Persimmon Plc (PSN) Earnings Call Transcript

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 very much. Good morning, everybody, and thank you for joining the call this morning. As usual, I'm joined by Mike, Julia and Vicky. I'll spend a moment or two to talk through the key points in this trading update before opening up to Q&A. Operational delivery was excellent, as good as we've ever seen, and trading in Q4 was robust, which has allowed us to report legal completions of 9,922 for 2023 ahead of our previous guidance. This includes 780 bulk sales for the year compared with 889 for 2022. We achieved an ASP for the year of GPB 255,750, 3% up on the previous year. We closed the year with cash of GBP 420 million. We expect to be reporting a housing margin of 14% for the year after providing some one-off costs that totaled GBP 15.5 million. We have taken a charge of GBP 6.8 million in order to remediate effective materials on closed sites in [indiscernible] and in the [indiscernible]. We have also reviewed our full portfolio of sites and raised the charge of GBP 8.7 million in respect [ to 2 ], where we have taken the decision to exit early. One through a land sale and one through an historic Investor Day. One site was acquired in 2019 and the other in 2014. Together, these charges amount to about 60 bps of gross margin. In total, our forward order book is up 2% compared to a year ago with the value of our private forward order book up 4%. You will have seen in our update this morning that our volumes in our private order book are up 11%, but our ASP is down 6% on a year ago. This is down to mix, some bulk deals and the exit of one of the legacy sites, I referred to. This time last year, our forward order book was skewed by late delivery of sales in some southern regions. This year, the forward order book is skewed to sales of small units in the North Midlands and the Northeast. Excluding both deals in the forward order book, ASP is up 2%. However, we did see an increased use of incentives on reservations in Q4 to 3.8% compared to an average for the year of 3.4%. Whilst pricing was robust at the start of 2023, it weakened as the year went on. As best as we can give a like-for-like comparison, we estimate that pricing fell around 3% over the year, and this will, obviously, impact 2024. Whilst, it's encouraging to see mortgage rates drop from the peak of last July, for a typical Persimmon customer with a 90% mortgage with a 35-year term loan, in today's market, they're still probably paying close to 5% and affordability remains an issue. So we expect 2024 to also be a challenging year with uncertainty ahead. Nevertheless, we remain on course to open a net 10 to 20 outlets by the late spring, and we shall continue to build on this through the year, allowing us to enter 2025 in a stronger [ place ] where hopefully, we should see interest rates falling and have a general election behind us. So in summary, we are pleased with the year ended given where it started. The market remains uncertain and 2024 will undoubtedly bring further volatility. However, we are controlling what we can control and preparing for more benign conditions based on a strong balance sheet, an excellent land bank, growing outlet network, an affordable and competitive product that continues to improve, deepening vertical integration, known and relatively limited cladding remediation costs and a great operational team. While there's still much to do, the fundamentals of the business are in great shape. We now have a sustainable dividend. We have reversed the decline in our outlet numbers. We have gone from a 3-star builder to an above benchmark 5-star builder. We've achieved an over 200% improvement in build quality. We have halved our run rate of planning refusals and we now have counselors advocating for our developments. As the market recovers, we should once again grow profits and margins. Thank you for listening to me. I'll open it up to Q&A.

[Operator Instructions] We will now take the first question from the line of Will Jones from Redburn Atlantic.

First, in the release, you talked about your Boxing Day campaign with the positive results from it. Perhaps you could just elaborate on what that exactly that entailed and whether you'd be willing to expand on how some of the metrics you're seeing from that such as leads shaping up relative to this time last year? And then second, really was just around the tick-up in incentives and speaking [indiscernible] close in '24, if you were to see a somewhat firmer underlying market, what's the priority for the business? Is it increasing the sales rate or potentially trimming back incentives, if you can?

Well, we've had one week of trading so far. So anything I say about the Boxing Day campaign has to be caveated by that. As you know, we're not really into the selling season yet. It will pick up over the course of the next few weeks. But we were pleased with the response from the campaign and inquiries and interest was up. We will be able to give you a much better picture as we report in March as to how the season has developed. I think in terms of incentives and volume, we just -- again, it's the same answer, I'm afraid, which is we need to see how the market develops over the spring. We should be very nimble. We should watch it very closely, and we act to market conditions just as we did last year to maximize the position for the group.

And maybe as an addition, in November, I think you talked about the [ stance ] of volume growth in 2024 and the base is that bit higher from 2023, but would that still be the case from the [9.9 ]?

Yes. I mean, look, very simply, we expect to open in that 10 to 20 outlets this year. So other things being equal by the spring, enabling us to sell into 2024. So other things being equal, just assuming the same sales rate, we would expect to see some volume growth. And I think during the course of last year, we did see improving positivity. The demand is out there. The market is there. It's a question of what price you transact at. And I think we've been very disciplined in how we've managed incentives. We had -- we did have bulk sales last year, but fewer than in the previous year. And we just responded to the market in a very disciplined way and I think a sensible way to maximize the overall position for the group. And that's what we'll do again this year. What I'm absolutely convinced about is that the demand is there, customers want to buy, but they need access to products that they can afford to enable them to buy. If mortgage rates continue to come down this year, then I think we will see improving consumer confidence, and that will ultimately help sales. But I think 2024 is going to be another transition year, I'm afraid to say. It's -- there's a lot going on. There's a lot of action here. There's a lot of action on the other side of the [ pond ]. There's still a war going on in the Middle East. There's still a war going on in Central Europe and inflation is coming down, but it's not yet tamed. So overall, I remain extremely positive in terms of the outlook for Persimmon, but we're just in volatile times, hence the caution.

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

Happy New Year. A few, if I may, please. I just wondered if you could comment firstly just on the margin in the order book. Just in relation to the comments you made, Dean, just about pricing and incentives obviously deteriorating a bit through the year. Next one is just really should we expect any big movement in that cash in '24 perhaps you could just talk around the moving parts there. And then I just wanted a bit more color on your comments around build cost inflation and whether you are thinking you're going to see a decline this year or it's more of a stabilization at a neutral level?

Happy New Year to you, too. Well, look, that's why I went in some depth in the order book. I think it's important not to get overfixated by the order book. The overall message in the order book is volume is up. What I think is positive in the order book is if you take out the exit from one of the sites we talked about and some investor deals that really were a hangover from '23 then in the '24 order book. ASP is underlying up. So I'm positive about that. And I think that shows the underlying strength of demand. But I think -- look, it's a game of small numbers, isn't it? The order book compared to full year and is very much a mix. I mean what struck me this year is that we've got quite a lot of -- if you take out the site that I'm referring to that we exited which is skewed [indiscernible]. That's 110 of it. Then you've also got quite a lot of forward sales of [2 beds ] in Teesside and [indiscernible], also some in Central and the West [ Mids ] and some of those in Central [indiscernible] flat. So that sort of just skews it overall. So it's very difficult to read too much into it. But I think with -- I'll come back to cash in a moment. If you come back to build cost inflation, it's obviously interplayed between ASP and build cost inflation and what happens during the course of this year. As I said, we did see ASP, we think especially we can tell our like-for-like, clearly we can during the course of last year. We would hope that as confidence increases and mortgage rates fall during the course of this year that we see some strengthening yet there, but there's going to inevitably be an overhang into this year's results. . In terms of build cost inflation, it felt nothing at the end of -- the very end of last year. We saw some months were actually a little bit of deflation. We're in a new year. We're in week 2 of the new year. So again, very early days. The usual suspects are coming forward and [indiscernible] alarm. So bricks are up, plastics are up, [indiscernible] up. Other categories are falling, timbers falling, for instance. So overall, about flat, up a little bit. It kind of feels to me that we return more to a normal year. So maybe 2% or 3% of build cost inflation during the course of the year, I don't know, very, very early days [indiscernible]. In terms of net cash, I mean, obviously, we're investing in the business. And what that means is that cash balance is coming down. Very pleased with where we ended up the year, but our central idea is that we've got a position where we're looking through 2024 into 2025, where we're hoping for more benign conditions. Despite all the chats last year, land prices didn't fall. And it's showing no signs of falling so far this year. We do want to rebuild our outlet network. So we plan to be active in the land market but still being very selective and do the right deals that are right for the group. So that will be a net investment. And in addition, we're very focused on getting through cladding remediation costs and getting that off the books by about GBP 300 million up to spend. We made good progress last year. We want to crack on with that this year. I expect to spend at least GBP 100 million on that during the course of this year. We want to -- we think it's good for us. We think it's good for our shareholders, and we think it's good for the residents of those affected by this to get through that as quickly as possible. So it's behind us. So that's a big cost for the business this year. That does mean, by the way, that we'll be dipping into the facility at various points during the year. So that does mean that there will be a cost to charge the balance sheet to the P&L and whereas there was a credit in the P&L in 2023. So hopefully, that gives you some flavor and feel for the moving parts in cash this year.

We will now take the next question from the line of Harry Goad from Berenberg.

I actually wanted to ask about customer [ policy ], which you've referred to couple of times, it would be interesting to talk about what has actually happened in terms of both your customer journey, the build process, et cetera, what is different in '23 maybe where the business was 2, 3 years ago. And is that -- to what extent is that affecting the build cost and build duration and time [indiscernible]?

Look, we are delighted with where we've gone from and to on this and [indiscernible] why that has been pivotal also last year gave us a real chance to get our build durations right. And it's added about a week to it overall. The key thing that was discipline and getting our teams focused on the discipline of completing with enough time to snag the property before handing over. Gone are the days where we want to run around like idiots on the 23rd or 24th of December, handing over 3,000 units. And the customer is lucky if he's got a front door and a roof that is not leaking. We're beyond that now. That's not the business we are in and that's clearly, clearly reflected in the progress that we have made in terms of both what our customers think about is, for instance, this morning, I look 10 minutes ago, 93% of our customers would recommend us. That's well above the benchmark for the industry and our [indiscernible] are the lowest they've ever been in our history. So really, really happy with that. And that's what making us feel good about our product. And it's now a product that we can be proud of, a good price to the customer. We're not losing customers now because of concerns about the Persimmon brand. And I think when you're in a more challenged market, that's exactly the right place to be. And I think also where you've got regulators who are taking an increasing interest in what we do, there's a new home and quality code that we signed up to activating that this year. That's the direction to travel. In terms of the overall net cost of the business, I think compared to its peak, yes, it's clearly cost us some margin, but not that much. And I think we're going to get that back in terms of demand and value. So overall, that's -- we're really, really happy with the progress we've made there.

We will now take the next question from the line of Gregor Kuglitsch from UBS.

I've got a few questions. Maybe the first one on margin. Just so we are clear what you're trying to say. So you're kind of saying maybe a bit of incentive headwind to the price -- exit price bit lower, maybe your cost still up a little bit, maybe some overhead leverage on the positive side. So are you kind of trying to tell us stability is sort of your base case at this stage? Or do you hope you can actually build on the margin versus the 14% of last year? Then the second question is just, I think you referenced in the statement the gross margin in the land bank, which I think, in June, you disclosed about 31%. I just want to understand, I guess, what's required to get us there, right, from, I guess, this year, we're probably going to be closer to maybe 20-ish or so. And then this sort of, I suppose, second bucket is the land bank and particularly the land with detailed planning. I think you said you've had, I think, 11,000 approvals. I can see that the land bank sort of -- owned land bank with planning has dropped considerably over recent years. I want to understand, has that actually improved year-over-year? Do you have more plots now with detailed planning on the balance sheet? And I guess, how do you expect that to trend because basically, both down to the conversion of outline planning land to detailed planning land? Is there more optimism that, that will start converting into land with detailed planning?

Yes, look, I mean, you rightly identified the moving parts in the margin. Overall, other things being equal, and I can't say enough times I don't know what's going to happen to ASP this year. At this point in time, we need to see the progress over the course of the spring. But yes, we will be hopeful of an improvement in margin this year as volumes begin to recover and we will build on that in the years following that. The margin in -- the embedded margin in the land bank is excellent. And as the business recovers, it will come through and support growing margins in the business overall. So there's -- no, we're not concerned about that. We continue to buy a strong hurdle rate, which will continue to underpin margins in Persimmon. But clearly, the key factor that's driving it is we're returning to strength in the ASP and that interplay with that and build cost. We're still working through the absolute peak of build cost inflation. There will be a tail of that into the current year before we begin to see that dropping to not a lot and then returning to more usual levels of inflation. But having said that, as you identified, we would expect to see the volume improvement and take out the nonrecurring costs that I referred to, and you should, therefore, see a modest improvement in margin this year. I think the key thing with what have we got in consented land is that it's a constant churn. I'm absolutely delighted with the progress the team made. We came into 2023 with nearly GBP 300 million of outline on the balance sheet. And we've got 80% plus of that approved during the course of last year. And that is thanks to a complete about turn and how we go after this, a really forensic approach on a committee via committee basis. The business acting up in a joined up way both that group and with the local operating companies, putting our best foot forward, getting R&Ds to go to the planning committee meetings so they can discuss directly with the counselors, understand what their needs are and sort it out there and then rather than get a refusal at a committee and then put that back by another 2 or 3 months. And so start the process all over again. And as a result of that, we, during the course of 2023, halved our refusal rate. That still means we're getting refusals, of course. Nobody is pretending that planning is going to get any better in this country, quite the reverse. We've got nutrients. We've got water. We've got God knows what. But there are enough councils out there that if you give them the product they want. That's what we're focused on, local houses providing local jobs when they're being built for local people to own. That's what we're about. And that is resonating extremely well with our authorities that we deal with, and that's what we're seeing is making progress for us. So much to do, but we've seen a real turnaround in the business.

We will now take the next question from the line of Glynis Johnson from Jefferies.