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Earnings Transcript for PSMMY - Q2 Fiscal Year 2017

Executives: Nicholas Wrigley – Chairman Jeff Fairburn – Group Chief Executive Mike Killoran – Group Finance Director
Analysts: Will Jones – Redburn Gregor Kuglitsch – UBS Chris Millington – Numis Ami Galla – Citi Chris Fremantle – Morgan Stanley John Messenger – Redburn
Nicholas Wrigley: Welcome to Persimmon’s half year results presentation. Same as always, I’ll make a very, very short introduction, Jeff will review our operations and discuss the outlook, and then Mike will go through the financial review. I’m delighted to introduce an excellent set of results with very strong numbers across the board, whether it’s increased number of units, additional 556 new homes, turnover up and underlying profit before tax up 30% on the back of very strong operating margin, which are up 380 basis points. I think the really pleasing numbers as well is the momentum into the second half with strong cash generation and our forward sales up 15%, so we’re very well placed for the next period. Capital returns. We’ve already told you about the 135p that was paid in March and July. And before we get too many questions, we’ll be obviously reviewing next year’s position when we have the results – before the results in February. And finally, we continue strongly to deliver on our strategic plan. And with that, I’ll hand over to Jeff.
Jeff Fairburn: Thank you, Chairman. Good morning, everyone. So just to sort of rundown really, I want to just give you an overview on the strategy to see what progress we’ve made on there. A bit of an overview on how things are growing in the group. And then a bit – obviously, go through the land, both short-term, long-term, an update on current trading and the return plan and then an outlook. So moving on swiftly to the first slide, which most of you will be familiar with this, but I think is worth just articulating some of the key points here, because these are the core principles of our long-term strategy. And I think the results in this first half of 2017 are an excellent example of the progress that we’ve made under these various headings. So if you consider growth, as Nicholas says, 8% volume growth with top line of 12%, that’s a good result for us. We’re keen to meet the underlying demand out there, so we’ve got good growth. Cash efficiency. I think I’ll come on to this in a bit more detail, but clearly, the operational efficiency of the business is driving good margin growth. The operating margin of 380 basis points in the period, which is excellent return on capital up now to 47%. Land, obviously, a key feature of the business. We’re a strong buyer. We’re keen to invest at the right time in the cycle, and we see that we’ve got good opportunity to do that now. So 120% replacement in the last 6 months. £370 million spent at very good margins. And free cash generation, £285 million. So obviously, through the additional profitability, the cash efficiency we’re generating good surplus cash. And that resulted in the payments this year under the return plan. And as the Chairman quite rightly says, we will continue to keep this under review, and we’ll do that exercise again and report back to you in February. So looking at the group position, good progress in the first half. Strong outlet openings again. So 95 sites opened in the first half of the year. And importantly, we continue to strengthen the infrastructure of the business as we are keen to continue to grow where we see good opportunity. So a new Nottingham office opened in January. And already, we’ve seen good volume coming through that business, 170 completions in the first half of the year. And within 18 months or two years, that will be a business producing 600 completions per annum. So we’re really pleased with that, and we’re looking for other opportunities. Brickworks, which we’ve talked about before, we’re just in the commissioning process there now. So we expect volume to start production next month and then get the product out of the site. So we’re very pleased with where we are on that high-quality product. And that’s going to support the business for many years to come. I think it’s important just to remember that Persimmon aims specifically at the lower end of the market, so first-time buyers, first-time movers. We are gearing the business to make sure that we cover all of those price points. Nearly half of the houses sold are still under £200,000, which proves where the strength in the market is as we support new entrants to the housing market. And I think, consumer confidence has been very good. We saw after Brexit that actually quite quickly there was good strength in the market and that’s continued through the first half of this year and into the second half so far. And the customers are supported by a very good mortgage market. There’s excellent rates out there both on Help to Buy, but also the maturing side of the market supporting the higher loan-to-value products, 95%, which can get rates of 3 to 3.5 percentage points and – sorry, at 90%, at sub 3%. So very good supportive mortgage market, and I think that will continue. So looking at the operations. Top line growth, good. I think just picking out some of the issues on here. 8% volume growth in our type of manufacturing business is good given the constraints that we’ve got in terms of skilled resource, which I’ll talk about a bit more later. But the standout to me here is margin improvement, 380 basis points, now standing at 27.6% operating margin, which everybody in the team has worked extremely hard for. And I’ll go on to discuss some of the processes that we have in place which is leading to that improvement. Pretax profit is up 30%, so £463 million. Obviously, a strong result. Looking at the operations across the broad. You can see that the Persimmon operations, North and South, with good completions growth. We continue to reposition the Charles Church product, where we’re moving the size and average selling price of those units up the market. Hence, why the volume is slightly lower in this marketplace, but the average selling price is higher. So that repositioning continues as we move forward with strong growth overall and good price improvement as well. Nearly, 560 additional units sold. And just over 3,700 helped by completions in the period. So now moving on to land. I would say that the conditions are very similar to those which we’ve seen over recent times. There’s a little bit more competition in some of the regional markets. But generally, we are finding excellent opportunities. And as you can see there – Michael will go into a bit more detail here, but the cost to – plot cost to revenue ratio, a further reduction there, which is a great indicator of potential improvements to margin as we go forward. And the strategic land content within the land bank, which is very strong and supportive. In terms of the overall scale of the land bank, we’re nearly 100,000 plots. And typically, over recent times, the average site size has increased. So you got some larger positions in that slower moving, last a lot longer, underpin a very strong margin position into the future, which gives us the confidence in that land bank to produce strong margins well into the future. Strong investment in land in the period, £370 million. Nearly, £3 billion, actually since 2012, when we launched our strategy. So very strong land investment continues. And 120% replacement in the 6-month period. 9,300 new plots across 47 locations. 6,000 of which were on the open market on 31 sites, so round about 200 plots per site on the short-term open market land. And we’re a keen buyer of those larger positions, as I’ve said. Looking at strategic land, we’re really pleased with the progress we’ve been making on that. We’ve invested heavily in our business, in our infrastructure and our people who are doing a great job of bringing sites through the planning system. And you can see there’s good conversion rates coming through on that. 3,300 plots in that six-month period, which, again, is actually just over 200 plots size per site. So very similar to on market, very similar to the shorter-term land market. And that’s a feature really of the current planning system producing bigger sites, which really do suite our model. And good progress in terms of new strategic land coming in, which gives us good visibility for the future. Moving on to the review of operations and current trading. As I’ve said, the market has continued. We saw a good progress through last year following the referendum. And we now see sales rates up 2% since the middle of the year on pretty strong comparatives from last year. We sold very strongly in the second half of last year. So the rate of sale is encouraging and continues to improve. In terms of sites, one of the challenges that we’ve got is making sure that we can facilitate the resource to build these houses, skilled labor, et cetera, so it was quite challenging. And that’s one of the areas where we’ve really spent a lot of time in the business making sure that it’s as efficient as possible. And I think you can see the benefits of that support in the underlying operating margin of actually a big proportion of the 320 basis points coming by the way of build efficiency. And I think some of those things – we talked about some of these before, but just to sort of recap. House types, we’re pretty fully integrated right across the board now on our standard house type formats, different elevational treatments for regional markets, but nevertheless, good, well-designed houses, efficient to build and attractive to the customer, enabling us to compare and contrast prices right across the UK. Layout design, site layout are really key. And we’ve developed processes there to ensure that we get good design, but – that we can repeat the format of our development where planning allows around the country. Build detail. So standard build construction details for house types and use of similar techniques and details from one house type to another, which also helps the efficiency. And even things going into the detail of foundation design, floor slabs, utilizing similar processes right across the UK has brought quite a lot of benefits to us in terms of how we get the best out of our labor. And a well-organized site is one where tradesman want to work. So if you’re working with your partners, subcontractors, they know that an efficient well-run site is where they can make their best returns. So that’s an area which has really benefited us and our partners. Materials on the supply partners. Again, we’ve got good opportunity for them. We’ve got a volume promise. So for our supply partners providing materials to us, the volume underpins their production, which enables them to give us good prices, but enables them to operate efficiently in their production processes. Standardizing specifications with them on their products, so that they, again, only need to produce a limited number of products. And these are things that we’ve carried across from our Space4 production, where we’re driving great efficiency through the business. You’ll see that we’ve got an 18% increase in the overall productivity in the factory there. We’ve only been able to achieve that through standardizing the product going through the factory. That’s where that manufacturing works and it’s very efficient. So all of those things help smoothing through the production of material as well as important. So that you try and move out the peaks and troughs, which are pretty inefficient if you think about providing resource in a factory situation. We talked about the labor workforce before, and we’ve got a good sized direct and labor-only workforce on-site that we spent a lot of time training. We continue to do that. We’ve got many apprentices and trainees in the business, over 500 in total. And we continue to invest in that. So it’s a challenge, but it’s something that we’re addressing as we go forward for the future of the business to give us more longevity and productivity as we go forward. And I think there are still some further things that we can do there into the future, which will continue to improve the efficiency and productivity, which I’ll recap on later. Planning is still challenging. So the planning process is still challenging, but you can see that we still plan on – continue to bring forward a good number of new outlets, 100 further new outlets in the second half of this year. 22 already we’re on-site selling. Further 25 of those 100 are well progressed and ready to open for sale in the new – in the autumn season, but it’s a challenge again. Planning has improved, as I mentioned before, but it’s still very challenging. So – and we’ve got a great planning team there in the business. And – but really the industry is treading water in terms of total site outlets, which is the biggest driver for volume as we go forward. So we want to see the planning system free up and produce more sites more quickly to enable the industry to continue to move forward on volumes. And I think pricing has remained pretty firm on – in the marketplace and Part Exchange is also a good support. Interestingly, even though the secondhand market is a bit slower, properly priced product in the secondhand market is moving quickly. So about 9% of the customers are choosing Part Exchange on our higher priced products as they Part Exchange into a bigger house. Looking at current trading. We’ve talked about some of these things. I think that the forward sales position is good. But I think, we’re again pleased that we’ve managed an 8% increase in volume in the first half of the business, but it’s not at the expense of forward sales. So we’ve grown our forward sales position as well, which should give you confidence that we’re going to continue to produce increasing volume and gives us the confidence to invest in the business for the future as well. So that’s a big issue there, and we see that continuing as we move forward. On to the return of capital. Clearly, we’ve made the payments this year, as the Chairman has said, £1.35 paid this year, which is £417 million. £1.5 million returned so far since 2012, when we launched the scheme. And we have since then increased the capital return by 49% up to £9.25 through to 2021. And I think, as we’ve already pointed out, we’ll keep that under review, and we’ll be coming back to you in February with our position for next year. So on the outlook. Good consumer confidence. I think that given our marketplace, our customers are confident about the job position they’ve got money, they’ve got the ability to borrow. So at the present time, customer confidence is good. And it’s a pretty compelling purchase for new homebuyers at the present time given the affordability in the sales and the mortgage rates, which are available. As I’ve mentioned, there are more higher loan-to-value products available. And the market continues to mature in that regard, but Help to Buy is still an important feature and does enable a lot of first-time buyers to enter the market and it’s done exactly what it was intended to do, stimulating the economy and ensuring more access to new homes, increasing volumes in the industry and also, increasing the employment of skilled resource. So no apparent effect yet on the EU position, but we keep a careful eye on that. And we watch all of the indicators on visitors, visitor traffic reservations, cancellations and so forth. So we’re keeping a very careful eye on the direction of travel there. I’ve mentioned the other two issues on there with planning. We’ve done a pretty good job in the business of making sure we’re rightsized across the UK for the future, so all of our businesses are sustainable. And then looking to the operational priorities, just to recap on a few of these things. We want to continue to grow volumes where the market allows and all of the efficiencies that I’ve referred to will continue to drive improvement through the business. And I think, as we go forward, as I mentioned, there are further things that we can do. Brick manufacturers is a great opportunity for us to reduce our cost a bit in that regard, but also to make sure the availability of materials is right for us to continue to increase volumes. We can also make lock purviews on the sur machine, which we intend to do. Space4 has moved into the area of making insulated roof panel systems, which we’re increasing our volumes in the factory on that basis, and we look for further opportunities as we go forward. And I think in terms of efficiency, we’re just in the process of rolling out the first stages of a new IT package, which will help our site managers operate a bit more efficiently, enable them to focus on the right things and support them in doing their job, which is pretty challenging actually given the volumes that we’re producing per site. So I think, good support in the business for all of the different disciplines, site management being a crucial one there. Good investment in trainees, and land investment will continue. We spent a little bit less last year as we took stock of the market following the referendum, but we will see that increase and strong investment this year. And importantly, we’ll maintain all of those capital disciplines, all of those key principles that I referred to at the start, which the team is so focused on. And as you can see is making a real difference to our business as we go forward. And with that, I’ll move on to Mike for the financial overview.
Mike Killoran: Good morning, everybody. As is usual, what I’m going to concentrate on is just pointing out some of the key features of the trading performance of the business through the first half of 2017, look at the balance sheet at the end of June, and we’ll understand the cash generation of the business and the returns that come from that through the first half of the year. So as Jeff has already touched on, strong trading performance. We’re really pleased with the legal completion growth of 8% in the first half. As we know build is challenging, so to deliver and hand over the keys to that increased number of legal completions, we are pleased with. We have to keep bringing through the new outlets. Obviously, that is supportive of the profitability progression as is our ability to control our cost base. So I think, they’re all interlinked, these objectives, and I think the first half of the year demonstrates some success in achieving in part those objectives to deliver a 30% growth in the bottom line, the pretax profit growth. And we think that the growth that we are delivering is high quality. Obviously, volume and price drives the top line, but it’s not growth at any price. We want to deliver high-quality growth. And I think that gross margin improvement, the step forward of 360 basis points compared with the first half of last year is the manifestation of all the hard work that is going on in the business in every area to try and improve the quality of what we do and what we produce for all stakeholders. So a gross margin of 30.5% is a record for the business. And it’s partly delivered through the operational gearing, which comes with the controlled growth to sustainable scale in each of the regional markets of each of our regional businesses. And as you know, there isn’t one silver bullet on this, you’ve got to work hard on all fronts to deliver this sort of performance. So I think, all the management teams around the country have done really, really well in delivering that step forward in profitability. To a company that the main feature in the numbers is the continued additional contribution from opening up the new sales outlets on fresh land, we’ve seen an additional 40 basis point come from lower land cost recoveries as a result of that relative to the selling prices. And when you throw all that together, we’ve seen around about an 18% increase in the gross profit per unit sold compared with the first half of last year to just over £65,000 per unit. 27.6% EBIT margin for the first half, results primarily from that gross margin step forward. It is supported by greater efficiency in the OpEx line, largely driven through the volume growth, but together with good cost control. And that’s delivered round about a 20% increase in operating profit per unit, just shy of £60,000 per unit. One example of that operating efficiency, you can see there in the sales and marketing cost area where we’ve seen a further improvement to 1.1% loading of revenue for selling and marketing costs compared with 1.5% in the first half of the previous year. So again, that’s that operational gearing coming through that’s delivered the scale efficiencies and controlling the growth well as the – each of the regional businesses grow into the regional markets. Looking at the land bank and as we’ve already seen, a further improvement in land cost recoveries to 16.2% through the income statement in the first half. But when you compare that to the land bank, you’ll see there the – for the total own plots, we’re now at a cost of revenue percentage of 13.7% at the end of June. So that’s a continuation of a good strong signal for the future in considering the prognosis for our profitability and margins moving forward. Obviously, the quality of the land that we bring into the businesses have critical importance in delivering higher levels of return. And I think the cost of revenue percentage, which is the last column in the green box at the top of the slide, at sort of 13.7% is a further 100 basis point improvement on the position at December, which points to margin growth to come as those plots come through over future years as that – as those sites come through and those plots are built out and new home’s delivered. And tracking across the pace to the number of plots at the end of June, 73,500 plot, so that level cost of revenue percentage gives us great confidence for the future. The quality of the land bank owned by the business and indeed controlled as well, is a very high quality, which hopefully will give the market confidence that our margin delivery will be well supported moving forward. Looking further at the balance sheet. Touching on the land, obviously, as Jeff says, £370 million spent on land payments in the first half. Just shy of £200 million, within that £370 million, was spent on servicing existing land creditor commitments. So the remainder going on the front end of new deals that we’ve brought into the business that Jeff has already touched on in terms of the new plots that we’ve brought into the business. And we continue to secure good deferred terms on those new deals. Albeit, you can see the land creditor has ticked down a little on where we were at December at around about £490 million at the end of June compared with around £550 million at the close of last year. Work in progress. We’re pleased that we are managing to continue to invest in the ground. We do need to support our forward order book £60 million of additional working capital invested in work in progress from the close of last year to June to leave us at about £680 million of work in progress invested. And as a result of that the WIP turn has slowed a little to 4.9 times from 5.1 times at December. But we’re very, very keen to continue to invest in work in progress. So hopefully, that turn will decrease a little further as we manage to drive the build forward as Jeff has already pointed too. And obviously, the WIP turn points to cash generation. Delivering legal completion is cash or lease mechanism, the build is very, very important. Obviously, you’re not – you don’t get a legal completion without the build being complete. And as you can see there £1.1 billion of cash held that is the manifestation of that quicker asset turn. And indeed, that has supported this improvement in return on capital employed by one-third to 47% in that 12-month period ended June this year. So I think it’s – it would be opportune just to remind everybody that we don’t generate 47% every year in terms of the returns that we generate. I’d look back 2004 to 2017, looking at a sort of a cycle, if you can call that a cycle, and the average return is around about 21% on our calculation. So in terms of a through-the-cycle view of return, I think it’s still a very healthy place to be. If you consider our cost of equity maybe around 8%, 8.5%, I think it’s a very attractive proposition in terms of value added. As we’ve already touched on, cash generation continues to be very good. The net free cash generation before capital return of £284 million is 24% up on the prior year. And we’re pleased, as I’ve already said that we’re able to invest more money in the ground, both in terms of land and work in progress. We’re very keen to continue to do that. As we all know, the cash generation goes hand in hand with the underlying operating profit of the business. There’s a high correlation between the two. And just to remind everybody, obviously, the cash generation of the business is a combination of what we deliver through trading, in terms of the after-tax profit, cash realization, together with managing the balance sheet in terms of working capital management. So the rather downside scenarios in the back of this book that we communicated last November, which is worth just perhaps tracking through. Well, if you have time after this meeting, just to remind you what the strong position we’re in to accommodate change in market conditions as we move forward. And indeed, our starting point when you’re considering those scenarios, has further strengthened from last November. So I think that the position of the business is very, very strong should market conditions become a little bit more tested. And indeed, we don’t need to think about ifs, buts and maybes about the future in terms of downside scenarios because looking back, you can see the cash generative nature of the business through the last cycle from 2007 to today on that longer-term look back on those graphs, which demonstrates the ability of the business to generate free cash through what were very demanding market conditions as we all remember back in 2008, ‘09. A key judgment for us moving forward is, obviously, to judge the capital deployment and the timing of that capital deployment. And as Jeff mentioned at the top of the meeting, it’s a key part of our strategy when and by how much do we invest in new land and work in progress through the cycle. And it’s something that we remind each other of almost every day. So it’s something that we’re acutely aware is being critically important in making sure that not only do we deliver superior shareholder value, but we also sustain that and that’s what the capital return plan is focused on doing. A key attribute of the business we would say currently is the flexibility that we’ve secured in the business. Obviously, every management team wants to return as much flexibility to react to market conditions as they develop. And I think that at Persimmon, we’ve got a very strong balance sheet and a very high-quality platform. And that gives us great flexibility moving forward. We will remain very focused on the issue of capital deployment through the cycle. As Jeff has already indicated, we remain very keen at this point to invest in the land and work in progress in support of future sales. We’ll minimize the financial risk in the business. So that means, we’re not going to run any structural gearing within the capital structure, which keeps the shareholders at the top of the tree in terms of first dibs on the free cash that we generate. And we’ll continue to review the extensive surplus capital that we can return as we move forward. And at that point, I’ll move back to the Chairman.
Nicholas Wrigley: Thank you very much, Mike. Briefly, these really are excellent results. We continue to grow the business. Each of our regional businesses have a strong and sustainable model, which is aimed at increasing output to meet demand. And we are very well positioned to deliver continued success. And I’d remind you all that our strategic plan is aimed at delivering sustained superior value creation for our shareholders. And on that note, I’m delighted to take questions.
A - Nicholas Wrigley: Very keen. We’ll start right at the front here. Will, you can have the first question.
Will Jones: Will Jones from Redburn. Could you just go back to the impact of the build cost performance on the margin in the first half. I think in the past you talked about potentially 3% to 4% like-for-like build cost inflation, maybe a couple of percent of ASP inflation, which all else equal would maybe hold your ratio. The fact that it’s gone down 300 basis points or so in the right direction. Can we assume from that, that like-for-like build costs are actually declining versus this time last year after your all the efficiencies you’re making around standardization? And I guess linked to that, are you telling your land buyers that you need to go out and buy land that bit better to make sure we retain those savings? And just to be totally sure, when you make those savings are you happy that there’s no compromise at all to the customer offer in terms of specification and the like. I guess, the sales rates would fully indicate no, but just any thoughts around that? And then the second one just around sales rates, I think you talked…
Nicholas Wrigley: That’s three going on…
Mike Killoran: I think you’re trying to sneak three or four questions in there.
Will Jones: 0.75% I think in the past you talked about is the kind of optimal sales rate, you’re going to be probably close to that this year. Just theoretically, if demand was to increase beyond 0.75%, do you think you could build quicker than that? Or is that probably the extent with regard to construction capability?
Nicholas Wrigley: Jeff, do you want to?
Jeff Fairburn: Yes, dealing with that first point first on the sales rate. Yes, I think we are reaching that sort of optimal point, which I think is why it’s important that we look to increase the outlet network wherever possible to try and drive more volume. It is not just about sales, it’s about build, as you say. And some of these sites, these bigger sites are producing 100, 150 and in very few instances, more than that volume per annum of one outlet, which is –it’s at the top end of the scale. It’s quite challenging. And I think we’re pushing that as hard as we can. And there is a point to bear in mind, obviously we need to try and meet the underlying market. But equally, we’ve got to give the customers a good journey as well. So they expect their houses to be provided within a reasonable timescale, which to me, for our type of product, is around about six months, up to six months from point of sale, if it gets beyond that then it starts to effect their behavior. So I think we’ve got to bear in mind their journey and obviously, the resources that you can actually achieve on any single site to produce that are quite significant. There are some sites where we can perhaps grow a little bit more, so I think it’s on balance really, but we are finding it, we’re approaching that optimal sort of scale I think, well, on the average unit per site. Yes, build cost inflation. We are seeing the underlying inflation, as we’ve talked about before, which is why it is so important to look at these other areas that I mentioned. And keep that in check, and there are a number of issues there through security of supply, but also how we build houses and how we deal with things efficiently. I mean, in terms of specification or the customer experience in that regard, that is improving as well. And one of the challenges is really how do you continue to drive that improvement in quality, but also the standard of specification of the houses, whilst delivering those efficiency savings. And we can do that through those various things that I’ve talked about principally. And we need to involve all of our partners in that process to make things efficient for them. So I think everybody is tuned into being able to operate efficiently by standardizing product wherever possible, which isn’t a bad thing. But obviously, recognizing local situations and individuality as well. So I think all of those things can be done to drive down, to improve that efficiency and contain that underlying build cost inflation. We’re seeing labor costs, we have seen further increases, but it’s not been as much as it has been at other times. So there’s a bit of stabilization there. It’s really down to the way that we’re employing our trades and training more who are staying with us longer. So I think that helps to improve matters as well, but look at different types of materials, different techniques where we can actually make some savings in the process. Have you got anything else to add to that, Mike?
Mike Killoran: No. I think it’s just to say, a key challenge, as you say Jeff, is the build rate. And you can pull together a sales forecast, but you do have to keep in mind the units have to be built and handed over. So I think, as always, that is a key challenge, as Jeff says. So you just need to keep that in mind when you’re looking forward.
Will Jones: And if you just think about, say, build cost inflation of 3% to 4% over the next 12 months, is there more you can do to take that down on a net basis or have you done most of what you can?
Mike Killoran: Well, as always, there’s no one silver bullet. As we keep saying, you got to work hard on many fronts, as Jeff has outlined. And all those marginal gains come together to deliver the end result. How much more progress we can make? Well, it’s a little bit of voyage of discovery in a way, but we’re very, very keen to test ourselves and test value in the market, et cetera, et cetera. So it is something that you’ve got to continue to do all the time and never be complacent.
Jeff Fairburn: It’s difficult to articulate specific things. But I think, if we gave an example for ground works, for example, there’s various different ways to install foundations and floor slabs. There’s one way that we think is the optimal way. And but it’s a challenge actually getting all of the subcontractors to do it that way, because they don’t necessarily agree with us. So actually helping them change their processes to suite what we think is more cost effective is what it’s about. So the type of foundation that you would install, the techniques used by them in terms of their resources, their labor to install floor slabs, for example, plot drainage, things like that, which are all marginal gains, but all add up to make quite a difference. And that just goes through the whole build process to help the efficiency. Just another small example about staircases, it’s a small part of the overall build process, but if you can ensure that you use the same flight of stairs in a number of different houses then you make it more efficient for the manufacturers to make them. And manufacturing does operate efficiently if they can keep the machines running, keep the same volumes going through. But the way that our industry works is there’s peaks and troughs. But if you give them a standard product, they can keep making it, put it in the stock would keep the guys employed. And that enables them to work more efficiently. And through doing that, we can then say, well, could we improve the product a little bit and still make those savings. So that’s the type of thing that we’re looking at just being a little bit more open-minded about how we can – what we can change in a house to make it easier for our – what we call our partners really to operate their business.
Nicholas Wrigley: I’ll pass it back to Gregor.
Gregor Kuglitsch: Thank you. I’ve got two questions. I’ll drill a little bit more on the margin front. Can you just give us a sense to direction of travel from here. Obviously, 27.5% margins in first half is obviously very strong. Do you think from here, the main improvement is essentially that land recovery, which I think you kind of flagged there is probably another 150, 200 basis points looking at the difference between the balance sheet and the P&L? Or do you think the build cost, perhaps, just to pin you down, is that as good as it get to the 53%, which is, obviously, very strong in terms of year-on-year improvement? That’s the first question. The second question is maybe just on land. Can you confirm what the plot cost to average selling price is on the land that you actually acquired in the period? Is it around 10% or something like that? And then finally, which is maybe a little bit of a trickier question, and perhaps for the Chairman, on remuneration. I think some of your peers have kind of in hindsight or in retrospect changed the remuneration packages. Obviously, they look rather favorable in hindsight, obviously, with the benefit of the share price having gone up as much as it has done. Have you considered that, that you alter the remuneration plan to perhaps phase it out, cap it, anything in that kind of direction because, obviously, the absolute quantum of payouts look quite high.
Jeff Fairburn: Thanks, Gregor. Well, I’ll just do the first one. On the direction of travel on margin, we’ll continue to work out on that. I think some of those efficiency benefits that we’ve got through the build are not fully delivered. So I think there is potential for us to continue a bit further on that track, although is increasingly difficult, marginal. I think, as you quite rightly point out, land, there’s still the opportunity in the land when you look at the plot cost to revenue ratio to see a bit more progression on that as well. So yes, it’s going to plateau. We think there is a bit more movement there, but it becomes increasingly difficult as you can imagine. So we’ll continue to work that as hard as we can. What about the second point, Mike, on the…
Mike Killoran: On land that we’re acquiring, when we look into land bank, as I referenced earlier, we’re very pleased with the quality of the land that we’re acquiring. As you know, plot cost to revenue percentage is just one dimension of the attraction or otherwise of the land. The one key thing that you need to bear in mind is off-site infrastructure, cost loading, because you could get a situation where you’ve got a very low bare land cost, but you got a lot of off-site infrastructure to facilitate to open the site up and get on. The more important think is looking at margins obviously. And our margin expectations right across the land bank, I mean, Jeff and I were looking at it just the other day, looks very strong. And so I think the – today’s prices, we feel very confident, as Jeff has already said, with respect to build cost, the margin progression is well supported. To what extent that will come through moving forward, again, is – we got to see what happens as it unfolds, but we’re still positive. There is a little bit of improvement to come, albeit, we’ve said previously that will plateau at some point. But as we said earlier, we’re still very, very keen to test value in the market, down the supply chain and in the land market. That’s our responsibility to do that. So that – we’re happy to take that and test it. And where we end up, we’ll have to wait and see.
Nicholas Wrigley: And Greg, on remuneration. I’m not certain which bits you’re going at, but let me just give you the sort of the holistic view on it. I mean, I think from my position and the Board’s position, we’re very comfortable with the LTIP. And we think that it has been a contributory factor in driving the business, in delivering very, very substantial results, which is outperforming competitor base very significantly. And it’s very widely based up to 150 people in the business. So I think any suggestions that we might go back and introduce a retrospective cap to a contractual position with our top 150 people would be on a scale of sort of shooting oneself in the foot or perhaps tad higher and quite, quite, quite destructive. So I make no apology for that. So I think if you look at it in that context, that’s very clear. If you look at it in terms of how can we ensure that when it does crystallize, which hopefully it will, that it’s done in an orderly fashion and the impact is minimized on shareholders, then that’s something we are reviewing and to ensure that actually there’s no distortions in the markets and the impacts are ameliorated. So that’s something that we’ll look at and come back to you in due course. You look puzzled, but is it…
Gregor Kuglitsch: I’m not. I think it makes sense. I guess, the question is, when you talked about that last point, are you talking about the fact that there will be a dilution? Or you’re talking that key personnel risk that…
Nicholas Wrigley: I mean, we are – we monitor the key personnel risk and we need do to make sure that all the key people are on-site and is fully committed. And I think you can see in these numbers that the commitment remains. But I think we can – there are things we can do to minimize the dilution and look at that to ensure that it’s done in the most orderly and sensible fashion. And that’s the point I was trying to make. Please.
Unidentified Analyst: I’ve got three, all on bare land actually. First one is on just kind of net, can you give us a gauge because of your land replenishment expectation for the full year, probably one for you, Mike? The second one is really around the dynamics of the – like comments around five year land bank, particularly six at the moment. Obviously, the mix between where you could see maybe volumes going in and the overall size of land bank over that medium- to longer-term, split it half maybe just some guidance as to where that might move? And the third one is around kind of the ongoing government’s consultation into kind of ground rents and leasehold and proportion of your sales during the year around leasehold high, so I think it is lower 10%. If they were to propose the Help to Buy equity loan, which is no longer allowed for the sub-sales, what can you do with that? Could you move into freehold, you have already got proportion of land where you have to sell those homes as leasehold, just to get a flavor for that, please?
Jeff Fairburn: Yes. Thanks, Kevin. I think I’ll let Mike think about the replenishment issue on the land bank. In terms of where volumes are going to go vis-à-vis the length of the land bank, I’m not particularly hung up on the five year or six year sort of length of the land bank. It’s really the shape of it, what it looks like, how long or how – what the size of the sites are in there and how long they individually would last. So there’s a lot of moving parts in the land bank, which you have to consider in that process. So I think we’ll continue to invest if we think the opportunities are right and the business will be strengthened by further investment on good terms in the marketplace irrespective of the – at this stage the length of the land bank because what we intend to do is bring those sites through as quickly as possible, bring them to the market for sale. If we sell houses, the challenge to us is to build them. So we’re keen to continue to grow volumes where the market allows us, but really that will be driven by outlets. The land bank is a little bit longer than it would be because of the size of some of those outlets that are renewed, which is a feature of the planning system. It’s good business for us to buy those I think because of the very good terms that we are enjoying on them and it gives us longevity for the business. And if we look back through previous cycles, we see that it is generally those longer term sites that perform very well through a whole cycle. So we’re very comfortable to invest in those positions if they’re at the right level and if we’ve got the right deferment on them. So all those things being equal, will we ever come back to a five-year position. We’ve always said that would be our aim, but whether we landed that position or not, it depends on all of those features. I mean, I think on the last point, government consultation leasehold, I think the key thing there is really what the government is saying is that if the builders are to utilize Help to Buy, those properties can’t be sold on a leasehold basis. That won’t have a great effect on our business. Properties can be sold on a leasehold or freehold basis. I think the key thing here is, are the terms fair? We consider our terms to be fair, but that’s a view we don’t know yet what the government consultation will say in that regard. But if effectively they outlaw leasehold property sales on Help to Buy, then, obviously, we will follow that lead. And it will be a pretty seamless transition in that respect. So we don’t see any effect on our trading at all.
Mike Killoran: I mean, on land replacement, just to finish off on. I could see us being a keener investment this year compared with consumption. So maybe, the indicator – although the stats in the first half is an indication for the full year, I think, as Jeff said earlier, we’re seeing good value up and down the country, some good opportunities to put new money to work. We’ve got liquidity and flexibility to do that and there is opportunity to support the growth of the regional businesses around the country in the right way. So I could see us replacing a little more than we’re consuming this year, which would be slightly different to last. But I think that’s the sort of indication we got at the start of this year given the outlook at the time. So no real change on that one.
Unidentified Analyst: Couple from me. Charles – one on Charles Church. Can you just let us know what you’re doing with that brand? I mean, revenue didn’t move very much in the first half? Profits have jumped quite a bit, so there obviously has been an improvement there. Just what you’re trying to do with that business in terms of positioning? And then, the second one was regionally, have you seen any material differences around the group, around the country in terms of, sort of, again, recent activity in particular?
Jeff Fairburn: I think on the Charles Church, it’s really a progression from what we’ve been doing before. One of the features of the market at the moment is very supportive of the lower end of the market, first-time buyers, first-time movers. And we had a situation where we had bit of a crossover between the two products, Charles Church and Persimmon. And we didn’t think that was right. It wasn’t value enhancing. So we’ve moved the brand upmarket a little bit, which has meant that the volumes in this market at least are a little lower and targeting where we’re positioned in those houses is, as you quite rightly point out, meaning that we’re driving a bit better margin through that as well. So I think that’s a feature of the market at the moment. I think we – given the ways that we plan our sites and can change very quickly, we could reposition that or increase the volumes of Charles Church production on the sites in the future if we think that’s what the market will support. So it’s really just a feature of the times. In terms of regional positions, again, it’s still pretty similar right across the board. I would say the Midlands areas are very strong. There is a lot of demand there. And we are particularly strong in those areas. So that’s proving beneficial. But I think one of the continued features for me is where there is a lack of land supply, that’s where the demand tends to be the highest of these low positions. So clearly, there is still an issue to address by government and local areas to make sure that they’ve got the right housing supply in those areas to prevent further price inflation and a squeeze on volumes. So I think that’s the most important driver both generally from our business, we’re positioned well and we’re seeing pretty similar patterns right across the UK for the projects we’re building.
Nicholas Wrigley: All right. Let’s move over. Yes. No, no, carry on.
Chris Millington: Good morning. Chris Millington from Numis. Just one actually, and it’s just really about your thoughts on the Help to Buy scheme. It’s clearly been quite a lot in the press about its extension recently. Can I just ask kind of what you all are doing internally to try and protect yourself against an expiry of the product? And kind of what form you think any extension may take if we do see that happen?
Jeff Fairburn: Obviously, we’re very conscious of this. Help to Buy, our information is that it’s through to 2021. And there’s nothing to suggest that it wouldn’t last until then. So that’s the first point, which gives us confidence to continue to invest. It’s a scheme that’s done exactly what it was intended to do. So I think the government should be pleased that it has been very productive. It’s enabled – the key thing is it’s enabled people to get onto their housing ladder that wouldn’t have the opportunity otherwise because of the requirements as it was with lenders for a large deposit. And it was preceded by a labor scheme – a scheme introduced by labor, which was first buy, new home direct, et cetera, similar sort of shared equity products. So I think there’s good support for it. It’s done what it was supposed to do. It’s stimulated the economy. It produced more volume in new homes. And quite frankly, I mean, obviously, our business is positioned to this. If we can help people onto the ladder at the lower end of the market, then I think the whole market should function better anywhere. So from that point of view, all works well. What it would really look like in the future? Difficult to say. But I think it’s probably worth reflecting on the fact that there will be a level of redemption going forward, which will allow some recycling. And there’s also the interest payable after five years, which again will provide new money back into the scheme, which I think should ensure that – should mean that it could be extended going forward. So hopefully it will become somewhat self-financing in that way as you get redemptions rolling as we move forward. That’s what I would like to see. That’s what I think is sensible, but there’s been no real debate around that with government at this stage.
Chris Millington: If you changed any sort of incentive, allowances in your land buying or sales rate allowances beyond 2021 because I’m sure few of the sites you are buying now probably do go beyond this expiry date.
Jeff Fairburn: I think, Chris, as you say, we’re mindful of sales rate. So it is important to be a little cautious around that. There’s only so much we can do though, but is – I think, there will come a point where it will become important to understand what is going to happen in the future so that the industry can continue to invest in land for the future. From our perspective, we take a pretty cautious view on most things. So sales rates being one of them on those longer sites into the future. So we’re pretty confident about that in any event, there is good strong underlying demand in the marketplace, and we feel confident still at this present time to continue investing.
Nicholas Wrigley: Glynis, only two?
Unidentified Analyst: Two, with add-on that comes with it. The first one is in terms of land bank margin, particularly the plot cost ASP in the land coming through planning is clearly very impressive number. And I was wondering if you can give us a bit of background. Is there anything in that, that’s unusual, is a very large strategic deal with two or three large pieces that are coming through that makes that number not necessarily representative of what we might see going forward? Then, one long one for the Chairman on the dividend assets. Clearly, we talk many times about surplus cash, excess cash. You have net cash available £1.1 billion, free cash flow prereturn of 239p per share. What are the parameters you will use to assess what is excess cash because I think the market generally views there is substantial excess cash about what you would return? And then, just in terms of how you minimize the impact. I know you have a mission to buy back shares. I know that from the AGM, but have you done any so far? And remind me, does your LTIP or your capital return program allow you to choose between share buybacks, capital returns or do both?
Jeff Fairburn: Okay. I think the plot cost to revenue ratio, it does look quite stark at this time as you say, Glynis. I think just to sort of emphasize the points that Mike made really that there isn’t anything specific except that there are quite a few sites in the larger sites, which would have a larger contingence of abnormal cost. So it’s – that really is probably the biggest factor in that regard. So there’s nothing we’ve done differently or nothing in that we should be advising about that is entirely different to what we’ve been doing in the past. It’s really just taking it on balance across the whole portfolio, what would you expect abnormal cost to be. So I think that should regularize going forward.
Nicholas Wrigley: Glynis, I think I had a go at this before, but obviously, not very effectively. When we look at the return each year in the run-up to February, clearly, in determining excess cash, it’s a balance between wanting to maximize what we return to shareholders, but also trying to ensure that we have sufficient capital in the business to invest in land, to put into new working progress and to ensure that our long-term through the cycle returns can be guaranteed to people. And as I’ve said to you before, it’s an art, not a science. And everybody has a different view of the outcome, and we have a pretty healthy debate. And in large part, it’s driven by the executives you – what we need to have and where we are on land buying, which as you heard our views on that at the moment. And I think a desire to actually put more investment in the ground because I think the rates of that we’re turning over – the capital there is probably higher than we’d like. And – but nonetheless, it’s a nice position to be and a nice way and a good debate to have on that. And we’ve got a strategy day in October coming up where we will, obviously, focus on that and start the debate, which will bring to conclusion in February, and I look forward to sharing it with you and hearing whether you think we’ve been overly conservative again. I think that was that. On share buybacks, I mean, on return of capital, we have the capacity to do share buybacks. I personally I’m a great believer that returns by way of dividends are much better because they target all shareholders rather than the marginal seller. And therefore, I’m a great believer that we should return capital by way of dividend rather than buyback, but nonetheless, we have the flexibility to do that. And then, I think if it’s picking up the point I was making earlier about looking at the best way of managing the LTIP, I think that there are ways whereby you could actually equity settle or cash settle. And that’s one of the ways that we will look at that to see what is in shareholders’ interest. There so if $1 cash settle, that’s in effect partly a sort of a buyback, but nonetheless, that’s something that we’re reviewing, and we’ll look at to get the right answer.
Unidentified Analyst: Just one very quick one. Just wonder if you could give a bit more color on labor availability. Are you seeing any kind of big regional differences? And also any changes on kind of immigrant labor given the uncertainty around Brexit?
Jeff Fairburn: Yes. I think to some degree things have stabilized a little. I think that the migrant sort of workforce is really more of a feature of London. And we will or are seeing some knock-on effect from that. But I think that’s being really overshadowed by the – in our business, our desire to employ more people, to train more people, which has given us a bit better position, a bit more sustainability. And I think that’s the right thing for the industry going forward. So we are making good progress on that, and we’re managing it as best as we can. So limited effects of – so far of any changes on the foreign workforce.
Ami Galla: Ami Galla from Citi. Just one for me. I was wondering if you could give some color as to what proportion of your bill process is by your directly employed labor? Or some sort of color around what proportion of your construction cost is probably fixed to semi-variable here?
Jeff Fairburn: Well, [indiscernible] Mike can take that secondly, but in terms of – there’s three types of labor really. There is the direct workforce. Obviously, the guys that we employee, generally trading on a weekly paid basis. Labor-only subcontractors, which effectively are individual subcontractors employed on a similar weekly basis. And then subcontract labors. So there are three different types. And we’ve said before that we would strive to employ up to two-thirds of the workforce on a direct or labor-only basis. We’re some way off that. And in a strong market as we see now, these types of trades, people tend to move around quite a bit. And – but I think, over time, through a cycle, you would see that change, but I would say maximum at the moment probably 25% to 30% of direct workforce at the moment.
Mike Killoran: I mean, in terms of fixed versus variable split in the build and direct costs, I would estimate around probably 15% to 20% is fixed in nature. Obviously, things like selling and marketing costs, there is headcount involved in there in terms of all the sales negotiators, et cetera. So, I guess, it gets down to how you define each element, but 15% to 20% is probably a decent step.
Nicholas Wrigley: Yes.
Chris Fremantle: Thanks very much. Chris Fremantle from Morgan Stanley. Just a very quick question on pricing. I think it’s obviously not new, but most of the indices continue to show better pricing growth in the new built space than for the broader existing market. And obviously, better volume growth. And I’m sure Help to Buy is a large part of the reason for that. Just wanted to check with you if you would expect that divergence to continue between existing homes and new built pricing? Weather actually help – the impact of Help to Buy on pricing levels has actually more or less fed through now?
Mike Killoran: Yes, I mean, this debate around what will impact Help to Buy on pricing is an interesting debate, but is elusive by way of the conclusion, I think. And we look at our pricing in our regional markets. Yes, we cater. We’ve got a greater leaning towards new – the first-time buyers and first-time movers at lower price points. And we sell at the same price to a customer that is hooking into a Help to Buy mortgage. As we do perhaps to one that is using a mortgage that has a lower loan-to-value. So pricing, the direct experience of our own in our markets would seem to indicate, well, what is – there isn’t a direct difference in the pricing achieved for very similar units from customer to customer with different financing packages behind them. And I think that, obviously, the ability to bring new outlets through sales outlets and offer product more widely is – continues to be constrained. That in part is because we’re offering good choice in local markets of house types that, obviously, are compelling at lower price points. And I think that it’s a well-trodden path in terms of understanding. It’s a chronically undersupplied market. So if that leads to inflationary conditions, which obviously it does, then all units benefit from that similar set of circumstances. So we don’t necessarily agree with a view that Help to Buy at 5% on price because it’s not our direct experience in markets, albeit, we’re a sales lead industry. And to stimulate greater supply, you need to have confidence in demand levels. And as Jeff said earlier, Help to Buy has done what it set out to do. And it stimulated the UK economy, the economic gearing effect, as well as the policy objective of increasing supply. If it was tailored slightly differently, would it have the same effect? Well, unfortunately, we haven’t got that opportunity. We haven’t got a control group that’s designed differently that we can compared to, so…
Jeff Fairburn: Chris, it’s also worth remembering that the new homes market, selling price is always pegged to the secondhand market anyway…
Mike Killoran: Exactly.
Jeff Fairburn: There is a very robust evaluation process there. So I don’t think it’s particularly our step in that regard. So I think one interesting thing is that we’ve now only got – we’ve got Help to Buy for new homes. There was a scheme of mortgage indemnity guarantee scheme for secondhand homes, which actually sold as many properties as Help to Buy one. But the government saw off it – to end our scheme, which is quite interesting. And maybe a part of that really was to stimulate more growth in additional volume because it is about how do we get more houses into the housing market and ask to building more. So I think that has driven more interest into new homes rather than secondhand. So I think there could be an effect on that in terms of volumes. But as I say on the line, what pegged to the secondhand market anyway. So we don’t recognize any effect in terms of Help to Buy in terms of inflating prices.
Nicholas Wrigley: And we got Kevin at the back.
Unidentified Analyst: Just wanted to return to almost full circle to where we started. And obviously, one of the features of that improvement in the operating margin, 320 points in the build cost. And in certain – if we just look at it in nominal terms, I think one of the charts is about 3,000 reduction in the nominal cost of build of the average house. And if underlying inflation was running 2%, 3%, that’s a similar number again. So in real terms, there has been a reduction of circa £6,000 cost to build per unit. I don’t know whether you have – two questions around that. One, do you have per square foot measure that can help sort of flesh it out for us? And secondly, when you talked around what’s driven that, the historic factors seem to be a combination of lots of things, which one would’ve thought were quite sequential rather than all coming together in a six-month period. But the comments looking forward around where the margin flex is were much the tone of your comments, were much more of those being around the plot cost rather than the build cost ratio. So just sort of – just trying to get a sense of – has it genuinely been a whole range of features that have dropped that behind that £6,000? Or is there actually one or two things which quite specifically have been the big factor? And again, just to be very clear, going forward, you see that element of the cost relatively not likely to be repeated, again, that you’ve sort of – you’ve had a step down and from here on, it’s actually whatever you can achieve in internal savings is likely to be counteracted by the underlying inflation that you’re seeing in build and material costs?
Mike Killoran: Yes, I mean, it’s not gross. I can’t lead off from a – it’s a £5,500, £6,000 in absolute terms per unit. If that is, say, 4.5% to 5% of the total building of the direct. I think the – when you look the average size of the property that we’re delivering, there is no material change. It’s a very slight reduction. It may be around 1% in terms of overall square footage. So yes, that’s moving in the same direction. So that probably explains a small element of that. But I think as we’ve already mentioned, the – it is a – it’s very much a combination of factors that have come together to deliver the step forward that we’ve seen. And in that way, as you correctly say, Kevin, there is no real reason to expect a bounce back to previous levels, because it’s the disciplines and controls that we’ll continue to manage that is very much at the heart of what we do. And as we say, we’re always testing best value for all elements of build. So in an inflationary environment, I think it’s a great performance to be able to deliver this sort of result, but it really is because we’re working hard on all fronts. It would be great, if we could say, well, it’s because of this, but it is multiple factors that are all – it’s like the Sky Cycle Team, isn’t it? So all those little marginal gains that come together to give you the end result. So Jeff’s actually the Bradley Wiggins of the – or maybe the Chris Froome of…
Jeff Fairburn: I think Chris Froome…
Nicholas Wrigley: I don’t think he’s got any DP, so that is what they call it.
Unidentified Analyst: So, in essence, although, you’re obviously less inclined to stress that, it would not be unreasonable to assume that it would still be possible to lower that build ratio?
Mike Killoran: I think – as I said, I think, there’s a still a little bit of improvement that we could make. But we’re quite focused actually on improving the product as well. So we may enhance specification a little bit, which could curtail further improvements, but it has been a very progressive approach to this. And yes, it’s quite significant in terms of the effect this time. But if you think about the underlying cost inflation and what – how we’ve managed to contain that previously, all of those aspects that I’ve talked about have made incremental improvements as we’ve gone forward. But I do think that one – a shift really going forward is that we will look to – wherever possible or sensible, to enhance the product specification within the same price structure, which seems quite challenging. Definitely, yes. But I think, we’ve got a few ideas as to how we can do that.
Jeff Fairburn: And obviously, just to finish, I mean, like selling at marketing cost, we’re at 1.1% loading on revenue. So that is at a low point. And you think, well, how low can – I mean, obviously, with more volume, if we’re successful in delivering more volume for more or less the same sort of fixed overhead, then there may be 10 bps in that or 15 bps in that. But in a tougher market, it will move into another direction as perhaps we have to incentivize customers a little bit more. So there are – when you talk about a flex in that, it depends on market conditions to a degree. But even then you say, well, on the build side, where the supply chain perhaps becomes even keener for the work, then there may be opportunity to mitigate that in other ways as those market – as those conditions change to our benefit rather than to our detriment. So I think, as always, we have to manage the business whatever the market conditions in the best way.
Nicholas Wrigley: John?
John Messenger: John Messenger, Redburn. One – just following on from Kevin really, when you think about, Mike in particular, you mentioned return on capital in that kind of 47% and across the cycle…
Mike Killoran: 47%, yes.
John Messenger: The profit number and the capital employed number are the two parts of that equation. When you think about sitting here today, clearly, supply side something could change, demand-side. But in terms of the messaging around that margin level, clearly, investing continue to drive volumes a little bit of land investment ahead of utilization, but not dramatically higher. When you look at those different parts, what is – where as you is the trigger that causes that return to really start to fall? Because it looks – you look at the whole thing and clearly, we can all get bolder by something extraneous that will likely be the trigger for the cycle turning over. But what is in there that you’re thinking around in that area, because, clearly, the guidance is not about profits suddenly coming that way. And then if one – just coming back to the Chairman, obviously, you talked about 150 people and the 2021 kind of cutoff point. Can I just understand, if you are putting in place a new LTIP, it would need to be in front of shareholders just thinking of timing and if I was a director inside or someone. I mean clearly, you guys will do this rather because you love coming here for these kind of meetings. So you’ll be here until 2027. But if we think about those are the 150 for an LTIP three wrote-in scheme, I assume that would be something that you’d pay out in 2022. So it would be 2019, 2020 and 2021, three-year program. Is that what we need to be thinking around because, clearly, I look at – the capital return couldn’t be brought earlier now because it’s getting too tight or you’d have a gap for your work force in terms of incentive arrangements. What is – what you’re thinking around? And is this right through the 150 as well as sort of the senior guys we have in front of us here, because, obviously, you’ve almost created bit of a problem for yourself in terms of avoiding people cruising off into the sunshine.
Nicholas Wrigley: Yes, I mean, I think the capital – the LTIP is linked to the £6.20. So we got £1.35 still to go and you can formulate adjustments on when that might happen. We introduced a new plan last year, which shareholders approved, which is already in secure and has started because we were conscious that there were people that weren’t either part of it or any – just are not fully involved in that. So that has come in and started. And it’s a three-year plan and that started 2017, 2018 and 2019. And so we’ve committed that the scheme that goes in for the very top people, we will put to shareholders. So and debate that with them in advance. So I think the process is starting and is well underway. And the scheme and if you look at what we put in place earlier this year is a three-year scheme. I think we’ve accepted that it’s probably better. Sadly, we have many people who don’t like the quantum but like the long-term plan, but nonetheless, I think enough gray hairs already with that going for another long-term plan. So it’d be more likely to be a more conventional three-year plan.
John Messenger: Just on the whole capital employed adjustment.
Mike Killoran: Yes, I mean, I think, there are some downside scenarios in the back of this book. So I’d recommend that you look through those. But I mean what do we – the question was what do we worry about. And I think the – what we worry about it all, obviously, you got a look at the market and worry about affordability. We worry about being best place to deliver choice to customer in the right way. We worry about accessing the right land at the right price. We worry about all these sorts of things. I think the thing that would directly impact most quickly is any impact on profitability. Volume-wise, again, rehearsing last time around, it was everything to do with the global financial system. I think the – obviously, we’re now more heavily regulated in terms of secured lending that provides sustainability, but also a constraint. I think the – from an affordability point of view, as interest rates tick up, then that will probably be a drag on price. Because, obviously, the stress testing, the mortgage lenders are required to do now in terms of the fresher guidance from the bank in terms of the default rate that has to be assumed as well as the headroom test. And the default rate would usually be the standard variable rate these days. It is a bit more testing. So that will probably form a drag on price growth moving forward. But that is probably a good thing in terms of sustainability of the market. And we would welcome that sort of well-measured approach to protecting market condition.
John Messenger: Just one thing. Can we back on it? Because, Jeff, you mentioned early, and you mentioned on your call back through time that actually the removal of the mortgage guarantee and switching into equity on Help to Buy has been clearly – it’s been a flip. And it’s somebody who would have wanted to potentially do the old secondhand as you had to move the new build market. When you look at your sales actually in that kind of 57% of your private of the Help to Buy, I haven’t got the number in my head, but is all of the growth actually Help to Buy as in – is the private unfunded non-Help to Buy kind of flat or slightly down? I’m just behind the all, is that the thing that is the issue here that without Help to Buy and the one year flip, clearly that will start to annualize out now or next year. Is that something that’s running in your mind that you’re thinking, look, actually, this is just a very strange sales market that we’re operating. Clearly, we all hope it continues, but if the government was to change something further out, is that the biggest trader?
Jeff Fairburn: Yes, I mean, for me, obviously, Help to Buy, you need to keep an eye on it. I mean, it’s such a good offer to the customer for first-time buyer, in particular, compared with renting a similar property, to say. It saves them a decent amount of money every month. Probably, 35%, 40% saving in terms of cash every month. It’s hard for us to be explicit about that answer, because, again, we’ve nothing really to compare it to. And because it’s such compelling offer, then, obviously, more people are taking it up. Do they really need it? Well, it’s hard to assess that. Obviously, the broker that is advising the customer will source the best offer for the customer. And if that means it’s Help to Buy given the individual circumstances, well, that’s what is used. So it’s hard to see through that with any great degree of clarity to give you a clear answer to that.
Nicholas Wrigley: Right. I’m getting dirty looks. We’re well run over. So thank you all very much, indeed. Enjoy the mini-heatwave we’re expecting this week.