Earnings Call: H1 2020

Aug 18, 2020

Good morning, and welcome to Persimmon Plc's Half Year Results Presentation. The first half of the year has been a period of focused delivery of our purpose, producing a resilient first half performance for the benefit of all stakeholders. Today's presentation will start with me looking at company purpose and strategic focus. I will then pass on to Richard Stenhouse to talk about how we responded to COVID. I will then pick up on operational review. I'm past to May to talk about the financial review, and we'll finish up with me looking at our platform for future growth. Over the last 2 years, I have ensured our company purpose And our vision of how we achieve that purpose of long term sustainable returns for all It's fully embedded within the business. As you would expect, now that it is embedded in the business, The company purpose has provided a focus for the delivery of the following three key areas. Firstly, how we responded to the threat of COVID-nineteen. Secondly, the group's half year performance and finally, it has provided a strong platform to deliver the country's homes. I will now pass you over to Richard, who will update you on how we responded to the challenges of COVID-nineteen. Thank you very much, Dave, and good morning, everybody. Before I delve into the main body of my presentation, I'd just like to draw out a couple of important points. The agile and thorough measures we have introduced have helped support this set of results. And second, The actions we have taken will ensure Persimmon is well positioned to be a second wave of the coronavirus. Now with that in mind, I'd now like to describe how Persimmon has focused on the safety of everybody connected with the group. We have prioritized The health and safety of our workforce, colleagues, customers and wider communities. And as you would expect, our response was swift and effective. Throughout, we've aligned ourselves to official guidance, whether that's in England, Wales or Scotland. And this has enabled us to produce a comprehensive set of safe operating procedures backed up by supervision and enforcement. What this means is persimmon has a COVID secure way of working. Now we've also ensured we've minimized and contained the disruption caused. Psiman, as a national house builder, took a very early decision not to take advantage of government support measures. And throughout, we've sought to maintain our operational momentum. Well, this means we ensured We could an efficient return to work when we were permitted to do so. This means we paid all our staff in full throughout. We maintained a presence in our regional offices to support our operations, and crucially, We enabled home working from the outset. This meant that we could progress our business through difficult circumstances throughout this period. And with the view to the future, I personally have been very impressed by the positive self help measures everyone connected with the group has adopted. And this is exemplified by the training undertaken throughout this period, much of it online, which has received very positive feedback from all who participated. So within this framework of safety and business agility, now like to look at our construction sites. We started an orderly shutdown of our sites through April. This was to make them self insecure for obvious reasons, but also to protect our customers who are nearing the purchase of their home at this time. The Persimmon's operational agility enabled a safe and efficient restart of our build programs. We introduced a Passport to work scheme for all workers entering our sites, and once again, as I mentioned previously, This is backed up by supervision and enforcement. This means that we have a proven operating model to return to the permitted operational capacity. Our flexibility was replicated with our sales process too. Throughout the lockdown, we maintained a sales presence, and we were particularly pleased with our new online reservation procedure. Now that our sites have all reopened again, we have been very encouraged by the level of sales activity since the end of the lockdown. Now persimmon's customers are at the forefront of our business, and we sought to maintain contact and communication with them throughout this period. So at the outset, it was emergency appointments only for obvious reasons. But now that we are unable to enter customers' homes where they permit us to do so, once again, we have introduced a passport to work scheme backed up with enforcement and supervision. Even before moving in, a customer can Inspect their home and learn about it safely through innovations such as our digital new homes presentation. So drawing all this together, a flexible and comprehensive approach. We have produced detailed health and safety protocols in line with official government guidance. All areas of the group can react to local and national disruption if this occurs. We are maintaining a COVID secure way of working. And should there be a second wave of the coronavirus, we are fully prepared to deal with the challenges this presents. Thank you very much. As you can see from Richard's presentation, the challenges of COVID-nineteen were responded to sympathetically and with agility. Now I'd like to take you through the 5 key areas of business focus in half one twenty twenty. Firstly, let's look at financial performance. In view of the decrease in numbers, In normal circumstances, I would not be highlighting numbers going backwards. However, I believe these numbers to be industry leading, and I am proud of what we've achieved. We still achieved 4,900 completions, even if that was a 35% decrease. We still achieved a margin of 26.6%, which is industry leading. And I'd like to highlight the ROCE of 32.5%, which I believe is the most important indicator and is a true test of how well a business is run. I believe these results prove how resilient The financial performance of the company has been even in these unprecedented circumstances. But it's not just about financial metrics. I would like to draw your attention to the WIP position. We are currently carrying 14% more equivalent units than this time last year. Our rate as a percentage of forward sales is at 66%. This places us in a great position to take advantage of our current forward sales position. PacSun is committed to delivery for all stakeholders, and I consider shareholders to be a very important stakeholder. That is why I'm pleased this morning to announce we will be paying a 40p dividend. We are confident we can pay this modest payment without in the long term future of the company. We will review a further payment later in the year. We are now seeing signs that I have embedded in place the Customer Care Improvement Plan within the business. We have made significant progress across a suite of measures. In particular, I'd like to draw your attention to the home buyer retention scheme, which is driving customer and behavioral benefits within the company. And I was proud to say that this has been recognized by the consumer code for the industry as best practice. Despite what some people thought within the industry, this has been achieved without major financial investment, And I do not envisage we will require significant further investment over what we have already made. We are seeing some strong signs of progress on all our results. I know The HBS star rating is only 1 metric. However, it is important within the industry. We are currently scoring 89.5% for the current year. And very encouragingly, Since the start of January, we've been trending at a 5 star level. Persimmon is committed to providing homes for all. We have produced a company with 31 regional offices with the ability to flex output up to 20,000 units. But just as importantly, we have positioned the business in what I believe is the market sweet spot. Our average selling price is 17% below the national average U. K. Selling price. Importantly to me, we have also continued to focus on first time buyers, with 50% of our purchase has been from that background. We make more first time buyers' dreams of buying a new home a reality than any other house builder. I also firmly believe in our long standing commitment to providing opportunities for all. We have continued to provide career development opportunities for our staff. A further 95 colleagues were promoted during half one twenty twenty. We continue to make significant investment in our staff with over 5,700 training days provided. And this is something which is very personal to me, and I was proud that the work that we do within our business is being recognized by the Social Mobility Pledge as industry leading. Despite all the challenges we've outlined, We have continued to treat our colleagues fairly. As you've heard from Richard, We retained all our staff on full pay, and every member of staff received a pay increase and bonus still. Because of the culture that I have embedded in the business, I am first to recognize staff have never been more important in these uncertain times and in periods of adversity. Our people have certainly stepped up to the mark. We are also committed to building space sustainable homes. We have now established a dedicated resource, and work is underway of providing a carbon based science target. Also, we've identified environmental champions within the company to promote these issues so we're more aware. But it's not just about building sustainable homes. It's also about how we support our communities and our supply chain, who depend upon the success of the company. We have shown strong leadership in paying our supply chain and supporting them back to work to support their livelihood. We do not take lightly our obligation to the 50,000 people who depend upon persimmon lightly. There can be little doubt that we stepped forward in all respects on this. While at the same time, Investment has continued in our local communities with over £670,000,000 invested in the last 18 months. Now I'd like to pass over to Mike. Thank you very much, Dave. Good morning, everybody. What we're going to do now, Having understood our response and features of the performance that Dave's outlined Is look at the financial performance in a bit more detail. We're going to look at spend a few moments to look at the group's trading Performance in the first half of the year, we're going to look at the main features of the balance sheet, review the cash generation and consider capital returns in a bit more detail. So moving on to the first half performance, trading performance The business, it's obvious that the disruption to our bill programs has the consequential effect of reducing our legal completion delivery. So that is abundantly clear in those numbers. Dave has already highlighted The volume shortfall or drop compared with the prior year at 35%, leading to a revenue a lower revenue level of 33%, down half on half. However, as Dave has already touched on, we believe that our operational continuity Through the period disruption, which was supported by our early decision not to furlough our colleagues, enabled us to mitigate the impact of the disruption over recent weeks, And we'll touch on that in 1 or 2 other areas of the financial performance as we move through. So in terms of the impact of essentially that revenue fall, you can see that our pretax profits, we Delivered just shy of €300,000,000 profit before tax in the first half. And importantly, our selling prices have remained firm through the first half of this year, which demonstrates a degree of confidence in the current market of our customers. And also, when you marry our ability to support our customers Through the continued support and as Richard's pointed out, the ability to work from home remotely, We were able to mitigate the challenges that emerged over recent weeks as part of the government's measures to combat the pandemic. In the profit bridge there, you can see the major impacts on the profit from last year to this. Revenue, as we've already touched on, is the main driver. I'm particularly proud of the fact that our margin performance has remained very resilient based on resilient selling prices. So moving on to look at our margins The impact on our overhead efficiency becomes clear. When you look at our gross margins and operating margins, With the reduced volume in the half year, whilst we're continuing to invest in our workforce, as Richard mentioned earlier, has led to a drop Efficiency, if you will, in terms of that overhead recovery, which you can see is magnified both in terms of percentages and in terms of the per unit statistics when you look at the half year Income statement. So looking at the margins there, the key thing also that comes across is the strength of our Land holdings in supporting margins, where you can see the land cost recoveries have continued to run on at lower levels, which we believe is an industry leading performance based on the high quality land holdings the group owns and controls. A key statistic there to focus on is the cost of revenue percentage of the home and control plots at 12.7% at the end of June 2020, which again continues to demonstrate The approach the group brings to Landry placement and the fact that it continues to focus on a disciplined criteria set in investing and supporting bringing us into the group. And because of that, the embedded margin within the business, as demonstrated in the graph there, is again industry leading based on the long term approach to managing the cycle and deploying capital at the right points in the cycle to replace our land investments. Another area of the business that we've continued to invest in over the medium term has been in self help measures. And essentially, these are focused on delivering greater security over key material availability and cost with a view of the long term cycle. So that we've seen over recent times continuing to work for the business well. We're proud to have opened A new roof tile manufacturing plant on our Haworth manufacturing hub Site where Brickworks is already up and running, and we're pleased to see that Tile Works is now starting to deliver roof tile to our 31 group businesses, which will continue to move forward. And I think it's important to note that this investment that has undertaken over recent years not only helps persimmon, but it also helps the industry, both in terms of improving supply chain capacity and supporting industry output. Turning to the balance sheet. It's very important to recognize the strength of the group's financial position. Dave is going to mention the wider aspects of the platform the group enjoys. But focusing on the financial Platform for the second half of this year, the immediate future and the medium term future. It's important to recognize that we've got an excellent platform for future growth. Dave mentioned the investment in work in progress. You can see over the position in June last year, we've invested around about £200,000,000 in additional work in progress, Not only to support quality and customer service levels, but also to support more customers in that choice of buying a new build home in the current circumstances. Another feature of The strength of the position of the business is the management and And design of how the group acquires its land, and that delivers a very Strong profile of land commitment over time and land payment over time, and that is demonstrated by The continued settlement of land creditor obligations, which is reducing at this point in the cycle Just at a time to open up further headroom that the group can take advantage on of as we move forward in identifying appropriate new opportunities in the land market as we move through the next few months and beyond. So cash generation is very important to the business. Cash At June of £829,000,000 very similar to where we closed last year. So we believe that is a very resilient Cash performance, demonstrating strong liquidity that the group enjoys. And as always, the cash generation of the business is a combination of trading performance and balance sheet management. And it should be remembered that this year's this half year's cash generation Also accommodates an acceleration of around about £90,000,000 of Corporation tax that has been accelerated from next year. So we have been able to add that well In terms of our cash generation, in delivering a net cash position that remains very strong, So the €454,000,000 net cash position there is presented net of our outstanding Land creditor obligations, which I mentioned a second ago, which provides a lot of Confidence and clarity in terms of the group's liquidity to manage its business It's business operations and land replacement moving forward. So looking at the cycle, thinking ahead, This is historical data in terms of the cash generation of the business over many years, which demonstrates a very strong performance looking back, which gives us confidence for the future. The half year, as I say, the half year for this year does include the acceleration of the corporation tax payment. So that should be added back to Cabare Apples with Apples. But the key thing that comes across in this slide is demonstrating the judgment around replacing land at the right time in the cycle to ensure that the cash generation remains healthy. But secondly, the value embedded through those activities is there for the future and can be released to the benefit of all stakeholders as we move forward. And as Dave mentioned earlier, that is critically important. Shareholders are an important stakeholder group to the business. Reinvestment in the business is our top priority. It remains our first priority to continue to invest in the working capital of the business for the future. And I think that the balance sheet demonstrates the priorities that we've placed on that. But also, We have to in response to the impact of the pandemic, we have to cancel the Intended return of surplus capital that was scheduled for early April, And we have to postpone our intended final dividend for last year, 2019, that was scheduled to be paid on the 6th July. So it's great today that we can announce that We intend to pay a modest interim dividend on account of that full year 2019 final, given the strength of the performance of the business through the first half. And as Dave has already mentioned, we'll continue to review further payment possibilities through the rest of this year and that matter beyond. And in that respect, I think it's appropriate to look at our longer term returns Looking backwards, and this is we've chosen a 20 year time frame here. So this is a through the cycle view of life, if you will, both in terms of internal metrics and, I guess, external metrics. So a 20 year view of our average return on capital employed, Which has been around about the 22% level on average over that 20 year period. So when compared with the cost of our equity, which I guess it's maybe 8%, 9%. That demonstrates the substantial value creation over such a long period of time. And then secondly, looking at the total shareholder return, where The group has delivered over 2,700 percent of total shareholder return over the last 20 years compared with the FTSE at just over 100%. So I think that The group has performed well over an extensive period of time, demonstrating The benefits of the strategy that we pursue in terms of managing the housing business through a cycle. Quickly returning to the group's current position. Dave's already mentioned the strength of our forward sales. It's critically important at this point in the market to have a strong forward sales position, £2,500,000,000 of forward sales, that's over 20% ahead of the same point last year. Not only that, we have enjoyed particularly strong current sales over recent weeks, where our private weekly sales per site Around about 49% ahead of last year since the start of July, which is an outstanding performance and speaks volumes for the hard work and dedication of our sales teams throughout the business And also the location of our sites and the quality of the product that we and the homes that we deliver And the experience for that matter that we deliver to our customers. We have 55 around about 55 new outlets here marked to open through the second half To continue to strengthen our outlet network, it's a very key point in terms of future home delivery. Selling prices remain firm. And I think that we can now say with the build strength that Dave's highlighted that our second half delivery, we would expect our volume to be at least in line with the second half of last year. So this point, I'll hand back to Dave just to broaden out the some thoughts on The strength of the group's platform moving forward. Thanks very much. Having listened to what we have put in place, I want to look forward to our strong platform to deliver the company's horns. This is down to the skilled management of the housing cycle, as you've heard from Meg. And I've identified these 5 key parts I have embedded in the business and culture, all of which are fundamental to the future success of the company. I believe To run a business, you need to have options. Otherwise, decisions are forced upon you, which potentially can be detrimental to the business. The strength of our balance sheet gives us options. As Mike has outlined, At the end of June, we had £829,000,000 in the bank, no debt, A high quality land holdings, which puts us in a strong position to navigate future challenges and take advantage of opportunities. Now let's have a look at our cash deployment. As you've heard from Meg, the key to managing the housing cycle is how you deploy and disinvest capital at the correct time in the cycle. In housebuilding, This manifests itself in how you manage your land holdings. The strength of our land bank means We don't need to buy land. We have total visibility of over 133,000 plots. The quality of land bank we've put in place gives us choices. As we have always done, we will continue a disciplined land acquisition strategy based upon a strict criteria. But importantly, we have the ability to deploy more cash if we see compelling opportunities to reflect risk v reward. The results of my customer care improvement plan also give me confidence for future growth opportunities. The systems and processes are proven to be both efficient and resilient. Culturally, The customer is now at the center of the business. Confidence To grow our output is now there at the appropriate time. I believe we now have the ability to deliver high quality customer service and volume. We have also created an infrastructure to take advantage of the land, balance sheet strength and the benefits of our customer care improvement plan. We have 31 operating companies with the ability to increase output at the appropriate time. We have an excellent range of choices across the country at an appropriately advanced build stages. But most importantly, we have created a senior management team with a proven track record of delivery. This is something I am really proud of. The strong position has been achieved by placing the company purpose at the heart of the company. Let no one be in any doubt Persimmon is placed in a great place for the future. As we have heard from Mike, we have a proven track record of managing the housing cycle. We have an industry leading land bank. We have an industry leading balance sheet. The customer care improvement plan is embedded in the business. But most importantly, we have exceptional quality of colleagues. This will be my last presentation, and I am really proud I'm pleased of what we've achieved over the last 2 years. Because of it, I'm absolutely confident persimmono and our people will continue to deliver the company's new homes they need and deliver for all stakeholders.