Persimmon Plc (PSN) Earnings Call Transcript & Summary

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

Thank you. Good morning, everybody, and thank you for joining us. As usual, I'm joined this morning by Jason, Mike and team. Since it's only been a few weeks since we gave a very comprehensive update, I think we can probably keep this brief this morning. I would start by saying we are seeing, across the country, that confidence is slowly recovering. We're seeing increasing [indiscernible] numbers and [ consolation ] rates, which has resulted in a steady improvement in sales. But if these conditions continue and follows the usual seasonal pattern, then we would expect volumes in 2023 to be towards the top end of the 8,000 to 9,000 range that we've previously guided to. We kept out clearly in the statement what our ASPs currently are in our order book. Since last we spoke, ASPs has been sort of firmer than we thought it might have been, but so too was the build cost inflation, which is remaining quite stubborn. So the net results is awash. Consequently, our margins for the current year are expected to be in the range of around 15% as we clearly set out in our March presentation. So this doesn't mean that we see probably little opportunity at this stage for material out performance in 2023. However, we have an excellent pipeline of land opportunity, with strong margins ahead of us, that should lead to meaningful outlet growth next year, which will allow us to begin to deliver good profit and margin growth next year as we can come up. In terms of operations over the last couple of weeks, I visited many sites across Scotland, the Southwest and the Tayside, i really can say our products and service continues to get better and better at prices that are consistently lower than the competition. And this gives me great hope for the future success of the company. So I think coupled with the strength of the outlet position and the growth that we give, as well as the continuing improvement in the service and product we provide, we're in really good shape for years ahead. So with that, I will open it up for any questions, please.

[Operator Instructions] We will now take the first question. It comes from the line of Rajesh Patki from JPMorgan.

I've got three questions, please. The first one is on incentives. Can you talk about how the incentive usage has evolved over the last couple of months and if there is any regional variation of incentive levels required? Second one is on build cost inflation, you've noted limited signs of easing in the short term. I was just wondering which key aspects have been more persistent than you were expecting? And thirdly, based on the guidance, can you comment on how you see this year's profitability split between H1 and H2?

Maybe if I have a go at the first two and Jason helps me out on the third one once he chips in along the way. I mean on incentives, it's very similar to what we said to you in March, that's some quarter and half numbering to talk about what we're seeing on pricing in the in general. So it's pretty [ bowing ] around about 3%. And there's not a huge regional variation around that average number. It's a little bit more in the Southeast and the Southwest. It's a little bit less in the North, but there's not a great dispersion around that average. I mean I think what we are seeing, and I don't want to overexaggerate it, but there are pockets of strength that we are seeing in terms of recovery in confidence. In some locations, we're beginning to feel confident enough to be able to push ASP, there's a bit of tension. That is by having a uniform picture across the piece at the moment. But it is encouraging to see and hear that, and really not seeing that now for some 9 months. So that's encouraging. In terms of build cost inflation, a similar story to what we said to you in March, it remained persistent. We are seeing more reductions in some costs, for instance, but there are costs around the place, we are seeing maybe [ GBP 50,000, GBP 100,000 ] costs coming down, but that's by no means a uniform picture across the country. So for instance, we may see that in the Northeast. But when if you come to [indiscernible] where we are today, then cost of them isn't going down yet. So that's a mixed picture. Even within a bit lower costs, timber costs are falling. But anything that are energy related, costs has got involving cement or key commodities that are clearly by energy costs, then they are still pretty tough. And we're seeing a double-digit cost inflation still as -- and that's why we're pointing to the margin squeeze because ASP is not gonna to cover that. I think it's interesting. If you look at labor costs, that now does appear to be flatlining. So ground workers would be our example there. It's not falling, but it's now stabilizing. Which is interesting, because obviously, there's split within those costs 55% energy, going off somewhere. So they must be taking some pain to absorb that. And obviously, we've asked ourselves why is that, why the slowdown, why we're not seeing greater reductions there. And anecdotally, what we're hearing and seeing around the place is, well, there's been a switch from residential to commercial, which is still strong in pockets. And I think also, well, there may be an element of Part L going on still because people around the country, I think, are clearly trying to get ahead of the additional costs that will come in with the introduction of Part L in July. So it will be interesting to see what happens in the second half to grow with the costs. So yes, it's a mixed picture. Some signs of moderation. But overall, we're still pretty low. Jason, do you want to bounce to it.

I think we've see the trend lines to be similar to last year, it was the best way to put in formal guidance on that end of last year. It was about 44% in the first half. It won't be massively different to that and we expect at this stage.

We will now take the next question, it comes from the line of Chris Millington from Numis.

I just wanted to explore the sales rate trends a little bit further and just hoping you could perhaps provide a little bit of color over what's been happening over the last month or so. Have you seen any sort of just see or, I don't know, steadying of the sales rate in the back end of March. So that's the first one, just the breakdown there. Next one is really just about your confidence on the outlet growth for 2024. How material could that be. And suppose just a lag for that, how quick could you recover volumes if the outlets would add, just from a point of view and a capacity point of view. And then the final one's just a -- -- is a bit of a follow-on from the last one there. And I just noted last year, you were quite heavily Q4 weighted on completions. I'm just wondering if we should be expecting the same sort of trends this year.

Thanks, Chris. I think -- as I said at the top of the call, gradual increase, steady improvement. It's broadly stable in the last 3 or 4 weeks. It's steady dip around a level, it's not continued to accelerate at the moment. But again, we expect that post this, that is pointing to a more normal seasonal pattern to establish itself. And then perhaps in the wake of COVID, sometimes, hence we've seen that normal seasonal pattern, but those of us who have more experience of this, for instance, Mike, who sat next to me, he's indicating that we should now begin to see things to set it up a bit on the theme. So that's what we're seeing. But look, what is interesting is interest remains very high. And although what we are seeing is overall inquiries are down, the quality of those inquiries is very good. You're seeing good conversion. So that is very positive. And really that's across the piece, North and South across the country. Clearly, I think in the Southeast, customers are still, particularly first-time buyers, are struggling with really the full benefit, but their interest remains unabated. In terms of outlet growth, look, we -- it's too early to give you firm guidance. I think Jason said at March that we were targeting to get back to more then 350 over the medium term. And certainly, I would sign up to that to -- which is where the cement rates go back to 2018 and 2019 levels and our selling our ambition to do that over the medium term. As I said, we have an excellent pipeline of growth, which we've got a lot of control over in terms of securing acquisition, it all comes down to time. But I still think that we will see meaningful growth in our numbers over the course of next year. And I think you asked this in guys that were in [ talking to ]. Obviously, it will be net, to some extent, by sales and in the absence of Help to Buy, I think we're seeing sales rates returning more to the long-term trend of 0.6 to 0.7. That's what we're seeing. And as we grow our outlets, I'm confident that we will have the capacity to build them out. I'm certainly hoping to answer to the last question that we are not quite so Q4 focused. We certainly happen to be in good shape for build in first half, and we intend to keep that going over the summer to get ahead of the [indiscernible] and household to have a more enjoyable Christmas this year than we did last year. So that is a firm ambition of the moment for us.

That was very helpful. Can I just have a very quick follow-up? I'm just curious, if the outlets are down in the markets there, could Persimmon grow volumes 20% in the year? I mean would the business allow that? Or would that be pushing it too hard?

No, I think that is entirely possible.

We will now take the next question. It comes from the line of Aynsley Lammin from Investec. Aynsley Lammin, is your line on mute?

Can you hear me?

Yes.

Just 3 questions from me. I think just asking on the build costs. Just coming back on the comments you made, so I think you've kind of said your margins potentially 15%, and build cost inflation were 8% to 9%. I mean how much visibility do you have for the rest of the year assuming the materials acquired is locked at this point? And what's your current expectation now for build cost inflation for the full year? Is it around the 8% that you kind of mentioned quickly a couple of weeks ago with your results? And then secondly, I just wonder, if you had any comments on the mortgage market, if you're seeing they're quite supportive and healthy in terms of lending and appetite there. And then thirdly, just curious what your part exchange is running at? I think it was run at 25%. Any changes to that?

Look, I think you're right, we're pretty locked in for this year. And of course, we're constantly intented to see opportunities and we've been doing [ that during the first quarter ]. And what's interesting, I suppose, now is that compared to this time last year, our supply chain will have marked in our face, but now it's more -- picked on the out, but then they come back to us. And so there has been a change. But I think in terms of this year, build cost inflation is locked in. I think perhaps a bit [investors time ]. At the start of the year, we discussed the intensity of, actually, particularly groundworkers and the amount of activity they've got, we were expecting that would subdue a bit. But it hasn't happened, but I do [indiscernible] whether that's to do part elements. So that may moderate, but we're looking really for that impacting to 2024 rather than not having any meaningful impact in 2023. In terms of the mortgage market, yes, as I said, I think there is growing confidence. But still, there's an absence from the major lenders, the national lenders, a high LTV product . But I think there's still new builds for first-time buyers. There's still a lot of [indiscernible] out there about that segment of the market. But there, as again I pointed to a few weeks ago, it's interesting to see the regional is beginning to take up the slack. And I think, for instance, last week, Skipton announced a 95% LTV for new building [indiscernible] more creations. But of course, once we -- the bank [indiscernible] expressed an opportunity to try and execute lending. Fill rates [indiscernible] will drive more [indiscernible] a little bit across the quarter. I mean we saw that in the news in February, expansion rates have come down, as we quantify gravity with rates goes back up, [indiscernible] [ GBP 54.40 ]. So that's going to be great. But I think the banks are trying to be greater than the -- loans might get in a very small more on that rental cover system, making that to kind of affordability. And similarly, we're trying to be as free as possible. But banks like new build, they like the energy efficiencies, they like the green nature of the opportunities. So we do continue to see good support in general terms. We sell over the course of [indiscernible] the 95% LTV. And then thanks in just in context. It was 21% in the first quarter on a gross basis in that [indiscernible]. But we continue to sell quickly at a backlog that we're concerned about [indiscernible]. It's been a helpful product marketing, it was so helpful to support great chance. I think that recent the campaigns we've done towards bringing [indiscernible] and then the sales teams are converting. So it's helpful to have that in top [indiscernible]

We will now take the next question. It comes from the line of Anthony Manning from Bank of America.

Could I just ask a question on the outlook for the margin. So you've given us guidance for this year. But how will we see that progress? This is a multiyear story, to get back to the levels that it once was, is there any factors in there that we should think? Or as the volumes and operating leverage come back, will that just improve quite rapidly? And then the second was just if you can maybe talk about the mix effect that you've seen in your sales in order to the ASP seem very firm, but have you started to see differences in sales demand from your customer base to our larger homes outselling those kind of first time buyer, smaller homes in your portfolio?

I think -- well, I don't -- I think that the impact on margin is cyclical, not structural. So I think as we cover, we will see margins recover. And the much discussed slide we put out in March, the main look to the guide is in the most transparent I've seen anywhere in the market. So we're improving very back to that. We, Persimmon, continues to go on at excellent cost to revenue ratios, which continues to be industry-leading and will continue to end in our margin. And as we admitted back in March, we were -- we saw this dip is somewhat transitory and we're vary to dig too deep into it, because we want our resource to be there, that skill and experience in long term to be around to fuel growth again in the future. So as far as recovering, I think margin will recover. Clearly, there's been an impact of build cost inflation both in areas. ASP, I think ASP will recover in the fullness of time. And I think in the fullness of time, we'll see a dampening of build cost inflation not impacting so much this year, but I think it can't defy gravity forever. We've obviously had some impact on it, such as Ukraine and other cost jobs. But all the time I'm confident because the scarcity of supply of what we build, it will recover.

As I said, in terms of mix, if you got equity in the market, then the market's good. People are still very interested in -- very active in 3, 4, 5 pips. The interest remains unabated for first-time buyers. The challenge is affordability and getting to the market. Having said that, our Q1 completions, first-time buyers were the largest segment, they were 38% and they were up from 33% in Q1 of last year. So they're proportionately more of our completions this year than compared to last year. As i remind -- as you can compare and say, first time buyers are still the largest and the most active section of our market nationwide, out with something along, what issues do this week. So the interest is there, the demand is there, it's about fulfillment.

We will now take the next question. It comes from the line of Jon Bell from Deutsche Bank.

Just want to explore the bulk sales a little bit. Could you give us some color on the economics behind them and anything you can add on geography and house type? And then just a point of clarification on your previous comment, the first-time buyers is 38% Q1 completion. Is that 38% of total rather than private sales?

No, it's private.

Private. Yes, okay.

On sales, look, really the bulk sales have been really -- bulk sales went down are to existing relationships. We're not in the market hunting out big bulk sales, it's not what we do. So we highlighted it this year just because it's had a more material impact on sales rates. So we thought we should build rather good preexisting relationships. It's not a large number of units, but their customers we've had to deal is, who buy maybe 30 units here, 20 units turn, around the country and Midlands and in Scotland, and to start keeping those going. But we're not actively scouring the market for big investor deals because we think our demand will recover. And clearly, it's a stronger margin for us. We think that's the right thing to do.

Thank you, if you're gonna just one follow-up, actually. In Wales where Help to Buy was extended, what are you seeing on the sales rates there?

Yes. They are certainly -- the two large companies are certainly selling stronger and faster than their English neighbors and [ media ] neighbors.

We will now take the next question. It comes from the line of Charlie Camber from Liberum.

A couple of questions from me, please. Just the outlook for sort of 2024 outlets and volumes, and you said subject to planning. But just wondered what the planning risk there is because, I mean, on some readings of recent news, you'd be forgiven for thinking that planning is getting more and more difficult all the time. And just wondered if you could say anything about that. And then secondly, just to help us a bit with first-time buyers. Are you seeing people sort of materially change the mortgage terms? So moving from 25 years to 30 and 35, or even longer, to try and help them with affordability?

Certainly, I think planning isn't getting any easier. But nevertheless, we are pressing ahead with getting it open and some days we're opening now will obviously deliver sales to '23, but we will be able to deliver sales for '24. So that will feed into -- figure in the numbers for next year. And we have, as I said, got a great pipeline that is really -- I'm really excited about, and the power growth and -- will be able to pay for us, not just '24 but also beyond. Really, nothing externally has improved on the planning stage since last we spoke, it was a selectivity this week and housing minister overly defended the secretary of state says well things are going to be good and will see that in their own constituency, the 5-year plans, by his counsel, so i'm hoping banking. So most elements because that committee that won't be part housing volumes. There may be other, obviously, that are different. And I see other CEOs turning out things in the process today and also within the press yesterday confirming [indiscernible] than in terms of a difficult loss. But nevertheless, what I also highlighted back in March is we need to get better at what we do, and that is having some marginal impact. Yesterday, we had a brisk evening. I think, we don't control as general area, I think it's 1,500 units. And what we've got approvals, and everybody in the company is probably in a state of shock because it got approved by 6 months faster than we saw what it was going to. Which really to me was a vindication of the sort of things I was talking about in back in March, which we just need to be nimble and droid and sorry for the presenting planners with what it is they want to see and what they want to hear, and really getting attenuated to the local policies. And if you do that right, then you can have great success. And we've got increasing examples of that within the business. And that is very much a focus. We've got a team really working on that internally to drive that, which is a bit different to where we've been in the past. So it's still difficult, but having success, and we need to build on that success. So ultimately, I am confident that we'll see growth next year. In terms of your second question. No, I mean, I have -- I, personal, haven't seen -- I've seen in the press, I'm not sure I've seen many of them use a follow-up of that happening in practice. I think still the Bank of Mum and Dad is the most important bank for us. And many of our first-time buyers, including my own, are fully exploiting their patents.

We will now take the next question. It comes from the line of John Fraser Andreas from HSBC.

Two from me, please. The first is on net pricing. So it seems that sales incentives are pretty much unchanged. So the question is, has there been any underlying house price inflation in the improvement in the forward order book year-on-year versus last year? Has it gone up or is that just inflation that happened before September '22? So are we looking at a net price -- if incentives are 3% higher, we're looking at a net price that's 3% lower than the pre-September '22 level? That's the first one. And then the second one is a request for -- just an update on how you're seeing the land market, any trends and whether you're able to secure the land you did secure in Q1 at your 32% gross margin that was reported at the end of last year in balance sheet?

John, look, I think there is no uniform answer to that first question. Year-on-year, yes, I think it's still probably just about ahead. I think there's a volume impact going on, on margin. I think since September, prices has been -- pricing certainly hasn't gone forward and so you have to discount in order to make a sale. And so therefore, that has impacted the margin. However, as I did say earlier, what's interesting in the last few weeks -- and it's still very active and it's still very early days, we are seeing examples of being able, certainly on some products and some geographies and certain occasions, to push pricing, and we haven't seen that in 6 or 9 months now. So that's very welcome from our point of view, and it will be interesting to see how that evolves over the next few weeks and months. But as I said, highly selective at the moment, but wasn't there even a few weeks ago. So I'll take that. In the land market, we continue to secure land per wait. So very happy about that. We've seen some easing, I would say, in the Land market. Again, it's patchy, the pockets were. And there's a lot of activity, and there are other pockets where we are in a [indiscernible], which is also a fantastic place to be. Obviously, around the times are looking ahead with a lot of political uncertainty with a general election next year. What's that mean for taxation, that is something that is on my mind. So again, that will be interesting to see how that unfolds over the course of the next 18 months.

Perhaps a supplementary on the land one. So you purchased about GBP 40 million worth of lands in Q1. So probably quite a small sample of hurdle rate. Are you anticipating a pickup in your land purchase or purchases? Or are you still watching and waiting for profit correction in land values?

Where we are seeing opportunities at our hurdle rates, we are going to come out. We are cautious. We're needing to manage our risk. But I don't think anybody, well on the table anyway is expecting that land prices or land price collapse is just around the corner. So cautious, very disciplined about hurdle rates, but also conscious that we need to keep going and putting the hook on that..

John, what I said at the full year was credit was paid off this year around GBP 270 million is very weighted to Q1 actually. So we're ahead of -- on average, however i say probably same or [ 200 on top of that. But probably, as we sit here today, 2 months on, more at the top end of that. We will see how things play out. Of course, absolutely [indiscernible] those events that are on the margin. But equally, in those growth ambitions we do need to continue to invest. So that's the sort of level that we're guiding to at this stage.

Jason, was that the GBP 150 million to GBP 200 million was your expectation for the full year on sort land purchase?

Yes. That's on top of land creditors, that's right. So if you take the top end, the GBP 200 million on top of GBP 270 million to be at GBP 470 million cash spend on land. I think that was the sort of fully slide sweep guidance.

We will now take the next question. It comes from a line of Ami Galla from Citi.

Just a couple of follow-ups from me. The first one was on incentives. Now that you've seen the recovery in sales rate, mortgage rates have come down from the peak as well, and sentiment seems to be better. Do you think there's scope to removing some of the incentives that were put in place as we kind of think about the autumn season? And again, I know you've addressed this several times today, but as we kind of think about the sort of moving parts or drivers to margin recovery in '24 and '25, is it really pretty much linked to volume recovery? Or do you think there's scope for that sort of build cost versus pricing to improve as we go ahead into the coming years? And the next question was earlier -- just a clarification on your investment in TopHat. Appreciate you see that as the sort of future of construction going forward. But maybe if you could give us some color in terms of your thoughts in terms of that investment. You are already expanding your existing facility, what is it that is needed from a third party, which you can't build on your own?

Ami, thank you for that. Yes, look, I mean, good questions. Clearly, where we are seeing that price tension, I mentioned in fiscal 1, I mean they're not in those incentives. So where that's possible, they will be squeezed. I don't want to set haze running, this is not a painst to out. This is very early days and it's bit of pockets where we're seeing, nearly highlight in that, and that wasn't than even a few weeks ago. So that part, very positive. The volume recovery, I think, will be akin to margin improvement over the course of the coming years, but also [indiscernible] cost down [indiscernible]. I don't see any abatement in interest, the passion from customers to get on the housing matter. And I want to be -- opportunities to be building a great product that is on a price, to capture that strong demand. And I guess that goes to what we're thinking is on TopHat, which is we are -- we know what we're doing when we're building houses and we're obviously investing in the new factory. Look, it's -- I think it's similar GBP 8 million is the investment this year, and GBP 17 million and a bit next. It's adding 2 things. Really volumetric as you look ahead, is inevitably going to be a component of modern matters of construction. It's inevitable. And I don't think it is the answer, I think, is part of the answer and I think it is complementary to what we do. And so I think TopHat are great. I think they're very innovative. And obviously, expanding and looking for investment partners, as you know, proving on going back. So we're in a good company. What is very interesting for us is the [indiscernible] products and how we can integrate that portion with our internalization with our existing space for factory and the new one, in particular, as -- I mean, it looks great. I don't know if you've seen the product, but if you will look at it from distance, you cannot tell the difference to Brickworks and it was really excellent. And it could give a product as you link, is there's sufficient consumer acceptance of it in the use when you combine it with our panels. So that's the exciting factor for us and the reasons why we've invested in it.

We will now take the next question. It comes from the line of Sam Cullen from Peel Hunt.

I've got kind of 2 straight, 3 questions. Both sort of follow-ups really. First one is on a follow-up, another one on TopHat. Just kind of how long you've been looking at it? And then you alluded to even the volumes to kind of get the cost benefits, what sort of take-up does it need to drive those cost benefits? And what parts of the business would you be looking to use it in? Is this a thing you'll be using across just affordable, all of private, some of private, certain regions, certain regions where it won't be excusable? That's the first question. And then the second one is just kind of pushing you a little bit on your answer to Chris' question earlier in the 20% growth you alluded to that might be possible. But if I look back to the model, which, thanks to the seasoned nature of my colleague, dates back to the mid-80s, I think you've only grown by 1,800 units, which is GBP 209,000 organically once, which is in 2014, when obviously, you had the dividends to help by and you've never grown by 20% a year without M&A since the late '80s, I don't think. So I guess, in essence, what's different this time that would mean 20% is achievable on an organic basis? And then could be obvious follow-up is if they wouldn't be organic, would you look at M&A?

So I mean we've been looking at TopHat for 18 months to 2 years now. I think you're right, primarily, and I think in general, I think adoption and volumetric, it may well be that this is most relevant to the affordable market initially. But over time, it's very possible that private customer would grow an interest in it. We engaged you in to add to that in terms of -- I think i may be pushing around around what problems to do -- need to make...

I think that's right. We've obviously come from that -- [indiscernible] and we've come from a higher level you may have to say was the recovery, but we're doing fair enough for some time. But as we look forward, we do need to drive the number of atlas on the shape of that recovery. And I think we can have some to that, but not all sort of the land market. So we get our confidence in that difficult market, and a immediate basis in time, short term, that will be how it plays out. But we are seeking to build into that number of outlets on a to the best we can. We'll be able to build to that at a level we've come close to that. So we'll come back to development.

Yes. Look, in the second half of last year [indiscernible] only [ 15% ] at much higher level of policy and that was even and area of absolute trench. We will announce from last year as we do with anything. And so from the recovery [indiscernible], it is very strong. So yes, look, I think what we're looking at for next year -- last year, it was a very -- the impact of the budget car crash and the instantly full assets. You're right to say that build as you go down in the industry. It takes some time to recover. But it impact isn't much in our resources. So we'll see if I can rebuild the confidence, and I think that we can do it. And we gonna try for that..

I would now like to turn the conference back over to the speakers for closing remarks.

Okay. Thank you very much all. So look, we -- it's -- we're very much in line with where we were back in March in terms of what we thought our margins and bottom line profit. But we're very focused on '24 and beyond and building our volume. So thank you very much for your time and interest. And...

Bye, everyone.

This concludes today's conference call. Thank you for participating. You may now disconnect.