Foxtons Group plc

Good morning, everyone, and I'd like to welcome you all to our half-year 2022 results call. I'm Foxton's interim CEO, Peter Rawlings, and I'm joined on the call by Chris Huff, our CFO. I will start in a moment by giving a brief update on our strategic progress and a market update, and then Chris will take you through the financials before I finish with a summary and some perspectives on outlook. Then we will both be on hand to answer any questions you may have. Before I begin with the presentation, by way of background, I spent 20 years here at Foxton's, the final seven as managing director, and I was delighted when I was asked to come back last December as an NED. I saw there were some issues with the company that needed addressing, and when I was asked to step up to be the interim CEO for three months prior to the new CEO starting in September, once again, I was delighted. Over the past seven weeks, I've taken the opportunity to take a really good look at the business. Despite the obvious challenges, I'm pleased to report that the heart of the business is strong. to start the presentation on slide five. So by way of an overview, the first half saw us take decisive action to further accelerate the business reset to deliver improvements in profitability. The business has strong foundations. We have industry-leading proprietary technology, possess a talented and motivated sales force, and are the most recognized and trusted brand in London Estate Agency. However, more change is needed to realize the full potential of the business. We need a return to our estate agency roots in order to fully deliver against our strategic objectives and thereby create significant shareholder value. A key component of this is the appointment of Guy Gittins as CEO. I know Guy well, and I'm looking forward to welcoming him back to Foxton's on the 5th of September. He's a highly experienced and well-regarded industry leader who already knows our business well and has demonstrated his skills in transforming another estate agency. And we haven't sat still this half either. Our first half results demonstrate good progress against our core strategic objectives and Guy is well-placed to accelerate the delivery of the growth plan when he joins. To deliver organic growth, we need to rediscover some of the old Foxton's flair and return to a high sales intensity culture. To that end, we're investing in rebuilding sales negotiator and financial services capacity to achieve this. Revenue generating staff across our business segments is what's needed. As I mentioned earlier, we're in a strong position with high levels of brand awareness, but we have more property instructions, buyers, renters, and financial services customers than we can deal with. It's a nice problem to have. Increased headcount will enable us to match these together and maximize our revenue opportunity. In the current talent-constrained market, this isn't easy, but we're making good progress. In addition, we're pleased with the progress of our lettings acquisition strategy. In February, we integrated Douglas and Gordon lettings into Foxton's, and then in May we acquired two further lettings portfolios. These acquisitions will not only improve the resilience and predictability of our revenues, but are set to deliver a strong return on investment. Throughout the half, we've made good progress in managing costs despite external cost pressures. While there is limited flexibility on core costs, we've made significant progress on simplifying our management structures and continue to manage operating costs tightly. We've made three million pounds annual cost savings in HQ costs, and these savings not only help to offset cost pressures, but importantly, allow us to accelerate our investment in sales intensity. Foxton's is a people business, and reinvesting some of these savings in revenue generating cost lines ensures we have the ability to sustainably grow market share and profits. So that's a brief update on strategy. Before I hand over to Chris for the financials, let me briefly set out what we're seeing in the lettings and sales markets. Turning to slide six, it's been a strong lettings market. As widely reported in the industry, the supply-demand imbalance continues as higher numbers of rental applicants enter a low inventory market. Rents have recovered strongly, and as you can see from the chart on the right-hand side, rental prices in the half have recovered from their COVID-19 lows and are now at above pre-pandemic levels. The lower level of inventory is leading to longer tenancy duration, with new tenancy lengths 10% higher than H1 last year. And finally, we're also seeing growth from international tenants moving to London and in short lets as international travel returns. Turning to slide seven. Sales transaction levels were 20% down on an exceptionally strong H1 2021, which benefited from the stamp duty relief to the 30th of June 2021. This had the impact of pulling forward many transaction volumes into the second quarter of last year. This has not come as a surprise and indeed we budgeted for this. There is good level of applicant demand, and we expect Q3 volumes to be above prior year, reflecting more normalized market phasing. However, as widely reported, there is industry-wide capacity issues in those areas needed to support transactions, including conveyancing, surveying, and from mortgage lenders. This means the time for these transactions to exchange is extended, and this can increase the risk of transactions falling through. The time for a property to convert from an instruction to an exchange is approximately 35% longer than last year. I'll now hand you over to Chris to go through the financials.

Thanks, Peter, and good morning, everyone. This is my first results release as CFO, having taken over the role on 1st of April, and I'm pleased to be reporting both revenue and profits growth versus the first half of last year. We are highly conscious of the challenges the business faces and the expectations of all our stakeholders, And although it's not an overnight change, I am pleased with our strategic progress, which is reflected in our first half's results. Turning to slide nine, I'll run through the financial highlights for the half. Total revenue for the half grew by 3%. And within this, we saw good growth in our lettings business, which I'll go through in more detail in a moment. We've taken cost action in the half to not only mitigate external cost pressures, but also importantly allow us to reinvest in business areas that will drive future profitability. First half cost savings combined with the operating leverage inherent in our business model has allowed us to convert the 3% of revenue growth to a 13% increase in adjusted operating profits. I'm pleased to report adjusting operating profit margin has also grown by 90 bps. And finally on the P&L, Profit before tax grew 21% in the half to 4.3 million. Cash generation remains strong in the half and we continue to deliver on our capital allocation policy. This has included investing in the business, specifically rebuilding sales negotiate and financial services advisor capacity, acquiring two further lettings portfolios in May, and making shareholder returns, including 0.9 million of share buybacks and the interim dividend declared today of 0.2 pence per share. Moving on to slide 10, which sets out an overview of our segmental performance. In the period, we have revised our approach to segmental reporting and now present corporate costs separately. These corporate costs primarily relate to the cost of operating as a listed business. Following this change, segmental earnings better reflect the underlying profitability of each business and helps with peer comparability. On revenue, we delivered good growth in our recurring lettings revenue, which more than offset market-driven decreases in sales and financial services. The latter two being impacted by tough 2021 comparator, where the stamp duty holiday had a significant pour forward effect on volumes. On profit, we were able to convert this 3% revenue increase to a 13% increase in adjusting operating profits, demonstrating the underlying operating leverage within the business. The sales business was loss-making in the half, which is reflective of our investment in sales negotiators not yet contributing to profit, which I'll touch on shortly. Moving on to slide 11 and the results from the lettings business, which accounted for 61% of group revenue in the period. Revenue grew by 6.5 million, which includes 4 million of growth in our underlying portfolio. 2 million of growth from the D&G portfolio, including 1.7 million of additional revenue as a result of two additional months of trading. And 0.5 million of revenue contribution from the two acquisitions we completed in May. As Peter mentioned, the market dynamic is one of low levels of inventory and high levels of tenant demand, leading to significant rental price inflation. Specifically, we have seen a 23% increase in average rental prices this year versus last year. Reflecting this, our volumes were 9% lower with average revenue per transaction 32% higher, leading to a 20% increase in revenue. The average revenue per transaction growth is reflective of increased average rental prices, longer tenancy lengths being agreed, and growth in our property management service. Within our specialist channels, we also saw good growth. Build to rent revenues grew in the period, with further growth expected in the second half as we launched several new developments in June. We also more than doubled revenues in our Asia Pacific channel, reflecting strong demand from international tenants. And police report we successfully integrated D&G lettings into Foxen's in the half and delivered synergies in line with our plan. This has driven good conversion of revenue to profits and margin growth, with adjusted operating profit growing by 5.8 million to 7.3 million for the period, and adjusted operating profit margin growing from 4% to 18%. Moving on to slide 12 and the results from the sales business, which accounted for 32% of group revenue in the period. The prior year was a tough comparator for the sales business as it greatly benefited from the poor forward effect of the stamp duty holiday. We expect 2022 to display more normalised seasonality and in particular better performance in the third quarter versus the prior year. Volumes were 18% lower, reflecting the 20% decrease in market volumes Peter mentioned earlier. Revenue per transaction was 1% higher, with average sales price increasing by 5%. This reflects growth in our share of the £1 million plus property market as we selectively fee match our competitors to drive volume and momentum in this space. Taking the above, total revenue was 17% lower than the prior year. Profit margins were impacted by the planned investment in negotiator headcount over the second quarter. These sales negotiators will generate revenue in the second half and typically break even within their first 12 months with the company. By scaling up our salesforce capacity and leveraging our economies of scale, we expect to generate incremental revenues with an attractive profit drop through in order to drive sustainable profitability within the sales business. These investments will be funded through cost savings, mainly within head office management structures, which I'll talk to shortly. Moving on to slide 13 and the results from Alexander Hall of financial services business, which accounted for 7% of group revenue in the period. Revenues were 80% lower at 4.8 million driven by lower volumes. Specifically, new purchase mortgage volumes decreased in line with the wider sales market, partially offset by growth in reoccurring remortgage volumes. Revenue per transaction was 11% higher, reflecting larger loan sizes. In addition, we saw higher cross-sell of ancillary products in the period, particularly in life assurance and other protection products. Adjusted operating margin was slightly low in the period as we invested in our financial advisor base as planned, who typically take around 12 months to become profitable. Moving now to slide 14. Here you can see how we've delivered growth in adjusted operating profit in the period. Starting on the left hand side, we delivered 1.7 million of revenue growth, which after charging for associated direct variable costs, delivered a like-for-like operating profit of 6.6 million. Cost action, mainly relating to head office and management functions, has delivered 0.9 million of savings in the half, or on an annualized basis, will deliver 3 million of savings per annum. This supported 0.4 million of net investment in revenue generating areas and mitigated 0.9 million of external cost pressures to deliver 6.2 million of adjusted operating profit in the half. This demonstrates the operating leverage within the business, and despite the stated investments and external cost pressures, close to 50% of revenue growth dropped through to adjust operating profits. Touching on these cost pressures a bit further, like many businesses, we are feeling the impact of increased costs. These include increased employers' national insurance contributions, Increase utility costs and business rates relating to our branch network and wage inflation pressure. The cost actions we've taken in the half will mostly mitigate these headwinds. Moving on to slide 15 and group cash flow. To summarize, the business generated net cash inflow of 2.8 million in the period, driven by increased profitability. Breaking that down further, I'll start with the bridge on the left hand side. Operating cash before working capital movements was 11.8 million. 2.1 million working capital outflow primarily relates to an increase in debtors driven by seasonality of our revenue in the lettings business. This dynamic typically winds over the second half of the year. Income tax paid in the half was 0.1 million. Taken together, the net cash from operating activities was 9.6 million in the half. Lease repayments totaled 5.9 million. On a like-for-like basis, after adjusting for the repayment of COVID-19 related lease deferrals in 2021, lease repayments were 1.1 million lower than the prior year. Primary drivers for this was the disposal of D&G lease liabilities as part of the sale in February 2022, as well as further savings from re-gearing leases within the Foxen's branch portfolio. Capital expenditure of 0.9 million related primarily to branch investments and technology capital spend. Moving to the uses of cash flow on the right hand side. There was an 8.5 million cash outflow relating to letting acquisitions in the period. 8 million related to the two portfolios we acquired in May and a further 0.5 million deferred consideration relating to the initial D&G acquisition. 3.7 million of cash was left in the D&G sales business following its disposal in February this year. This was funded by the previous owners of D&G who left 3.9 million of cash in the business in excess of working capital and liabilities at the point we originally acquired the business. We invested a further 0.4 million in Boomin, the next generation property portal. Lastly, we returned a total of 1.8 million to shareholders, split evenly between the final dividend relating to 2021 and share buybacks completed in the half. Total cash at the end of the period was 11.7 million. Moving to slide 16, where I set out our capital allocation policy. In the first instance, our main priority is to invest in revenue generating areas in order to deliver profitable growth, whilst ensuring we have sufficient cash to serve the working capital requirements of the business. Secondly, we will deploy cash to fund lettings portfolio acquisitions, an area where we have a good track record of identifying, acquiring, and integrating businesses to deliver attractive returns on capital. Acquisition targeting is informed by a matrix of financial and operational criteria. Fundamentally, we want to buy well-run businesses with low compliance risk and have the ability to meet our financial targets of a return on capital in excess of 20%. Thirdly, we will make shareholder returns via our ordinary dividend. And as previously mentioned, today we have declared an interim dividend of 0.2 pence per share. Finally, we will also distribute excess cash to shareholders. And to support this, we launched a share buyback programme of up to 3 million in March this year, with 0.9 million returned to shareholders by the end of June. In summary, we're aiming for a strong but efficient balance sheet that allows us to invest appropriately to ensure that the business maintains its competitive advantage. Our business delivers high levels of cash generation and we expect this to support investment in the business and to deliver returns to shareholders. Now to summarise on slide 17. The key points are Good organic growth in lettings with further contribution from the integration and realisation of synergies in the D&G lettings portfolio. Sales and financial services delivered results in line with the markets, reflecting the tough comparison in the prior year. Whilst the sales business delivered a small loss on a segmental basis, the investments we are making to rebuild capacity and return to economies of scale over the next 12 months will enable us to maximise our revenue opportunity. Cost actions in the half will deliver three millions of savings on an annualized basis. These savings will enable us to reinvest in growth areas, mitigate external cost pressures, and ultimately support the delivery of profit growth. Our operational leverage drives strong revenue to profit conversion with adjusted operating profits up 13% and profit before tax up 21%. Lastly, we have good cash generation characteristics in the business and today declared an interim dividend of 0.2 pence per share. And we will continue with the share buyback program to return excess cash to shareholders. And I'll pass back to Peter.

Thanks, Chris. Let me finish up by summarizing and providing some perspectives on outlook before Chris and I take your questions. Turning to slide 19. Above all, I hope today's presentation has given you a sense of the progress we've made and the clear plan we have to accelerate the business reset to deliver profitability. As I said at the beginning of the presentation, the business fundamentals are sound and Foxton's enjoys an enviable position in many areas. We have the most recognisable brand. We have thousands of new buyers and tenants registering with us every week, and we have the largest property inventory in London for both sales and lettings. Over the past seven weeks, I haven't just sat in head office. I've been around many of the branches and what I've found is that we have lots of property for sale, but not enough sales negotiators to sell them. The result is we've not been able to maximize the revenue opportunity nor generate the economies of scale that the Foxen's business model and inherent operating leverage provides. But we have started to rectify this as the reduced HQ costs are now enabling investment in Salesforce capacity. Guy is well-placed to spearhead this return to a high sales intensity culture and will no doubt accelerate the pace of growth. I'm very much looking forward to welcoming him to the business in early September. The results also further underline the benefits of investing in our lettings business. The D&G portfolio's successful integration and the integration of the two recently acquired portfolios will continue to deliver revenues and profits growth. We are actively building a pipeline of other acquisition targets with a view of acquiring more lettings portfolios in the next 12 months, if they meet our investment criteria. Now looking ahead and some outlook for the rest of the year. At group level, we anticipate adjusted earnings for the full year to be at least in line with market expectations. The drivers for this within our business are as follows. In lettings, the market-driven demand and supply imbalance shows little sign of changing over the short term, and we expect the same characteristics of lower volumes and higher rents to persist throughout the year. And as I've just mentioned, we're expecting some additional benefits in H2 from the two acquisitions completed in May 22. In sales, our under offer commission pipeline is significantly above the same time last year, reflecting more normalized seasonality this year. However, looking ahead, we're mindful of headwinds from the longer transaction times and any impact to consumer confidence of macroeconomic conditions. And we see a similar dynamic in Alexander Hall, our financial services business. Finally, we will continue to manage the cost base tightly and remove costs where we can to support investments in revenue growth areas and deliver progressive profits. So in summary, While the UK economic outlook and confidence in the sales market presents some challenges, our large and recurring Letix business, together with a continued focus on tight cost control, will provide good mitigation. When operating at its full potential, the Foxen's operating model is highly resilient and able to offset the cyclicality of the property sales market. Our strategy is clear and there is momentum, so we look forward to delivering good profit growth for the full year. Now, over to you to ask any questions you may have.

If you wish to ask a question, please press star followed by one on your telephone keypad. If you change your mind and wish to remove your question, please press star followed by two. When preparing to ask your question, please ensure that your phone is unmuted locally. To confirm that, star followed by one to ask a question. Your first telephone question is from the line of Sam Cullen from Peel Hunt. Please go ahead.

Hi. Morning, everyone. three broad questions. The first one is on the cost base. Can you talk about the major areas of pressure you're seeing this year and next year, and specifically, what is your utility bill in a normal year? What would it have been for electricity and heating across the branch network and Chiswick in 2021, for example, so we can get a handle on what the headwinds are you're likely going to be facing next year? And then secondly, more broadly, in terms of the cost base that you've got across Chiswick and the branches, how important is Chiswick to the operating model of Foxton's and do you have the right branch footprint at the moment? That's the first question, a bit of a rambler. The second is on the under-offer commission pipeline and the risk of chains collapsing. Is this more people waiting too long, finding other properties to buy and pulling out, or is it having mortgage offers expire and then having to remortgage at higher rates and being struck out on affordability measures? Can you give an idea of the potential risk in that pipeline, or how do you quantify that risk going into Q3 and Q4? And then just the last one is on the sustainability of the rental price increases you're seeing and what's organic kind of like for like two bed versus two bed increases and what's kind of any mixed changes you might be seeing in what you're renting.

Great, thank you for that. There's a good few questions there. Shall I start with the risk of the pipeline? I mean, it is a risk, definitely. I think we've got about £19 million in the pipeline at the moment. Mortgage offers last six months, so chains are a problem. The nice thing in London especially is that chains aren't that long and there are a surprising amount of cash buyers, which obviously don't need mortgages and therefore can move chains on quickly. I think a really good estate agent, and we've got some really good estate agents, can work out how to get a transaction through, but it does need a lot of work. As I've often said, probably 15, 20% of the job is getting an offer. The other 80% is getting it through. And I think we're pretty good at it, but there are obviously constraints with the time it takes at the moment. So I won't pretend it's not an issue. It is an issue, but I think we have the skills in-house to push it through pretty well. Chris, do you want to deal with the cost base?

Yeah, morning, Sam. I'll pick up the cost base question. On the cost basis, we look forward, the cost pressures really are coming from employer NI on an annualised basis, I'd have that around 0.8 million. Utilities, that cost is around half a million to three quarters of a million per annum as we are today across the estates. We are on fixed contracts until the last quarter and clearly that's something we're negotiating and keeping close eye on as we approach that deadline. Other areas of pressure, business rates, wage inflation, particularly at the head office, that's something we're keeping very close eye on. In the front offices, we've got a structure which is payroll-based pay structures, which is obviously pegged to external inflationary pressures on rentals and on the sales markets. Peter, do you want to pick up the points around Chiswick Park?

Yeah, Chiswick Park. I mean, Chiswick Park, I don't know if you've ever been to Chiswick Park, Sam, but it is an extraordinary place, and I think it is part of the heart and soul of the business. Having said that, I'm certainly not wedded to it, or we are not certainly not wedded to it. We have a lot going on here, and some of the back office functions, for want of a better word, are, I think, pretty integral to keep them close and interactive. Having said that, we've got a lot of space here and we probably don't need it all. Therefore, there are plans and thoughts of maybe moving to one floor. We've got some space in other offices, so there are definitely plans afoot, but I wouldn't be in too much of a rush to run away from Chiswick Park. I think it is It is an amazing place. We've been here for 20 years, 22 years, I think. So we shouldn't sort of get rid of it on a whim. Was there anything else that you want me to cover on that? No, that's great, thanks. On the sustainability of rentals. The sustainability of rental increases? Well, no, I think that they have already dipped a little bit. Now, 23% is obviously a big headline figure. What we didn't say is they dropped about 20-25% during COVID, so in many cases they're back up to where they were a couple of years ago, and that's what happens to markets. The fact is, in the market, We have a lesser amount of private rented coming through. A lot of landlords have exited the market because of taxation and pressure. And so it is classic supply and demand. We do have a lot of demand and the supply is limited. So frankly, I don't see rental prices dropping anytime soon.

Great. Thank you.

Thanks.

There are no more telephone questions at this time. I hand back the web app question.

A couple of web questions. Andy Murphy. In lettings, revenue per transaction was up 32%. What was the average revenue per transaction in the Foxtons and in the D&G business? And the second one from Andy. Given the new CEO coming in in September, can we expect a material change to strategy or more of a focus on delivery of the current strategy outlined earlier on the call?

I'll take the first one on the revenue per transaction on the D&G portfolio. The answer to that one, Andy, is we don't track the D&G portfolio separately in terms of revenue per transaction. But what I can say is, on average, the average rental in the D&G portfolio is slightly higher than Foxton's portfolio. Why? Because it's more focused on central London areas. Offsetting that, the D&G portfolio had a slightly lower average commission. So on balance, D&G and Foxton's, they're very much comparable on revenue per transaction.

Great, thanks Chris. In terms of the strategy, and as I said, I know Guy well. I worked with Guy in the early 2000s here, so I know him well. said that um uh i've been speaking to the guy i i i include him on the things that i've i've thought about and and i'm doing so the strategy will be more of the same and he's 20 years younger than me so i i guess he'd have a lot more energy and get up and go and we'll uh and we'll really push this forward because that's what it needs right and then chris millington a couple of questions

Please, can you add more colour on the scale of capacity you were looking to add to sales and what future costs could be incurred? I'll pick that one up.

Thanks, Chris. I think on that, it's fair to say 10% to 15% capacity is what we're looking at on the sales side. That's an investment of around £1 million per annum. I mentioned earlier the time for those negotiators to break even, it's around 12 months. So you start to see some revenue benefit coming from that in the second half, taking us into 2023. And it will be at that point where we start seeing contribution to the bottom line.

Two lettings questions. What are your expectations for revenue per transaction in H2? And can you comment on the lettings acquisition pipeline and has there been any change in price expectations?

I'll take the first one over expectations of revenue transaction in the second half. There could be some cooling off there, Chris, but not significantly. And really that will be the supply demand balance as we move into the second half. But I'd expect that number we've given in the first half to be relatively stable as we move through.

In terms of the pipeline, this is fresh in my mind because I had a meeting with the head of acquisitions yesterday. There is quite a lot in the pipeline of potential. I think it's really, really important we look at where we want it, how the quality of the book is vital. There's no point in taking on properties that the agents are charging four or five percent for because one, it won't be very good too we won't make money at it but the the quality is vital and the area that we want to add to the foxton's portfolio is equally vital so it there's a lot there and we need to decide which ones we want on financial services what is the ambition in financial services do you foresee it becoming a material driver of growth in the future um i i'm a i'm a big fan of alexander hall and i think uh Frankly, we can make a lot more of it. It sort of seems to me that it's gone the same sort of way as Foxton's, which has got so much business, potential business it could be doing, and not enough people to carry it out. The applicants we get in, the buyers that register with us, we've got about 3,000 a week registering with us. The opportunity is absolutely immense. But like all these things, it's hard to grasp and grab, especially if you've got not enough people there. So I think I'm very hopeful of that business, and I think we can mould the two businesses, Foxton and Alexander Hall, together much better and produce a lot more revenue.

Finally, have you seen any increase in fall-through rates in light of extended sales chains?

Fall through rates are around the industry average and that is around about 30%. It's between 20% and 40%. So no is the answer. It does take a lot longer to go through. It is taking 35% longer to go through, so the chances are there. But as I mentioned earlier, if you've got good agents on board, holding a deal together is probably the one. It's definitely the most important thing they do. There's no point shoving deals in at the top if they come out halfway down. So I think it's going to remain around 30%.

And then from Greg, Can you talk a bit more about the M&A landscape? Is there scope to pull any of the planned investment forward? Should we expect anything more in H2?

There is definitely, as I mentioned earlier, there's definitely opportunities there. We have to be careful which ones we pursue. So I think there is opportunities to put it forward, yes. But as I said, we're going to be cautious about which ones we buy and the quality of the book. I hope that answers the question. But yes, we could easily do it.

That's all the web questions.

Yes, so this concludes our question and answer session. I would like to turn the conference back over to Peter Rawlings for any closing remarks.

Great. Thank you very much. I hope you enjoyed it. Until next time.