Persimmon Plc (PSN) Earnings Call Transcript & Summary

Hello, and welcome to the Persimmon trading update. My name is Patrick, and I will be your coordinator for today's event. [Operator Instructions] I'm now handing you over to your host, Dean Finch, Chief Executive, to begin today's conference. Thank you.

Thanks very much. Good morning, everybody. Thanks for joining us this morning for our trading update. I'm joined by Mike Killoran, our CFO; and again, by Martyn Clark, who is Regional Chairman of our Southern business. I thought I would just take a few moments to highlight some key points from the trading statement and then open it out to any questions that you might have. So I'll start with just reflecting on the strong performance in the second half of the year and what I think that means for us as a business. You will see that we achieved a record number of completions in the second half of 2020 and achieved a superb build rate. And I think this is all the more impressive because it is despite the problems of COVID that we achieved this and also -- we also enforced a 21-day period between practical build completion and key handover for our customers for us to handle snags. So those 2 issues represented a considerable constraint on the business, and we also yet achieved record production and 5-star quality. So I'm really heartened by that. I think it's a great testament to our team and to the business. They achieved that and represents, I think, a notable change in performance capabilities and gives me much optimism for the future. The second point I will raise is around our outlet position in the second half of the year. On average, we were 12% below 2019. Our focus is to rebuild our outlet position during the course of the year, but we will, of course, keep a close eye on the economy. And if need be and the economy turns south on us, again, we will obviously apply the brakes. But I am cautiously optimistic that we can continue to improve quality and grow volumes without compromising margins and returns into the medium term. And then, my third point is in relation to what lies ahead of us for 2021 because, of course, that's going to be on all of our minds. Obviously, we start the year in the midst of a pandemic which is getting worse. And this, of course, could affect our production capability. We're looking at the end of the stamp duty holiday in March and also the introduction of caps with the new Help to Buy scheme now introduced and effective from April. And of course, we also do not know what impact rising unemployment will have on the economy and on the housing market in particular and whether it will follow the pattern of previous recessions. On the other hand, we're entering 2021 with an unprecedented order book. And I guess, I'm really struck by the stimulation, the government stimulation to the economy. We are seeing -- we've seen more money pumped into the economy by way of quantitative easing over the last 10 years and at any point in the U.K.'s history. And within that, in the last year, we've seen more quantitative easing pumped in than at any point over the last decade. And clearly, that has got to support the economy in some way, shape or form, and we also can't rule out more government intervention to support the economy. And the other observation I'd make is that we are clearly seeing customers look at how they want to live, where they want to live and also, whether they want to live in bigger houses as a result of the pandemic. And I think Persimmon is a beneficiary of that. So all in, it makes for a complicated picture for us to predict what 2021 will look like. But as I said, I am optimistic about our prospects into the medium and long term. And also, I should point out that I think that Persimmon is in a great financial shape to take advantage of all of the opportunities ahead of it as well as to handle any risks. So with that, thank you for listening, and I'll open it up to any questions.

[Operator Instructions] Our first question comes from the line of Aynsley Lammin from Canaccord.

Just 2 questions. Firstly, on -- obviously, you've given lots of top line revenue information but just wondered if you could comment, margins, were they all in line as expected, nothing funny there? And I think consensus PBT is about GBP 855 million for 2020. Just wonder if you could comment on your kind of comfort with that number. And then secondly, any comment on kind of recent leads, the kind of sales interest? I know it's early on in this year, but your expectations for how the kind of recent trading and coming weeks will play out.

Yes. I mean on the profitability, Aynsley, obviously, we'll put meat on the bones when we get to the prelims on the 3rd of March. And -- but yes, I mean, we -- the mix of sales that we've achieved is more or less in line with our expectation. The mix is slightly more weighted towards the private sales and where we've achieved 84% of our legal completions to private individuals for our owner occupation, which you would look back, our typical mix is sort of 80-20 private, affordable to Housing Association. So a few more private sales in the mix, and that's because we've redirected or managed our resource intelligently by trying to support our individual private customers with their moving index, et cetera, given circumstance. And indeed, it recognizes that our Housing Association clients usually have a bit more flex in their delivery dates because, obviously, they've got to line up their clients for occupation via their own rental agreements and what have you. So I think that's worked well for us. We've examined that quite carefully through the year and directed our resource to the right areas that we believe. Dean, do you want to comment on early customer interest, perhaps? Or...

Well, it remains strong...

Sorry, sorry, Mike, on the consensus, are you comfortable with the GBP 855 million?

Yes. I mean, I think the -- we have incurred a bit more cost this year than we would normally. I think that when you think about the environment we're all living through, we do have a full team of COVID enforcers, for example, on-site. So given that we've got 300 or more sites, then there's a whole team there of people making sure that all the workforce that we engage on-site are adhering to our protocols and making sure that they remain healthy and safe and well. That comes at a little bit of a cost, together with providing more hygiene and welfare support. And I do point back to the efficiency of our overhead recoveries, which obviously became a larger issue in the first half of 2020, less so in the second half, but for the full year, it's still a drag on profitability. And then you've got our overarching comments on the balance of inflation effect on margins to think about we're sticking to the margin drift type mantra, where we believe that our ability to achieve substantial price inflation is muted, given where affordability is and where the concerns are in the general economy and confidence, et cetera. Whereas on the production side, as you can imagine, the supply chain has tightened up more recently. And that, we believe, will drive a bit more cost inflation into the system as we move through '21. So where will that be, I guess, 3%, 3.5% is what we indicated in November, and I guess we'd be sticking to that sort of level just at this point in time. So overall, for 2020, I think you mentioned around the 850-ish mark. Yes, I mean, that is more or less okay. But we need to put all the different pieces together, which we're doing currently. And then the outlook is obviously very positive. We've got a great asset base, as you know. But again, we need to be mindful of the volume that we're going to be able to deliver, and there is risk to production, as we said in the statement. Dean, I don't -- do you want to add anything on?

Well, I think perhaps I'm guilty of not putting enough color on the COVID restrictions and build. But it is quite a different situation that we're dealing with at the moment to a non-COVID situation because we can only let one operative per floor work on whatever we're building, and that's an entirely different situation to how we normally build. And so there are implications for that, that we're working through. And it's quite hard to appreciate that if you're not on a building site and seeing how we're working around that. So I would emphasize that. But in terms of, I think, sales, as you also asked, I mean, it's up and well. It remained strong.

I mean, obviously, we've only had 1 week, Aynsley. So one swallow doesn't make a summer, as you know. And -- but we're optimistic, as Dean said in his opening remarks. We're optimistic about the spring. There are reasons to believe that lender support is strong. We've seen more higher LTV product come back into the market and the measures that we're taking to ensure we've got good availability. We're continuing to build into this market, as we've been saying through last year. So that will put us in a strong position to offer choice to the customers across the market.

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

Two questions on my side. Firstly, in your statement, you speak about normalization in the sales rate in the last months of last year. Could you be a little bit more specific than that? Is it still up on a year-on-year basis? Or when you say normalization, you speak about the stabilization? That's my first question. And my second question on your cash position at year-end, clearly better than expected, which would suggest a very strong free cash flow generation in the second half. Could you give us a little bit of indication how you ended up with such a large cash position in December?

I'll jump on the cash, sort of the major moving parts on the cash flow. Obviously, we entered the year with about GBP 840 million of cash held on the balance sheet, and we closed the year at GBP 1,234 million which is quite a handy number to remember. So that means net cash generation of GBP 390 million in the year. That is after making the dividend payments of GBP 351 million in 2020 in 2 parts, being the 40p and the 70p per share that we made, GBP 1.10 per share in total, GBP 351 million; and land spend of GBP 326 million through 2020. So when you add those moving parts back into that GBP 390 million, the cash generation pre-capital returns throughout dividend and land spend was GBP 1.067 billion. If you do the same calculation for the prior year, obviously, the capital return was GBP 748 million, GBP 2.35 a share, and the land spend was GBP 126 million higher at GBP 452 million. So adding back those numbers to the prior year, you get a cash -- a gross cash generation of GBP 996 million. So we are very pleased with the cash generation of the business through 2020, as a result of both the strong trading and the working capital management process within the business. We've protected both the liquidity of the business and the asset quality with obviously the selectivity to land replacement that we've pursued through the year as well. So I think you can see our sort of cyclical playbook playing through there in terms of how we're managing liquidity, which has been a real advantage for us in terms of supporting everybody associated with business, the supply chain, our colleagues. And obviously, we've not taken any advantage of any of the government support schemes, for example, fully paid up on corporate taxes, et cetera. So yes, I mean, we are particularly pleased with that. I mean sales rate normalization, I think that's a relative observation. I mean when you split the numbers Q3 and Q4, you can see that for the second half in total in the statement, we've pointed to a 39% outperformance over 2019 for the second half of 2020. If you split that into Q3 and Q4 in terms of the direction of travel, which we point to again in the statement, we were over 50% ahead of the prior year in Q3. And in Q4, we were over 15% ahead of the prior year. But as we progressively move through the year, obviously, stock availability for ourselves dwindled, if you will, because we'd sold so well previously. And that's enabled us to basically look after our customers in a better way because of the previous investment we'd put into work in progress to support service quality and obviously realizing -- monetizing that investment. And that's in part why our cash generation has been so strong. So it's a relative measure. I mean, it's amazing really in terms of how the market has performed through 2020 because if you look -- if I remind you in the first half, our average private sales rate per site per week was 10% down in the first half; whereas in the second half, it was 39% ahead. So overall, for the year, we've ended up 12% ahead through what has been an unprecedented period of time and the challenges that the market is faced. And as Dean referenced earlier, obviously, government support has been key in supporting the U.K. population generally, but also, that has fed through into supporting the housing market. Is that all right, Arnaud?

Yes, that's perfect.

Our next question comes from the line of Emily Biddulph from Crédit Suisse.

I've got 2 questions, please. The first one, I appreciate you've sort of gone through the sort of various risks to kind of to output for the coming year and to the sales rates from here. However, like as we look at it today, if we assume that sales rates remain relatively normalized and the sort of minimal disruption to build from here, how should we think about the sort of potential for sort of volume growth? Like clearly, the WIP position is down, and at the moment, outlets are down. But should we think about that sort of just being a snapshot that can unwind and you can still deliver volume growth if the market's there for this year? Or can you give us sort of any kind of quantification of the sort of potential there? And then secondly, on the forward sales number, clearly, it's strong, sort of plus 25%. But can you give us a sense of what the private growth is within there and the sort of split of volume and price, please?

Yes. I mean just on that little bit of detail on forward sales. Within that sort of 25% up figure year-on-year overall, the private sale element is actually around 36% up year-on-year, and that's 1/3 stronger on volume and about 2.5% stronger on price. We just got just over 4,300 private customers that have reserved or exchanged within our forward order book this time around, which, as I say, is around about 1/3 higher than -- 1/3 stronger than -- and as Dean said earlier, now it's a record order book, which supports our plans for the business in the first half of this year as we build through those orders and deliver them. In terms of potential sales growth, Dean, do you want to touch on that in terms of outlook, so to speak?

Well, as I said, I think outlook is really complex this year. I mean if -- anything we say at this moment could be totally wrong-footed by some government announcement this afternoon. As you will be aware, the Scottish government, for instance, are debating today what further restrictions they're going to introduce. And that may result in what we saw last March and April with closure of production in Scotland. So Mike and I could try out a statement about volume and be wrong-footed even as we speak, which is why we'll be cautious about it. In a normal year, we would expect to be at a normal level of output. This is anything other than a normal year, I think.

Yes. And I think, Emily, you've got to reflect on, obviously, the increased transmission, given the new strain of virus and what that mean. I mean we see the increase in -- the sudden increase in transmission across the population at large. And we can -- as we've said in the past, we can control what people -- try and control what people do in the workplace. We've got very strong protocols and disciplines around that in the workplace. But obviously, we can't control what people do outside of the workplace. So we have seen a slight tickle up in incidence of absenteeism because of people having to isolate for all the good reasons, which is the right thing to do. As I say, it's only a small tickle up at this point, but we need to see how that develops. And as Dean said, we need to remain mindful of our ability to build if we see a substantial increase in absenteeism, and because of that, then it becomes more difficult for all the teams to marshal the resources to achieve a rate of build. I mean we're still -- I mean we are really pleased with our production rates through the second half of 2020. And if that's any indication of what we can do, so long as we get a good run at it, we're able to -- we're allowed to proceed on the same or similar footing, then we've got to be optimistic. But as Dean says, it's a particularly unpredictable environment at the moment. Is that okay?

That makes sense.

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

I thought I was going to be late, and so I've still got 4 questions already standing.

You always have 4 questions, Glynis.

Likely predictable. One, just in terms of the land market, you obviously were a little bit shy on the land market through 2020 for obvious reasons. But can you just give us a little bit of color about how you're seeing the land bank now? Are opportunities starting to pick up? Second of all, just in terms of price for that forward -- private forward order book. Forgive me, I don't have the absolute number in front of me in terms of value. Can you just let me know and sort of save me the calculation and just tell us what the pricing has done on that private forward order book? And also, how we should tie that into 2021, given the mix of affordable versus private is also going to move? Thirdly, can you remind us of your definition of excess cash, excess capital as you have previously used it? And then the last one is just in terms of that build WIP, that calculation you did for Arnaud in terms of cash flow generation. I could look and say, actually, your cash flow [ difference ] year-on-year is about the land spend, which would imply that your build WIP actually hasn't changed much year-on-year. Now you can see the build equivalent units are down slightly, but how should we think about that build WIP? Are those build equivalent units now above 20 -- I mean, [ I know that ] 2019, 2017, '16 may not be comparable, but what is the right level of build equivalent units that you'd like to enter the year on?

Yes. If I could -- if I can jump on to that straight away. I think you're right, Glynis. Your observation is [ bob on ] in that, yes, we would like more WIP in the ground. We keep saying to ourselves, we would be able to sell more new homes to more customers if we have them available. And I think we are seeing the consequences of selling well through 2020 in terms of our carryforward build given the disruption to build we suffered from in Q2 2020. If you're building at capacity, you can only repair that sort of reduction in build only very gradually over time because obviously, you're running at capacity. And as I said, we said already, we're pleased with our build rates. In fact, we feel the second half build rate, we have pinched a bit of efficiency gain through the second half and partly through -- it's actually quite interesting, partly through deploying our construction quality inspection team, which is unique in the industry as part of implementing our -- the Persimmon way, which is the consolidated processes around construction now in Persimmon. And that's encouraged us to look at that in more detail. And we're going to invest a little bit more on that side as we move through 2021. But suffice to say, we do need to invest more in WIP, and I could see some absorption of cash in work in progress as we move through this year to get ourselves in a similar position to where we were, say, in the middle of last year, where we had over 7,000 equivalent units of new homes constructed. So I think that we are going to be absorbing WIP as a cash flow movement moving forward through 2021. That could be somewhere between maybe GBP 50 million to GBP 100 million of cash absorption within work in progress. I mean another ready rule of thumb on that is that at period end, if we're carrying WIP of maybe 32% of prior year sales, that probably is about right for us in terms of the type of homes that we build. So that is a sort of a way to triangulate your cash flows and your balance sheet. In terms of the -- you're right on the -- going back to your private ASP, in the forward order book, it's just over GBP 253,000, which is about just over 2.5% higher than the same point last year. You do have to be careful with the legal completion ASP for 2020 because that has got this mix skew of 84% private sales in the mix, where normally it would be more akin to around 80%. So when you're looking at your 2021 prediction, I would recommend that you flex that group -- overall group price for 2020 to give you a new base. Surprisingly, I've done that, and it gives you a figure of about GBP 226,000 for 2020 as a base to move on from with that normalized mix. So that's just a guide on overall group pricing to think about for '21. We don't think that we're going to see a lot of opportunity for a lot of underlying price inflation for reasons that we've touched on previously. Dean, do you want to talk about the land market and how is...

Well, it's good. We are seeing opportunities. The business is very disciplined and rigorous. In a way, it evaluates opportunities. I'm hugely impressed the way Persimmon buys land and develops land. But we see the opportunities out there, and we go after them. And the right ones, we execute on. So there's a good supply, which we're working through.

I mean on the excess capital point, Glynis, I think it was your third question. I think that yes, we have previously said that we return surplus cash to shareholders based on the continual assessment by the Board of that very issue at GBP 1,234 million cash held at December. That points to a level of cash that you would say contains surplus liquidity. We've bookended that really with our observations previously around how much cash we do want to carry. And for our scale, at the moment, we would say GBP 650 million to GBP 700 million, just to repeat ourselves that we've been saying for a number of years now, is the sort of level of liquidity we would want to hold on balance sheet firstly, to cover the working capital cycle; secondly, to provide liquidity for -- to support further land investment. So that gives you the pieces of the jigsaw to think about. One rider I would emphasize just at this point in time, given the state of market is the -- what price liquidity. And I think that the Board needs to think very, very carefully about ensuring that we marshal both the assets of the business in terms of quality and the liquidity of the business in a way that really underscores the sustainability of the business over the long term for the benefit of all stakeholders. So I think we have thought very -- and we continue to think very, very carefully about that. Obviously, there's a strong position there, and we're in a strong position to consider those moving parts. But we'll communicate some conclusions on that at the prelims on the 3rd of March. So we can't give a view yet. We just need to see how things develop, especially in the teeth of a new national lockdown.

And just you threw one extra number. I mean if I look at your build equivalent units at the end of first half of '20 and then the end of 2020, it implies that you built in the second half 7,450 homes, if I just compare that to completions, effectively. Is there any reason why that second half build rate shouldn't be achieved in 2021, i.e., completions that could be subject for demand, 14,900?

Yes. I mean, I think you point to the key issue for the industry. It is all about construction. And we've set our sites up in the same way, new sites coming on, in the same way Dean's already touched on the fact that the constraints are particularly tough at the moment. We've had to readjust what we do and how we approach construction, and it's got tougher, not easier. But having said that, we're optimistic that -- I mean we're fortunate, the type of homes that we do build do -- does lend itself to more social distancing. But even having said that, it is tougher. And we shouldn't ignore that because we would be -- it would be remissive as we might and risk sort of misleading you a little bit if we were to say otherwise. So I think that it is tougher, but we're optimistic. All the teams are very, very keen to drive the business forward. We're keen to bring new outlets through as quickly as we can to meet demand that's there. But as Dean says, we're mindful of the overall situation we find ourselves in. It's like walking a tightrope in a way at this point in time. We've got to get the right balance.

I think that -- good answer. I was at pains to try and point out at the outset, right? I'm super impressed with how the build -- the business did build during the second half of last year. And I think it really has enhanced its capability in terms of building up quality and building up volume, and it did that in the face of the pandemic. We've got to be right to be cautious about what the next 6 months are going to bring. We all know the strain is particularly bad at the moment. And it could well affect output during the spring of this year. Medium, long term, we're really optimistic about the strength of the business and its capability to build. And I think you're right to point to that. But our caution is around the media outlook because of COVID.

Our next question comes from the line of Gavin Jago from Barclays.

A few for me if I could, please. The first one, I guess, just to follow-up -- just back onto the build rates. I'm just wondering if you're able to, I guess, in the context of these kind of tougher restrictions and the situation at the moment, are build rates kind of materially different from kind of pre-COVID levels? Just wanted to kind of, I guess, frame that in terms of what you're talking about the efficiency gains that you had in the second half. And then linked to that, just any comments on build costs would be useful. The second one is just around, I guess, your exposure or any worries about particular regions with the new Help to Buy price caps coming in. Any comments there would be great. And then the final one is just a clarification point. Is -- are you pointing to a roughly 80-20 mix on private, affordable in FY '21 if things go to plan?

On the mix, that's an easy one, yes. 80-20. Help to Buy price caps, we're in a pretty good place on that, as we've said before. We don't see any major issues there for us. We see the rest of the industry downmixing a little bit as a result of that, but we already have very good representation at lower price points with -- you can see that in the statement, we remind you that our average group price point on private is -- on private sales is 16% lower than the national average, for example. So yes, I think that we're in a pretty good place on the new scheme. We're seeing good interest, early interest on that. Build costs. We've already mentioned that supply chain has tightened up again, given that the industry is back at it. And we expect a bit more cost-push inflation developing through '21, maybe 3%, 3.5%, perhaps by the time we get to this point next year. So yes, I think in terms of build rates, Dean, do you want to just sort of mentioned, we've seen a little bit of efficiency going through the construction quality inspection team, et cetera?

Yes. I think we both think there's a price to be had in terms of building right first time. And I think that we are beginning to see that come through the business. And as -- but just to put color on our previous comment, I mean, I suppose I've seen just between before Christmas and post-Christmas, I've seen a -- there's a slightly different mood on the building sites. I think people are -- the builders, the operatives I've seen on-site since going back to Christmas are -- post-Christmas are very, very careful about making sure that there's only one operative in -- on a floor or at any one point in time. And I think that does represent a change. I mean, Martyn, I don't know whether you'd agree with that. But certainly, on the sites I've been on, I've seen that.

Yes, definitely, since Christmas, it's a little bit more cautiousness with people and just being a little bit more -- and some of that things. It's becoming embedded to them now to a degree. We are carefully monitoring them through our COVID inspectors, and we are quite happy to issue a warning to them if they're stepping outside the rules. They're definitely more...

Okay. Would you be able to put a number now of a pair of kind of [ 3-bed semi ]? I mean, pre-COVID, it took X weeks to build. I mean, are you still building at that rate?

Yes. I mean, generally speaking, it's extended, but it's not significant because of the type of homes and the construction process that we deploy. And as I say, countering that, we have seen a little bit of improvement, as Dean puts it, building right first time. There's a -- it's interesting to see how that develops in terms of a bit of efficiency gain in terms of process there, which mitigates the COVID-induced extension, if you will. So as always, we try and help ourselves, and a bit of self-help there is supporting build rates. And I think, as we said earlier, to Glynis' question, we remain positive about our ability to build, so long as we're allowed to continue. And that's the point that Dean raises is that the different jurisdictions in the U.K. can take a slightly different approach as we've seen in the past. So we are not going to drop our guard on health and well-being on-site. That is the top priority, as we say in the statement. And we will not jeopardize people's health and well-being to build an extra house. We are fully compliant with regulation. We're enforcing that strictly. And indeed, last year, when we look back, under our COVID passport to work on-site, we did issue around about 500 contravention notices for people to pull the socks up. So we are very clear-sighted about what needs to be done to protect our operatives, protect our customers and protect the public in terms of our working arrangements. So I think that we can't be clear around that. And if there's a consequential impact on build rate, well, so be it. At this point, it's not really the case. But as I say, we need to see how that develops from here.

And I suppose, just trying to give you some sort of direct answer to your point is that, look, as Mike said, we're building at about the same rate despite the restrictions. So what will be really interesting to see is that once those restrictions lift, when they eventually lift, what can we do then? We don't know at the moment because we're not in that scenario. All we know is that we're building at roughly the same rate or perhaps even slightly better with these restrictions. And the real interest is post-restrictions, what can we do because the build quality is good. The quality inspectors are out on every site that go on. I don't think that's just a coincidence. I think they're there, and they're interacting well with the people. And I think definitely -- I speak to all of our leadership team, and they all think that our quality is improving. And we're building out about the same rate despite the COVID restriction. So there's an interesting gain to be had there at some point in the future.

Our next question comes from the line of Ami Galla from Citigroup.

Just 2 questions from me. The first one is really on the planning backdrop. How do you see that panning out during these restrictions? Does this have an impact on your pace of new site openings in 2021? My second question is on the take-up of the new Help to Buy scheme. As you've seen the take-ups in 16th December, what is your view on the proportion of Help to Buy as a percentage of private reservations going forward? What would be the normal level that we should be expecting in 2021 on that?

I think just coming in on planning, yes, it is undoubtedly -- COVID is definitely having a slowdown on the land market. I think we see that everywhere we look across the business. I mean...

The local authorities are having to adapt to new protocols for getting things through planning committees, virtual planning committees. And it did have a slowdown on things last year, but they are gradually changing, and things are moving forward positively. But you've got that momentum to catch up to a degree.

Now I agree with you, Martyn. I mean, just before Christmas, there was a local authority that we had to -- we have an opportunity we thought we could get through in December, and it's now slipped to February because -- and it's entirely because of COVID. So it's definitely having an effect on the business. Yes, it is. And it will be interesting to see how that develops during the course of this year.

Sorry, Ami, your second question, just I missed that. Sorry.

Yes. It is just on the new Help to Buy scheme. As [ things ] normalize, what do you think it would be as a proportion of private reservations on an ongoing basis?

Yes. I mean, I think when you look at the old Help to Buy, we were about sort of 50% overall in terms of volume that we delivered customers taking advantage of that scheme. I think with the fact that non-first-time buyers now not being able to take part, you would expect that proportion to reduce a little bit. However, the caveat on that, thinking it through, is that we've always thought that the old Help to Buy scheme was quite a crowded trade as we put it. Given the strength of demand in the market, we could sell a house more than once to sort of try and visualize it. So there's a little bit of a queue of people who would like to buy that home. And therefore, those that could access the Help to Buy scheme were perhaps a little bit quicker to transact and therefore, nearer the front of that queue. Now under the old Help to Buy scheme, some of that queue and indeed, some of the purchasers who were at the front of that queue would have been non-first-time buyers. Now we need to see how it develops. This is purely anecdotal, but we anticipate that perhaps more first-time buyers will be successful in being the first one in the queue to buy the home. So our sense of it is that so long as demand remains supported and at good levels, then yes, the proportion, we expect to drop, but the question mark is how much. And it might be -- we might see a more muted drop than perhaps would be first expected because of that crowded trade type characterization of the demand. Does that make sense, Ami?

Yes, that does. Okay.

Our next question comes from the line of Gregor Kuglitsch from UBS.

So I've got a few, maybe just sort of 2 things, 2 things, maybe just sort of touching on what you commented earlier or maybe 2 or 3 things. So the first one was your kind of longer-term optimism around volumes recovering, obviously, as productivity and the restrictions lift. So can you just remind us what you think is the capacity of the business and how kind of maybe a directional time frame where we think that could go back to? And then secondly, on -- coming back to margins, I think you kind of stick to your drift -- margin drift point, right, which I kind of look at the operating margin probably ended up at, call it, 27%. Are you saying you think you'll drift from that? And if so, how does that kind of stack in with the gross margin in the land bank that I think as of -- we haven't obviously seen December, but as of June, I think, was still 33%. So I just want to understand how that circle, where and what you mean by drift over time? And then, the final point, I think, is just an interesting observation on your comment on WIP turn. So I look at WIP turn, which is probably 3x, as you say, like 32%, 33% of sales. But if anything, you were suggesting that efficiency could improve rather than deteriorate. Is that what you're saying? Are you saying that could improve? In other words, the capital efficiency -- I mean I know there were years back 5 years ago when you were doing 6x WIP turn, which was extraordinary, and maybe that was too much. But it sounds like you found a way to become more efficient. Are you saying that could maybe improve over time? Just to understand.

I think just on that last point, I think that if -- in an ideal [ NRV armor ], if every step of constructing a new home was perfect, then yes, you would be -- you would have optimized your efficiency, and I'm sure the WIP turn would be swifter. But it's not just about build. It's about sales process as well. And one feature that we've not touched on really on the call at all but is a real feature in the market is the friction around the infrastructure support to sales progression and contract progression because, again, the whole infrastructure supporting customers in terms of buying a new home is essentially working from home, customer solicitors, independent financial advisers, the brokers, the Help to Buy agents. The whole infrastructure is relying on a different pattern of working now, and that has extended contract progression a little bit for the whole industry. And then when you put on top of that the increase in activity that we've seen, the volume increase, the loading on that infrastructure is quite high currently. So obviously, that does influence the WIP turn because the WIP turn is a product of handing over built homes, completed homes. So I think we need to be mindful of those moving parts as well in terms of what we can achieve. But I think your observation is fair that as we say, we've highlighted an interesting development in terms of deploying our construction quality inspection team to -- insofar as we're willing to invest more in that to explore that opportunity further. And I think that we're optimistic about what that will deliver, but it's hard to quantify to a certain extent. I think on the margin drift side, I think that -- I think if we can get back up to 15,000, 16,000 units, then our overhead efficiency will return. We'll be carrying a bit more cost, probably investing in processes, people, systems along the way. But we're still going to be at the higher levels, as you point to, to be precise is difficult. But there's not going to be a substantial undermining of the operating profitability of the business. And yes, it will move around a little bit as inflationary pressures wax and wane, et cetera. But the quality of the asset base is second to none, as you know, and that provides a fantastic platform for the profitability outcomes for the future. And as Dean says, that's why we're being very selective on the land replacement to protect that because it's all about scale of business as well. If the market gets tougher, and we can only deliver 13,000 units, then we'll do a bit less land replacement because it's self-regulating. Our existing land bank extends because of that. In terms of capacity of the business, Dean, do you want to add up?

Yes. I mean, look, we think that geared to buy opco, we'd be able to produce 600, 650. So do the math, we think, medium term, 18,000 to 20,000 is what the business is currently geared to produce. And if market conditions were right, we'd be very happily producing that.

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

A couple of questions from me. The first one was just going back to something you said right at the beginning, that a key focus for you is to build sites up. And clearly, you've given us a sort of -- there's good opening profile for the first half. But to maintain that in the second half and beyond, presumably, you're going to need to step up land buying. And just wondering how confident you are that even as you step up the pace of land buying, you can maintain the disciplines you've got in place. Second question, just around mortgage availability, really, whether you're seeing any signs of that improving yet.

I think on the second point, I mean, yes, it definitely did in the -- during the course of November and December, it certainly changed mortgage availability. There was hardly -- there was a withdrawal of products October into November. But I think where there was very thin on the ground, maybe probably end of October, maybe 5 to 10 products at high LTV; by December, there were 80 to 90. So I think that definitely changed during the course of the end of last year. Look, Persimmon is always going to maintain its discipline when it buys land, I mean, I'm not going to be the CEO that gives that discipline away, am I? And you have got 2 chart of accountants at the top of the organization here. So I don't see that changing anytime soon. But I'm confident from what I can see in our land bank and in our teams who are looking for land and the skills within the business that Persimmon is rightly proud of those capabilities. And we are very disciplined in deploying them. So yes, I think we can move forward whilst maintaining discipline and therefore, protecting returns and margins, I think, is the essence of your question.

Our next question comes from the line of John Fraser-Andrews from HSBC.

Three for me, please. First one is on the -- [ as to earnings ]. Can we just explore where you're expecting site outlets to be by the end of the half with those 60 coming through? Will that increase that 300 current number? Can that get anywhere close to the 350 as you see things in the first half? And so that's the first question. And second is in the build cost, 3% to 3.5%. Could you just set out or give some indication how you're thinking about labor and materials within that? And whether there's any particular materials that are causing any issues? And then finally, in selling prices, looking at how margins -- underlying margins could trend in that 2.5% increase in the forward order book, is there any underlying house price inflation in that?

Yes. On the latter, we'd point to the sort of circa 1% within that, as we've been saying about what we've seen in 2020, John, on the underlying inflation on price. As always, on the cost-push inflation, 3%, 3.5%, maybe expected for 2021. We think the majority of that would be within the labor part, albeit there's a bit on the material side here and there. Dean, I don't -- do you want to talk about -- yes. Yes. I mean appliance -- we've got to think about Brexit and availability. But I mean the supply chain, we're liaising very closely with our supply chain. And appliances have been a little bit tight, but we've thought about that carefully, and we're in a strong position as we speak. Internal doors, a little bit tight here and there, but we're okay. So as always, we're managing each component intensively to put ourselves in a good position. But it's really the labor rates that tend to fuel the bulk of the inflationary pressures. It's actually been quite surprising over the last 3 or 4 years that material pricing hasn't been more inflationary. It has been less of an issue compared with the labor side probably for obvious reasons, but -- given where overall industry output is. But the industry does still suffer from an aging workforce on-site. And Persimmon, as probably all the majors, particularly Persimmon, would -- were -- we continue to increase the amount of training we do. And particularly, that's another aspect of going back to the productivity on-site. We are deploying more training for site management team and partly through our -- the construction quality inspection team as well. So that, hopefully, will gather pace and support production moving forward as well. On the site outlets, we think it's going to be pretty flat through this year at this point, John, so around about 300 through the year. But it's a dynamic position. It depends on your sales rates, doesn't it? If you sell a bit slower, then you'll have a few more outlets open for longer. But our expectation at this point is reasonably flat around the 300 mark.

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

Just a couple left from me, please. The first, perhaps we could just go back to the implied margin guidance for the second half, which I think suggest that the gross margin will be a bit lower in the second half than the first, yet, obviously, your revenues are up dramatically in the second by, I think, about 3/4 on the first. I appreciate there were COVID costs to bear in mind that you've highlighted. But they weren't exactly suddenly new in the second half versus the first either. And pricing cost underlying seems to have been fine in the second half. So just given that revenue jump, can you -- and maybe it's something for March, but could you help us any further? And I guess, my angle here is whether you're taking somewhat of a prudent view on any of the moving parts or provisions, whenever it might be into year-end because it's quite hard to get to that slippage in the second half, at least sitting here externally.

Yes. I mean you've answered your question already, Will. You'll get more detail at the prelims.

Okay. That would be fine. I'll wait that. And then the second one was just really, maybe if we would 0 in, say, on the last month of sales, do you have any stats in your mind about the share of homes you're selling at the moment or in that time for delivery post March as opposed to pre? Just giving us -- I mean get some insight into the world beyond the cliffs as it were. And then just a nuance on Help to Buy part 2. Did you -- I know it only opened for official lodging and reservations on the 16th of December. But did you get everyone over the line in the second half of the month? Or is there a good proportion of people that spill into January to register there?

Yes. I mean I've not detected any sort of feedback that I'm picking up any hesitancy from customers not to buy for delivery beyond the end of March. Martyn, a view?

Our stock position is relatively low anyway. So they are helping to buy properties that are built.

Yes, absolutely. So I don't think that's an issue, Will, in terms of what we're seeing. I mean, the first week, I mean, did we book all our early interest on the new Help to Buy scheme before the end of December? No. We did have a good first week this year. But as we said right at the top of the meeting, one swallow does not make a summer, and we just need to see how things develop.

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

I think I've got 3. The -- how many reservations have you taken through the new Help to Buy scheme since it opened on December 16. And in broad terms, what proportion of those were kind of sat on the waiting list ahead of that date? The second one is on land bank length, 1 or 2 years ago, you were telling us that, that was expected to shrink. You've got a little bit of a changing of the guard having gone on. So I wonder whether that's still the case. And then third and final question is just on Scotland, given the discussions that are going on today. I think you've got 3 regional offices up there. Would it be fair to say that Scotland is maybe a short 10% of overall revenues, just as a broad sense check?

Yes. I mean on the proportion, it's just a tub more than that. I mean our West Scotland business is particularly strong. The team there is very well seasoned. And we know that they've got a lot of slabs in front of them. So they're in a super spot. So it might be slightly, slightly more than 10%, 12%, 13%, I would point to on that one. Help -- I mean new Help to Buy reservations, well, yes, we've had -- customers had to be patient, as Martyn said. We didn't have availability on stock to allow or to offer to reserve under the old scheme because we couldn't guarantee delivery day. So we -- some of our customers have to be patient. But we have seen good early interest. I think looking at it a couple of days ago, we'd actually booked over 550 customers on the new scheme. So I would say that's a pretty good start, whether they were being patient or they were rushing. I think that is most encouraging, and really, perhaps reflects the positioning of the Persimmon business in terms of the range and choice we offer across the outlet network. I mean in terms of land bank strategy, Dean.

There is no change there.

There's no real change there. I think that we play what we see in front of us. We have got our cyclical playbook in terms of trying to judge demand levels as impact by the health of the overall U.K. economy, whether we're tail end in terms of cycle or whatever. And we try and judge our investment game accordingly. And as Dean says, there's no change there, really. You've seen that our land replacement over recent years has gone from sort of 2017, 115%; '18, 100%; '19, 67%; '20, 50%. So that's a strong footprint in terms of the team here, the senior team sticking to the playbook in terms of trying to manage and judge a cycle. That puts us in a position where we're at lower levels of outlets than recent history, but it's still a strong outlet network. And we manage the scale of the business according to where we are in the cycle. And we don't make any apologies for that because we're trying to protect the quality of our inputs to protect the quality of our output, so to speak.

Our next question comes from the line of Sam Cullen from Peel Hunt.

I've just got a couple of questions, please. The first one is related to underlying price inflation. I think you said in one of your earlier answers, you think about 1% in 2020, and that's why you're sort of penciling in for this year. Given the limiting factor seems to be [ stock ] on the ground, and in simple terms, if it's [ fair ], you seem to be able to sell it. Is there any reason -- that seems quite low to me given kind of affordability levels, especially for Help to Buy product. And are you being overly cautious on that underlying price assumption? And the second question, really, just coming back to this WIP point. I mean you said it was 8% below last year. Can you give us an idea of where it would be versus 2 years ago, say?

Yes. I mean the price inflation point is obviously a judgment in terms of where we see the pressures. I mean, as you know, the whole -- and just take a step back, the whole industry is a price taker, it's not a price setter. At the real arbiter of the clearing value for residential property is the lenders and their valuation regime. And I think that, for example, the stamp duty window, the government change there, the relaxation, more recently, has created more urgency, particularly in the secondhand market. And that's fantastic for the overall market because there's more transactions going through the market, which gives a lot more confidence, provides more confidence around precedent and clearing value and therefore, selling price for us. Whereas if it's a thinner market, obviously, it becomes more skittish and fragile, if you will, because there's less precedent out there. So I think that our ability to push price or price gain inflation is tempered by the valuation regime that is sensibly managed by the lenders based on overall precedent in market. So I don't see that changing. And indeed, the lenders, as Dean's already referenced, in the back end of last year took a more risk-averse approach. But we saw resilience of price, of selling price. We -- I think the elephant in the room is still what's going to happen to selling price moving forward. We don't know. We haven't got a crystal ball. But there are reasons to believe that pricing is going to remain resilient. But our ability to move it forward from here substantially, we believe, is more muted. And therefore, I think that, that's the genesis of our commentary around the outlook on pricing really. Sam, so your second question, sorry, I missed that.

Yes. Well, just on the WIP position, I think you said 8% below last year's level. Just where it would be versus [indiscernible] given that you came in with more WIP last year?

Yes. I mean it was certainly stronger. Forgive me, I haven't got the exact numbers in front of me. But it's certainly stronger than going back -- slightly stronger going back 2 years ago, even being down on last year. So that is testimony to the efforts of all the teams around the country in terms of our drive for construction that continues as we speak. So yes, there's some progress we need to make that we want to make, as I say, investing in other, say, GBP 50 million to GBP 100 million in work in progress. We want to build into this market. Because if it does change direction, we know the work in progress can unwind quite quickly. As Dean says, the land side of the investment game is the one that you've got to be particularly careful with because it lives -- it moves slower, it turns slower, and it lives longer with you. So you've got to make that judgment very, very carefully. But we are keen to continue to build into this market. Is that all right, Sam?

Yes.

Our last question comes from the line of Andy Murphy from Panmure Gordon.

I think after 1 hour or so of questions, I'm down to one. I was just interested in your environmental comments there. I was just wondering what meaningful and what should be measurable actions will be taken to not just reduce your carbon from new homes built but to offset carbon production from the whole construction process, by example, retaining existing green features or indeed adding to them?

Yes. I mean it's a big question. You saved the best for last. It's a big question, isn't it?

Worth waiting for.

I mean, it's a really interesting -- we're in a really interesting process. The team here is the specific team members who are up to that is in studying the opportunities there with an adviser that we're using. So I think these science-based targets are going to be really interesting to look at and unpack in terms of what can we do practically on the ground to firstly move and address the future home standard requirements, and secondly, move beyond that because, obviously, that is but one step in that direction. So I think it's a little bit early to be able to put too much flesh on the bones on that, but it's going to be really interesting to see how that develops from here. And the whole team at Persimmon is behind that. We've always been pro build efficiency and at quality in terms of providing customers with the best thermal efficiency, et cetera, et cetera. So it's going to be an interesting journey. Dean, I don't...

No, I think that's absolutely right. I mean it's definitely on our agenda, and we'll be able to set out much more clearly during the course of this year what our strategy is and what we're trying to achieve. So I'll ask you to bear with us on that. I mean, obviously, the government set out its 10-point plan before Christmas, and construction was involved in that. And we are working very closely with government to interpret what their objectives are and how that translates into the industry at the moment. And obviously, it's quite significant for the industry. And also the -- actually, the capabilities in the industry at the moment are probably not where government aspirations are. So it's not as straightforward as perhaps it was in my old industry to give a very simple answer to this one and a simple target. So -- but it will become clearer during the course of the year, what -- how we're approaching it and what our strategy is. So I would ask you to bear with us and give us some more time to deliver on that one.

Just one more small point on that, Andy, is that in terms of future home standard, we -- the land replacement that we've been undertaking for some time does make allowance for a solution to that first step, if you will. But that is, again, but a small near step. And what we need to be very thoughtful about is the journey that we think is best traveled to go beyond that as we develop our strategy and actions on the ground to address it. So it's a really interesting one. Yes.

There are no further questions in the queue, so I will turn the call back to your host.

Okay. Well, thank you very much indeed for all your questions this morning and for your interest in Persimmon. And we will be talking to you again in a formal way in a few weeks' time at the beginning of March. Thank you.

Thanks very much. We'll close there.

Thank you for joining today's call. You may now disconnect your handsets. Hosts, however, please stay on the line.