Persimmon Plc (PSN) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Persimmon Plc Third Quarter Trading Update 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. Please go ahead.

Good morning, everybody, and thank you for joining us. As usual, I'll say a few words at the top of the call, and then I'll throw out to any questions you might have. So just picking out the key points from our release this morning. Pleased that profit and cash are in line with expectations and margin is in line with the first half. Clearly, margin has been affected this year by the long shadow of 8% to 9% build cost inflation, and we're seeing the impact of the widening incentives, albeit, I think we have on average pretty low incentives compared to the industry. The business is clearly benefiting from the actions to improve build quality and service, also to build a marketing platform and also I'll pick out our proactive approach to planning. For example, since July, we've got approval for 19 additional outlets. And as an additional example, we have, since the start of the year, converted 80% of the GBP 300 million of owned land that we had with outline consent. And I think that's really positive. As you would expect, we are managing costs and WIP very tightly, and build cost inflation is now beginning to fall fast. Indeed, in parts of the country, we're seeing absolute build costs falling. You'll see from the results that we should probably do something like [ 400 ] plots by way of investor sales this year. Actually, this is very similar to what we've done in previous years and broadly with the same customers. Whilst it's too early to call 2024. We do expect housing to be a key issue in the coming election, and we will have to see what impact that has on consumer sentiment. Our approach to 2024 will though be very similar to what we've done this year, namely, we should control what we can control. Whilst it's too early to guide, based on current sales rates, we expect to have a stronger forward order book in January compared to the current year, and we will expect to have more outlets open in the spring. We also expect to see the benefit of lower build cost inflation and perhaps, lower build costs falling into the P&L. But we expect this to be largely offset by widening incentives and weaker ASPs in some areas. But as I said, we will be in a much better position to call this in January. Overall, I'm very pleased with the business's performance in Q3. And as you can see in the last 5 weeks, albeit, with investors and albeit against a low base, our sales rates are up 31% year-on-year. If you take out investors, we're up 13% year-on-year. So at least that's a very good platform to go into Q4. I think overall, my feeling about the business is that we've been on a transformation in terms of quality and service, and we now build good quality houses with excellent services to our customers at market price, which is about 25% below the average, and I feel that is a strong and winning place for Persimmon to be. So with that, I'll open it up to any questions.

And it comes from the line of Aynsley Lammin from Investec.

Just 2 from me. Actually, I just wonder if you could give a bit more color around that improvement in the sales rate since the kind of beginning of October. How much of that is you kind of out there marketing increase in incentives versus maybe a bit more kind of buoyancy and confidence in the market just interested in that. And then just on the build cost inflation, trends you're seeing there, you said some parts of the country seeing it negative. Is that both labor and materials. Again, a bit more color on kind of trends into next year would be helpful.

Yes, of course. Well, look, it pains to point out that Q4 last year was weak. So the comparison is a low bar. But nevertheless -- and we always thought this would happen. We thought when we lapped Q4 of last year that we would be showing good growth. But nevertheless, I was in Kent last week, I was in West Midlands last week and talking to the team there, talking to customers there, seeing some real positivity. I guess it particularly surprised me in Kent because I think that is an area that has been hardest hit for us, at least. Inquiries noticeably are up since the depths of the summer. And actually, the same is true, for example, in Bristol. I think there is clearly a realization amongst customers that the world is not returning to the low rates, and this is the new normal. And expectations are adjusting to that. And I think we're finding our market in this new world. Affordability is still the stumbling block. There are some signs of positivity around that, too. For example, I saw yesterday that for -- in comparison to September 22 for a 90% LTV average mortgage on 5 years fixed. It's GBP 188 a month cheaper. So it's helping a tad. And obviously, earnings have gone up over the course of the last year. And I think the stats would also point to the fact that probably a similar type of product, similar type of house would be just about cheaper than the average national rent now. So the economics beginning to tilt. There's positivity out there. Affordability though, remains achieve. Stumbling block, though having said that, and you talk to the old hands, cash buyers are still in the market. One of the customers I spoke to last week was a cash buyer. [indiscernible] which I thought was a positive sign. They wouldn't be investing into the global market, was about to crash. And that was in Litchfield. And they're very -- a very good development, very nice development, but still large sums of money involved there for a good quality house. So there is positivity out there, albeit with lots of challenging challenges. People are willing to pay for perceived value. I think across the country, I would say, the prime locations have been largely stable across the year in terms of pricing, the more peripheral locations, more challenged. So I think that presents an overall mix picture, but some signs of positivity albeit against the backdrop of a hugely uncertain and challenging macro environment and geopolitical environment at the moment. In terms of build costs, yes, I mean, again, that is a picture that varies across the country. I would say, where it was already highly competitive, in places like, for instance, Northeast. We've not seen much progress in other parts of the country. We have, so for example, again, in the Bristol area, we're seeing Bricklayers incompetence coming down by between 5% and 10%. Of the trades are offering similar discounts. In some instances, they're sizing material suppliers, resisting price reductions, but actually across the business, I think we're seeing some healthy reductions. So build cost inflation now falling fast and across the country, albeit pockets, patchy, we're seeing absolute reductions in build cost.

Now we're going to take our next question. Just give us a moment. And the next question comes from the line of Will Jones from Redburn Atlantic.

Just 3, hopefully, quite quick ones from me, please. First, just to reflect on the margin for the second half, and I guess, what changed versus your thinking back in August with regard to stability half-on-half versus improvement? Second one is whether on outlets, you could give us a feel for what the net picture may look like because we had it, just bring up you mentioned the 30 gross openings targeted. And then last one is just really around the order book, I suppose. I think you came into the current year with about 1,700 private units. Do you have any kind of sense as to what that number might look like? I know you said growth, but I don't know if you have a number in mind at all, probably too early. And then just in principle, I suppose we go through next year and we exit next year, would you want that number to be, I guess, rebuilding higher from the base that it will start in '24.

So Will, in terms of margin what we're seeing, I think -- look, let me roll back to March. I think rolling back to March, we set out very clear guidance for the year. And broadly, I think that has been proven to be correct. In terms of the story for the year, the long shadow of 8% to 9% inflation that we were experiencing at the end of last year and coming into this year still with Part L costs spiking all causing a spike in the market all the way to the 1st of July gave, I think, a false -- a false peak in costs that caused the market not to adjust as quickly as it clearly now has done across the summer. Also, we are seeing -- you can see from our own numbers that incentives are increasing. They've probably gone up by about 100 basis points over the course of the summer, which, again, is impacting margin. And then finally, in our case, I think we've got some legacy cost issues of about, I think, about GBP 10 million that we're going to just be dealing with in the second half. So all of those are combining to give the results that we're giving. In terms of outlets, look, the try answer is, as you well know, tell me what my sales rate is going to be and I'll tell you what my net outlet position is going to be. Having said that, we're pretty firm with the view that we've got 30 outlets, we turned round about 30 outlets. We can have open by the spring of next year. And at this point in time, I'm thinking that's around 10 to 20 net up. But of course, it depends very much on sales rates between now and then, less so on planning in terms of these outlets because almost all of them are secure. I think in fact, we've got planning on law. We just got to progress to buy a number. So a bit more work to do, but planning is in a good place, which I think reflects the great work the team has done on a given credit for forensic work we've done in the business to improve planning. We're improving the presentation of our sites, where we have formed teams to work at local level to really understand what the local authority wants, to understand the -- what the local political needs are area by area. And we've moved from, as a business aiming to minimize the chances of a no to maximizing the chances of a success. Don't get me wrong, planning is really, really, really difficult out there, but I think all credit to the team for the success that they're having. Clearly, the order book will be what it will be. Again, it depends on sales rates, I think we've got about 1,000 units sold at the moment, primarily, so it will be what it will be, and we'll be able to tell you the precise answer when we speak on the 13th of January or whatever the day is.

January?

Now we're going to take our next question. Just give us a moment. And the next question comes from the line of Ami Galla from Citi.

Two from me, please. First was on overheads for next year. On the back of the head count reduction that you've kind of flagged in the release. Is there any color you can give us in terms of how should we think about overheads? And the second one was on the land market. What are the opportunities that you're seeing in the market today? And in terms of the sort of land acquisition profile, what is your ambition as you kind of think about the next 12 months on land.

Okay. Yes, look, I mean, we are -- we've done a lot of work on cost, and we've done a lot of work on overheads this year. Persimmon, I think, already starts from the leanest cost base, as you all know, for any comparable peer by some margin. But nevertheless, we've been through the books, and we've shaken things out with a view to the slowdown that we've been experiencing. But the presumption that the market will eventually return to growth. So we want to make sure that we have protected the infrastructure that we've got, valuable infrastructure we've got in the business to resume growth when we can. And in terms of volume, we may begin to see that come through during the course of next year. I think the actions that we've taken at the moment in terms of removing costs will clearly help to moderate the inflationary impact of overheads for next year. But at this point in time, it's too early to give you a precise guidance. We've still got that work to do. We've still got our budgets to pull together. But obviously, we will be managing that cost base extremely tightly. In terms of the land market, as I think I said in the summer, I think competition has moderated compared to where we were a year ago, compared to where we were 2 years ago. However, we're not seeing anywhere land prices falling. And it's the same story. It is landowners unless they're in a distressed situation of some degree will not sell their land cheaply. So I think we're seeing overall a pretty stable market for land in terms of pricing at the moment. Our ambition is to grow, but we need to keep a weather eye on these things. And as I said at the top of the call, the macro and the geopolitical environment is probably the most volatile, the most uncertain that maybe I have seen in my working lifetime, and this all poses risks. And first and foremost, my duty is to make sure that I protect the company and that we operate a prudent balance sheet and weather the storm, and that's what I'm going to do.

[Operator Instructions] And now we're going to take our next question from Anthony Manning from Bank of America.

I just have 2, please. The first one would be on the ASP in the forward order book. It looks like that's kind of coming down slightly. Is that just a function of mix? Or is there any changes in customer buying patterns in there that we should be aware of, first of all. And then the second one was just a follow-up on your comments on the progress you're making with the planning system. You talked about there, about the actions that you're doing. Is that something that we can expect going forward? Is that kind of this level of getting plots through the pipeline? Do you ever think that you could be kind of short on outlet openings going forward? Or do you think this is kind of a structural change in the business and a real kind of tangible improvement going forward?

Yes, look, you're right. The forward order book is -- you can see there's a 2% reduction. Inevitably, that mix because it's never -- it is never like-for-like. As I indicated a few moments ago, I think the picture across the country is very mixed in terms of ASPs. Nottingham North overall pretty firm and in place is prices still rising. Nottingham South, more challenging. But within that patchwork, prime sites, pretty strong. Charles Church, pretty strong, more peripheral areas weaker. Overall, pretty stable, remarkably stable, I think, for the environment that we're in. But as I said, none of us know what tomorrow is going to bring. So there's no change in approach from us that is -- we're very focused on returns and margins. So the business is continuing to prioritize that as a strategy. And we're looking to maximize wherever we can. But again, I think with a product, which is getting better and better every single day, a service that is getting better and better every day. And with the Persimmon Homes average price, which is 25% below the market, I think that's a winner, and it's a winner that we're backing. In terms of the planning system, yes, look, we've made structural change within the business. And it's made tangible progress, and I'm sure you'll see more of that to come.

There are no further questions. I would now like to hand the conference over to Dean Finch for any closing remarks.

Okay. Thank you for listening to us this morning. Look, I think given where we started the year in terms of a much reduced order book, I think where we're going to end up is a quick place and certainly one we'd have taken at the start of the year in a heartbeat. So I think it will be a good profit, and I think it will be a strong balance sheet. All this, of course, is relative. Whilst '24 will remain a challenging year. The business is in great shape and is poised to resume growth as soon as more favorable conditions return. So thank you very much, and I look forward to seeing you all soon.

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