing to do to scale those sales and get that cash in the door. Equally, I'm delighted that the message has got out there in week one of this year, our EU rate was 1/3 less in EU rate equivalent week last year. So we put that into immediate effect, and we'll control it extremely cautiously, as we move forward. In terms of eligibility, look, I mean, mortgage rates coming down, that is to be encouraged. I've seen a 95% LTV, I think, from Halifax [ 75.6% ], so that's encouraging too. Clearly, banks, and we've all seen the stories, were worried about negative equity this year. So I think they remain cautious. But there's also competition in the market, as you see evidence of rates coming down. In order -- the first question in terms of balance of order and price and volumes, I mean, look, we are not going to be the ones leading the market down. We are return-focused rather than volume-focused. Obviously, we'll watch the market very carefully, and we'll be nimble and we'll adapt to it, but our land bank has been hard fought. I don't want to give the crown jewels away in a bad market. So we'll be very cautious about that. I expect we'll see incentives creep up during the course of the next few weeks. But it's really too soon to say as well, if this strong interest we've seen in the first few days of the New Year remains and does convert into sales, then we might be saying something entirely different to you in March.

The next question comes from the line of Aynsley Lammin from Investec.

Just 3, well, 2.5 actually. First, a quick one, just to clarify on Will's previous question. The 8,000 volume completions, you mentioned [ 0.5 stars ] rate. Just to clarify that would compare to the 14,860 that you just delivered, it includes everything, social and private.

Yes.

It does. Okay. And then the other 2, just on build costs, labor and materials, any kind of color there, what you expect build cost inflation to be this year, trends you're seeing in those? And just, I mean, on the obviously eligibility and LTV numbers, et cetera, important. But when you look at the new interest rate environment, say, if it settles around 5%, have you done any work for your kind of average customer, how much they can borrow when they look at the affordability qualification for the mortgages compared to what it was kind of for the last couple of years? And how resilient do you think the prices will be in the face of maybe customers and you be able to borrow less than what they were before on affordability?

So on build costs, we're looking -- the outlook at the moment is 7% to 8%, but it is volatile. Anything with cement in it is still rising, but other commodities, timber, steel are falling, which is good news, obviously. And I do expect this year, labor costs will fall. We've already seen this with ground workers. Obviously, they're first in, first out, and we're beginning to see rates come down for them. I would say on the whole, though, the rest of the trades are still punched drunk from December, and they haven't really woken up yet. But I think they will. In terms of bricklayers, though, I mean, for the first time since I've been in the business, this week, I've heard of 2 instances of bricklayers dropping their rates by GBP 100 [ a 1000 ], so one was in the northeast and one was in north. So I think the message is getting out there. So I think, again, I think March, April time, we'll be in a better position to really understand what total build cost inflation is going to be. As I said, it's quite volatile sale, but I think labor will recede this year. I'm going to give my voice a rest and have a drink. Do you want to have a go at, Jason...

The mortgage [indiscernible] a mixture of where rates go, wage inflation and what we do on incentives, if you think that. Obviously, the banks didn't take 1 point whatever it was at the low 12 months ago and only use that rate for affordability, it was stressed. We've seen slightly lower stresses in the last month or so above the elevated rate. But if you just did a calculated calculation, you'd be in the 15% to 20% just purely depending on the numbers. We can alleviate some of that as we talk about on incentives. Obviously, wage inflation in a picky number, 5% to 10%, so it might take 1 to 2 years for that to sort of catch up and go through that. So I guess we are a little bit in the hands of others around where interest rates go. But we -- it's not fundamentally changed here, but we -- for certain customers, particularly for first-time buyers, we put that example in the statement. So you can see the very real cash implication in those first-time buyers who were leading on Help to Buy, we are facing today and hence, we're trying to be creative, and we would hope that maybe the government might start to be a bit more creative as we look forward.

And your next question comes from the line of Ami Galla from Citi.

Just a few questions from me. One is on land renegotiations that you've talked about. Can you give us some color as to what are the sort of discussions that you're having with land vendors? And as we think about...

Sorry, I didn't catch that question at all. I'm really sorry, I didn't...

Sorry, can you hear me?

Yes, sorry, some color on land renegotiations that we've talked about.

Okay.

Sorry, carry on, Ami.

Yes. Can you hear me well?

Yes. Yes, fine.

Yes. So my second question was just on future strategic drawdowns as we kind of think about the next, say, 6 or 12 months ahead, how quickly do you think land vendors are willing to adjust to these revised market conditions? And then last one is, can you remind us a bit on the payment profile of the land creditor base?

Okay. So what I'm really talking about is, I mean, we -- where we had uncommitted deals, I mean we were in agreement in principle, but we hadn't contractualized those arrangements. So there's been no penalty or anything like that for the actions we've taken, and we've either walked away or in the process of renegotiating or deferring. I think the land market is going to be very quiet over the course of the next 6, 9 months. I think it will wait and see and adapt. I mean, obviously, you'll get some vendors that need to sell, and that can present opportunity. But I think the vast majority will hold off and wait and see. And you really need to see the impact of what's happening to house prices to work through the market in order for any adjustment to the land market. I mean clearly as well a central assumption for us is that Help to Buy is ended, although, of course, it's interesting to note that the one labor government in the U.K., in Wales, has extended Help to Buy. So let's see what happens there. And I think in terms of profile, per GBP 300 million this year, wasn't it?

Not quite. It's about 50% of the 475 in '23 and about 40% in '24 and the residual. So slightly longer.

Your next question comes from the line of Arnaud Lehmann from Bank of America.

Two questions on my side related to cash. I think you mentioned the word discipline a few times in your introduction. Can you please remind us of all the kind of cash preservation efforts that you've implemented in the last months? And my second question is related to cladding remediation. We remember you increased your provision at the end of last year. Do you have a feel for the cash outflow relating to this work in 2023?

Okay. Thanks, Arnaud. Yes, look, we've introduced a range of measures. I mean, Martyn, do you want to comment on that one because you're...

Yes, by all means. Good morning. I mean, without going into a lengthy list of everything we've done, it's essentially ensuring that we're not building ahead of where we need to build. We are ordering materials when we need them at material control can be better as the suppliers can deliver to tight time scales, ensuring really that we're only putting in roads, infrastructure, where it's absolutely needed to match the sales rate going forward. So -- and it's very live, and I think that's the important thing to note is that we will look at every single site on a site-by-site basis.

Yes. And I mean, look, obviously, land, we talked about deferral of outlets. And look, the biggest priority for me was to in the last couple of months was to secure the sales we had got and crystallize those and get the cash in door at the year-end. So there is a huge focus on keeping those sales going and get them completed into the year-end. Lots of work on land. And as Martyn referred to, in terms of WIP control as well. And look, we're not -- we're not -- we're going to look very, very closely overhead. I think that's quite a difficult call. I think that clearly, I want to make sure that Persimmon is capable of responding to recovery when it comes, will obviously be very sensible about controlling overhead spend and unnecessary expenditure. But I don't want to be in a position where Persimmon is not a fat organization. I don't want to cut to the bone and then find I've lost capable skilled managers and we can't respond to a recovery in the market is pretty critical to me because I've seen anything over my 2.5 years here. It's how incredibly volatile this market is, [indiscernible]. So we got to be careful about that. In terms of cladding, look, we want to get on with this as quickly as possible. We want to make sure that residents, leaseholders are safe. We look after them. We do what we need to do for them, but also commercially, I believe it's in our best interest to get on with this as quickly as possible, and we have been getting on with it as quickly as possible. And I think, as we say in our statement, many, many of our sites -- our remediation sites have already started and all will have been started by the end of this current calendar year. In terms of cash flow, I don't know, Jason, now, I think GBP 125 million, GBP 150 million in that range...

Yes. I think we said at the November update is a multiyear program. It probably weighted towards this year and next. So if you're in the sort of GBP 125 million to GBP 150 million, slightly hard to predict given the nature of this work. As Dean said, we're trying to get on with it. We also need to do expertly and make sure that it's done to the right standard. But that's the sort of guidance I give you for now.

Your next question comes from the line of Charlie Campbell from Liberum.