Last checked at 8 Jul 2008 07:00
TRADING UPDATE - 8 JULY 2008
The first six months of this year have undoubtedly been the most challenging period in Persimmon's recent history. In our Interim Management Statement on 24 April this year we reported that there had been a further deterioration in market conditions from the beginning of April. These poorer market conditions have continued. The significantly reduced availability of mortgage funds and a reduction in consumer confidence is restricting the level of sales activity and the volume of total housing transactions across all markets in the UK.
Consequently, our results for the six months to 30 June 2008 reflect this more difficult market. Legal completions achieved were down by 31% during the period to 5,501 at an average selling price of c. £181,500 (H1 2007: £189,255). Total sales revenue for the period was £1 billion, a reduction of 34% on the first half of last year.
As previously reported margins have been under increasing pressure as a result of this significant downturn in the market. We expect that the underlying operating margin (before goodwill impairment and exceptional costs) for the first half will be c. 14% (H1 2007: 20.8%). This reflects the many pressures we have experienced in the market since autumn 2007, to which we have been responding.
Overheads
Due to the likelihood of the poorer market conditions continuing we have taken further steps to restructure our business and reduce overheads to a level which is more appropriate to our medium term expectations of annual new home sales volumes. This is in addition to the action already concluded in January and February of the current year.
We commenced this further restructuring of our business in May, and it is now almost complete. It will result in the loss of c. 1,100 salaried staff in total since the beginning of this year. We believe we now have the appropriate level of overheads to manage the anticipated lower level of business efficiently.
It is estimated that this restructuring process will generate a cash saving of c. £45 million per annum and an annualised overhead saving in excess of £20 million.
Land
As has been the case since August 2007, we continue to apply extreme caution to further investment in land in order to protect our balance sheet.
We currently own or control c. 76,000 plots (June 2007 - 82,145 plots) for residential development, of which c. 80% were acquired prior to 2007. Of these owned and controlled plots c. 27% have been acquired from successful pull through from our strategic land portfolio. This consented land converted from strategic holdings provides land for development at values which were below market values at the time of purchase and offers some margin protection as we move forward in this more difficult market.
Currently we do not expect to announce any significant write down of our land values when we announce our interim results in August. We will, however, keep the value of our landbank under constant review over the next few months taking account of any further changes in trading conditions.
Stock and Work in Progress
As previously reported, we have taken action to reduce our build activity in the light of the lower rates of sale on our sites. These efforts have led to a sharp reduction in the amount of new spend on our developments and we expect to achieve a significant reduction in the level of stock and work in progress over the next few months.
Borrowings
Total net borrowings at the half year were c. £900 million which represents a gearing level of c. 39%. This level of borrowings remains comfortably within our committed facilities of £1.39 billion. We expect our debt levels to decrease as we proceed with our strategy of a significantly reduced overhead, a reduced level of land spend and careful management of work in progress investment appropriate to the level of demand and mortgage availability.
Forward Sales
Looking ahead into the second half of the year we currently have a forward sales order book of £650 million which is 8% ahead of the level of forward sales we had on 1 January 2008, albeit 30% lower than at the same date last year (July 2007: £927 million).
Private Housing
Since the beginning of the year weekly visitor levels to our developments have consistently been c. 20% down on 2007 whilst private sale net reservations have been 45% lower. Cancellation rates over the same period have averaged 26% (H1 2007: 17%). Consequently, legal completions for the first six months of this year were 39% lower than the same period in 2007.
Social Housing
In line with our previously stated strategy, social housing completions in the period increased by 27% over prior year levels. We are working on a number of initiatives with Housing Associations and other interested parties to accelerate the increase in volumes of social housing sales achieved by Westbury Partnerships and the wider business in the second half of 2008 and beyond.
For example, we have recently concluded a new three year rolling agreement with the Housing Corporation for 2008-2011. This will provide direct grant funding from the Corporation for affordable homes on a national basis. We also welcome the new measures announced last week by the Housing Minister in respect of the first part of a wider package to assist the housing market.
Outlook
Our strategy is to maintain a presence in all markets across the UK whilst reducing costs, overheads and debt in line with current demand and market conditions. We have reappraised our business in the light of the significant change in trading conditions and have taken action to address the new challenges presented. We now have a lower level of overheads and structure appropriate for the current levels of business, whilst at the same time remaining well placed to achieve an increase in output whenever mortgage availability and the overall market improves.
Further details will be given with our Interim Results announcement on Thursday 21 August 2008.
For further information, please contact:
Mike Farley, Group Chief Executive
Mike Killoran, Group Finance Director
Persimmon plc
On 8th July 2008: +44 (0) 20 7153 1530
After this date: Tel: +44 (0) 1904 642 199
M: Communications
Edward Orlebar / Charlotte McMullen
Tel: +44 (0) 20 7153 1523 / 1549