Persimmon Plc (PSN) Earnings Call Transcript & Summary

Hello, and welcome to the Persimmon 2020 Full Year Results Presentation. My name is Josh, and I will be your coordinator for today's event. Please note that this conference is being recorded. [Operator Instructions] I will now hand you over to your host, Dean Finch, Group Chief Executive, to begin today's conference. Thank you.

Thank you. Good morning, everybody, and welcome to our call this morning. I'm joined by Mike our CFO; Andy Fuller, our Construction Director; and Martyn Clark, Regional Chair for Southern. Hopefully, you've had a chance to see the materials that we posted this morning and had a chance to look at the presentation. I thought I might spend just a couple of minutes talking through some of the key points and then open up to Q&A. So in terms of 2020, I think a very robust performance in the context of COVID. 13,575 completions for the full year, record completions of 8,675 in the second half. Private affordable mix of strong at 84-16. Statutory PBT at GBP 858.9 million. And obviously, strong cash position of GBP 1.234 billion. Looking ahead to the new year. It started well. We come into the year with a record order book, which is 15% up by value. Sales rates are strong, up 7% per outlet per week. And we're seeing the -- selling prices, it's firm. We're selling well into the second half at the moment. No material impact of price caps on the business so far. Indeed, we've sold -- or we reserved some 1,500 under the new Help to Buy scheme. So we've got a great platform for growth. I'm pleased to say that in terms of quality, Persimmon is doing really well. Our check this morning, our latest survey results are at 93.2% for the new survey year. So business is doing really well there. Hopefully, you've had a chance to look at our priorities, and we'll no doubt discuss those this morning, but they were posted on the website in a couple of materials that we released. Build, brand, being able to build consistently well, maintaining our financial position and driving healthy profits and cash and sustainability. Turning to the outlook for '21. Well, as I said, the business has started well. We were affected by production at the beginning of the year. We had quite a storm of COVID, Brexit, quarantine, bad weather, which did affect us in January, in particular, but the business is back now to where it needs to be. We probably lost about 2 weeks' worth of production over those first few weeks of the year, but I'm pleased to say build is back to more or less now where it was pre-Christmas. And the shape of the build, I think, is also important. So if we look ahead, we're forecasting that by March, we'll have everything roofed that we need to for the end of the first half. So I think that's in good shape and recovering. So obviously, in '21, we're still dealing with the consequences of COVID, in terms of the impact on production and also the impact on outlet. So we're thinking that in '21, will be around, in terms of volume, 90% to 95% of where we were in 2019 volumes with first half approaching -- first half of '21 approaching first half of 2019 volumes. Looking forward, though, which I think is important, '22, we're aiming to be back where we were in 2019. And then in '23, hopefully, we've done what we want to do with land and also with our ability to -- our capabilities to build consistently well, and we should be in a great place at that point, assuming stable economic conditions for growth. And we would have created, I feel, a great platform for growth at that point. In terms of dividends, I'm pleased to say you would have seen the Board's approved, as expected, an increase in the regular dividend up from GBP 1.10 to GBP 1.25. And we're expecting that we will be paying the GBP 2.35 full dividend in the year, subject to market conditions in the second half. So thank you very much for listening to me, and I'll now open it up to questions.

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

Congrats on the good results. Got 3 questions, please. Firstly, within the forward sales position, ASP is 5% ahead of last year. Could you help us in understanding what the private ASP and sort of what level of underlying house price inflation within that looks like. Second question is on margins. You had earlier talked about a drift in margins. And this morning, you've mentioned about the dilutive impact from a higher affordable mix this year. With the affordable mix... [Technical Difficulty] closer to sort of pre-COVID level...

Sorry, could you repeat? I lost you there.

Yes, sorry. So the second question was on margins. You had earlier talked about a drift in margins. And this morning, you've mentioned about the dilutive impact from a higher affordable mix this year. So with that mix reaching a more normalized level and completions reaching closer to pre-COVID levels, would you expect margins to see some uplift in '22 and '23? And lastly, on land market, commentary seems to have improved as you plan to get back to some GBP 500 million land investment. Does that mean your previous comments on allowing the land bank to drift back are no longer applicable?

Thanks, Rajesh. So look, I'll start, if I may. In forward sales, the increase in private is around about 2.5%. And the underlying is around about half of that. And if we look ahead to the year, that's sort of further underlying increase maybe a round about that level. I mean, obviously, we look at selling prices on all of our outlets every single day. Obviously, we're not price setters, but we do what we can. So yes, selling prices is -- it's firm and good. And I suppose connecting that into the next point on margin. Look, we are seeing an increase in costs. And some of them are quite punchy, 3%, 3.5%. Within that some commodities have gone through the roof, but overall, 3%, 3.5%. And so if you take the underlying increase in selling price and what we think might happen as we look forward across the year, then maybe there's some neutrality in the margin there overall. There's obviously the mix effect that you talk about. We're still below volumes pre -- we're still pre-COVID level of volume -- we're not back to pre-COVID levels of volume, sorry, and so that's obviously going to have an impact on overhead absorption, but we will be increasing volumes, we hope, this year. And obviously, we still got the cost of COVID with us. We've still got the inspectors out on site. We've got around about 340 of those out on site at the moment and other costs associated with COVID. So we've got some headwinds. But as I said, volumes recovering, selling prices are firm. And also, look, in the coming years, '22, '23 and beyond, we hope to be reaping the rewards of the investment we're making in terms of building right first time and being able to consistently build well at quality. So other things being equal, we're expecting that the business will do well. And we'll be able to protect its margins.

And on the land side, we're not particularly seeing any major changes, Rajesh, on -- in the landmark. I think obviously, with the vaccine or multiple vaccines out there now, we're being able to tick off some of the uncertainties that we were facing last year. So that enables us to -- whilst we've got, as you know, an incredibly strong land platform. I think that the resolution of these uncertainties as we move forward. And as Dean says, there are still some out there that you've got to still be vigilant around. I think that provides us with a bit more confidence with respect to residual land values. Dean mentioned selling price profile and looking forward, our expectations around that. And obviously, that is a bit of a key driver around residual land values. So yes, I think we do feel a little bit more confident about the outlook just over the last sort of 3 or 4 weeks, as we get more data around the efficacy of the vaccines that are now getting dispensed very widely. So that's great to see. And indeed, that creates a bit more certainty for us to plan for the future. And indeed press the button on some of the really quite attractive land parcels that we've got in the pipeline. So we're very fortunate in that regard. So as Dean says, that gives us a real opportunity to grow back our volumes from here as we move forward.

There's no doubt that if we had more outlets at the moment, we will be selling more product. And as Mike said, the land bank is very strong and certainly, it has got some fantastic embedded margins within it. Persimmon, in my view, buys land incredibly well and develops it really, really well. And I think it's our job to deliver that effectively for shareholders and for stakeholders. And we're doing a lot of work to develop what we've got into the land bank, and looking ahead to bring more into it to bring more supply and to deliver what government wants us to do, which is to bring more houses, which are affordable for buyers into the market.

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

Three questions on my side. Just following up on your last comments, is it fair to say that you sound probably a little bit more optimistic about your medium-term volume outlook at this stage? And I guess you refer on 2019 in your statement, but that was not your peak volumes. I guess 2018 had actually higher volumes than 2019 because you slowed things down back in the time. So do you think going back to 2018 volumes, maybe, let's say, by 2023, could be achievable? That's my first question. My second question is around the cash return. You do confirm the 235p for 2021, and that's quite helpful. Are you implying that there could be upside to this in the medium term, so beyond 2021? And also, you've adjusted the timing of the payments -- of the returns. Could you elaborate why you -- I mean, it's just a timing issue, but why that was the case? And lastly, could you just comment on the cladding provision, the GBP 75 million that you announced in February. Are you confident that this is as bad as it gets, let's say, and that there's no risk that the provision might be increased at a later stage?

Okay. Well, shall I have a go, and then I'll turn over to Mike. So thank you for your questions. Look, the world is a different place to January, isn't it? And the vaccine rollout is motoring ahead. And I think that gives us optimism to be able to see through the crisis and Brexit and other things that were hanging over us earlier in the year. Look, yes, I'm well aware that 2018 was higher than 2019. And I believe that -- and I hope that we will be able to, in the fullness of time, beat those previous records in terms of volume. And yes, certainly, '23 would be where I'd see '18 or beyond, maybe. But it's about us building that capability within the business to consistently deliver quality houses well. I see that being developed, thanks to the Persimmon Way in the business, which, as I've said, we're doubling down on in terms of strengthening within the business. And I just think to give listeners some confidence about that. When I go out on site, I -- which I do every week, I do make a point of seeing the IQC, our independent inspectors out on site. And they're engaging well with the businesses up and down the land and making a real difference to our quality and actually building efficiently. So I think it's a tremendous tool the business has got there. And I'm confident that over time will actually be a differentiator for Persimmon and strengthening its ability to turn out volume consistently well and quality. So yes, we're feeling good about what the future might hold, assuming economy remains stable. I think in terms of dividend, look, we've got the cash. And we sat on GBP 1.2 billion worth of cash as we speak. And so it felt only right to be accelerating the timing of that return in March. I think in future years, we'll return to a more normal pattern of distribution. Look, let's not get ahead of ourselves in terms of even bigger distributions in future years. I can assure you that I firmly believe that the Board is committed to always distributing surplus cash subject to the investment needs of the business, which will vary from year-to-year. We -- Persimmon has, I think, a justified reputation for managing the deployment of capital within the cycle. And I'm not going to do anything that's going to upend at. I want to strengthen and continue that. And so that may mean, in some years, we'll have more cash. In some years, we'll have less cash. But I think that's the strength of the business' balance sheet and the metrics it's put out there in terms of the GBP 600 million to GBP 700 million of cash at the year-end to enable us to manage those cycles whilst giving shareholders the confidence of that, not just the regular dividend, but the surplus dividend as well. And I'm sure we do like to see that in the share price. Turning on to cladding. Well, look, this is about us doing the right thing as a company. We triggered a review in November. And Andy has done an exhaustive and extensive review of the business going back years and years and years. And we've identified these 26 buildings, 5 of which we own. They're all below 18 meters. The other 21 are a mix of above and below. And I think we have taken what I hope is a conservative view of the level of provisioning to give both us certainty, stakeholders certainty, and I think, importantly, to signal to our customers out there that, look, we're going to keep you safe in your homes. You're going to be safe in a home you buy from Persimmon, but also we're going to make sure you get your AWS1 certification as well to enable you to mortgage your homes and sell your homes. So hopefully, that's answered most of the points. And Mike, is there anything I have missed?

No, I think that's fine. Yes.

Our next question comes from the line of Aynsley Lammin from Canaccord.

Just 2 questions for me, please. First of all, on the mortgage market. Just wondered if you could give a bit more color what you see in the mortgage market, the kind of providers becoming a bit more optimistic as well. And any thoughts you have on what we expected over the kind of mortgage guarantee product that's been speculated or will be announced in the budget? And secondly -- question. Just any more color on kind of regional differences you're seeing and any different pricing strengths in different parts of the country?

Thank you. Well, look, the mortgage market has improved, obviously, since last year, and there's more products available and -- at certainly 90% and there's a tick or more at 95%. I mean, obviously, from an affordability point of view, with low interest rates remaining, then that's obviously key welcome the speculation, which everybody has assumed now is certainty about what the chancellor is going to say. I mean I'm probably going to share my age here, but I don't remember chancellors resigning when they -- when budgets were leaked, but that doesn't seem to happen anymore. Probably a good thing. So look, positive for sentiment. It's obviously for the broader market, not just new homes, but obviously welcome that -- the government policy is there to help people get their feet onto the housing ladder. In terms of regional differences, well, actually, it's looking all right overall. I mean, there obviously are pockets of strengths and weaknesses as there always are. But I think Persimmon's got a fantastic platform -- national platform. I think it's in the right markets. And it's right not to be in the market. It's not in as well, I believe. So overall, the position is pretty well looking consistently good.

Great. Actually, just one last one as well, actually, if you don't mind. The split between private and affordable, is that closer to 20% this year in '20?

Yes, it's going to be a more normal return, 80-20 this year, yes.

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

A couple from me as well, if I could, please. Persimmon is just exploring, I guess, what you might deem the optimal sales rate at the moment. I think in the past, you've talked about somewhere in the midpoint 7s, which is pretty much where you were in 2020 as a whole. You're obviously ahead of 2020 at the moment against the toughest comp. So how are you thinking about the -- that position in terms of what you might deem at the optimal level? Is there a ceiling you might put on it at which point you might say to the teams, let's try and push a little bit more on price? So just, I guess, the tradeoff there, please, will be great. And then the second, just coming back to the comments around growth. Obviously, there is a 2022 target ambition. Presumably, there's a site and outlet number underpinned to that. Would you be willing to share what you think that might be next year? And then maybe just looking beyond it, is there anything as you look at the map for the business as a whole? Any gaps you think you might look to be bigger in regionally, new offices needed longer term, anything like that to support that medium-term focus you seem to be emphasizing today?

Okay. I'll have a go, and then Mike can tell me often to put me right. I mean, funny you should say this, but obviously, a heated debate internally. And my -- the gentleman sitting opposite me across the table. It has been heard recently to say, well, if you're selling that fast, then why don't you put the prices up? You didn't say that, did you really, but, yes. Look, we're on it all the time. And we're clearly benefiting at the moment from, I think, very strong sales. And it is a mix of price and what's available and obviously, demand out there. And I think that's driving us towards the higher end of the sales rate at the moment. But obviously, we're always at pains to point out. We don't set price. It's valuations that set price. I would say that we're not seeing much in terms of down values at the moment. And so there does seem to be an ability to afford what's going on out there. We want to build a rate that matches what we're selling at. So I think that's also very important. In fact, we want to get ahead of the rate at which we're selling at, so that we can deliver a quality product to our customers. So it feels quite high at the moment. We're keeping up with that. You can see. I mentioned at the top of the call, the HBF survey results where we're at the moment. So I think that's a particularly strong performance of the business in terms of quality at these very high sales rates. Turning to -- and I'll invite Mike to comment in a moment. I think turning to outlets. I mean, we're around about 300, which is where we're going to broadly be during the course of this year, a bit stronger in the second half, so over 50 new outlets being opened this year. And look, this goes to the heart of what we want to do, which is to open back -- open up more outlets. That takes time to bring them through planning, and the business is extremely focused on this at the moment. And we will be -- our ambition is to drive out that growth in '22 and '23 and beyond, getting more towards the GBP 350 million level towards the end of '22, we would hope. And then subject to market conditions, seeing how that develops from there. There are -- it's interesting what you say about new offices. I mean I do without wanting to give the game away, I think there are clearly opportunities as I've walked around the business where I think actually, there would be the potential for us to open more offices, to rightsize the regions and take advantage of more presence in certain of the markets. So I think, yes, there is that opportunity out there, which is great for the business. And we want to see that come on stream over the next 2 or 3 years. Mike, anything you want to add?

No. I think that's fine. Yes, I mean in terms of sales rates, well, obviously, we expect the traditional seasonality of the market to reassert itself this year. And as you know, it's well documented now the disruption last year turned our traditional pattern of seasonality on its head in terms of sales behavior, customer behavior. So we would expect that to return to a more normal pattern of where spring is stronger than autumn. And indeed, the first 8 weeks, as Dean has already touched on, is encouraging to us to think along those lines as well, where we've got a PD sales -- an average PD sales rate to site of around 0.94 over the first 8 weeks, which is a good rate of sale, albeit it's spring, and we would expect that. So I think that bodes well for spring, and we'd expect autumn to be a little bit slower, if that seasonality comes through. So we'd expect a decent forward order book at June and then with the pattern of handover of completed properties, legal completions through the second half, as we've indicated, we'd expect a pretty good forward order position to take into the following year as well, into '22. So yes, I mean, we're encouraged with what we're seeing at this point in terms of sales rates.

And I think that we haven't touched on it yet, maybe there will be a question later, I don't know. But I mean, clearly, I think consumer habits are -- customer habits certainly anecdotally pick up when I walk around. There is differences in terms of what we've seen through COVID. I mean I was at a site in Witney the other week. And I was talking to sales rep there. And she was telling me that maybe there's -- she's seeing 15% more inquiry, more interest from people moving out of London, for instance, which she's not seen before at that scale. And maybe we're seeing that really across the country as people are wanting to work from home in a different pattern to where they were before. And I know there's a huge debate about what working life is going to be like post-COVID. Will it ever go back to quite where it was? I mean, some people have -- well, there's very different views on that, isn't that, but I can't imagine that will ever quite go back to where it was not for some time. And what we offer in terms of space. And also, you've seen what we said today about FiberNest, I mean, it's a real USP for the company. So maybe all of that is underpinning strong sales as well.

Our next question comes from the line of Chris Millington from Numis.

A couple if I can, please. I mean, can you just comment on how much more money you'd like to see in WIP through the course of this year? I think you did mention that you'd like to kind of update the build rate a little bit. The second one to ask really was about the role land creditors are going to play in this increased land buying you're forecasting. And whether or not you're looking to run those up a little bit higher? And then just back to Will's question before. I just wonder if you could make a quick comment about where you see the current capacity of the business in terms of volumes based on your regional structure? That's all for me.

Okay. Thank you. Yes. Well, look, we are going to be investing in WIP this year. We came -- we entered the year about GBP 500 million, GBP 600 million and we want to get back to a more normal rate of 6,100 by the year-end. So we want to get ahead of that. And as I mentioned, January, early February, we took a bit of a setback. So we will be investing more in WIP. I'll -- in a moment, I'll hand to Mike on land creditors, but I think you can expect those returning to normal pattern of the business.

Sticking number on that, Chris. You've got to think that if we can get ahead on the build, as Dean is pointing to, because obviously, building sort of more or less full capacity that we returned to on the 300 outlets. It's an incremental sort of slow-moving additional investment that will go in through this year. Because it's not as if we've got loads of fresh sites that we're beavering away on. We're at full capacity as we sit here. So I think that over the rest of the year, we might see maybe another GBP 75 million to GBP 100 million being absorbed in work in progress by the time we get to the end of this year. Just to give you a sort of feel for the scale of that intent, if you will. Dean, back to you.

Thanks, Mike. And then on capacity, well, look, we've got 31 companies, and we're targeting 600 to 650 as an optimum for scale build in those companies. And I think that's pretty good tried and tested model within Persimmon. So do the math, you can see where we think we can get to. And a lot of our companies now within the business are operating at 5-star, a few aren't now, particularly in the new year. So I think we're proving we can deal with it. And so that links back to the previous question about opening new offices if the market is there, and we see the opportunity to go on and expand build in future years.

And Chris, the other thing on the additional investment that's needed that we touched on a minute ago. Obviously, yes, we need more work in progress. But yes, we'll be investing in land as well. And Dean mentioned the land creditor point, which is very important. The pay down of land creditor over the last 2 or 3 years is by intent by design. And the flip side of that is that it opens up more headroom to accelerate your investment gain because you've got the ability to add more leverage, more gearing. And I think the -- to characterize what Persimmon does over the long-term is we tend to agree terms with landowners where we defer a decent proportion of the initial value to, say, over the next year or 2, maybe 40%, 50% on average. So if we're -- within that -- we've indicated about GBP 500 million is a more typical level of spend, cash out on land. If you split that to say, well, GBP 150 million to GBP 200 million on line creditor pay down, you've maybe got GBP 300 million left on new deals. But that, in terms of cash, would represent, say, only 50% of the land value. So double it up, you've got GBP 600 million to GBP 700 million capacity, if you will, to -- in a more normal, stable market that we'd be expecting to invest. So that gives you a feel for the, firstly, the gearing effect, the assistance we have, the balance sheet that we've got, together with liquidity, together with a normal sort of pattern in terms of how that capital would be deployed.

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

I have 3, if I may. The first one just in terms of growth. Forgive me, Dean, I just want to clarify. You gave -- you talked about volumes for 2023 and beyond of 18,000. Was that for 2023 or was that the beyond? And the reason I say that is the 350 site levels at the end of '22, that's a 16% increase on where you're saying you're going to sort of be in terms of '21. So that would suggest it's quite a meaningful uptick. The second one, land bank margins. You talked in your presentation about it being above 32.5%. I calculate it's around 32.8%. Can you just give us a bit of color in terms of does that include the COVID costs that you've referenced? Does that include the recent house price inflation, just to make sure we understand the basis of that number? And then the last one, just in terms of land buying, forgive me, Chris said it was clear. I certainly realized I didn't think it was in my head. Are you saying that the land spend will be GBP 500 million, but then you on top of that increased land creditors to where they were, i.e., we will see somewhat of a bulge come through in the next 12, 18 months or so. Or should we just be having that GBP 500 million in per annum?

So thanks, Glynis. Just on growth, I mean, in 2018, we were about 16,500 units and -- sorry, Mike is reaching...

Glynis, you were referencing 18,000 units. I think you're getting confused between 2018 and 18,000 units.

The capacity of the business, we believe, is around about 18,000 at the moment. I'm not saying that's where I think we will be in 2023. But if we are, nobody will be happier than me, so long as we're at 5-star. But yes, are we signaling long-term ambition and intent for growth subject to managing the cycle and maintaining our margins, cheap for me, keep people say, maintain our margins, grow the business, protect the balance sheet. Those are the issues that drive me and deliver a 5-star. In terms of the land bank, yes, I mean, look, COVID costs, I think Mike said that carryforward is about GBP 9.5 million. So in the context of what we've got, not material. And in terms of inflation. Well, as I said, I think at the moment, our selling price and cost inflation are broadly neutral. So that, I think, evens out. There's some tremendous embedded margins in the land bank. I've seen some super exciting things since I've joined the business in terms of opportunity. And very strong margins in there, both within the land bank on strategic land and on spot too. I think on land spend, I think the cash is around about as Mike outlined, but I'll ask him to cover that.

Yes. I mean, again, it's reiterating Chris' question really. In terms of the cash flow and obviously, you're thinking about absorb -- how much is going to be absorbed by way of cash, the liquidity? I think the land creditor there is to lean on, really. That provides us with assistance in supporting a more positive land replacement process, given that we're seeing the future, perhaps, a little bit more clearly. As we referenced earlier, with that vaccine-virus equation being fought out and hopefully successfully. So I think the -- given that we've paid -- we've opened up this headroom on the land creditor, that gives us great opportunity to talk about the acquisition of new land parcels with landowner with some deferral attached to that. But also -- Dean's touched on already the fact that in terms of the capital structure of the business, we book ended the liquidity issue with sort of the GBP 650 million, GBP 700 million that we think we should be carrying at the scale we are to minimize financial risk through the cycle. And within that GBP 700 million, say there's about half of it that's there to assist our land investment ambition. And that's ignoring the fact that we're currently at GBP 1.2 billion of liquidity. So I think when you put the pieces together with the available gearing and headroom in land creditor, we've probably got thick end of GBP 1 billion, slightly more than GBP 1 billion that we could invest in the land market over time. Together with, obviously, looking at what we're going to do on trading this year because, as you know, the cash generation of the business is a combination of trading and working capital management. So if you look back at '20 in the slide deck -- Page 12 in there is a good work example. The trading compared with '19, we're about GBP 180 million cash gen lower at just shy of GBP 900 million. Whereas if you look at after working capital and tax payments, we turn that around to GBP 150 million positive comparison to '19. So that is a great work example of how the cash generation in the business can work as long you pull the right levers and press the right buttons at the right time in the cycle. So this -- always this combination of trading and working capital management that delivers the cash flow of the business, which supports our investment ambition as well as the distributions that we make to shareholders to keep the capital structure in the right place.

And I think that's -- just coming in on Mike's point there, which I think is really an important one. I mean, look, my own calculations and the calculations of the business do support the view that assuming we've got stable market conditions, we protect the margin that the business can continue to invest and grow at the pace we're sort of indicating this morning, whilst being able to continue to pay the dividends that we've paid in the past. So I think a great business, strong balance sheet, strong opportunities. We can protect returns to shareholders and grow the business, too.

And just to clarify on that land bank margin. Is there anything in the mix and the timing that would suggest why that land bank margin shouldn't become P&L margin for full year '22?

Yes. I mean, that -- I always -- my stock answer on that, Glynis, is that, look, in any 6- or 12-month period, we can't -- it's not a sausage machine. We haven't got CapEx out there delivering a homogeneous product. Every plot is different. Every site is different. And the mix delivered from all those sites will be different in any period. So it's hard to guarantee an absolute level because that mix has changed from time to time as we saw in 2020. But having said that, we've got a fantastic underpin. When you look at the blended margin that we provide site on, as usual, within the slide deck and pointing to it on Page 9, the graph with the 3 colored blobs on it. If you do the simple calc on a weighted basis, for the 67,200 plots that we own, we've got an embedded margin over 32.5%, which is -- provides great strength to the outlook, as Dean is pointing to, to bring forward and support delivery as we move forward. So as always, you know it's hard to be tremendously precise about an exact margin in any 6 or 12-month period because of the various moving parts. But I think that there is a strength -- it is a really strong, high-quality land bank in the right locations, offering more affordable product, 17% lower than the national average, our private selling price. It's an enviable position to have, especially in these more challenging markets.

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

So I just want to be very clear on what you're actually trying to say on '21 margin. Because obviously, there's moving parts. Yes, the social mix, the headwind, volumes are going up. But are you trying to tell us margins will be down year-over-year? Or are you referencing the growth relative to the land bank margin? So if you just be explicit maybe on essentially whether you think it will be down year-over-year, say, on the operating level to keep it simple? And then I'm intrigued also by the comments, Dean, you made. You -- I think you kept on referencing maintenance of margins, right? That, I think, was repeated several times, which suggests you think the current margin level, I don't know, 27%, 28%, say, high 20s is the right level. Obviously, it doesn't quite square up, right, with a 33% growth minus 3% overhead, you'd be closer to 30%. I mean, maybe we're splitting hair here, maybe it is. Maybe you mean the same thing by that. But just to be clear, are you suggesting that kind of the margin level that you're producing in '20/'21 is kind of what you think is what the business should be doing? And then maybe finally on FibreNest because it was called out a few times. And I think there was a section about it in the presentation. Can you just give us some financials on this? So did it generate revenue and profit? And how does it kind of fit in? I appreciate it's a value-added offer for your customers and so on. So it's a differentiator. But does it make -- is it meaningful in terms of P&L contribution?

Okay. Well, I'll have a go at answering these questions, and I'll pass over to Mike. Look, the central case this year is broadly in line with what we saw last year on margin. But we're pointing to the puts and takes in that. And we're all crystal ball gazing here, aren't we? And as Mike said, it depends on how things cycle through during the course of the year. But in terms of this year, that's our central case. In terms of going forward, over the next couple of years, as you say, as the business expands, we would expect the normal pattern of margin and profit to deploy into that. And on FibreNest, it's a small net cost to the business, but I think -- at this point in time, but I think it's a huge USP of growing importance to the business, which will become incredibly valuable in the years to come. You're right to say that we see it as an adjunct in terms of being able to provide a value-add to the customer, which is exactly how I see it. In future years, would it have its own value? Yes, it might well do. But we're not there yet. However, I'll pass over to Mike.

I think that's right, Dean. On FiberNest, it's an exciting opportunity. It's a real strategic long-term view that we've taken there to invest in a full fiber national network, and you can see within the slide deck, the footprint that we've already got, and that's only after sort of 2, 2.5 years, where we've got sort of 2/3 of the outlet network already hooked up with new outlets going on to that network. So it's really quite an exciting platform that we've already built and we'll continue to build out. And there's many opportunities that we're considering actively that will add value for the customer, as Dean correctly pointed out. This is all about added value services Persimmon will be able to provide choice and value to customers moving forward, hopefully. So -- it's of a scale currently where it's a small net cost, as Dean characterizes it. And we recognize that you do -- obviously, you have to invest at the front end of these sorts of business opportunities to get the return out longer term. And I think that's where Persimmon -- at Persimmon's mindset. And indeed, we are, as you know, we think, very long term. We acquire land parcels that continue for many years and establishing a fiber network is a similar characteristic in that we are prepared to take those longer-term views if we see value for the customer. And indeed, we can generate value for stakeholders more generally, including shareholders. So we're very, very confident this will become increasingly valuable in both respects as it moves forward. In terms of the overall margin, I'll just echo what Dean says. I think we've got great support. I know you're asking us for more precision. But I think the -- Dean says, well, hopefully, this year will be similar to last. That -- it might be slightly thinner for various [indiscernible] COVID costs, et cetera, et cetera. The mix that we've touched on, the overhead optimization that isn't quite there. But I do think that with the investment in customer care and maintenance that we're doing, the quality inspection team that we're doubling up on through this year, there's more investment going in. It's a bit like fiber. You've got to invest to get the return. So there's a bit of a timing difference there. And that's why I'm saying that it might be a little bit thinner this year because we're putting that investment in. We're expensing that investment prudently this year. But that's in the full expectation for '22 and '23 and beyond. It provides a platform whereby margins will then start to ascend, if you will. The trend will be positive. Exactly to what level? We haven't got a crystal ball that provides that exact answer, but that's the sort of trend and pattern to it that we see.

That's really helpful. Can I just have a follow-up on land? I know there was lots of numbers flying around. But maybe if we can look at it differently. In terms of the length of the land bank, and it's been pretty consistent over the years. But to sort of support that kind of volume growth? Do you think it has to be, I don't know, 4.5 years owned? Is that kind of what you're thinking? Or can it go lower?

Yes. I mean, back in the day, Gregor, when we used to talk, maybe 15, 20 years ago, we'd have been saying, well, a 5-year land bank -- consented land bank is at the outer edges of the length that we would want to carry. And I think over recent years, we've let that drift back, managing the cycle risk in many respects and the capital structure of the business. I think that as we tick off these uncertainties with the pandemic and what have you, it's not over yet, and you can't afford to be complacent. You've got to remain vigilant. But what we've got and -- we've spent many years positioning the business in this way is that we've got a starting position. If you take today's day as a starting position, there remains strength in capacity to invest. And I think that Dean has already touched on. We've got ambition to do that. But as we said in answer to Chris' and Glynis' questions, we've got capacity within our capital structure to do that without putting strain on the business. We've accumulated the financial strength over many years and preserved that, protected that for the right time to deploy. And we're still sticking to our strategy. We're managing the cycle with a real focus on the risks that are associated with that. And a big part of that, as you know, is timing of the deployment of more capital rather than less. And we've not said anything, I think, today or previously that contradicts us. So I think that we are really well positioned to take advantage of the opportunities that we're seeing.

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

I've got a couple of questions certainly. So on the kind of sales rate and outlet growth, I think -- and I might be wrong, but you can correct me if you wish. But I think the implied sales rate for '22, at least, given your outlook and the numbers you've given for around outlet guidance implies kind of 0.75. Are you happy that the business has the infrastructure to kind of build and sell at that rate and maintain the quality, given, I think our sales rates ahead of what you were doing in '17, '18, when you probably had some more serious quality issues? So that will be the first one.

The answer to that is yes.

Okay. So -- but you don't need any incremental investment from here?

Well, Mike's just -- we're doing it now.

Yes, okay. And then the second question around, I think, Dean, you had some comments initially around margins and looking into the medium term, adding back to margins from no longer having to do kind of remedial work on build. Can you give us a number for what you're spending currently or what you have spent maybe last year and in 2020 that would be helpful.

I think it's -- I mean, just -- I'll take it if I may, Dean. I think, Sam, the gross margins that we're talking about reflect the level of customer care investment in terms of the teams that we have there on the ground and any of the remedial work that we do. Obviously, we've got the -- we haven't mentioned the home buyer retention scheme that is unique in the market that we introduced in the previous year. That is playing out really well. About 50% of our customers have taken the opportunity to use that scheme, although it's on offer to them all. So again, that plays to the fact that our quality is running -- quality standards and service standards are running at these higher levels, which is great to see. So customers are reflecting that and actually choosing not to use that retention scheme, which is interesting. So the peace dividend, if you will, from this investment that we have made to promote better quality and service. It's hard to put your finger on exactly what the payback will be on that investment. But we do positively think that there is going to be a reduction in remedial works on the back of it. The logic is sound in that if we do build the right way, initially, then there's less interruption of the construction process on-site. And the focus we've got on finishing quality with the handover processes now, as part of the Persimmon Way all adds up to delivering top-class quality for the customer. So what you -- I know what you're trying to say, well, is that worth 50 bps of margin or 100 bps of margin or whatever? Again, it's hard to be -- it would be remiss of us to give you a precise number because it's a bit of a false precision. But there will be a return on that investment.

Yes. Look, I would agree with what Mike said. The truth is at the moment, the business doesn't know what the opportunity is there, but we all agree there is an opportunity. So we're going to get after it, just like Persimmon always does. First and foremost, it's about ensuring that we -- and our absolute focus is to make sure that the business is consistently delivering quality houses and make sure that we've got our customers' content. That is our absolute priority. When we feel we're secure and we're delivering that, then these efficiencies that we've identified will play into that, and give us a return, which I'm sure is there. I mean Andy, do you want to -- I mean, you -- we have the expert in the room.

We've got our Group Construction Director in the room with us. So...

So I mean last year, we invested, as Mike and Dean have already said, and we have over 30 independent quality controllers that report into me. And Dean has said in his report that we're doubling that investment this year. So we shall have over 60 independent quality controllers reporting centrally, so that we ensure that we're going to build each home right first time. The training that we are delivering to our construction teams now is ensuring that we've got the very best experience and skill set, building each one of these homes. And that check the checker principle as the slide, if you've looked at them, show, means that we can quality assure each home we build. And it's not the driver to save remedial costs in the future. But clearly, that's going to be a business benefit in 2022, 2023. What that number is, I don't know. But what we can be sure of and what the statistics are already showing is that customer satisfaction numbers are now well above 90%, 5-star and clearly on a par with others in our sector.

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

I had a couple of questions, please, if I can. Just going back to the idea of volume growth. Back in sort of the pre-COVID days, you sort of grew quite happily, sort of, about 4% a year while still having a long land bank and the capital returns came through. Is that your thinking going forward that you would be physically able to grow at that kind of speed while maintaining quality? And the second question is sort of related. Just reading slightly between the lines in the statement. Do I get a sense that you think you might need to be a bit more vertically integrated to continue to hit high quality as you scale up even further either in terms of kind of building materials or in terms of construction labor?

So look, I'll take the second question first, if I may. I think Persimmon, I've been really impressed with the capabilities -- the in-house capabilities that Persimmon have got through brick, through tile and through timber frame. And I think there is an opportunity there to draw what we have more into the business and to make full use of the capacity that we have. I mean, if you just take, for instance, tiles at the moment, we don't yet fully exploit that opportunity in-house that we've got. I mean, we've only really brought that onstream during the course of 2020. But there is that opportunity to come. Will we necessarily see because that will beg another 300 questions about the margin, will that result in a margin opportunity? Not necessarily, but what it does do is give us security of supply actually -- critically speed of supply of a good quality product. Likewise with the bricks is to make sure that we maximize the use of the product within the business. We're doing that. We're increasing the take-up of our own bricks and innovating with permeable pavers, for instance, which is helping on all sorts of issues within the business and helping on the biodiversity front as well. So there's that opportunity. And I think Space4. modern methods of production in timber frame, yes, I do think over the coming years, there is an opportunity there to build into the business. We don't -- we're still working out what that opportunity is going to be, but it definitely exists. And we are experimenting with all sorts of new internal design ideas that will, I think, take us into -- in future years real opportunities to think about how we build differently. So I think that's a really interesting aspect of the business. I mean, look -- yes, I mean, I think turning to one -- yes, 4%, 5% kind of growth is what we're hoping for in a stable market and being able to deliver that whilst also consistently maintaining our quality build is our ambition.

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

I've got one question. It's not about margins, though it is about capital allocation. Just casting our minds back, the GBP 400 million dividend that you held back last year in the throes of COVID. You're telling us that you're honoring the 235p total for this year? No more, no less, and you're also telling us that 125p of it is going to recur going forward. Is your message to us that you're going to keep running the business with as much as GBP 400 million worth of extra cash in it through this cycle? Or should we expect the top-up elements of that dividend to manage your balance sheet starting from next year?

Here we go. Mike is getting excited now. He's going red in the face, too. You're asking my finance director to reach for the checkbook, I mean, oh my god.

Yes. I think -- I mean, really absolutely already, Jon. I think -- no, I don't think that we are permanently going to be running liquidity levels at the level that we're currently at. The -- we're consistent in saying at the scale we are, GBP 650 million to GBP 700 million of liquidity at June and December is about the right sort of level to minimize financial risk. And I think that sort of philosophy was reinforced, if you will, and confirmed on the back -- in the middle of March last year, when -- yes, we did have to cancel the GBP 400 million surplus top-up return that was earmarked for early April. But I think the design of our distribution policy and policy around maintaining a sound capital structure for a cyclical business in a cyclical industry, basically demonstrated its worth at that time. We've always said the Board will continually assess and review the level of surplus capital it feels able to return to shareholders depending on a number of aspects, where the business is, what the outlook looks like, what the reinvestment opportunities are. Because we continually are told by certainly the owners of the business that if we see good opportunity, they would like us to invest in those opportunities. So long as -- with the cost of equity around 7%, we can add good value and generate value for them and the wider stakeholders over time. But I think the lessons of the past in terms of the cycle and the risks that we run were well documented. And I think the -- our strategy is well designed. And we've spent many years theorizing it, backtesting it, projecting it, demonstrating the moving parts. As we said last year, 2020 is a great work example as to how well designed the strategy is to deal with turbulent conditions. Because at the end of the day, none of our stakeholders -- shareholders and wider stakeholders would thank us for running a capital structure that was fragile. Because there's a lot of stakeholders that rely on the business for a sustainable future and that's what we're all about. We've said that over many years. And I think that it's well designed to deliver. So I think the philosophy is permanent, Jon, yes, given the nature of the business we're in. Is that all right?

That's right.

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

Two for me, please. The first one is on the build rates for '21, what you've implied with your guidance doubling half 1 '19 is a build rate that looks about 10% higher than -- per site than you achieved in 2019. So perhaps you could just flesh out your comfort on that when the equivalent unit starts ramping up whether that will take advantage of this spring selling season. So you must have some sort of visibility on that. Then the second question is back on the EBIT margin. Because at interims in November, we were talking about margin drift from a 2019 level of sort of plus 30%. The Slide 9, the land bank blobs, that does seem to have drifted a little bit, but you sound now much more optimistic on getting some dividends from your investment in build quality. So is that the factor that's changed? And are you able to replenish land at what we're seeing on Slide 9. So just some detail there, please, on the margin -- that change in outlook?

Well, look, the business was building -- I mean, obviously, there's build rates and the sales rates, and they occur at different times, certainly. But the business is now back to broadly, had a few weeks of blip, January, February, as I said, lost about 2 weeks of production. We come into the year with 5,600 units in terms of in stock, and it's also -- it's not just as simple as that. You've got to look at the shape of build as well. But look, we're back to now near enough 300 EUs a week. Multiply that by 50, you get to the number. So we are all right on build rate this year. There's nothing to see there. In terms of embedded margins, can we replace? Yes, we are seeing that.

Yes. I mean, I think -- I mean, the biggest driver, let's not forget, is the quality of our input margins on every parcel of land that we invest in. And this is about the discipline around that focus. And we've banged on about that for years and years and years. And those -- that bleb graph, I think, it's become -- is a good demonstration of that resilience. And okay, it's going to flex around a little bit. But surprise, surprise, it's come back a little bit. You're talking 2 or 3 basis points or whatever it is, 6 months on 6 months. I mean, let's not ignore the fact that we sold more PD units in 2020. 84% of the sales were into the private market. They carry a higher margin. So surprise, surprise, the embedded margin comes back a little bit. It's dynamic. In terms of a slight change in tone, you're right, John. I think that is a fair observation. But the margin drift issue was around the parity of the inflation equation. And as we've already said, this year with better visibility. Yes, there is a bit of pressure on costs, timber and one or 2 other areas, as you know. There's some inflationary pressure. There's still a game to be played out there in terms of ForEx because of Brexit. So we need to see how that plays out. But the margin drift was really a consideration around the balance between well -- in a market where we've seen some improvement in selling prices over a number of years now, we all know where price levels have got to in terms of the journey we've traveled so far from the GFC. The question is, well, from an affordability point of view -- and okay, interest rates are likely to remain low for longer. But from an affordability point of view, what is the ability of the industry and Persimmon to continue to push its prices forward at a rate that covers the cost-push inflation? That is the exam question and previous comments were around a feeling that we'd only be able to move price modestly at a time when the industry has ambition to meet government housing targets, which means there's pressure building in the supply chain. Now what we've done is we've invested to help ourselves and actually the wider industry in vertical integration. And we'll continue to think about that, but that only helped so far. So I think, again, there's still that specter out there, that shadow out there, but we may suffer from a supply chain that is increasingly tight again. There's so many bricklayers in the country and there's -- there are tight spots in manufacturing capacity in the supply chain to support the industry. So those comments were reflecting on those pressures. And we haven't got a clear answer to how they will play out because, again, there's a lot of moving parts, albeit, as always, like Persimmon builds. We try and help ourselves and create more certainty in terms of security of supply, perhaps a little bit of cost advantage associated with that over time. But the key thing is get the homes built because that is the big cash release mechanism for the business. We don't want to be in a position where we can't build houses for lack of roof tiles. That would be a nonsense. So is that all right?

I think you're going to have the full [indiscernible] for the margin.

Just a quick follow-up on that security of supply. Have you locked in your supply chain certainly on the material side to the end of this year? And obviously, you've got your own supplies. And how far does labor stretch in terms of that visibility of the sort of 3%, 3.5% cost increase?

That's our best estimate at the moment. We constantly test it all the time. We're on top of managing the business.

Yes. I mean, materials, more certainty. Obviously, labor is -- you play more in the spot market, don't you? You let the work packages out on-site for as far ahead as you feel confident about. And it does there -- it's more variable, should we say, because of that. But on the material side, you can lock into longer-term supply agreements.

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

Just 2 for me. First, on the land investment, is this still dominated by your strategic pipeline? Or are we talking for meaningful increase in open market purchases over the next 3 years? My second question was on the -- sort of on the planning system and the sort of potential plots which are currently proceeding through planning. Can you give us some sense of how long does that process take now? And my third question is on the outlook growth for 2023. As we think about the outlet increases. When should we actually see a material pickup in the outlet opening? Is that in the first half of 2022?

I think if I may take some of these in reverse. I think in outlet, I would -- I think we're going to see -- the ambition is the second half of '22 is when we see the outlet position. It will improve during the course of this year and early spring, but it will take time to come through the business. I think everybody is seeing planning delays in the system at the moment, which have been exacerbated by COVID. And we are certainly no -- we're in no different position to that. We're not seeing any relief on that at the moment, and we probably won't until we're out of COVID. I think that's common that everybody is experiencing that. In terms of strategic land, yes, look, we're probably where we've always been in terms of strategic land and spot. And there's a healthy balance in the business on that, and that's continuing.

We continue to invest in strategic land, Ami. It's an important part of the business. We've got around about 15,500 acres of strategic land as you can see, with the potential to deliver over 100,000 plots over the longer term, and we are converting that. We've got a great reputation in terms of planning success. We've probably got the biggest planning team -- London planning team in the country. The expertise in that area of the business is excellent as we've seen over many years. And that continues to be an important part of the strategy as well as participating in the open market for land. So no real change there, except, obviously, a drive to push forward.

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

Just a quick one from me, hopefully. Just on the Future Homes Standard and sorry if I used the margin wordage, but just how you're thinking about that and extra costs and how that might be impacting you or indeed, land availability?

Well, good question. Part L is obviously communicated out to us now, and we know what that means for the business. And that's about 31% reduction in emissions from '23 onwards. So no immediate impact on the margin. It does add to build costs. We think about GBP 3.50 a square foot, something like that in the business. And when we buy land, we make allowance in the viability process. And so that should help protect us. Looking beyond Part L to Future Homes Standard, well, at this stage, we need to see -- we do not yet know exactly what they're going to be. And they're impacting or going to impact the business from '25 onwards. So quite out into the future. There are, as I'm sure you're well aware, lots of issues around Future Homes Standard, which affect the whole industry in terms of the ability of the supply chain at this stage to deliver the ambitions. But as with everything, with -- when capital is brought to bear, the supply chain will perform, and unit costs will drop. I think that -- we, obviously, absolutely sign up to these important agendas and reducing emissions and producing net-zero carbon homes, as we've said in our statement today. We set out our own challenges there, our own targets for ourselves there, which we're going to live to. And these are important for the customer. I think they are very important to the customers and important for us. And we're working out how to do that. We've got a very clear idea how we'll cope with Part L. I'm sure there are yet more iterations to come, though, in terms of how Future Homes Standard itself will ultimately pan out and how the industry delivers it.

We have no questions, so I'll hand back over to the hosts.

Thank you very much all this morning for listening to us. Look, we -- I think Persimmon did particularly well in 2020 in handling the pandemic. I think it was very nimble, very well managed. Hopefully, we've communicated exhaustively this morning, our bull and bear case for the margin, but we're feeling good about our prospects for the future. I think Persimmon's great strength is in its land development, and that continues, and it's got fantastic embedded margins there. And we're about ensuring we can consistently deliver quality homes well for customers. And 2021 has started well. And after some initial production difficulties, we're back now in full swing. So thank you very much, and speak to you again soon.

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