Persimmon Plc (PSN) Earnings Call Transcript & Summary

Hello, and welcome to the Persimmon Trading Update Analyst Conference Call. My name is Ben, and I will be your coordinator for today's event. [Operator Instructions] I will now hand you over to your host, Mr. Dean Finch, Group Chief Executive, to begin today's conference. Thank you.

Thank you very much. Good morning, all. I'm joined this morning, as usual, by Mike Smith and Julia Nichols. Can I begin by apologizing for being 12 minutes late. We didn't make this up. The operator who's handling the call is short on staff and has suffered delays in patching you all in. So apologies for that. Anyway, thank you for listening in this morning and tearing yourselves away from the drama on Westminster. It does, I guess, make being CEO of Persimmon feel perfectly mundane. As I drove in this morning, I was reminded by the radio of Proverbs Chapter 29 Verse 18, "Where there is no vision, the people perish. But he, that keepeth the law, happy is he." My wife subsequently reminded me of Verse 11, "A fool that utters all in his mind, is a fool." Anyhow, I am pleased with our progress, as I think we are building an all-round excellent business against the backdrop of difficult circumstances. While completions are lower, our profit is marginally ahead of our expectations and gross housing margins are up. We are rebuilding our outlet position. As guided back at the start of the year, we should be down on the first half. As previously indicated, we started the year with a low number of outlets. Back in 2018 and 2019, we were running at over 400 outlets. At the start of this year, we were selling from well below 300. Low outlet numbers have been compounded by slow planning. It is clear that the regulatory environment is no longer in our favor. But despite this, we have beaten our profit expectations in half 1 with an improved gross margin compared to last year. Operating margin will, of course, be down because of volume, but this will recover as volume recovers. We are rebuilding our outlet position and are opening some superb sites, for example, at Garendon, [indiscernible] Wellingborough and even in Amble. All are opening at great margins and at first budgets that are ahead of the land appraisal, which is fantastic. We have also some great sites coming through, for example, Didcot, Pittington, Trowbridge, Warminster. These will be superb sites with excellent margins that will be the mainstay of the business for years to come. Since I joined the business, our Land Committee has approved the purchase of over 44,500 plots, deploying well in excess of GBP 1 billion of capital at industry-leading margins and at ratios of cost to revenues that are historical lows. And we are building at rates that are faster than ever before at much enhanced levels of quality. And I'm delighted that we are carrying forward much greater levels of WIP into the second half of this year, which is the first for me since I joined the business. We're also selling at rates that are at historical highs and at excellent prices. Our customer satisfaction scores are an all-time high, not just the 8 weeks, but now also the 9 months. And our ROI is at an all-time low. This is very much reflected in what customers are telling me. I make a point of trying to get to site every week. And when I am on site, I always try and ring doorbells. Just last week, I was in East Calder in Edinburgh, I rang a doorbell and spoke to a lady that has just moved in. She told me that she worked in customer service but our service is the best service that she'd ever experienced. A few weeks back, I was in Cheadle in our marketing suite when a customer walked in. They had just canceled with a competitor across the road because of customer service and reserved with us. In Exning, I came across 2 sisters who had bought 2 Charlie churches 10 years ago. Excited by our new development in Exning, they came in and reserve 4, 1 each and 1 for each of their children. So we are winning on service, beating the competition and growing our lifetime customer loyalty. We are investing in our brick and tile factory, and this is delivering results. We are producing a new range of bricks that are better quality and looked much better than our previous ranges. We have installed a new bridge line in our factory, and we are now self-sufficient in this. This is giving us a cost advantage as previously we paid GBP 3.50, and now we're paying 69p. We are progressing our new timber frame factory, and this will give us an enormous boost in a few years' time. We reckon that we can build 7 weeks quicker using timber frame than [indiscernible] based on current build times. In the meantime, we are also extending the use of timber frame within the business and the trialing timber frame in the north of England where previously we just focused on [indiscernible]. We are also raising our design bar to improve the cover field of our houses and give both planners and community developments that are a pleasure to look at. Get it right, first time just doesn't apply to construction, but also planning. And anything that accelerates our consent time will help us build and sell more. We are also investing in our people with more apprentices and with more training, especially for our site staff. People want to come and work for Persimmon now. So there's a lot of good things happening in the business. We shall continue to grow our outlet numbers this year, and I expect us to deliver a material increase in outlets over the course of the year. We are, of course, targeting to deliver over 15,000 completions this year. But recognizing how tough it is and how slow planning it is, we are prudently guiding in the range of 14,500 to 15,000, albeit we expect decent profit growth. We have great visibility of H2 with 75% sold for the year at great margins. We expect the margin to remain secure. As you can tell, I'm really excited about business. We have carried out a root and branch review of the business over the last 2 years, and we are building a fundamentally better business. Although there are great many challenges out there, businesses that change are the ones that thrive and prosper. Persimmon is a fantastic business with great people and great assets, and I'm certain we have a great future ahead as we continue to focus on building a great quality product, with great service on attractive and appealing developments at excellent prices that deliver and will continue to deliver industry-leading margins and dividends. Thank you very much. I'll now turn it over to any questions.

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

Two questions for me, please. Firstly, on the completions guidance and the planned outlet profile, does the guidance revision for this year have any bearing on what you can deliver for 2023? And just related to that, based on what you've seen on planning delays, do you think the plan to add 7 new outlets in the second half is realistic or an ambition still? And my second question is on the sales rate evolution. Do you think the evolution we've seen in the trend for May and June compared to the first 4 months of the year, driven by underlying market or there are any exceptional factors in there?

Rajesh, we've got the land coming through the pipeline to easily grow next year. What's critical is we secure planning consent. It's all in the hands of planning consent now. Some of it is more difficult to secure than others. We pointed in the statement to nutrient neutrality, which is causing not just as a problem, but the whole industry a problem. We've got about 1,500 plots over the course of the next 3 or 4 years affected by nutrient. You will recall back in March, Natural England announced another 27 billion impacted by this across England and that affected some of our sites. So it's a pretty complex environment at the moment. I'm confident that we will eventually secure planning permission. And other things being equal, I think our volumes will grow again next year, providing the market remains benign. So you're right, it's a risk. It's not completely in our control. There's lots we can do about it though. We need to make sure that we're giving local authorities, the developments and communities, the developments that they want. Our pleasure to read and look at and then develop. And as I said in my opening comments, we're doing a lot about that. I'm pretty confident we'll open of the order of the number of outlets we've indicated in the first half. It will be plus or minus a bit. That's life. We're not helped by, I think, the general macro political instability at the moment. But nevertheless, we will continue to open sites, and I'm confident that we will have more -- substantially more sites open and selling at the end of this year than we did at the end of last. Sales rate evolutions. To be honest, we've not seen any material change in the last few weeks. It remains remarkably strong. It's going to be difficult to tell over the summer now because, I think, summer has clearly started with the school holidays. That does impact sales rates. We see that we are trending back more towards seasonal norms. And I think we won't really know what's happening now in the market until the autumn when we normally see a secondary spike up in demand in September and October time. So I'm afraid I can't give you much better guidance than that. It's a question of waiting and seeing. But we haven't really seen any slowdown, particularly in the business. And our problem remains, not building -- not selling, but building, and we need to land on which to build on. And we bought the land, we need to get consensus, too.

Coming from the line of Aynsley Lammin calling from Investec.

Just 2 questions from me actually. Just on the first half, obviously, volumes are lower, but you expected seeing better gross margins. Pricing is strong. Just wondered when you look at the full year lower volume guidance, but are you kind of more confident or seeing better gross margins and ASP for the full year? I guess, just trying to work out how much of that would offset the kind of lower volume guidance or the PBT level for the full year? And secondly, you mentioned labor and material shortages. I mean I've been hearing that materials shortages actually are easing across the industry. So just interested to hear, is that specific to Persimmon? Or is it getting worse across the industry? And your view on both labor and materials causing a constraint for your volume delivery.

Well, if I can answer the second question first. I mean, prosaically we were 12 minutes late this morning because they didn't have enough staff. I think it's a common feature of Britain at the moment that there's not enough staff, isn't it? Whether it's the airlines, the railways or whatever it is. So I would agree that I think material shortages have generally eased, but we have found labor challenging. But having said that, as I said, since March, we built on a per outlet basis, faster than we've ever built before. So we're clearly overcoming the problem. Some of the material challenges I'll refer to, what did we see at the start of the year? Shortage blocks, then March, April time, we saw problems with windows and boilers, but we were able to source that. It's tougher, but I think there's always some sort of sporadic problem, it seems to me in our supply chain, and it probably affects the industry in general. I just think the environment -- the operational environment in the U.K. at the moment is extremely challenging. And what that means is, as I said, we are being able to deliver EU output. We're currently building at 30 to 40 more than we were this time last year with now roughly the same number of outlets. So I'm really pleased about that. And I can't fault the guys that we're working incredibly hard. But what there isn't, I think, is no elastic in the system so that if you have got a planning consent delayed by 2, 3, 4 months, which is typically what we're experiencing. There is no more labor out there to go and build even faster to catch that up. I don't mean we're going to lose the sales. They're going to come. But you just can't catch that period that 3, 4 months up in the evolution of the year. In terms of the full year, look, you can see from the trading update, and we've got some excellent prices coming through. Build cost inflation is high. I would put it in the 8% to 10% range. It's probably higher than some people are also saying. But certainly, that's what we're experiencing. I think materials are coming off. I don't think we're seeing quite -- in fact, we're seeing some prices coming back now. But I think labor cost inflation is high, and I think it's going to remain stubbornly high for some time to come.

Okay. So from that kind of could take the -- your ambition is to maintain margins maybe for the full year?

Well, I hope we're going to do better in PBT margin in the second half. Could we see a tad more in gross margin in the second half? Yes, it's possible. It's possible. I think it will be small numbers, I think it would be possible, though.

The next question comes from the line of Will Jones calling from Redburn.

Three for me, please, mainly around outlets, build and volume, I think. But just coming back to the outlet number position at circa 300. Am I right thinking that includes -- that's the build number? Could you help us with the difference between that and the actual sales number and maybe how the sales outlets evolve for the year and how you expect that number to trend into year-end, please? The second one just come back to the volume guidance for the second half, which I think the midpoint of which implies something like a low double-digit percentage increase on last year. The order books at the moment, down versus last equivalent units, I think, are down versus last year. Is it maybe the balancing item for the second half? Is the outlets growing and that gives you the increase or perhaps it comes from the year-end order book, but just trying to marry up those 2 apparent differences. And then maybe just if you can give a view on where you think the equivalent units might head through the second half. I think you built about 7,000 homes, give or take in the first half. Do you think you'll be matching completions maybe in the second to hold the equivalent units? But any thoughts there would be great.

We've got about 50 being built out at the moment. And so the balance we're selling from -- that number will grow in the second half. I mean, look, I often get into conversations with you about -- all of you about it. It depends on how fast that bodes well. And with the very high rate -- sales rate we've seen in the first half, we've been selling out faster than we expected. But I have confidence that we will grow our outlet numbers and continue to grow them in the second half. They're open now as we speak or they're being built on services provided roads towards and services are going in, and they will be opening very soon. So we will see an uptick there, and that will provide us with further sales opportunity, but that will mostly now impact next year. I think what will -- in comparison to the second half of last year, I think our build is in much better shape. We've got the work in progress coming through. So I think we will be building at a faster rate than the second half of last year from a higher number of outlets. I can see it as I walk around the sites as we speak. So I think that is what's going to give us the modest growth that we're pointed to over last year's numbers. We certainly are anticipating aiming to grow EU carry forward again at the end of the year. That's a big ambition of ours. It does, of course, depend on how quickly we can get consent and get outlets opened.

And just to be clear, the 70 that you -- outlets, do you expect to bring it into the business in the second half, is that 70 to start building or 70 to open for sale?

Both.

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

I just wanted to ask about working capital movements in the second half of this year. And how you see the cash position moving over 2022 and '23. Just in light of higher land spend and also the wet investment. That's the first one. Second one is just on Help to Buy usage, just where you are and kind of your thoughts as we travel into '23 there. And perhaps also comments on how you're feeling about the sustainability of the dividend. Just in light of the lower cash balance, higher tax coming through and obviously, the risk around volumes with the planning environment.

Okay. Thanks, Chris. Mike, do you want to talk about working cap?

Yes, sure. I think yes, we've seen that we've came into the year at GBP 1.2 billion. We've consumed some cash during the period. We've invested heavily in land. And we spent GBP 416 million serving that. We paid the dividend of GBP 400 million in the start of April with another GBP 350 million coming out at the end of this week, actually. I think things already pointed out, we've got a lot of strong pipeline of land coming through where we've been through the robust approval process. So there will be further land investments through the second half. Dean has also just pointed out there that we have the ambition to grow our WIP EU so that will involve building more and building that EU position as well as then bringing those new outlets through with the infrastructure spend. So I think in terms of the cash position, I personally am expecting it to be somewhere where we are about now, I think if the volume comes through, that will generate revenue receipts. But I think our focus is that we will leave this year with a very strong all around WIP position, which will then take us through into '23, '24. I do just wanted to pick up on the Help to Buy point there, Dean. Just looking to in terms of the percentage of Help to Buy volume, it's around 25% of our private completions in the first half. We're on the Help to Buy scheme. Our sales rates are running around the low 20%. So there is a little bit of Help to Buy left in the order book, and we will see where that goes through the second half.

Thanks, Mike. On the dividend, I think we're done for this year, as usual. Look, the Board constantly keep the dividend under review as we always say. We are very conscious of the importance of dividends to our shareholders. So we always keep that front of mind and realize that is one of the big USP holding Persimmon's stock. So this is something that the Board takes incredibly seriously. We keep it constantly under review. I have a new finance director that starts on Monday, who will no doubt arrive with his own views. And we shall be making further comment about dividend as we progress through the year and look at where we're going with it. I mean, obviously, we do want to invest in the business, which is what you're seeing in the cash balance at the moment. But I am confident that Persimmon has got the capability to continue to grow and to continue to sustain margins. Obviously, we are in a cyclical industry. So if there's a slowdown, it affects the cash balance, but that's the point of the structure of our dividends. So we will come back to you on that subject later in the year.

That's helpful. Can I just have a quick supplementary? Just on the cash guidance, which was very helpful as those working capital moves. Do you think they unwind a little bit in 2023? And so all things being equal, the cash balance starts moving back up? Or is this a more kind of elongated investment profile?

Look, I think, as I pointed to at the -- in my opening remarks, when I came into the business, it was pretty obvious that we were going to run a bit short on outlets. And as I said, back in 2018, 2019, we were operating from over 400. And got to a position at the end of last year, beginning of this, where I was below 300. We are rebuilding that, which is where a load of the cash has gone. I'm absolutely confident that we bought those extremely well. And as I said, look, also in my opening comments, what we're actually finding is that typically, when we're opening on first budget now opening site, our margin is beaten land appraisal, which is fantastic. But I think what's implicit in your comment is right. Yes, because once we get back to a reasonable number of outlets, I'll stop pleading for cash from Mike, and we'll get the WIP back into where we want it to get to. But having said that, when -- I suppose I've come from a mindset that where I see that we're capable of deploying capital and earning 30% plus ROCE, that seems a good use of shareholder money to me. We're obviously not daft and mindful of recession. But given the margins that we're operating at, there's a lot -- hell of a lot of wall on our back. And who can see through the crystal ball? If we get into a bit of a downturn, that might be a further land buying opportunity for the business. And I'm pretty sure that the Board will want me to deploy our capital to give us best advantage for the long term. And look, that's what this business is really about now. It's about long-term sustainability of the excellence of Persimmon. That's what we're focused on, both with shareholder margin, shareholder return and product we're building for customer.

The next question Ami Galla calling from Citigroup.

Just a couple of questions for me. My first 1 is on the land market, if you could give us some comments on what are you seeing in the land markets right now and the sort of intake margins that you're achieving on land acquired in the first half? My second question is more on your targets of volume growth for 2023. What sort of sales rates are you assuming for next year in that assumption? And just last one, as a follow-up. In terms of the house price inflation that you've achieved in the first half, are there any differences emerging in your markets in the North versus the South?

Look, that market is pretty tough. I think everybody is experiencing inflation in the land market. I think I was hearing 7%, 8% as a general average the other day across the country. I think it's the strength of Persi that we've got so much strat land and we're continuing to develop our strat land, which we see as being an incredibly important part of the business. And that underpins our long-term margin, we have not dropped the hurdle rate. In fact, we are probably now operating at a high hurdle rate when we buy land as Persi's ever done. So our margins, we are confident remain good, and we're able to buy at historical ratios -- historically good ratios of cost to revenue. So yes, the land market is tough. But look, as I said, we have deployed over GBP 1 billion of capital, 44,500 plots on top of an extremely good land bank. So it's tough, but we don't chase volume. We focus on margin, and that's what this business is about. And we've got an excellent pipeline of excellent margin opportunities coming through. We expect -- we do expect sales rates will moderate next year. But we'll have more outlets so we'll be able to compensate for that moderation in sales rates as a result of opening up more outlets, planning, permitting. Are we seeing a difference in North and South? That depends where you go. I've heard this comment that it's getting grimmer up North. No, I don't know. Maybe in patches. Market still seems pretty keen to me. And it's such -- I think the market is such a local market. It depends where you are. Probably on true, it's average. It's true on average that you are going to continue to get better HPI in the South as opposed to the North. But then you've got lower build cost inflation to offset it. So margin is still excellent.

The next question comes from Arnaud Lehmann calling from Bank of America.

The first question, I'm sure you can't give me much details at this stage, but I'm sure you've seen the headlines about the U.K. government and obviously, the Housing Minister now is gone, and we don't know if there's going to be one. I guess as far as the industry is concerned, we had the building safety deal in the pipe with some potential implication for your cost base. Do you think it's likely will be delayed or even potentially never implemented at this stage? That's my first question.

Sorry, Arnaud, was that the Building Safety Bill or the Levelling-up Bill?

The Building Safety Bill. I mean, any bill, I guess, but I'm asking about building safety. And if you maybe you started to adjust according to this bill and now you might have to readjust. And my second question is an easier one. On build cost inflation, you've addressed this a little bit already, but are you starting to see moderation in some materials, better availability could that help with completions into the second half or into next year? And related to that, what's happening with wage inflation?

Okay. Okay. I think the Building Safety Bill, given that it's got Royal Assent now, I kind of doubt that's going to -- I doubt that's not going to happen. However, so much of the detail of the Building Safety Bill was still to be worked through secondary legislation over the course of the next couple of years. And I mean, you've got to expect now and I don't know who. Maybe you guys know but I don't know the new Secretary State of Housing is. And even if you've heard, we might find they've gone by the end of the day. So I think, yes, you're right to point to the fact that personality is going to matter an awful lot there. So we've just got to see if nothing else. You've got to bet that it's going to slow everything down even further as a new set to administer. I mean I think I heard this morning that my department has got 1 serving minister left in it and maybe he's gone now or she's gone now already, I don't know. So Britain is not governed at the moment, is it? Probably means we're going to do better, but there you go. So we'll just have to see. It's difficult, incredibly difficult to tell. But look, in terms of our commitment to what we're going to do, it's not going to impact us because we're just going to get on and do what we said we were going to do. Obviously, what it might impact is building safety levy and further measures that were within the act. I think a follow-on question, which is relevant is what does this do to the Levelling-up Bill? I was I am moderately concerned about that. I think that it's about -- that bill is about not just stopping and building on green belt, but drop something you're building on greenfield if a local community doesn't want it. So we'll have to see where that goes. However, on the other side of that equation, we just have to get better as a developer giving local authorities and communities developments they want to build, and we are doing that. So we just have to rise to that challenge. On build cost inflation, yes, we are seeing a moderation in general on materials. I mean, timber prices are coming back now, for instance, it really does depend because there's other factors going on in the supply chain. And I think we've yet to understand how the Ukraine conflict will play out in global supply chains. I mean we're doing a lot of self-help, just even the internal restructuring and having 1 U.K. MD in the business has helped us miraculously find 10 million bricks across fields in the country. So there's an awful lot of self-help Persimmon can do. And that's why we are expanding our timber frame capability and while we're expanding brick and tile. The small example I gave in my opening comments about the rich tile line, I mean, we were looking at GBP 350 and rising for rich tiles if you could get rich tiles. Now we've got our own mine set up is costing 69p. So -- and we don't have a shortage of brick and tile. Other things we've experienced shortages of, as I said, windows blocks at the start of the year, boilers but we're also getting sharper at spotting these coming and getting better at overcoming the problem. So it is a problem. It's really hard work. But I point to the fact we're building more deals at a faster rate than we've ever built before. So clearly, we're being able to manage it. I think, as I said earlier, I don't think wage costs, we should expect wage inflation to abate anytime soon.

The next question is from Gregor Kuglitsch from UBS.

Maybe a few questions. And perhaps I missed it, but I just wanted to sort of confirm what your average sort of sales side count actually was in the first half? And kind of what you're targeting to end the year by and sort of as we think about next year, I'm appreciating that there's obviously sort of uncertainty around that. And then maybe a follow-on to that, compared to what you sort of thought you could deliver back in, I think, it's a couple of months ago, end of April and now, what would you say sort of the big difference? Is it labor shortage? Is it material shortage? Or is it simply planning consent that we're delayed nitrate and that sort of stuff that sort of accumulated into that sort of cut to the volume guidance? The second question then is going back on pricing. I mean maybe one sort of simple one. I was looking at the order book that you kind of cited and I think up 12% in private, I think, you're citing. Are we talking sort of 5%, 6%, 7% price increase sort of on a blended basis for the year? Is that what this is heading towards? And then maybe sort of more anecdotally, are you seeing any sort of evidence that pricing is leveling off in the market? I mean I appreciate that it's very strong. We see all the numbers, but is there any pushback to pricing and the customer obviously seeing increased mortgage rates, affordability is getting impacted. Any evidence of that or not really?

Average sales rate is just under 1, which is a historical high for us. And though as I said, I do expect that to moderate next year. We will continue to review that and take a view of that as we go into the autumn when we see the -- what the market looks like as people come back to work. What's the biggest challenge? Without a doubt the biggest challenge is getting planning consent at the moment. In some instances, where there are problems like nutrients, you've just got an absolute block. There are some local authorities that are going to go nowhere on that and without government guidance and they're going to go nowhere on that for years. Others, we are working hard -- well, other authorities have taken a more robust approach, Teesside is one that sticks out, for instance in terms of ignoring government guidance on this and actually challenging the legality of it. And I think I've seen some other developers also challenge legality of some of the stock notices that have been put upon them. But I think for us, the biggest #1 challenge is we bought the land, it's getting that through the consent process, the regulatory process to get them approved and that is incredibly slow at the moment. And look, as I said, we are buying a lot of land. So we're experiencing a lot of uncertainty and delay as we bring those through the pipeline. Yes, we've got challenges with materials. Yes, we've got challenges with labor. But I think they're secondary to planning consent. And I mean, clearly, nimbyism is being played out at large at the moment. But what I do agree with is, look, we have to build better quality houses on better-looking developments, and that is what we're all about and that's what we're delivering. We've got to help ourselves here, and we are very focused on that. I'll ask Mike to come in, in a moment on the overall blended rate for the year. Do I see any evidence? Not really. I mean, some of the MVs, when I go see them, tell me how terrible it is because they're now up to down valuations, and they haven't experienced for them for some time. But really, the down vals are very few and far between still in our business. And we continue to see very strong demand and very strong sales rates, they continue at historical highs for the business. And we have very low stock availability across the business because we sell out so quickly. So the thing that is not concerning me at the moment is sales rates or for that matter, pricing. But Mike, do you want to come in on that?

Yes, sure. I think we've seen in the first half the blended ASP has gone up 4%. I think Greg or in your question, you pointed to have blended, maybe, 5% for the full year. And I personally don't think you're too far away from that. I think that's where it's pointed to at the moment.

The next question comes from Clyde Lewis from Peel Hunt.

A couple of questions, if I may. I think one is probably around how you are thinking about what a significant drop-off in sales rates would lead you to do, I suppose, into next year? Because clearly, the market is very concerned about the economy, consumer confidence, higher mortgage rates, et cetera, et cetera. And we're all sat here wondering how difficult it's going to be next year? And as you've alluded to, you're expecting sales rates to slow but what are you thinking you would do, I suppose, particularly around land buying, WIP investment if sales rates drop 20% to 25%? That was the first question. The second question was, I suppose, coming back a little bit to prices. And you sort of said you're pretty relaxed about pricing at the moment. But have you stopped trying to increase prices across the business? And are you, I suppose, the -- attach to that, are you seeing incentives starting to increase at all? And the last one was whether you're seeing any real variation around product demand by the product, i.e., the smaller units versus the bigger units, really?

Two is the easiest one. No. No to both. We're continuing to increase pricing because we see an incredibly strong demand -- and no, we're not having to increase incentives at the moment. In product demand, no, not really. I anticipate, though, as Help to Buy comes to an end in the autumn. As current guidance has it, although clearly, we've got a new chance for the exchequer for a few days. Look, we're about to have a new Secretary of State. And we may even get a new Prime Minister that recalls that the conservative parties fortunes are about satisfying the housing the country desperately needs. So should all those things come to pass or come to pass in different variations. You could see that product demand will change if and when Help to Buy comes to an end. But I think there, our product is just right. We're in the middle of the housing market, aren't we where I want us to get to is great on quality and a little on price or Persi on price. So I think our product is the right place to be in the event that, that comes to pass. If we see a drop off, well, I think we see a ton of cash coming back into the business because -- if -- and of course, it depends because it also could be an opportunity for us. If land prices remain high, then we'll slow down on land buying because we've got a ton of opportunity coming through the pipeline now. Anyway, but if we see the opportunity and then we'll press forward with it. And look, our model enables us to slow down pretty quickly if we have to. And then the business will throw off parts of cash. And I think, look, to my mind, what we'll see, I mean, we're seeing some absolutely crazy rates, subcontractor rates, eye-watering. They will ease. And the subject is now they'll ease and that's their model. And that will provide a lot of support for our margin. which is already ahead of the competition anyway. So if a slowdown comes, it's our job to turn it into an opportunity, and I'm sure that we'll do that.

The next question is from Andy Murphy calling from Edison Research.

I just had 1 question, really, many for you, Dean. You mentioned about the review of the business has been going on for the last 18 months or so. And you simply suggesting that you've seen opportunities where the business perhaps wasn't run as well as it could be run and therefore, opportunities to make it better. I was wondering if you could give us a bit of color around what those opportunities are and what they might mean in terms of magnitude or perhaps a margins or returns?

Thank you. Look, I inherited an incredibly well-run business. But we have a broader focus now, which puts a lot of focus on customers. I think as the world changes, our focus on customer needs change. And what I'm seeing as a result of that is that we're beginning to see a lot of good customer goodwill. I think a happy customer does give you the opportunity to sell more product at better prices. Clearly, we need to invest, and we are investing to give customer a better product. But first and foremost, we are very focused on delivering that. And I think if and well, Help to Buy does end, house builders are going to probably have to work a bit harder on selling to customers, whereas maybe in the past, it could take them for a bit for granted. So sharpening up our act and giving a better product for the customer is front and center of what we're about. I think making though -- and it's evolution, not revolution in Persimmon because we've got an enormously -- share a great assets and people within the business. It's our focus of making them run better together. Instead of being 31 items, our focus is to make them more cohesive, more working together, sharing the know-how that exists within the business, whilst also investing in our staff, if you build right first time, you do get lower remediation costs, you do get lower customer complaint and that gives you opportunity as well as investing in some of the assets we've already got and investing in new ones. So I think the investment in brick and tile, for instance, as -- and the expansion we've done this year in brick and tile new lines, new products like a rich tile line, but also expanding our own brick range. We are producing now a much better quality brick that, frankly, looks so much better than Generation 1 and 2 brick on our site when I go around them and you see the contrast between Gen 1 and 2 brick and Gen 3 and 4 brick. It's like a different builder. And that is helping ourselves in my view, in securing more planning consents, which is what we're very focused on doing for all the reasons we've discussed on this call at the moment because local authorities are beginning to actually like what we're building, which I think is really important. And then building on new capabilities like the new timber frame factory that we're progressing. That's just got to help us. New panelized products, a new range of roof tiles. All of those things are helping, I think, Persimmon improve. And give a better value to a customer and ultimately to shareholder [indiscernible] the increased brand value that brings.

The next question comes from John Fraser-Andrews from HSBC.

So 2 for me, please. The first is, if we just [indiscernible] the rig [indiscernible].

I can't hear you. I'm sorry. Your line is a bit wobbly.

Is this better now, Dean?

Yes, it is. Yes.

So the first one is just to the explanation for the completions pool. If I could just check that you're selling outlets, the average was 285 in half 1 '21. So you're sort of a bit over 10% down. So that would seem to explain pretty much all or even more of the completion decline. I appreciate you're building a bit quicker, which would indicate actually that the materials and labor issues are actually very, very small. And it's down to the sales outlets rather than those factors that explain the lower completions. So that's the first one. And then secondly, that 8% to 10% build cost inflation you gave, Dean, in the first half, I think that was. Can you split that between materials and labor, please?

Thanks, John. Yes, our issue is outlets. That is our issue. It -- I'm being grizzly on about material and labor this morning is more about our own frustrated ambitions than it actually having an impact in terms of output. Our grid or complaint about material and labor is we just can't catch up. There's not enough of that out there. So if we're falling behind in out that opening despite the fact we bought the land, we're building really fast, but we just can't just knock the labor out there or material to go even faster. That's the real point. So yes, it's outlet-driven. Build cost inflation, Mike, can you help me out there? I mean labor, our internal was about -- averaging about 6% at the moment. Some groundwork at costs that are seeing 10%, 12% come through. But Mike, do you want to help me out on the split, please?

Yes. I think as we've seen material costs when we came into the year were strong, as you pointed out, they have eased a bit and labor is continually pushing. So I think about 8% to 10% as we sit in now is more pointed towards the labor element of it. The cost of living crisis that we're seeing people that have done competition of the constrained labor pool did push us towards that. So I think it's more of a -- we're moving towards maybe a 40-60 split of labor of that.

Okay. So does that imply that -- I mean materials, you'll be running into a -- given the pickup during last year, you'll be running into a higher comparative base. So that, if anything, that should potentially decelerate that 8% to 10%. Is that fair?

I think it depends what happens on payroll cost. Yes, but it depends on what happens to, I mean, we're expecting plaster costs to go up in the next few months. I can't think why. But it all depends on what happens. Broadly, I think you're right, but it all depends on what happens to certain key pools.

And just one quick more follow-up. The 12% in the forward order book in pricing, the increase, how much of that do you think is underlying inflation?

We have been very tough on pricing. We've had to be to absorb build cost inflation. And I think we're giving a better product. There's obviously a mix effect in there, obviously. But we are building a better quality product, and we're focusing on getting value for it.

The next question comes from the line of Glynis Johnson calling from Jefferies.

It's actually 2 follow-ups just on the land side and more clarification. You referenced the strong strategic pipeline. I'm just wondering in terms of the intake that you had in the first half, and I expect second half, what is the proportion of strategic within that? Is it different from normal? And then just you said on opening your split in budget, given that the intake margin is as high as it's ever been. I think it's the way you phrased it. When you say opening, do you mean actually the selling rates you're achieving versus what's in the budget?

Glynis, I hope you're feeling a bit better. No, we've not seen a material change in splits. I think it's about 50-50 in that. Mike?

And I think what we've seen in the first half, it's around 40% [indiscernible] strategic was going through, which is probably a little bit more in line with what we usually see.

And then on -- no, it's not rate. It's what is the balanced estimation of the balance of cost and selling price. So typically, what's going on is selling prices opened higher than we bought in the original land bank. That's what's driving the improved margin.

Okay. But it's -- once you've established the selling price and loan build cost on those sites, that's where the budget could be going through.

Yes. Yes. So the process is obviously go through the land bank. Different teams done that. Then you hand it over to construction, there we do budget. We do a compare and contrast to the original land bale.. And typically, we're opening up much better than the original budget -- the original land bale, sorry.

The next question comes from Sam Cullen calling from Peel Hunt.

I've got -- I think they are actually 3, but hopefully, all kind of clarifications. Just coming back on the hurdle rates. What -- the intake hurdle to the land you're buying at these kind of record levels that you've indicated that the land you're selling is that? And are you kind of pushing them up? I know, Dean, you mentioned they weren't coming down, but are they going up in the current environment? And the second question is I think you mentioned at the top of the call that your build cost inflation is probably higher than some have been talking about. Why do you guys think that is? I guess, on the material side, you're probably better priced given the versatile integration of the business. So kind of just interested on that front of why they're probably slightly ahead of others? And then lastly, when you talked about the kind of capital allocation within the business, and the keenness to invest in -- continue to invest in the land bank. In the context of the dividend, which is pretty clearly generous, why would you not look at a share buyback with the share price at this level?

Hurdle rate. We're not relaxing it. That's for sure. And we -- we'll keep a very close eye on to it as we go into -- if we go into a slowdown. I think now it's not the time to reduce -- be reducing hurdle rates. Build cost inflation, you got to ask them. I don't know what they're seeing. I think my margin beats their margin -- so hey, happy days if they've got lower cost inflation than us. They must be doing something right. I don't know, but it's not what we're seeing. So maybe you should go back and ask them that. And on capital allocation on share buyback, we have a very covered cap turning up on Monday, and we'll defer that question to him. My own view of it is that you're damned, if you do, you're damned, if you don't. You've got a whole range of views of what our different clientele or shareholder like. And for every one of them, prefers a share buyback. Another one tells me they hate me if we ever do it. So as I said, I'm going to leave that to a much, much cleverer person than me to work out.

There are no further questions. So I will hand you back to your host to conclude today's conference.

Look, once again, I'm really sorry that we delayed you at the start. Apologies for that. I gather we don't have -- we no longer have a Prime Minister. So I don't know if any of you had the call. And I hope we've been able to answer your questions. Thank you for your interest. I think, look, Persi is a fantastic business. It's got amazing strengths. It's getting better and better. We are overcoming our difficulties and I think the margins and returns will continue to be really, really great as we continue to build a better business, better product. Thank you very much, and I look forward to speaking to you again very soon.

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