Foxtons Group plc (FOXT) Earnings Call Transcript & Summary

Good day, and welcome to Foxtons Group plc interim results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Nic Budden, Chief Executive Officer. Please go ahead, sir.

Thank you very much, and good morning, everyone, and welcome to our half year 2021 results call. As usual, I'm joined on the call this morning by Richard Harris, our CFO; Patrick Franco, our COO, who will be on hand following the formal presentation to take any questions you might have. I'll begin in a moment by giving an overview of performance for the first half period and a brief progress update on the comprehensive suite of strategic programs that we shared with some of you at our Capital Markets Day in June. Richard is then going to take you through the financials before I finish up with some perspectives on outlook. So turning to our highlights on Slide 5. I'm delighted to be presenting this morning a really strong first half performance. In fact, our results today are the best they've been since 2016. In H1, we delivered significant growth in all segments of the business, and not just as a result of better market conditions, which we did successfully capitalize on, but because of the strength of our proposition, which enabled us to grow market share, and the power of our strategic capabilities, which enabled us to extract good synergies from acquisitions and improve our productivity in our existing businesses. In terms of financial highlights, group revenues were up 66% against last year, and probably more importantly, were 29% higher than in 2019 when market conditions were more normalized. Sales revenues grew to GBP 28.6 million, up 86% compared with 2019 and higher than for the full year in 2020. Much of this growth clearly came as a result of improved property sales market conditions, but I'm pleased to say that we were able to outperform the market over the period, growing market share and sales despite our premium price position and our Central London focus. We successfully captured much of this increased activity within our cross-sell systems, and that's enabled us to deliver higher levels of referral business into our mortgage broker with Alexander Hall posting an increase in revenue of 31% to GBP 5.2 million. Lettings revenues grew by 2% over 2019 as a result of significant increases in volumes being partially offset by softer rents. The work we've done over the last 3 years to improve efficiency and remove cost in Foxtons as well as a good contribution from Douglas & Gordon meant that a significant proportion of revenue growth flowed through into operating profits, which were GBP 5.2 million in the period, a GBP 6 million improvement on 2019, and a level we haven't seen since 2016. As well as [ vetting ] in the acquisition of Douglas & Gordon, which has surpassed my expectations. We've made good progress with all of our other strategic initiatives, including the rollout of our new Customer Data Platform, and our GBP 3 million investment in Boomin in the U.K.'s next-generation property portal. On an operational level, I'm pleased to report that despite ongoing COVID-19 operational challenges, our branches remained fully open during the first half, unlike last year. And as a result, we've made no use of government support this year. Our strong performance in H1, together with our confidence about the medium-term prospects for the business means that we're now in a position to recommence dividends. And furthermore, with excess cash currently being beyond our requirements, will tomorrow launch a further share buyback program of up to GBP 3 million. As we set out in June, having optimized our operations over the last 3 years, Foxtons now has a huge potential for growth underpinned by a clear strategy to reinforce market leadership and diverse revenues to grow profits. This strategy was initiated in autumn last year and is already delivering good results. Let me give you a quick reminder of our key programs, and then I'll briefly report on progress during the first 6 months of the year. Slide 6 sets out 3 current strategic priorities. We want to sustain market leadership where we already have it, and build it rapidly in the new markets we enter. The economic cycle is always going to be an important feature of our property sales market, but the more that we can diversify towards recurring revenues and new market opportunities, the more resilient we'll be and the more we can maintain profitability throughout the cycle. And fundamentally, our objective is to grow profit. We've seen a glimpse of our future, potentially in the first half of this year, and we're confident that 2021 can be a significant first step towards delivering improving shareholder value over the next 3 years. The next 3 slides provide some more detail on the levers we're pulling to achieve our strategic goals and the progress we're making. In terms of market leadership, as I've said before, I'm particularly delighted with the headway we're making on market share. We believe this progress demonstrates clearly the strength of our customer proposition. We deliver premium results for customers, which substantiates our premium fee position, and we support their user experience with the best people, tech and digital marketing available in the sector. It remains early days for our new Customer Data Platform, which gives a unique and highly sophisticated way of targeting customers, but we're very excited about the positive impact that could have. As I set out last month, just a 1% improvement throughout the sales funnel would lead to GBP 13 million of incremental sales commissions, the majority of which would flow through to profit. In lettings, we've built a highly scalable end-to-end service platform, which, as a reminder, has the capacity even today to manage every tenancy in London. During the last 18 months, we've fully and seamlessly integrated a number of acquired lettings portfolios into the platform, and we've achieved excellent levels of land or retention. Taken together with the organic growth achieved through Foxtons, these acquisitions have enabled us to grow our portfolio by 15%, and they represent a successful track record that we can now build upon and give us confidence about our ability to deliver good levels of financial returns from additional bolt-on acquisitions in the future. As I've already mentioned, our own technology and Customer Data Platform, but we're also interested in investing in concepts and adjacent proptech opportunities that are synergistic with our interest and reinforce our competitive advantage. Our recent investment in Boomin is an excellent example of this. And we believe Boomin has the potential to disrupt the lucrative aggregator market and have some exciting points of differentiation. It's made a good start already, and we're very pleased to be involved at an early stage as an investor. Our diversification strategy is summarized on Slide 8, and is primarily based on developing new channels to market, growing our position in the Build to Rent sector and further expansion beyond London. Our dedicated China Desk is performing well, and our specialist team there have been able to quickly build an additional GBP 1 million in revenue across sales in lettings. Chinese buyers and tenants represent a large and attractive opportunity who love the property market in London and want to work with a quality agent with a great online user experience. And beyond China, we feel there's lots of potential to develop similar overseas channels into other international markets. Huge investment is also being made in the Build to Rent sector. And having worked hard to build relationships with key investors and developers over the last 3 years, we now have a leadership position with an estimated 20% market share in this sector, and that led to a doubling of revenues this period. And our expansion beyond London continues; Berkshire trial has gone very well, confirming what we knew that London's -- that Foxtons brand and customer proposition resonates very well beyond the M25. Our plans to launch further a field are well developed, and I expect to be able to update you some exciting progress before the year-end. Finally, on Slide 9, let me explain how we're making the most of top line revenue growth to ensure high levels of conversion into operating profit by focusing on maximizing productivity, synergies from acquisitions and cross-sell. Profits this half grew quickly with revenues, demonstrating the attractive operational leverage we've created after several years of focus on efficiency. In sales, our highly motivated teams and bespoke operational systems enabled us to achieve a 45% increase in deals per agent compared with 2019, whilst maintaining excellent service levels and growing market share. Essentially, this level of productivity growth meant that we were able to handle much higher transaction levels with fewer people. In lettings, as I mentioned a moment ago, we have a good track record of integrating acquisitions, and the profit contribution from these is currently surpassing expectations. At a group level, continuous improvement in our cross-sell capabilities enabled us to improve our ability to successfully market our mortgage and conveyancing services to our customer base, which are now present on 69% or 49% of sales deals, respectively. So that's a brief update on strategy. Before I hand over to Richard, let me briefly set out what we're seeing in the current market in sales and lettings. As we've said on a number of occasions recently, we believe the London property sales market could currently be as something of an inflection point. Clearly, the first half of this year was unusually busy as a result of the stamp duty holiday period. But we consider the long-term underlying fundamentals to be solid also. For the last 5 years, in particular, London sales markets have been severely impacted by economic and political turbulence. We've experienced several General Elections, a disorderly and lengthy Brexit and, of course, COVID-19 over the last 18 months. These conditions have been extremely tough for our sector, but we believe that with a stable government, Brexit behind us, and the COVID-19 threat receding as a real chance that property sales market will experience more consistent growth over the next few years. And that perspective is borne out, at least in the short term by the strength of our current sales pipeline, which today remains well ahead of 2019 levels despite the very high number of exchanges we achieved in H1. In fact, you may remember, we began to see the beginnings of some green shoots in late 2019, following the decisive General Election outcome and the perceived resolution of Brexit, but that recovery was quickly snuffed out by COVID-19 and the closure of the property market in the second quarter. You can see on Slide 11, 2020 and 2021 property sales market were extremely volatile as a result, with supply and demand crashing in early 2020 only to return sharply in 2021 with the announcement of stamp duty relief. Prices, on the other hand, have remained pretty stable for much of the period, reflecting the fact that supply and demand moved in concert and increased only marginally in early 2021 as significant numbers of new buyers enter the market to take advantage of the stamp duty holiday. Turning to Slide 12. It won't be surprising to learn that the lettings market was also impacted by the effects of COVID, in particular, the numerous lockdowns that we experienced, significantly limited the population's mobility with the majority of Londoners working from home, entertainment opportunities severely limited and virtually no international business travel, corporate relocations or overseas student arrivals. In addition, the closure of the tourism industry in 2020 led to an influx of rental stock into state agency hands from short-term booking platforms. And whilst that is great, in terms of long-term opportunity for us, it did result in oversupply, which is still being worked through and led to downward pressure on rents, which in H1 were down on average 9% across London and closer to 15% down in Central London. As the COVID restrictions have eased, we've seen significant demand growth as normal working patterns resume, entertainment opportunities open up again, and tenants take advantage of lower rents in more attractive locations. And that has started to stabilize rental prices. We saw growth in each month of Q2, and our expectation is for rents to continue to firm up throughout Q3 and the remainder of the year. That's all I had to say on the market so far, but let me now hand over to Richard Harris, who's going to go through the financials in more detail.

Thanks, Nic, and good morning, everyone. I'm going to start the financial review on Slide 14 with a summary of our income statement. Throughout the presentation, I'll be comparing our first half performance for the same period in 2019 rather than last year given the disruption that we saw driven by COVID-19. Total revenue for the first half grew by 29% or GBP 15.1 million across the group versus 2019. Within this, just under half of the growth came from the existing Foxtons business, where we saw strong volume growth in both sales and mortgage broking. The balance in growth came from the newly acquired Douglas & Gordon, and I'll go through the detail on each of the component parts in a moment. On the cost side, as Nic mentioned earlier, we saw good growth in negotiated productivity and combined with good tight cost controls. This allowed us to convert the revenue growth into a much improved profit performance. First half adjusted operating profit was GBP 5.2 million, an improvement of GBP 6.1 million from 2019. In contrast to 2020, our branches have traded without closure this year and are performing well. As a result, we have elected not to take the business rates release that our branches were eligible for in the first half. In July, we made a GBP 1.5 million rates payment for the period, and the rate expense was fully reflected in the income statement that you see before you. More broadly, it also means we have not utilized any government support in the first half of the year. Douglas & Gordon, which we acquired at the beginning of March, and [indiscernible] for 4 months, contributed GBP 7.2 million of revenue in the first 4 months of our ownership, boosted by the more favorable sales market conditions. This dropped through to a GBP 1 million operating profit contribution. The integration of D&G is going well in line with our expectations, and we expect further profit improvement to come through in 2022. Adjusted items in the period totaled GBP 0.8 million, and this includes the costs related to the acquisition of D&G as well as a noncash write-down of our investment in associate. Net finance costs of GBP 1.1 million were charged in relation to the IFRS 16 lease liabilities. Taking all of these points into consideration, profit before tax of GBP 3.3 million was achieved during the first 6 months of the year. Finally, just to touch on taxes. The total tax charge for the first half was GBP 7.2 million. This was primarily driven by the remeasurement of deferred tax balances in accordance with the enacted U.K. corporation tax rate of 25%, up from the previous 19%. The current tax charge in the period, after utilizing brought forward losses, was GBP 0.2 million. Moving on to lettings, on Slide 15, which accounted for 49% of group revenue in the year. Revenue grew by 2% in the first half with GBP 3.8 million revenue contribution from Douglas & Gordon. Excluding D&G's revenue contribution, and adjusting for the GBP 1.4 million impact of the tenant fee ban, revenue was down 5% in the first half. Average rents were down 9% in the period, and this was partially offset by growth in the number of tenancies. Average weekly rents have improved through the first half. And with tighter stock levels and strong applicant demand, we are expecting this trend to continue into the second half. Build to Rent revenues were very strong in the period, more than double the level they achieved in the first half of 2019 and 2020 as our market-leading position combined with increased availability of stock. The proportion of the lettings portfolio that is actively managed remained at 34%, which we believe to be a good result given landlords are experiencing downward pressure on incomes from the lower average rents. Contribution margin was lower at 68%, and this reflects the impact of the tenant fee ban, the portfolio mix in the period and D&G's higher cost base. The tenancy portfolio grew by 15% during the half to GBP 25,000. In part, this is driven by our successful lettings by acquisition strategy and the acquisition of D&G. But it's also pleasing to see the number of tenancies grow on an organic basis as well. Moving on to sales. The first half of 2021 was a strong period for our sales business with revenue of GBP 28.6 million, being up 86% on the same period in 2019. Excluding D&G's contribution of GBP 3.4 million, revenue growth was 64% of 2019. Returning confidence in the sales market, pent-up demand from last year's lockdowns and stamp duty relief all encouraged more house moves. The best market conditions for some time resulted in total volumes being 73% higher than 2019. Average revenue per transaction was up 7%, driven by a combination of 2 factors. First, impact of the D&G acquisition, but the average price of the home sales is higher with our business being focused on Central and South West London. In addition, the average price of homes sold by Foxtons increased marginally by around 2% in the period. In sales, contribution margin grew strongly to 59% as productivity gains ensured the revenue growth dropped through to profitability. Removing the impact of D&G, we maintained the Foxtons commission rate at an average of 2.4%, well above much of our competition. Results at Alexander Hall, our mortgage brokers are strong with revenue up 31% to GBP 5.2 million. Volumes were 33% higher driven by the more buoyant sales market and increased cross-selling from Foxtons state agency business. Average revenue per deal was broadly flat. Alexander Hall continues to deliver high levels of customer service and is regularly recognized awards for quality and the service that it offers, and won 2 prestigious industry awards earlier this month. As disclosed last week, we're in the process of reviewing all of our strategic options for Alexander Hall, and this includes a broad range of options to choose from. Slide 18 covers the group cash flow. The business generated a net cash inflow of GBP 3 million in the period driven by our increased profitability. During the half, we repaid GBP 2.1 million of lease deferrals that were negotiated during the initial COVID-19 lockdown. There's a further GBP 200,000 of lease deferrals still to be repaid in the second half of this year. The branch business rates payment, I mentioned earlier, for GBP 1.5 million, was made in July, and so was not included in the period end cash balance. Adjusted items of GBP 0.5 million in the cash flow relates primarily to the acquisition of D&G. Capital expenditure of GBP 1.1 million related primarily to IT equipment and sub-branch investment. And then moving on to the uses of cash flow on the right-hand side of this slide, we invested GBP 10 million net of cash acquired in the acquisition of D&G in the first half. Further consideration payment of GBP 1.1 million was made in July when the completion accounts were agreed, and deferred consideration of GBP 0.5 million is still outstanding. We also invested GBP 3 million in Boomin, and GBP 2.7 million was returned to shareholders through the share buyback announced in December. Total cash at the end of the period was GBP 24.4 million, taking into account the rates payment of GBP 1.5 million and the D&G acquisition payment of GBP 1.1 million, both made in July and the outstanding rent deferral of GBP 200,000, the underlying cash balance at the end of June would be around GBP 21.6 million. Now turning to our capital allocation framework, which we reiterated at our Capital Markets Day in June. I'll cover the key points here, just to reiterate. The first priority of the business is to ensure we have sufficient liquidity available to manage our operational requirements and protect against any short-term shocks in what are cyclical markets. We believe a cash balance of GBP 12 million to GBP 15 million is appropriate at this stage. Our second priority is to then fund investment in the future development of the business, and the success of Foxtons depends on this continued investment in our 2 key assets, being people and technology. We continue to see opportunity to grow the business through acquisitions of high-quality lettings businesses. The focus in recent months has been on ensuring smooth integration of Douglas & Gordon, but we intend to further progress our acquisition program in the months ahead. In terms of cash returns, we have a policy to return 35% to 40% of profit after tax as ordinary dividend. In line with this policy and having stripped out the impact of the deferred tax movements in the period, we've declared an interim dividend of 0.18p per share for the first half. Finally, we will distribute excess cash above our operational requirements back to shareholders. To this end, we returned GBP 2.7 million in the first half from the buyback announced in December. And in addition, we've announced a further GBP 3 million share buyback program today. In summary, we're in a strong, efficient balance sheet that allows us to invest appropriately to ensure the business maintained its competitive advantage. Our business delivers high levels of cash generation in more normalized markets, and we expect this to support investment in the business and deliver returns to shareholders. Finally, summarizing on Slide 20. The key points from me are, we delivered good growth in both the sales business and mortgage broking, which have been supported by improved market conditions and delivery of market share growth. Lettings performance was resilient, in fact, at lower rental levels, but the market continued to be impacted in the half by the ongoing disruption due to COVID-19. As we're comparing to 2019, we also saw the residual impact of the tenant fee ban. As presented at the Capital Markets Day in June, we have high levels of operating leverage in the business, and this meant we were able to deliver much improved profitability from the revenue growth in the period. There was good revenue and profit contribution from Douglas & Gordon and the integration process is progressing in line with our plan. We are pleased to reinstate the ordinary dividend and to announce the further share buyback of up to GBP 3 million today. That's all from me, and I'll hand back to Nic.

Thanks, Richard. Let me finish up on Slide 22 with a summary and outlook before taking questions. Above all, I hope today's presentation has given you a sense of the pace of our strategic progress and how well the business has rebounded from the impact of COVID-19 last year. We delivered strong top line performance across all segments of the business and achieved excellent profit growth driven by the successful implementation of our strategy, growing market share and by capitalizing on more favorable market conditions. At our Capital Markets Day in June, we set out the strategy we've been following since last autumn, and we're making good progress against key objectives. The D&G acquisition was significant for the group. Integration is underway, and we're very pleased with how that is performing. Looking ahead, the lettings market is recovering quickly and will continue to do so as restrictions ease and supply and demand rebalances Rents are increasing and we anticipate the second half of '21 to represent another step towards a more normal market in lettings. The second half sales market will inevitably cool compared to the first half, but underlying activity has stepped up from pre-pandemic levels and judging by the short-term growth in our pipeline, we believe this is sustainable. So we have a clear strategy. Our differentiators are as strong as ever. There's momentum in the business, and we look forward to delivering good profit growth for the full year. With that, I'll just pass back to the operator to handle the Q&A from a technical perspective.

[Operator Instructions] We take our first question from Sam Cullen with Peel Hunt.

I've got a few questions. Do you want them all at once or do them one at a time?.

Yes. Just [indiscernible], Sam, we'll write it and down and pass them on.

Okay. So the first one, I think, was on trying to point your comments around productivity growth and separate market versus what you've done. So I guess in short, kind of how do you think your market share has evolved in the first half of the year because you've got the 45% increase that you flagged, at least some of that is down to better market conditions. So kind of interested to hear your thoughts on that. Secondly, if you could kind of flesh out your thoughts a bit more about the pipeline and the increase you've seen -- with the improvement you've seen in July and your thoughts around the second half. And then 2 kind of last questions, which are kind of interrelate, I guess, on the M&A program, kind of indicated that you're perhaps looking to step on the gas again in terms of M&A. Are we talking a return of further lettings book of acquisitions? Or are you looking at other assets similar to kind of D&G within integrated sales and the things platform? And then finally, related to that, I guess, is how does that -- how is the strategic review of the mortgage broking business fit in with the cross-selling of services that you drive as one of your drivers for profit growth. I'm interested to hear your thoughts there.

Thanks, Sam. Let me take the first 2, and then maybe Richard can comment on the second, too. Productivity growth versus market share, obviously, 2 sort of different measures. The productivity growth comes from our ability with our systems and platforms to deal with more exchanges and lettings deals with a smaller number of headcount this year. So that's the 45% figure. In terms of market share, we have about 7 and a bit percent of the commissions pool in sales. across our core markets. And whilst obviously, the largest share of revenue growth came from the market recovery in H1, we're pleased with the market share improvements that we've had. And we use 3 systems to try and triangulate market share, the land registry, which has lagged some data from TwentyCi and some other database information from the aggregators. So we don't publish our market share improvements on a sort of half year basis, but we'll be looking at further communicating that when there's more certainty around that. In terms of the pipeline, we exchanged a lot of property in June, and so we saw the pipeline reduced quite considerably, and that was totally in line with expectations, obviously. What's been pleasing, though, is immediately after the stamp duty tapering window closed, the July figures have been good in terms of new offers. And so we today stand at around about 14%, 15% above 2019 in terms of value of the pipeline. So we think that there is good reason to believe that the stamp duty window closing wasn't a cliff edge. There were clearly large numbers of exchanges, but we think that there are good prospects to improve revenues throughout the back end of this year over and above what we achieved in 2019.

And on M&A, Sam, so the primary focus of our M&A strategy is to acquire lettings books. And you kind of rightly pointed out, the last few months have been primarily focused with integrates in Douglas & Gordon and making sure we do a good job of that. I think that will be a key factor of the group over the next couple of months as well. Behind the scenes, we kind of continue to cultivate relationships with owners of lettings businesses to ensure that when they come to market, we are at that first quarter call, if you like, as a potential for our lettings business. So I would expect -- I wouldn't expect a huge amount of activity in the next few months, albeit there'll be lots of activity behind the scenes. But as we get towards the end of this year and into next year, they'll get some more activity in that regard. In terms of the strategic review of Alexander Hall. So the key portion we're trying to address with this review, I think, is Foxtons has a very large funnel of buyers [indiscernible] in the sale of business that are looking to take out mortgage brokering services. And we have this access to this large funnel -- large referral pool with Alexander Hall unable to be able to fully utilize all of those referrals because of some capacity constraints. So the strategic question we're trying to answer is what is the best way to unlock that referral opportunity going forward. And there are options to increase capacity in our deductible. That may take some time or it might significantly damage profitability in the short term. So then if that's one option, alternatives might be partnering with a third party to try and utilize some additional capacity or find some other way to utilize those referrals in the most profitable way and maximizing our returns from it. I think one thing I would say -- I would rule out is a complete disposal of the business that leaves us with 0 exposure to mortgage broking market. I think that's very unlikely. So after that, I think all options are available to us, and we'll continue to try and identify the best opportunity for Foxtons alongside the best opportunity, for example. Does that answer your question?

Yes.

[Operator Instructions] It appears there are no further questions at this time. I would like to turn the conference back to you, Mr. Nic Budden, for any additional or closing remarks..

We've got one question that's come through on the online webcast. So this is a question from Andrew Murphy at Edison Group. And the question is probably in 2 parts, actually. So can you discuss [indiscernible] revenue from outside of London. So I think that's referring to the Berkshire trial? And then how activity is likely to play out in half 2. I think we partially answered that with previous question.

In terms of outside London, I mean, clearly, if you're referring primarily to the Berkshire trial there, we've only really had that file up and running about 9 months. So revenues would be very small from that initial trial. We are, I think, the ninth or tenth largest agent in Berkshire now, which is obviously a very large area by listings. And so as those flow through to exchanges, we'll see the revenues there. The Berkshire trial was not really about revenue maximization in the short term. We were testing brand appetite. We were testing different pricing levels. And so that's instructed very helpfully how we'll be going forward in other areas and other models outside of the M25. So whilst we do expect that to be a profitable market for us in future, the first 6, 9 months was really about testing different marketing and pricing concepts. We'll give a more of a detailed update at the end year results. Okay. Well, thanks very much, everybody, for attending. And we're obviously catching up with a number of you later in the day on one-to-ones.

This concludes today's conference. Thank you for your participation. You may now disconnect.