Earnings Call: H1 2021

Aug 18, 2021

Good morning. Thank you for joining us today. I'm joined here by Mike Kalloran, our Group Finance Director, who will take you through the detailed results. But just before he does that, I'll highlight 1 or 2 key points. Despite the challenges we faced with both Brexit and COVID, I'm delighted to say we've delivered a very strong first half. We've seen sales and profit recover, and we've seen bottom line margin improve despite shortage of labor and Materials and some very significant cost increases. Particularly important for me is that we've continued to improve build quality and as a result, customer satisfaction is rising. And we've grown our industry leading land holdings. So the future continues to look good. I'll now hand over to Mike to provide more detail on the results, and then I'll come back and show you what we've been delivering on the priorities I set out in March. Right. As is usual on these occasions, what I'm going to do is focus in on the financial performance of the business for the first half of twenty twenty one. And what we're going to do is rate. Look at the key elements of the group's trading performance. The main features of the balance sheet, we'll have a close look at the cash generation of the group for the first Day 6 months of 'twenty one, and then we'll look at the longer term returns and consider the distributions that the group makes. So moving on to look at the first half trading performance of the business. We're particularly pleased with the return of greater activity by the group. You can see that Day. Our overall new home legal completions have increased by 51% half year on half year. It's important to set the context for that increase. Obviously, the prior year was significantly disrupted by the pandemic. Day. This year, we expect to return to more normal seasonal patterns of trading. We do point to Day. 2019 is a more similar profile that perhaps we should be looking at rather than the prior year, which was, as I say, significantly disruptive. However, the return of Day. The activity levels and customer trading levels in the first half of the year has been most encouraging, Together with the return of our operating margin performance to 27.6%, Day, which it's partly due to the improvement in overhead recovery on the back of the increase in activity levels, Day, which has delivered a 65% increase in profit before tax for the half year. And all that comes together in delivering a return on average capital employed of around about 38% on a rolling 12 month basis, Day, which does reflect this more normal trading delivery and velocity together with strong working capital management, Day, which we'll look at a little later in a bit more detail. So if we look at trading in a bit more detail, Day. As I say, we've seen a recovery in legal completions in the 6 months, and that is a strong performance Against a backdrop of healthy customer demand, new housing revenues have increased by 59%, And our average private sales rate per site have achieved 20% ahead of the first half of twenty nineteen, Day, which as I said earlier, is a more normal trading year to reference against. The pricing environment has been positive and supportive. We've seen a more active secondhand market, key support from mortgage lenders, Together with the substantial pandemic related government intervention measures, which obviously has supported the economy Day on a wider footing and in particular the housing market. So the group has traded well within that context. The operating profit delivery for the 1st 6 months at £483,000,000 is a strong performance. Rate. And the pricing achieved behind that, a 5% increase in average selling prices, has mitigated the cost inflation experienced Day in the period, which I'm sure Dean will touch on a little bit more detail in a little while. So overall, the first half trading performance has been robust and at rate. Healthy levels, which gives us a good deal of confidence for the second half. Moving on to the business' margin performance in a bit more detail. Day. A key element of that performance is the land cost recovery as a percentage of sales, which at 14.1% Day, is consistent with the prior year, which is in line with our expectations given that a lot of the outlets that we have been delivering new homes from have been the same have run through last year and into the first half of this year. Day. But suffice to say that has supported the delivery of industry leading gross margins at 30.9%, Day, which has been supported by that embedded quality of the group's land holdings. Looking at the land holdings in a little bit more detail, Obviously, we the group does have a very strong land position with industry leading embedded returns. As you can see in our overall total plots that are owned and under control, Day. The cost of revenue percentage of those plots, around about 86,000 plots in total, Day. Have a cost to revenue percentage of 11.9%, which is a further improvement on December last of 12.4%, Day, which really plays to the fact that the over 10,000 new plots added through into the business in the first half of the year Looking at the margins that are embedded within those land holdings, this is In relation to the owned plots, which is just shy of 67,000 plots that the group owns, Day. You can see the distribution there of the gross margins associated with all the land parcels that the group owns. And that demonstrates an embedded gross margin on a blended basis of over 32.5%, Act, which is pretty consistent with the land holdings the Group owned at the end of last year. So A continuing strong performance in terms of land replacement and provides a great platform for future growth. Turning to the balance sheet in a bit more detail, looking at that. We've got a very resilient balance sheet. You'll see a reduction in work in progress as a feature there. Day. We do intend to continue to invest in work in progress moving forward, Day. Both in terms of bringing new outlets through, which I'm sure Dean will touch on a little later. But together with the build, we're very pleased with Day. All the efforts of the teams around the business to continue to build strongly at pre COVID levels, Day. That has continued, but we intend to invest strongly in support of future delivery as we move forward. Day. And one aspect of the business that helps us deliver that is obviously the liquidity with cash of £1,300,000,000 We are able to invest in the future growth of the business and support the capital return program moving forward. So let's just have a quick look at the cash generation of the group in a bit more detail. A key Day. Elements of the management of the group remains to focus on our strategy, which supports our judgments Regarding capital deployment, that is a central key element to Day. The focus that we bring to managing the business and we've said many times that the group's cash generation is the product of Both the trading performance of the business together with the management of the group's working capital. And that we believe creates a sustainable business model, which delivers long term sustainable benefits for all our stakeholders. You can see in the 6 month period, we deployed about £200,000,000 of cash out on land, Day, which includes circa £90,000,000 of paying down outstanding land creditors. Day. We're very keen to obviously bring new outlets into the business, and that will continue to support Day. The investment in work in progress that I touched on earlier in support of the growth of the business from here. So the liquidity remains very strong. The free cash generation before capital returns within the 6 months rate was £480,000,000 and that delivers very strong net cash of £949,000,000 Which is net of land creditors of £366,000,000 the majority of which will be settled over the next 3 years. So We've got a lot of headroom to invest in the business and support its growth moving forward. Looking at the cycle, I think it's important to view the short term in the context of the long term, and it's vitally important that we do sustain the strength of the group through the cycle. And obviously, with a cash generation centric strategy, Day. Judging the scale and timing of capital deployment is critically important for all our stakeholders. Day. So we will remain focused on delivering high quality homes for all Through the management of our working capital needs and the graphs there demonstrate the long term performance Of the management and the group in being disciplined in terms of its approach to generating Day. Good healthy cash flow through the cycle for the benefit of all our stakeholders. Day. And it's important to know that where the group generates surplus capital after careful assessment by the Board, Day. We do return any surplus capital to shareholders. So if we now take a look Day. At the company's distributions, a key part of the group strategy Day, is to deliver the greater stability of returns to the owners of the business, which proves to be resilient over time. So as we can see in the first half of twenty twenty one, Day. We've returned 750,000,000 to shareholders, £2.35 per share In respect to the 2020 financial year, we accelerated the distribution, The regular annual distribution of £1.25 per share from early July to the 26th March And the top up payment of surplus capital of £1.10 per share was paid on 13th August, And that is in line with our previous commitments. However, it's important to remember that Day. The key priority is the business' needs for reinvestment, and our working capital needs will remain a priority moving forward as always. However, given the focus Of the business, the management in running the business, we are able to maintain a commitment to the current return profile distribution of per share in early July, albeit it was accelerated this year. And the top up payment will remain subject to regular review in line with our existing policy. So these capital returns are an important element of rate. Persimmons longer term returns, which are particularly robust. We can see this in Day. The longer term performance of the business, on the left hand side, Day. We can see the longer term historical performance, both in terms of margins, capital employed, and as a result, Day. The return on average capital employed over a 20 year timeframe, which averages around 22.5 percent including land creditors. And that has to be compared with the cost of persimmon equity currently around 7% to 8%. Day. So yes, it is a bit of a rollercoaster ride at times, but overall, The return on capital delivered from the business remains very healthy. Day. And that goes hand in hand with delivering the longer term track record of strong returns, which is in the best interest of all our stakeholders. And at this point, I'll hand back to Dean to review the performance of the business overall for the first half of the year. Thank you, Mike. As last time, I'll begin with our priorities. Back in March, I spoke about our key priorities for the business. Director. I remain relentlessly focused on these, and I'm pleased to report progress against each in the first half of the year. Against our commitment to build right first time every time, we've seen a reduction in the number of incidents from warranty providers and an improvement in both our current HBF build quality and customer satisfaction scores with satisfaction now at about 92%. These measures are also important in my second priority, reinforcing trust in the brand. And on that basis, we adopted industry leading positions on both cladding and leaseholds earlier this year, and we're already making good progress on both. Our growth in private sales rates in the first half Day, was not just above the same period in 2020, but also the first half of twenty nineteen, with customer satisfaction scores running above 5 SAAR. Industry leading margins are a key priority for me. And so I'm pleased that our new homes operating margin has improved 100 basis points in the period. Environmentally, our carbon reduction targets have been accredited by the Science Based Targets initiative, and we've moved to fully renewable energy for our offices and manufacturing facilities. Across all these five priorities, I'm encouraged by our progress. We'll continue to relentlessly focus on them because they'll enhance our existing assets and drive greater efficiency as we seek to maintain our industry leading financial performance. In order to support these priorities, we're investing in 4 areas of the business to drive commercial opportunity and growth that will ensure we maintain a resilient financial position. These areas are our people, our technology, our build quality and our land holdings. And in each key feature, we have again made important progress so far this year. I'll address both the people and the technology points by focusing on our site management teams. During this year, I've continued to visit as many sites as I can and I remain really impressed by the quality of our people up and down the country. Not least in the last 6 months, they've managed the challenges of the pandemic alongside labor and supply challenges to collectively deliver more legal completions at higher rates of customer satisfaction whilst maintaining industry leading margins. We are stepping up our investment in our site management teams. I want to develop and retain the best talent as well as provide enhanced tools to support them as they deliver the quality and efficiency improvements we seek. As well as training programs, we are investing in digital technology to support on-site improvements as well as enhancing our customer service. All this is helping us build right first time, Drive savings and make for happier customers. And this investment in technology extends to FibreNest, our full fiber broadband service we're providing to customers. Day. Fiber Nest is rapidly expanding its customer base as we connect new sites to the network. Customers increasingly expect A Broadband Connection When They Move In and Fiber Nest gives us more opportunity to meet that demand. And of course, with the rise in home working, fiber and s ultrafast broadband has proven even more important and attractive for our customers. In other areas, we've also made important recent progress and demonstrated our commitment to put customers first. The industry leading commitments on cladding removal and the leasehold undertakings we agreed with the CMA demonstrate that we're acting to put customers first. We're making good progress on both. On cladding, we've written to all relevant management companies and building owners and have already completed works on 2 buildings. We're already in touch with many of these whole customers who want to take advantage of the extended arrangements we put in place. So in both respects, we're providing certainty and reassurance for persimmon customers and sending a signal about the company we now are. And that also manifests itself in build quality. As I've said, our focus is to build right first time, every time and deliver both outstanding service to our customers as well as good value. We recognize our customers are making what is likely to be the single largest purchase of their lives so far when they buy a home with us. But another crucial aspect of the Perciman Way is that it's driving greater efficiency. By improving our consistent delivery of quality, we create value. Let me give you one example. We've reviewed our technical drawings to improve consistency and remove duplication and inefficiencies. That might sound simple, but across a house builder that size of persimmon, it requires a lot of commitment and as a fundamental part of Build Right First Time, Every Time. By continuing to improve key elements of our Homes Director, we've improved customer satisfaction and reduced the need for aftercare services. For me, that's a key efficiency. And we backed that by continuing to create what we believe will be the industry's largest team of independent inspectors, Director, empowered to ensure quality standards are met at key construction stages. Internally, we've launched the Construction Excellence Awards to reward best site teams across the business and I'm looking forward to announcing the 1st national winner later this year. So these are just some examples of a range of initiatives we now have in place. I think they'll more than pay for themselves as our continued drive for quality secures greater efficiencies, which in turn creates enhanced value. I want to return now to my 4th area of investment to drive our growth. 1 of the greatest assets of Persimmon is our high quality land holdings. We've added over 10,000 new plots to our land holdings in the 1st 6 months of the year. These are across 48 locations and they maintain our challenging return requirements. I'm pleased that we have brought some great sites and they'll, of course, strengthen our platform for future growth. Indeed, we now have a total land visibility of around 125,000 plots. We anticipate 85 new outlets will be brought into construction by the end of this year, and we anticipate a similar number of opening in the 1st 6 months of 2022, subject to planning. Inevitably, planning slowed during the pandemic and securing timely permissions is obviously key. But nonetheless, we believe we now have a new momentum in our pipeline and will provide the opportunity to increase our output in the coming years. You've seen that we have a strong financial position to build on as we seek to create further value for our stakeholders. We have, as I've said, great assets to draw on. The strength of our land holdings and our excellent liquidity Director, provide both the confidence that underpins strong shareholder returns and provide a platform for disciplined growth. Of course, there are challenges, but we're managing to build cost inflation with price increases in the homes we sell and by driving further improvements in build quality and by enhancing our capability to meet demand with 5 Star Homes. Day, this should mean the margin will remain resilient. Our unique off-site manufacturing capability will also help. Through our Bricks and Tiles and Spaceport Timber Frame Factories, we have a unique set of assets that help with security and efficiency of supply. With the broader supply challenges the industry faces, This has proven particularly helpful at times this year. They continue to provide an important asset as we seek disciplined growth from a strong platform. We continue to see good demand in the market. Our forward sales are strong and customer inquiries remain above 2019 levels. As it is, we expect to deliver a 10% increase in completions this year and expect the momentum to continue into 'twenty two and beyond. With great assets and a strengthening financial platform, I believe our outlook is exciting and positive. So in concluding, I'd like to wrap up with what I see as 3 of the fundamental strengths of Persimmon for all its stakeholders. Director. Firstly, the inherent strength of our balance sheet, which will support both our development and importantly, which underpins our payment of dividends. Secondly, We're strengthening our already strong land holdings. We're buying a lot of land at the moment, and that's going to allow us to sell into a strong market for the foreseeable future. And thirdly, and I'll talk today about changes that were taking place and how we manage the company more efficiently. I'm determined to also drive value from the improvements we are making both to our service and build quality, so we deliver 5 star homes more consistently. These fundamental strengths, coupled with our expected strong second half to this year and good momentum into next means I'm looking forward to next year and the future with confidence. Thank you.