Persimmon : Half Year Results 2023 4 items

HALF YEAR RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2023

Disciplined management during market uncertainty; building a platform for future growth

Persimmon Plc today announces its half year results for the six months ended 30 June 2023.

Dean Finch, Group Chief Executive, said:

"Against a backdrop of higher mortgage rates, the removal of Help to Buy and significant market uncertainty, Persimmon has delivered a robust sales rate excluding bulk sales whilst growing the private average selling price in our forward order book and also securing cost savings. We are on track to deliver profit expectations for the year and are building a platform for future growth.

"Our private sales rate has remained broadly consistent throughout the period resulting in a private forward order book that is now 83% higher than it was at the beginning of the year, despite controlled use of sales incentives and limited recourse to investor deals. Our pricing overall has remained resilient with continued positive momentum in the forward order book. However, the reduced volumes in the first half of the year has negatively affected our operating margins as we predicted earlier in the year. As we look forward, we expect increasing completions to result in improving operating margins.

"We have been proactive in managing our cost base however, this has been done without losing our focus on quality. We were delighted to retain a five-star customer service rating in the period and have made very pleasing progress in our Trustpilot scores. The Group's national network of outlets providing high quality products at a range of attractive prices and an improved brand reputation are crucial strengths in this market.

"We have maintained targeted investment in exceptional new land opportunities and enhanced key capabilities to deliver high quality homes for customers consistently. Subject to the challenges in the planning system we are determined to grow our outlet numbers in a disciplined way. Our new Space4 factory and investment in TopHat modular manufacturer will help us drive even greater efficiencies in the coming years. We are carefully strengthening our operations and national outlet network to position ourselves for future growth while protecting margins.

"With the historic under-supply of homes the longer term outlook for housing remains positive. Persimmon has a proven track record of delivering strong returns through the cycle. I am confident that the combination of a relentless focus on our key enduring strengths while enhancing key capabilities, will again drive strong returns through the next cycle."

Financial highlights	H1 2023	H1 2022
New home completions	4,249	6,652
New home average selling price	£256,445	£245,597
Total Group revenue1	£1.19bn	£1.69bn
Underlying new housing gross margin2	21.5%	31.0%
Underlying operating profit3	£152.2m	£440.7m
Underlying operating margin4	14.0%	27.0%
Profit before tax	£151.0m	£439.7m
Earnings per share	34.4p	106.5p
Interim dividend per share	20p	-
Cash at 30 June	£0.36bn	£0.78bn
Land holdings at 30 June - plots owned and under control	84,751	89,052
Underlying 12 month rolling return on average capital employed5	21.1%	30.9%

Trading highlights

• 4,249 new home completions in H1 (2022: 6,652), reflecting the lower forward order book coming into the year following the market challenges after last Autumn's 'mini-Budget'
  o Group private average selling price of £288,327, up 8% year on year, partially reflecting a greater proportion of larger homes sold
  o Group average selling price of £256,445 up 4% year on year
• Sales rate of 0.59 for the period (2022: 0.91), broadly sustaining the higher than expected rates seen in the first quarter and secured with the controlled use of incentives and investor deals
  o Average incentive levels of 3.2% in the period on the Group's private sales (H2 2022: 1.5%)
  o Investor deals accounted for 0.03 of the sales rate in the period; continue to assess approaches from interested parties on a case-by-case basis

• Cash at 30 June 2023 of £357m, after £192m in dividend payments and £182m of land creditors paid in the period o Continued close WIP and cost control, to manage cash and margins while maintaining capability for upturn o New revolving credit facility signed in July, increasing to £700m and extending to July 2028; includes
  sustainability-linked metrics
• Interim dividend of 20p per share to be paid on 3 November 2023, to shareholders on the register on 13 October 2023

Operational highlights

• Maintained five-star customer satisfaction rating for second year running and have made good progress on our Trustpilot scores
• Excellent progress on build quality with a c.50% reduction in Reportable Items6 over the last year; building homes customers can rely on at a price they can afford
• Continued targeted investment in vertical integration through a new Space4 factory and TopHat, a modular home manufacturer
• Maintained positive progress on building safety remediation programme; many active tenders and works on-going; 36 of 80 developments completed; £350m provision announced in March remains unchanged
• Continue to engage with the Competition and Markets Authority Housing Market Study

Land and planning highlights

• Selective approach to land buying with 3,245 plots brought into the business across 15 locations, maintaining good coverage across the country
• Selling outlets remained broadly flat in the period (June 2023: 273; December 2022: 272)

• 1. Our ambition remains to return to pre-Covid outlet numbers in the medium term, subject to planning constraints
• Sharpened approach to planning through local engagement with 5,102 plots across 33 sites achieving detailed planning consent in the period
• 1. Represents 120% of completions in the period; focus on seeking permissions on already owned land

1. Some progress in addressing nutrient neutrality through proactive local engagement on mitigation

Outlook

• Current forward sales position (including 5 weeks post period end) of £1.6bn; 30% lower year on year (2022: £2.2bn) o Forward private sales of £875.9m, up 83% compared to 1 January 2023 (£478.5m)
  o Forward private average selling prices up 0.9% compared to 1 January 2023
• Full year completions expected to be at least 9,000, the top end of our previously indicated range, with operating profits in line with expectations given stubborn build cost inflation in the period
  o Prevailing build cost inflation of around 5%, we expect it to moderate further in the months ahead

Footnotes

1. The Group's total revenues include the fair value of consideration received or receivable on the sale of part exchange properties and income from the provision of broadband internet services. Housing revenues are the revenues generated on the sale of newly built residential properties only.
2. Stated on new housing revenues of £1,089.6m (2022: £1,633.7m) and gross profit of £234.0m (2022: £506.2m).
3. Stated before goodwill impairment (2023: £5.8m, 2022: £3.2m).
4. Stated before goodwill impairment (2023: £5.8m, 2022: £3.2m) and based on new housing revenue.
5. 12 month rolling average calculated on operating profit before goodwill impairment of £9.2m (2022: £5.5m) and legacy buildings provision charge
   of £275.0m (2022: £nil) and total capital employed (including land creditors). Capital employed being the Group's net assets less cash and cash equivalents plus land creditors.
6. A Reportable Item is an area of non-compliance with NHBC standards. The item is rectified fully before completion of the home.

For further information please contact:
Victoria Prior, Group IR Director	Olivia Peters
Anthony Vigor, Group Director of Policy and External Affairs	Teneo
Persimmon Plc	[e-mail]
Tel: [phone]	Tel: [phone]

There will be an analyst and investor presentation at 09.00 today, hosted by Group Chief Executive, Dean Finch and Chief Financial Officer, Jason Windsor.

Analysts unable to attend in person may listen live via conference call by registering using the link below: https://register.vevent.com/register/BI721dc6c73bb042db9d2365131ef60590

The presentation can be viewed via the webcast using the link below: https://edge.media-server.com/mmc/p/gdpdpt3a/

An archived webcast of today's analyst presentation will be available on www.persimmonhomes.com/corporatefrom this afternoon.

CHIEF EXECUTIVE'S REVIEW

Discipline through uncertainty; strengthening future platform

Overview

Persimmon is on track for the full year to deliver results in line with expectations. In the period we have delivered a PBT of £151m, will pay an interim dividend of 20p per share and have a cash position at 30 June of £357m. Despite the significant economic, political and geo-political challenges of the last 9 months Persimmon continues to actively protect margins. Given the strength of our land bank, our focus on cost efficiency and our continued land buying expertise, this will continue.

For the full year we expect to deliver at least 9,000 completions, the top end of our previously indicated range. In the period, the Group's average private weekly sales rate was 0.59 net reservations per outlet per week. This broadly maintained the improved rate seen in the first quarter of the year following the challenges at the end of 2022, but is around 35% lower than the strong comparator of last year. Incentives have also been used in a very controlled manner at around 3.2% per plot, split roughly 2.2% cash and 1.0% non-cash. In the 5 weeks since the period closed, sales rates have been 0.41, compared to 0.69 for the same period last year. Cancellations have remained around typical rates for the year so far at c.18%.

Private average selling prices in the current forward order book are proving resilient, up 0.9% since the start of the year. Our current forward sales position is £1.6bn, 30% lower year on year (2022: £2.2bn), reflecting the Group's lower sales rates. This forward sales position is, however, over 49% higher than at the start of the year. Affordability remains the key challenge, with mortgage availability at higher loan-to-value ratios and the removal of Help to Buy impacting First Time Buyers in particular. The proportion of sales to First Time Buyers has dropped to 34% in the period, compared to 42% in the first half of last year.

In the period 4,249 completions were delivered. This is a reduction of 36% compared to the first six months of 2022, largely due to beginning the year with a lower forward order book following the market challenges experienced after last Autumn's 'mini-Budget'. The Group's average selling price of £256,445 (2022: £245,597) is up 4% year on year, partially reflecting the delivery of a greater proportion of larger homes to our customers. Underlying selling prices have remained broadly flat for the period. Together these lower completions combined with price growth has resulted in housing revenue declining by 33% to £1.09bn (2022: £1.63bn).

As anticipated in the 2022 full year results announcement, the net impact of house price inflation in the period against stubborn cost inflation, lower volumes and increased sales and marketing costs has reduced the Group's housing gross margin¹. This together with a higher proportion of homes sold to our housing associations partners (2023: 23%; 2022: 17%) has adversely impacted housing gross margin by 950 bps.

	%
Housing gross margin H1 2022	31.0
Inflation impact	(4.2)
Sales rate	(2.3)
Increased proportion of completions to housing association partners	(0.9)
Sales incentives and marketing	(2.1)
Housing gross margin H1 2023	21.5

The Group generated an underlying housing operating margin2 of 14.0% (2022: 27.0%).

In response to these pressures, we have rigorously sought new opportunities for efficiency and cost savings, especially in light of prevailing build cost inflation of around 5%, with a clear focus on protecting margins. As such, Persimmon's well established and disciplined cash and cost management processes are being stringently applied as we use incentives in a controlled way, carefully monitor land and work in progress investment and diligently control our already lean overhead cost base. With a total fixed cost base of £281m, we believe we compare favourably within the sector.

We are also looking to the future and have sought targeted investment, in excellent new land opportunities and our vertical integration, to enhance our capability to respond rapidly and effectively in an industry-leading way to improved market conditions.

Delivery on strategic priorities

In line with our strategic priorities, our experienced management team has focused on the following in the first half of the year:

• Maintaining a disciplined, proactive approach with cost and cash controls in place
• Vertical integration to provide efficiency and resilience in supply
• Improving sales effectiveness
• Land and planning success
• Continued focus on build quality, safety and sustainability

Maintaining a disciplined, proactive approach with cost controls in place

Persimmon's senior management teams have significant experience in applying rigorous cost control throughout the cycle, focusing on protecting margins and cash generation. Drawing on this experience, the Group acted quickly to enhance its already strong investment discipline and working capital cost controls in the fourth quarter of 2022 to protect our cash position and provide the flexibility to pursue attractive growth opportunities in the longer-term. This approach has been maintained in the first half with additional cost control measures put in place and stronger central oversight of spend within the regional businesses to balance the need for significant discipline, alongside targeted investment in long term success.

Our cost discipline is focused on four areas of 'smart' savings.

First, we are reviewing value engineering across the Group to share lessons and opportunities for efficiency, as well as further procurement savings. This involves a plot-by-plot,site-by-site review to identify areas for cost savings or value enhancement that do not compromise quality. This review typically considers, for example, whether we are optimising: the house type range on a specific site; the external works (e.g. drives, patios and retaining walls); and, the construction methods used, including whether there's more opportunity to use our own brick and tile products more widely. This enhanced review and oversight of site costs is being complemented where possible by the expanded use of procurement framework agreements and frequent supplier negotiations to reduce the impact from build cost inflation and capture any pricing opportunities as soon as possible.

Second, in an era of significant affordability challenges alongside cost inflation, we are identifying opportunities to secure savings in specifications that are less important to customers and do not compromise on quality. We believe this review could identify savings of up to £1,800 per plot. Persimmon's mission is ever-more relevant: to build homes customers can rely on at a price they can afford. In identifying opportunities for build cost savings, this work is a crucial part of achieving that.

Third, we are reviewing our sub-contractor pricing on a more frequent basis to identify opportunities to secure increased savings. We are actively retendering sites to identify savings. Just as we absorbed many price increases from subcontractors in recent years, so we need to share the cost pressures in this new challenging environment. While there are of course variations across trades, groundworker, bricklayer and dry liner costs are in general coming down, for example. National infrastructure projects like HS2 continue to create pressures in the broader sector, however the overall inflationary pressure is reducing and we are working proactively and in a detailed manner to capture it.

Fourth, Persimmon is already a 'lean' organisation within the sector but we of course are keeping our overheads under constant review. A recruitment freeze across the Group has seen headcount reduce by nearly 300 in the period. Further reviews are on-going and we are targeting £25m annualised saving, which will benefit our 2024 operating budget. We will continue to balance the need for cost savings with our aim of ensuring the company has the ability to respond quickly to an improvement in the market to achieve our objective of growing fastest in the industry - while delivering industry- leading margins - as market conditions improve.

Underpinning all of these smart savings initiatives is the further enhancement of our disciplined control of Work In Progress to manage cash. This enhanced management has more closely matched build rates to sales with build rates in the period running at around 26% lower year-on-year at 195 units per week, while also delivering targeted progress on our build given the low number of equivalent units (c. 3,900) that we entered 2023 with. We have ended the period with around 4,700 equivalent units providing benefits from improved quality and greater customer choice. New outlet openings are also rigorously reviewed on a similar basis: balancing the cash investment required with likely customer demand and ensuring we have a strong platform for future growth. Build rates and outlet openings are kept under constant review by both local and Group management teams.

Vertical integration providing efficiency and resilience in supply

A key differentiator is Persimmon's vertical integration, especially through our BrickWorks, TileWorks and Space4 timber frame factories. These facilities provide a cost-effective, resilient supply of high-quality materials. As part of our continued review of costs and efficiencies these facilities are providing further opportunities.

At the start of the year we altered the shift patterns at our factories to ensure our manufacturing facilities remained a low cost solution for the business, but we have the ability to ramp up production quickly when market conditions improve.

We have also reviewed where we can expand the use of these products by operating regions. We have increased the use of our own products to 55% of all bricks used (2022: 41%). A switch to our own brick products typically secures a £2,000 per plot saving.

Our vertically integrated approach demonstrates both our cost-efficiency focus and how we are investing to enhance our capabilities to grow quickly when the market conditions improve. In June we secured planning permission for our new Space4 factory in Leicestershire. This next-generation factory will use advanced automation to provide up to 7,000 units a year and allow even more of the frame set to be built in the factory. The new factory will have the capability, for example, to include windows and pre-drilled electrical and plumbing spaces amongst other advances. Timber frame is currently seven weeks faster to build than traditional homes. We expect these new frames to improve that by a further two weeks at least.

Our investment in TopHat, announced in April, adds further exciting opportunities. As part of their innovative modular units, TopHat has developed an industry-leading brick façade. There is an exciting opportunity to combine this façade with our timber frame unit to provide further efficiency benefits as well as help manage the growing challenge of labour shortages in key trades with the assurance of factory-produced quality. TopHat's industry-leading modular units will also provide the opportunity to expand our range of products to customers.

Improving sales effectiveness

The period has seen significant market challenges and volatility. This has been principally caused by mortgage rate increases. There have been more welcome signs recently - albeit after only one data point - on inflation and associated reductions in some headline mortgage rates, however this only underlines the volatility in the market. Within this context the Group has worked hard to secure sales while using incentives and investor deals in a controlled way. Without this discipline we could have sold more homes, but at a lower price with the associated effect on margin. A private weekly sales rate per outlet per week of 0.59 in the period broadly maintains the improvement seen in the first quarter of the year after the market challenges following last Autumn's mini-Budget. Nonetheless, they are 35% lower than last year's strong comparator. Cancellations have remained broadly stable at typical historic levels. Taken together we are now confident we will deliver at least 9,000 legal completions in 2023, the top end of our previously indicated range. Since its introduction in 2022, Persimmon has delivered 260 homes under the Government's 'First Home' scheme, one of the largest contributions of any developer. These are below market value homes, supported by a Homes England grant.

Part exchange has proved popular, being used across the Group in approximately 19% of gross reservations in the period (2022: 5%). Within this, we are seeing a noticeable increase in existing Persimmon and Charles Church customers using part exchange to purchase a new home with us. This customer loyalty is pleasing to see as it reflects the improvements we have made to quality and customer service in recent years, as well as opening up the opportunity for further growth in repeat custom.

In this more challenging market, our recent improvements to quality and customer service while maintaining our affordability advantage are ever more important. In the period Persimmon Homes' average selling price is around 25% below the market average3. We are now more consistently building well-located,attractively-priced homes to a high standard. We have promoted this with increased investment in marketing, with our two main campaigns, launched on Boxing Day and over Easter, receiving strong customer interest. We are planning another campaign for the up-coming key selling season.

We have also been enhancing our digital marketing and customer service capabilities, addressing historic underinvestment in these key commercial areas and aiming to improve lead generation and conversion. We now have 'always on' digital marketing, targeting advertising at key market segments - such as First Time Buyers, young families seeking space and downsizers - with a greater propensity to buy new build homes. This more targeted approach enables more bespoke messaging to resonate with these groups and generates insight that can aid constant refinement of marketing strategy.

A new sales and marketing customer relation management (CRM) system, YourKeys, will provide a 'one-stop shop' for all customers, making their buying experience with us easier and more engaging. As well as providing real-time updates on the progress of a reserved home, parts of the purchase process can be completed online at the customer's convenience. The process will also be made more efficient for our sales agents and colleagues. The roll-out will start later this year and once implemented will provide a CRM system that can be added to in the coming years, further enhancing customer service and providing a rich database to refine our targeted marketing.

Our new approach to marketing and enhancements to customer service are helping to generate interest and enquiries. The current challenge is to convert the interest into sales. While banks are lending and there is significant - perhaps, record - levels of equity in the market, loan-to-value ratios remain high. Affordability remains the key challenge in the market and we are considering new, innovative opportunities to support First Time Buyers in particular in the absence of government policies such as Help to Buy. As well as being a core Persimmon strength, cost efficiency and savings are ever-more important to be able to offer customers the opportunity of homeownership when affordability is stretched for many.