Persimmon Plc (PSN) Earnings Call Transcript & Summary

Good day, and welcome to the Persimmon Trading Update Analyst Conference Call. [Operator Instructions]. And finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Mr. Dean Finch to begin the conference. Dean, over to you.

Thank you very much. Good morning, everybody, and thank you for joining us this morning. As usual, we will say a few words and then hand it over to Q&A. I'm joined this morning by Jason Windsor, our CFO; Paul Hurst, our U.K. Managing Director; and Martyn Clark, our Chief Commercial Officer. Clearly, today is an important update. Whilst we only spoke 3 months ago, a lot has changed since then. This uniquely disruptive period is being reflected in our trading, and I will say more on that shortly. I want to begin by taking a moment to go through 3 key issues: trading, capital allocation and cladding. Jason will set out our new capital allocation policy in detail in a moment, but first, I wanted to say something on the decision we are announcing today. I recognize, of course, the importance to our shareholders of their dividend. What we're announcing today is that our ambition remains to pay an excellent dividend to shareholders, but obviously, any dividends need to be sustainable from the cash flows of the business in order to secure the long-term prosperity of the company. Through careful management, we'll prudently manage cash flow, maintain a robust balance sheet and generate firepower to pursue the opportunities that I believe will arise through this turbulence. I genuinely believe Persimmon is in the strongest position in the sector. We have, for example, maintained our very disciplined approach to land investment in the last 2 years. Some others have been bidding at a lower margin, and there are already examples of these deals returning to the market. This is one reason why I'm so confident that we'll be seeing a lot of opportunities ahead. We've also made an important announcement today on cladding. This increased provision reflects the latest discussions with [ Didcot ], a much better understanding of the amount of work in scope and the number of buildings that we need to fix. We now also have a much more detailed set of costings from our tendering of the works required. But with a number of tenders now in place on the larger developments, we have greater clarity of the likely costs over the next few years. As best we can tell, this is a full provision for the likely cost of our remediation bill over the next 3 to 4 years. I'm confident we remain at the forefront of the industry in protecting leaseholders from the cost of the works that need to be done with 31 developments now cleared and a further 18 at least tendered. You can see from this, we are nearly halfway through in terms of the number of our developments that we need to remediate. Turning now to trading. In August, I was accused at the time of our half year by some of being too bearish, certainly compared to peers. The news in the last 3 months has not altered my view about the challenges ahead, but equally, I don't want to overdo the doom and gloom. We're on track to hit our year-end targets, and I'm still optimistic about the long-term strength of the sector and Persimmon's particular opportunities within it. For me, we need to look at the present situation across the short, medium and longer terms. To take them in turn, in the short term, we came into the year in a strong position which continued to the first half with good sales levels. This, together with our improved build rates, means we're on track to hit our year-end targets, which I've previously said are 14,500 to 15,000. We're on track to build 15,000 houses and we've sold 15,000 houses, but there's some uncertainty as our increasing cancellation rates show. We still have to exchange at around 1,700 of those sold, and we're seeing cancellations running at about 50 a week, with about 6 weeks left of trading. But we're being proactive. Our new Head of Sales, who has long experience in the industry, has reviewed our approach and is putting in place new sales processes that includes helping to derisk our year-end number through enhanced group-wide use of parts exchange and breaking chains, for example. So we're being proactive and working hard to deliver the quality homes our customers have brought or reserved and, in so doing, hit our year-end targets. In the medium term, things are more uncertain. We've been through a turbulent few months. Sales were significantly impacted by the morning after Her Majesty the Queen's death. Added to that are the effects of the ongoing war in Ukraine, the uniquely disruptive political uncertainty of the Truss interregnum and the increasing economic uncertainty. The Bank of England has obviously recently added to this with its prediction we've now entered the longest, albeit shallow, recession in modern recorded history. We're seeing an impact in customer behavior and our recent sales rate show. Forward sales and slight deterioration in average sales price on reservations also demonstrate this. Help to Buy, of course, also now closed to new customers. We don't know the full impact of all of this yet. It's still too uncertain. We won't be making any firm predictions today about next year other than we expect to build fewer homes than this. But I think you will see from our statement, we have been very transparent in our disclosures today and you are seeing what we are seeing. I do want to say something on what we can manage and control. I've asked Paul and Martyn, who have many years, decades indeed, of an industry and Persimmon experience across many housing cycles to say more on what we're doing to manage this uncertainty. And of course, they'll be around for Q&A. But I'd also like to add a few thoughts of my own. We go into this period of uncertainty with a robust balance sheet, strong cost and cash controls, and having protected an industry-leading margin. The land we've acquired is at great embedded margins and will maintain our industry-leading position. We've not chased volume when investing in our land in the last couple of years, and I'm very glad we made that call. We're a 5-star builder with a much improved reputation and better customer service. Our uniquely strong combination of quality and price provides an attractive opportunity for customers looking for value in an uncertain market. Our new housing range provides more flexibility in terms of the sizes of the homes we can offer, and this is something we'll focus on to target first-time buyers, movers and downsizers looking for value. We'll also closely manage work in progress and cash, of course. For example, we'll be prudent on new outlet openings and expect to spend much less on land next year unless, of course, we see excellent opportunities. As you'd expect, we're already reviewing recent uncommitted land agreements to see where there's opportunity for new deals to be done. On existing sites, we should look again at our mix, our build rates and how we maximize the opportunity. Indeed, we'll apply this discipline across the business to ensure we're managing costs and protecting margin. Even on a lower volume, we'll still be a highly profitable and cash-generative business as we manage to build what's sold. Through this prudent cash management, we'll also be able to deploy our firepower at the right point in the cycle to buy land. As I said earlier, I'm sure there will be opportunities out there. With an experienced operational team managing Persimmon's core strengths, I know we'll prove more than resilient in the face of the market uncertainty. But equally, I'm excited by the longer-term opportunity. I want to make sure we're ready to capture it. Despite the uncertainties, it's important to step back and take a longer-term view and recognize the fundamental strengths of our sector and Persimmon. Constraints on housing supply and the ongoing demand for homes in the U.K. mean the longer-term outlook for the sector is positive. And just as our strengths will help us navigate the medium-term challenges, we're looking to sensibly invest to enhance them further so that we're well placed to respond and capitalize on the future upturn. With our relentless focus on cost efficiency, our new product range and further investment in our vertically-integrated factories, we further opportunities ahead. If we take the new Space4 factory, for example, this will be a state-of-the-art factory, increasing the number of timber frame homes we can build and enhancing our ability to deliver high quality more consistently. Timber frame homes are quicker to build as you can get the superstructure up quickly and then have trades working inside and out at the same time. It's quicker, better and more cost effective. Our programs to enhance build quality with training, stringent standards and independent oversight and review will continue, as well we'll work to further improve customer service with an enhanced CRM system that will also benefit sales due to be introduced being an important investment. So to conclude, we are on track to hit our targets in the short term. The medium term is more uncertain, but we enter this period in a strong and resilient position. We have opportunities to build on that and we shall. In the longer term, I remain excited by the opportunities for the sector, and for Persimmon in particular, to meet the demand for the high-quality, energy-efficient and good value homes at our country needs and customers want. I see it as my responsibility as CEO to make sure Persimmon navigates this downturn prudently and to ensure it's best placed to maximize our undoubted opportunities when the cycle returns. We're making disciplined decisions to maintain our strength and capitalize on our opportunities. And I'll now hand over to Jason to say a few words on the new capital allocation policy.

Thank you, Dean, and good morning, everybody. I'm just going to cover one topic today, that of capital allocation. As you know, Persimmon's approach over the last 10 years or so has been a capital return program, delivering fixed dividends with periodic top-up payments. The Board has decided to conclude that approach and replace it with a new capital allocation policy. Of course, today's uncertain political and macroeconomic environment compounded by higher taxes makes now a challenging time to test out a new approach. So with that in mind, the policy sets out a series of important principles: first, long-term sustainable performance, of course, through selected land investment and other operational investments; second, financial prudence. We will not over-distribute or put undue stress on the balance sheet, and hence, ordinary dividends will be well covered by annual profits and cash flows, thereby balancing payouts to shareholders with the investment needs of the business. So now moving on to financial year 2022. The Board will propose a dividend alongside the full year 2022 results in March next year. This will, of course, be based on the new policy and will reflect the business performance, financial position and the outlook at that time. As a final point, let me just say that as we move into these more uncertain times, there will be no change to the financial priorities of Persimmon. We will prioritize strong margins and return on capital, a selective approach to buying high-quality land and retain adequate cash in the business while offering shareholders a sustainable dividend. With that, I hand over to Paul.

Thanks, Jason. Good morning, everybody. Just by way of introduction, I've been with Persimmons for 27 years. I started as a Commercial Director, moved on to being Central Divisional Chairman and laterally as U.K. MD. As Dean has already mentioned, the uncertainty is something that we've managed before. While each time is different, there are some key quality disciplines we can apply. Firstly, in the short term with our customers, clearly, some are feeling very nervous about buying and some are finding it harder to secure their mortgage at the right rate. We're looking after them. We're helping improve the sales process, looking at alternative mix of houses, where appropriate, tailoring sales incentives as per mortgage lenders' requirements and parts exchanging, if necessary. Our prices provide good opportunities for people seeking better value. We're also carefully managing housing chains and working hard to reduce cancellation rates. We're using parts exchange more widely and, if required, chain breaks to ease different chains. I've been through a number of recessions and, as Dean has said, we're heading into a period of increased uncertainty in a strong position. We've made some good investments in land over the last 2 years, and with our existing high-quality landholdings and diverse outlet network, we'll be carefully protecting and managing our cash and working capital position for increasing selective new land acquisitions while maximizing value from the sites we are already on. New land additions will drop next year as we seek to secure only the best deals available on our uncommitted pipeline. And judging from the experience of previous downturns, some great opportunities will arise. We're already revisiting and reassessing our uncommitted opportunities to see if we continue to offer value in a difficult future market. On existing developments where we have already introduced even tighter controls on future work in progress spend across the business, we'll ensure we retain rigorous cost control to protect our cash position, which is what we do anyway, so doubling up going forward. These are challenging times, but we've been here before. We're a strong and resilient business with an experienced team to help us navigate through. I'll now hand you over to Martyn, another long-serving member of the team, who will describe how we are managing our land investment and pipeline opportunities.

Thanks, Paul. Good morning, everybody. Some of you will already have seen me at our 2021 year-end and 2022 half year presentations, and it's good to be with you again today. Dean and Paul have mentioned that, as you would expect, we are going to sensibly manage our new land investment opportunities and our working capital position over the coming months as we go through this more uncertain period. Our existing high-quality landholdings with industry-leading embedded margins give us the ability to be highly selective in our future land investment and to invest at the appropriate time in the cycle, ensuring we invest in the right sites, in the right location, at the right margin. We already have a well-established track record of executing this strategy, which we will continue. Our experienced group land and planning departments working with our local teams are going through a rigorous reassessment of each of the new and uncommitted U.K.-wide land opportunities that we currently have coming through to determine when and whether we take the opportunity forward. The assessment will involve a careful review of the market conditions and demand within the local area, together with an assessment of appropriate use of capsule. And where those opportunities work, we will invest. If there are opportunities and deals that we want to execute, we need to secure planning consents as quickly as possible. At the half year, we described our new place-making framework that ensures we put forward design-led attractive schemes to maximize the chances of achieving consents quickly. Our group land and planning teams will be assessing and reviewing the schemes our local teams are putting forward, ensuring we share best practice across the business, and some of the schemes that will be considered favorably by both local authority planning departments and the local residents. So we are sensibly and carefully reviewing our land investment opportunities to invest in only the very best deals, and once invested, we are putting measures in place to ensure we realize those opportunities as effectively as possible. And with that, I'll hand back to Dean. Thank you.

All right. Thanks, guys. Okay, enough from us. Let's take any questions, please.

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

I've got 2 questions, please. First one is on the building safety provision. The number of buildings in scope has gone up from 33 to 71, but can you provide some color on the increase in estimated cost per building? What has changed in there? You referred to non-cladding fire-related build effects. Can you confirm this is not related to the snagging defects from 4, 5 years ago? And the second question is on the net cash guidance of GBP 700 million. Can you help us in the key moving parts in there, please?

Okay, Rajesh. Why don't I have a bash at the first one, and Jason, you have a bash on the second, please. So in terms of what's changed with the provision for us, well, I mean, obviously, quite a lot. In total, we've gone up from 26 buildings to 71 buildings. What's changed is scope, so only towards the end of August did we get visibility on what deal we're really looking for in terms of scope, so that's played into this. Obviously, we've seen build cost inflation play out. I know you're looking at and you want to look at an average cost per building, but I'm not sure that's really desperately helpful, to be perfectly honest with you, because every building is different. I think the real issue, and you touched on it, Rajesh, in your question, is how much is this is cladding related and how much is this legacy build defects that are fire-related. Well, the answer is more than half of this additional cost is build effects that are fire-related. When we originally put our provision together, we assumed that the build cost defects we'd have to repair was something like 20% of the original cladding cost. Now they're well in excess of 100% of the cladding cost. So that's clearly a big driver in this. Look, we've taken a pretty prudent approach to this as well. You might ask why are there so many buildings out there that we were not aware of, obviously, a very good question. Records have been poor, but we've done a very detailed and extensive [ toll ] of the database of our buildings we have built and are responsible for. We've looked far and wide as well in terms of identifying them, as have [ Didcot ], who've done desktop exercises encompassing many thousands of buildings. So that has all played into this. We had originally thought we'd be able to recover VAT on this. We're no longer assuming that. And we're also not really assuming, at this point in time, this is a gross provision and we're not making an allowance for any recoveries. Although clearly, we will go after those. So hopefully, that gives you some picture of what we're looking at here. And as I said in my opening remarks, I realize there's a sticker shock to all of this. We got our estimates wrong, but as best we can tell them at the moment, this is sizing the problem for us and enables us to define what the envelope is going to be to fix our problem. And we've got now the benefit of working through nearly half of the population that we identified. Jason, do you want to cover cash?

Sure. Nothing untoward to point to. We'd indicated GBP 700 million of cash, which is slightly down from the June position. The GBP 350 million went out of the door first week of July on dividends. The only probability -- as I said, nothing untowards to flag, the only thing that we put in the statement and you can see, we spent a little bit more on land this year than last, and we've got another GBP 115 million committed through the year, so that's why we anticipate ending the year around GBP 700 million of cash with land creditors, not that different to where they were in June.

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

I'm going to be very cheeky and try for 4. I thought I was going to come later and some of them have been asked. Cancellations, can you just talk a little bit about cancellations? Are you seeing them on exchanged properties? Is the cancellation rate increasing week-on-week? Second one, in terms of that deterioration in the selling price, is it that there's a net selling price? Is it the incentive? Is it the [indiscernible]? Is it parts exchange? Or is it actually that the whole asking price is coming down? Thirdly, just in terms of the [indiscernible] being flat in 2023, if you can just talk us through why that is? Is it because the land just isn't coming through? Is it that you're holding back because of the upfront infrastructure that might require? And then lastly, I'm going to push you again in terms of that cash. The guidance on net cash. It's effectively down GBP 500 million year-on-year. Where is that GBP 500 million going to because it's not really the difference in terms of the operating profit? Is it land? Is it WIP? Is it something else that we're missing?

Glynis, so I'll attempt to answer some of your questions, and then when I get stuck, I'll run out of the room and ask somebody else to answer. On cancellations, they've been about flat really over the course of the summer. In terms of absolute numbers, they've been running at around 50 a week. But obviously, as a percentage, sales have come down a bit, the percentage has increased. Where are we seeing the cancellations? Well, during the 4 weeks, and we're also seeing cancellations as we come to complete. But that's why we are taking the actions that we're taking to chain break, really looking at 3 down the chain. Very difficult to get a lot of intel, but you're picking up your uncertainty and chain break about 3 down to give us more certainty as we go into the year-end. Obviously, with exchanges, we don't know what we don't know. And you only get to it at the end, which is why I'm flagging that risk in terms of the year-end. I mean, look, there's been a lot of uncertainty out there in recent weeks, hasn't there? People have had mortgage offers withdrawn, they've not been able to get mortgages. Rates have gone up, they're receding a bit now, but there's been huge uncertainty in this area. In terms of price, what we're dealing, I mean, I don't know, Paul, whether you want to comment on all those questions really about cancellations and price, but we're sort of dealing to get deals done at an incentive level. Aren't we?

Certainly in the hazy days of Truss, in the first 3 or 4 weeks in September, it was chaos. The mortgage lenders just withdrew their product and people got very, very nervous about is it the right thing -- the right time to move. More recently, we're obviously working through our customers to ensure that their nervousness is eased, and we are incentivizing them to stay on with their sales, to keep their sales going. And as people get their minds around more expensive mortgages, that pressure is -- we are seeing it ease off in the last week or so. In terms of sales price, then we are -- what we are doing, we are tailoring more sales incentives to ensure that our customers -- ensure that they carry on with the sale, quite frankly. So it's a deal led to ensure that we get to firstly our year-end position.

And look, it's not -- although we've seen volume tail off, it's not shabby out there. I mean, if I look at last week's sale price, average sales price, across the group for the units we did sell, we were at GBP 305,000 for PD, a 35%, 34% off-site gross margin. So I don't think it's terribly shabby out there, but it's just got tougher. In terms of outlets, I mean, the reality is that Paul, Martyn and I started paring back on land purchases about 6 months ago. It curtails that it's remarkable if we go on holiday and there's nobody around to sign a piece of paper there, and we're pulling out land committee meetings on the [indiscernible] that we start buying land, isn't it?

We still have a problem with planning, though.

Well, we did have a problem with planning.

That is certainly holding back our supply. And there are tactical -- we are looking at tactical strategic sites where we are just -- we are certainly delaying some of the major infrastructure in the next 2 or 3 months just to see where the market goes. If uncertainty lasts, then we'll hold back and then we'll come back stronger for whenever the recession ends.

The answer, Glynis, to the outlet point is a combination of both. Planning has not eased, but also we've gotten a lot more cautious. And as Paul says, we're not going to be stupid about this. We aren't going to spend tens of millions of pounds worth of infrastructure spend to get an outlet open to sell maybe 5 units at the end of next year. We're just not going to do that. So we've been very careful how we manage it, as you'd expect us to be. Cash?

I'll have a go at cash. So Glynis, again, there's nothing untowards to point to. Now in terms of land, we say in the statement in here, we spent GBP 590 million, we've got GBP 115 million to go. So that's just over GBP 700 million of cash out of the door this year. Last year, that number was GBP 460 million, so we're GBP 240 million-ish higher year-on-year. That's the fundamental difference. And you saw the growth in the land asset at the half year was GBP 300 million, so that's materially above land recoveries through the P&L. So there's a net cash commitment to land. There is also a little bit of work in progress. We took -- we mentioned in the statement 1,000 equivalent units higher. That will unwind into next year, so you might have GBP 70 million to GBP 100 million of cash tied up in that temporarily as we go through go through the year-end. Obviously, completions might be slightly lower than we anticipated 4 months ago. That will unwind in the first half of next year.

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

Can I just ask a quick question on the sales rate, first of all? And obviously, things have [ tolled ] quite heavily by the cancellation rate. Perhaps you could help us with what the gross sales rate has been over the last 6 weeks and maybe just give us a comparative as well because I don't think there was a comparative even for the net one. That's the first one, please. Second one is really about what you're seeing on build cost inflation, and do you see any possibility to mitigate administration costs given you're looking at a lower volume backdrop. And then the final then is just on land given it's been touched on a little bit. And really I suppose my question is, are you confident over the last 18, 24 months that the land you bought will produce margins kind of consistent with what you used to produce? And I understand the market may kind of reduce that, but are you confident that the land bought over the last 2 years has been at strong margins like you say?

Chris. Do you mind if I do those in reverse order? In terms of land, yes, we are confident. Look, as I indicated earlier, we have pared back on buying land anyway, but we've been very disciplined about maintaining our hurdle rate in the business. And I think the other thing that is relevant is the lands coming through may be purchased with deals that were down maybe 6, 12 months ago at the moment. We've seen 12%, 13% PD inflation between now and then. So you've got an improvement in HPI on the property compared to when we did the deal. And we also bought those at great hurdle rates. So yes, look, we're doing -- we are very confident at the land we have purchased. I think it will inevitably take a dip, which is linking to your second question, as we see -- if and when we see prices fall. But it's a cycle isn't it? And we're constantly -- land stays around the business as we develop it out, and we bought some great sites that will be with the business for many years, and I'm confident that if margin does take a bit of a squeeze in the next couple of years, we can manage that, and they will return to the margins that we'd hoped for in time. So yes, we are confident. And where we have got land and we want to improve the margin on the existing sites, then we're optimizing either through looking at the mix and deciding about how and when we're releasing and what we're releasing at. In terms of build cost inflation, I think the picture is mixed at the moment. Obviously, those materials that are affected by energy costs will continue to see increasing costs over the next few weeks and months. Bricks, cement, that sort of thing. We are seeing, though, other commodities falling in price. Timber is falling in price, and we're retendering. We're also seeing -- it's interesting, we're seeing -- our groundworkers are seeing a slowdown, and they're coming to us for the first time since I've been in the business certainly and saying, can we fix the price. No. Guess what? No. So I think you're right to point to it , but it is a mixed picture out there. The -- I think the energy cost issue will -- sort of sets this out a bit differently. It's going to take some time to work that through, and we'll see some pain as a result of that, so we will see some margin impact of that. But if the next question is when do you start -- when do you expect that you're going to start seeing the impact of the slowdown on labor and materials? Not before the year-end. We'll start seeing it probably early summer, in particular, and we'll react accordingly. In terms of gross sales rates, I've got for the 12 weeks from 1st of July to the 25th of September, we were selling at 216 a week gross and 6 weeks, 26 September to Sunday, 183 a week. And as I said, throughout that period, cancellations have been running at about 50.

And what's the cut to those numbers, please, Dean?

I didn't get that part. I'd have get back to you on those, if that's all right, Chris? I'd come back to you on those.

No problem.

Next question comes from the line of Will Jones from Redburn.

A few from me if I could please. If it's possible, maybe just to explore this last 6-week period in a little bit more depth. But just firstly, kicking off whether it's changed, I guess, week to week? Or has it been fairly stable against the numbers you provide for that kind of 6-week period? Also against that, I suppose things like leads and inquiries, are they down by a similar number relative to sales or is there a conversion issue here because of confidence? And alongside all that, do you have any sense of the mortgage rate at which customers have reserved in the last 6 weeks? What rate they've been dealing out, as it were? And then I guess just big picture into next year, and clearly, a lot still to evolve there. But how are you thinking about the interplay, I guess, of sales rates on pricing? Is there a minimum sales rate you think the business needs to achieve, and you will respond on price to achieve that, or just early strategic thoughts on the enterprise pace?

It has bounced around week-to-week. But in terms of -- but having said that, this has been reasonably consistent. I mean, I suppose linking back to the previous question, actually, rates have halved compared to the start of the year. However, we were running at net of PD of 1 per outlet per week, and now, we're running at about half per outlet per week. So compared to first half, they've halved. But there is some -- they are bouncing around that, about half number of per outlet per week. Leads and inquiries, interesting. I would say the north of England has suffered the most in terms of -- and we've seen the biggest drop in inquiry interest in the north of England. Sales are an interesting picture. I mean, while sales are down, our Central region is probably still the strongest in the group. Southeast is down, but inquiries are only marginally down in the Southeast compared to this time last year. So there is a slightly different picture across the U.K. In terms of mortgage rates, well, people have been dealing above 6%, 6.5%?

It's 6%. The highest we got to about 6.99%. And recently, they've gone -- dropped a little bit. So yesterday, they were talking about 6.19%. So that's the kind of range which since beginning, what middle September, too, 6 weeks, where we're at.

Apologies. Just to push slightly on that, that is your insight on customers' mortgage rates in the last 6 weeks rather than the stuff we see advertised across the market. Because just wondering whether they're going forward with mortgage offers from before the mini budget potentially that you're saying actually are they the mortgages at which they are reserving?

Yes. They are the mortgage rates, which people are being qualified on and going forward.

Look, as we say, we don't chase volume. So we're going to be firm on pricing, but obviously, sensible about it as well. So we'll react to market conditions as we feel our way forward is the best that I can give at the moment. We operate in real-time, we review sales and build every single day almost. So we are alive and nimble to what we need to do in the market.

Next question comes from the line of Arnaud Lehmann from Bank of America.

I have 3 questions, please. Firstly, could you say a word on your relative position in the market? I mean, you have typically lower ASPs than your other volume competitors. On the one hand, it should help with affordability for your customers, but at the same time, you have, I guess, more first-time buyers. So how do you feel you are operating in the market relative to peers with your lower ASP? Is that a positive or more of a challenge with the first-time buyers? That's the first question. My second question is on the loans. You made a few points already, so maybe just a follow-up. You're saying you're reviewing existing loan agreements where you can. Are you canceling loan deals, or are you trying to renegotiate price where you can, or maybe a combination of both? And lastly, just on the cladding provision. Could you give us the time frame, how many years are you going to spend this provision?

Well, look, in terms of affordability of the product, I mean, the reason is that we want to capitalize on that. We're building quality homes which are as good as our peers now at more affordable prices, so we want to capture some of the benefit of that as we go into this period of volatility. I'm not saying we're an [indiscernible] or a little, our market is not like that. But in terms of -- I'm very struck by listening to their MDs when they talk about downturns and opportunity and Help to Buy bigger, wasn't it? So with that removed, I think -- I feel Persimmon's in a good place to capitalize on affordability issues as we work through this downturn, and that's what the business has got to go after. In terms of the land deals, well, each land deals has got to stack up. And each land deal -- we're all over hungrily to maximize the opportunity. So each and every done deal continues to be reviewed all of the time, and it kind of doesn't really matter. We just highlight it because obviously, there's an added focus to it at the moment. But we're doing this all the time in terms of looking at the deal, have we got the right deal. And if we haven't, well, we'll walk away from it, but we constantly look to improve it. And in terms of planning provision, it's challenging to give a finite time line on this. I'm very pleased with the progress that we've made. I certainly would hope that 3 to 4 years' time is when we will have it all done, if not sooner. We're very conscious that we've got -- you have leaseholders living in these buildings, and so their safety is of paramount importance to us, and we're doing absolutely everything we can to safeguard their security into -- including in every single building. We have carried out fire risk assessments, and we're implementing the advice of those fire risk assessments to keep people safe. But it's, as you can imagine, very challenging to get contractors to do this work. There simply aren't enough of them out there, and that is a part of the equation here in terms of giving a certain time line for when all this work will be done. So that's our estimate, but it's very hard to say. There's a lot of uncertainties.

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

Just 2 questions from me if I could. Firstly, coming back to the dividend. Obviously, quite a big shift in capital allocation policy. Am I right in thinking it's going to be a kind of earnings cover -- dividends cover target type policy going forward? So obviously, there's a balance sheet and cash flow element, but if it's based on earnings cover, given where earnings might end up over the next year or 2, that's obviously significantly reduced the visibility or dividend you would pay? Or would you pay a bit more attention to the cash on the balance sheet and cash generation and not strictly follow kind of 2x dividend cover policy, for example? So a bit more color around that. And then secondly, just on the price, kind of forward, you're seeing 2%. I mean, is there a wide range within that average 2% for any kind of patterns or -- and big differences between regions or product mix, for example? Be interested to hear.

Okay, so I'll take the first on the divi. We would deliver it in what we said, obviously, around the dividend being well covered from earnings and also balancing the required investment in the business with the past to shareholders. We recognize very much that the profits are a good long-term guide to the cash availability to pay dividends in a period to period. That will be different. This year will be lower cash flow than earnings and next year, probably higher, just for the reasons that I touched on earlier that we will seek to smooth that out somewhat. So the policy deliberately gives us a bit of flexibility around that, and then that's factored in. And as we get further through next year, clearly, as we declare the '22 dividend and beyond, we'll be able to give you a little bit more visibility as to how we expect it. But it's a risk at the moment to give us that extra flexibility.

On the sales price, well, it was actually a conscious effort. You think about, as of July, we're giving away an average of about 2% of top line price as an incentive. That's all we have to do to secure our year-end position. We actually did a national campaign that was advertised giving an average of GBP 10,000 away. So we naturally increased the -- reduced the net, actually, in terms of our trading to get the year-end position. So the 2%, has it risen slightly -- risen -- the actual net price has come down slightly because we have been having to deal and keep our cancellation rate. But there's nothing kind of top line that has moved at all at this moment in time.

So just one follow-up on that. Is that kind of how you see prices for the whole industry in the market? Or is that more Persimmon specific that you have that national campaign to secure some of the completions for the full year target?

I see that it's the whole sector. Everybody's dealing at this moment, and we're competing against a smaller market share, a smaller share overall. So we're all dealing to try and get a forward order book.

Next question comes from Clyde Lewis from Peel Hunt.

Two questions, if I may. One on Part Ex. I think you referred to using Part Ex as a bigger incentive going forward, so I'm just wondering what sort of scale of investment you might see being redeployed into Part Ex assets? And the second one was on, I think, Jason, you referred to sort of undue stress on the balance sheet. You didn't want to put undue stress on it. Could you sort of help us define that a little bit? Because obviously, now with very large cash file even if it's down year-on-year, would be a long, long way from undue stress on the balance sheet. So just be useful to maybe understand some of the metrics around what you would see as undue stress on it.

Paul, do you want to -- Part Ex?

So Part Ex, unbelievably, this year, we've done very little. Our average is normally around about 10% to 15% Part Ex. And we've been in the single figures, so we have a facility built into our year-end provision. We'll probably holding about GBP 30 million worth of PX at year-end, which is up from probably about half much again as what it was last year.

So on the balance sheet, obviously, when we're setting out a new statement, it needs to be weatherproof for all types of different trading environments. So it's not looking directly at the position today, and you're absolutely right, the balance sheet today and the guidance that we've given you versus into a comfortable position. I think about net cash as simply the cash less the creditors. I don't want that one to go negative, so we'll continue to see that as a key metric. I think in the past, we talked about GBP 700 million of cash with GBP 500 million of creditors plus or minus doesn't feel wrong. I mean, that's the best comfortable position as we go into the year-end. So we're in a good place now, but I wouldn't want to be driving that down into a net [ cash ] position.

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

Two questions, if I may. I just wondered if you could talk a little bit about the build rates and how you're reacting to the lower demand on the cancellations? Are you deliberately holding back on the build rate? You were saying it was up 20% year-on-year, but how do you feel about it now looking into next year? And then secondly, more of a broader question for the rest of the team. It's really thinking about the last recession. Just wondering thinking about that, what lessons the team can take from that and apply to this current situation?

Well, I take build rates and then Martyn, Paul, you can talk about the recession, last recession. [indiscernible] completion for year-end, so we've kept absolute focus on that and driving that forward. We've still got a lot to do to hit the number, and those are valuable sales and completions that we want to get over the line, into the books and into the cash file. Obviously, next year, we're going to be monitoring WIP very, very closely, and we're going to be managing build to what we've sold. So we don't have a massive cash out and work in progress. So we're just going to be very controlled in how we're releasing those stages and controlling WIP.

With regard to lessons learned from last recession, a lot of it is about cash control, really. We need a sort of in-step to console the WIP, we need to be careful what infrastructure we put in. Our build releases, we need to make sure that we do not release too far down the field. We control what stage we stop the houses up. Land payments, I've already mentioned, just to ensure that we're signing up the right deals in the right locations, ensure we're getting the right phasing on payments, so we're not exposed all in one year. Sales, I think we continue to be alive to what's actually happening in the market. We've got very well-trained sales advisers, we have strong sales structure. The feedback from them is vital, so we know what's going on in the market. And as Paul said earlier, if there's a limited or reduced pool of customers out there, we need to be sure that we are able to meet their expectations and sell them the right products that suits them.

[Operator Instructions] Your next question comes from the line of John Fraser-Andrews of HSBC.

So perhaps I could just explore the land situation with a couple of questions, and then one on costs. So the first one on land, the spend is up year-on-year with the GBP 175 million in the period. Is that all pre-mini budget? And -- or is it commitments that you've made before that, and you can't renegotiate those? So that's the first question on land. The second question on land is that have prices reacted yet, land prices? Or are we still in the phony war period of participants getting their minds around what's happening? So that's question two. And then the third one is on cost cutting. Have you already implemented or have plans for reducing your costs? On the admin line, I suppose, is the easiest, but anywhere else would also be useful to know.

John, start with chaos. Land, we are very content with the GBP 175 million at the prices we bought that. Very content. In terms of the market, though, I think you're right to point to the fact that we're in, as you -- I think you called it the phony war stage. I think, we're at the sharp end of this, aren't we, in terms of seeing what's happening, in terms of demand. And landowners and land agents are going to take some time to react and respond to that. But that's fine. Look, we've got a strong land bank. We're in a good position, and so we can afford to wait and see how the market reacts, and we will respond accordingly. In terms of cost cutting, I mean, we've run a lean shift anyway as our margin shows. So there is not going to be a vast scope to knock out a whole lot of that in a downturn. Although obviously, any CEO is required to hunt for cost savings in a downturn, and I have spent a lot of time doing that, and this will be no different.

Your next question comes from the line of Ami Galla from Citi.

Just 2 questions from me. First one, just on the labor rate. Have you seen any changes to subcontracted rates in response to the demand slowdown that we've seen in recent weeks? And the second one on the timber frame factory. Can you give us some timing in terms of the cash commitment on that spend? And is there scope to defer a delay with plans going forward?

I missed that last one. Is it -- yes, it's a scope to what, defer or delay?

The actual spend on that project.

In terms of subcontractor rates, well, first is availability. We're actually seeing people who are available and people who are now hungry for work. I think we're not at a stage, Paul, where we're seeing prices fall yet, but certainly, they're stabilizing, aren't they?

Yes. So the first kind of green shoots, if you like, in terms of cost drops is that the groundworker tenders are starting to fall from where they were. So any works that we are tendering currently for next year are definitely down by 4%, 5% than they were in the spring of this year. So they are -- obviously, our groundworkers are looking at their forward order book and getting a bit concerned. So that's the first green shoots for us. Other than that, you said right at the moment, it's year-end, everyone is concentrated on year-end and half year-end for competitors. So we're not seeing that downturn yet.

I think we'll only begin to see this May, June -- April, May, June next year. I think groundworkers will see it first in January, February time when they're hungry for work and that will build. In terms of timber frame, it's about GBP 45 million over the course of the next 3 years, isn't it? So it's not a big number. And look, we want to get this factory built, so it's there for improving our efficiency. There's a big payback from this factory when we actually get it built and get it live into the business. So at this stage, we're not planning to delay that.

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

Sorry, taking advantage that others might drop off the line just to ask a couple more. One in terms of land creditors. Did I hear you say GBP 500 million for land creditors, just to confirm if that was the case? Second, just in terms of buyers' mix, you said normally 10%, 15% of Part Exchange. I wonder if you could just remind us what your buyer mix, first-time buyers, those buyers that you can Part Exchange, whatever else is left in the mix? And then lastly, just in terms of the GBP 175 million of land spend yet to do, how much of that is coming for strategic land? And how much that is land that you're picking up on the market?

On the mix, well, Part -- first-time buyers is 41%, I think, in the period, wasn't it? Something like that. And in terms of land we're buying, strategic land is about 40% of the overall mix at the moment. So part of that will be, I'm sure, reflected in the spend of the year overall. And land creditors, Jason?

I did say GBP 500 million. I don't know precisely where it will land. It's only what we pay off, what we said we will take on. I think it will begin with a GBP 500 million, Glynis, so that's sort of rough guidance. It might be slightly above that figure. We were just under GBP 500 million at the half year. We might be just over it come the full year.

[Operator Instructions] And there are no further questions at this time, so I'd like to hand back to our presenters for closing comments.

Okay. Thank you very much. Sorry for the interruption in the call. I hope it hasn't disrupted your morning too much. Look, I know guys, you want to know what the EPS and DPS is going to be next year, so do we. I think we've given you a very fair, very full, clear transparency in terms of what we're seeing at the moment. I would remind you that Persimmon starts in a very strong position with an excellent land bank, and a very experienced management team that has lived through these cycles before. So I am confident that we will manage this appropriately and come out on the other side racing away in a strong place. I'd rather be [indiscernible] in my position as CEO of Persimmon with our land bank and with our margins and with our cash position than in my competitors' position. So I'm looking forward to the opportunities that we will, no doubt, be seeing over the course of the next weeks and months. So thank you very much, and the next update is in January.

12th of January.

Thank you.

Thank you.

That does conclude our conference for today. Thank you for participating. You may now all disconnect.