Foxtons Group plc (FOXT) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining the Foxtons 2025 Half Year Results Presentation. I'm joined by Chris Hough, Group CFO, and we will answer any questions at the end of the call. We have a streamlined presentation today following the in-depth look at the business at our Capital Markets presentation last month. This morning, I'll take you through some of the key financial and operational highlights to provide an update on London's lettings and sales markets. Chris will then talk you through the numbers, and I will finish with an update on operational progress in the half, followed by some detail on July trading and outlook for the rest of the year. The business I took over when I rejoined Foxtons in September '22 was very different to the one we are today. Following a forensic operational review, we undertook a massive rebuilding exercise over '23 and '24 to completely turn around the business. And that work is really paying off. We are now firmly in the next stage of growth, and I could not be more excited about the momentum we're building. And that progress can be seen in our results for the first half. We delivered 10% revenue growth and 31% profit growth. Revenue growth was delivered through another half of Lettings growth plus a 25% growth in Sales as the business capitalized on Q1 volumes that were boosted ahead of the stamp duty deadline. Driving margins is a key area of focus, and we delivered profit growth through a focus on higher-margin activities, delivering returns from our acquisitions and keeping a tight control on costs without impacting top line growth. Following our strategic rebuild over the last 3 years, today, Foxtons is first and foremost a lettings-focused business. In total, noncyclical and reoccurring activities generated 2/3 of revenue in the half, highlighting our totally changed financial profile as we aim to deliver consistent and predictable earnings growth. In the half, we delivered continued market share growth to further cement our position as London's largest estate agency brand and impressively, for a London-focused business, also as the U.K.'s largest lettings brand. Operationally, although the turnaround stage of our plan is complete, we haven't stood still. The business has really embraced a new culture of continuous improvement, which is key to ensuring that we not only stay ahead of the competition, but build a bigger lead over time. In the half, we delivered further upgrades focused on driving lead generation and conversion, customer service and experience and further developing our people and culture. I will provide more detail on these later in the presentation. Finally, and excitingly, we held a Capital Markets event last month. On the day, we presented an in-depth look at our business, our enhanced strategy for growth and set new medium-term financial targets to deliver GBP 240 million in revenue, GBP 50 million in adjusted operating profit and a 20% adjusted operating profit margin. To give some context, our new profit target is more than double the level delivered last year and really highlights the growth potential that we see in this business. Turning now to Slide 7 and an update on the London lettings market. On the chart on the left-hand side, we have indexed the tenant demand and property instruction levels to 2021. As you can see, supply and demand dynamics have now stabilized following a period of volatility after COVID-19 to a new normalized level. Demand remains high. And although we are seeing more turnover of properties in the lettings market, demand continues to outstrip supply. Reflecting this structural imbalance between supply and demand, rental prices grew 2% in the half, broadly in line with inflation. We expect this dynamic will continue, underpinned by the long-term trends of high levels of demand and limited numbers of new landlords entering the sector. Our industry-leading platform enabled us to maximize our opportunity in the lettings market. We continue to deliver market share growth to further cement our position as London's #1 lettings agent. Our commuter town acquisitions are performing well, and I'm excited by the growth opportunities we can deliver both acquisitive and organic by rolling out our brand, technology and data capabilities in these new markets. On the regulatory front, the government is advancing the Renters' Rights Bill, and it's expected to take effect in 2026. The new legislation creates opportunities for Foxtons. As London's largest estate agent, we are uniquely positioned to guide landlords through the evolving landscape, leveraging our deep market insights, robust research capabilities and sophisticated legal and compliance infrastructure. These strengths enable us to turn regulatory change into a competitive advantage. As we discussed in detail during the Capital Markets presentation, today, over half of landlords operate without an agent. But given the increased levels of regulation, we are seeing an increased number of these landlords now opting to use professional agency services to mitigate the risk of getting it wrong versus a DIY approach. And this is a trend that we expect to continue to grow. In addition, the increased regulatory burden enhances the appeal of our value-add property management services. And with a concerted effort across the business, including training, KPIs and top-down management; we delivered a 9% increase in our upsell rate in H1 alone, which is a fantastic result that will support further revenue growth in H2. Together, these dynamics are expected to grow the Lettings total addressable market and drive stronger customer lifetime value supporting delivery of our growth plan. Turning now to Slide 8 and an update on the London sales market. Exchange volumes were 18% higher than in the prior year, with volumes reflecting 2 distinct quarters. Q1 volumes were 50% higher than the prior year as we saw high numbers of first-time buyers completing transactions ahead of the stamp duty deadline at the end of March. As expected, Q2 volumes were 10% lower, reflecting the pull forward of deals into Q1. At Foxtons, we're focused on volume markets, characterized by properties priced below GBP 1 million, which is where the bulk of London's property transactions are completed. This segment massively outperformed prime and super-prime markets where tax changes, coupled with high levels of stamp duty, have disproportionately impacted demand from wealthy and international buyers. In fact, despite the overall London market seeing growth in volumes in exchanges, these markets were year-on-year lower. This dynamic reinforces our strategic focus on the more resilient volume markets within London and beyond. Looking further ahead, one dynamic to highlight is demand has not grown at the levels that we and most of the industry expected at the end of last year. The primary driver here is borrowing costs, which have not reduced at the rate initially forecast. In fact, borrowing costs are broadly unchanged versus last year. Compounding this is a general weakening in consumer confidence, the economic outlook and uncertainty ahead of the Autumn Statement. The pace of interest rate cuts will be key in determining how demand evolves over H2. For vendors looking to sell in this environment, pricing is absolutely key. There are high levels of pent-up demand in the market. And where we see properties priced competitively, buyer interest and offer rates remain strong. We welcome the government's recent announcement of the new mortgage guarantee scheme and await further detail. More pressingly, in my opinion, is a review of stamp duty. Q1 demonstrates just how much stamp duty impacts the market, and I'm firmly of the belief that stamp duty needs reforming across all price points to allow people not just to buy their first property but create the market fluidity that allows homeowners to either upsize or downsize as their needs evolve. A healthy, functioning and affordable sales market is critical in supporting the government's growth agenda. I'll now pass over to Chris for a run through the financials.

Thank you, Guy, and good morning, everyone. In the first half, the group delivered strong revenue and adjusted operating profit growth as we continue to progress against our growth plan. Financial highlights are set out on Slide 10. Group revenue grew GBP 7.6 million or 10% to GBP 86.1 million, with Sales contributing 70% of the revenue growth as we capitalized on a buoyant Q1 sales market and Lettings contributing 30% of the revenue growth. We delivered GBP 12.3 million of adjusted operating profit, which is 31% higher than the prior period. Consistent with the full year 2024, adjusted operating profit for the half excludes amortization of acquired intangibles, with the prior period comparatives restated to provide a fair comparison across financial years. Our adjusted operating profit margin grew by 230 basis points to 14.3% as operational initiatives and the inherent operating leverage in the business drove growth. I'll provide more detail on these initiatives in the segmental overviews. Adjusted EBITDA, which is defined on the same basis to calculate the group's RCF covenants, grew by 32% to GBP 13.8 million. Statutory profit before tax was GBP 10.2 million, up 35% on the prior period. Net free cash flow was positive at GBP 3.6 million compared to a GBP 0.9 million outflow in the prior period, reflecting improved profitability and a lower working capital outflow. The Board has declared an interim dividend of 0.24p per share, a 9% increase on the prior period under the group's progressive dividend policy. The group also bought back 2.8 million of shares in the first half under the buyback program announced in April this year. Turning now to Slide 11, which provides an overview of the income statement and key changes. The 10% increase in group revenue to GBP 86.1 million reflected 4% growth in Lettings revenue, 25% growth in Sales revenue and flat Financial Services revenue. I'll talk to the key revenue dynamics in each business over the next three slides. Group revenue continues to be underpinned by Lettings, which represented 63% of group revenue in the half. As highlighted at the Capital Markets event, Lettings revenue is noncyclical and recurring in nature and delivers high levels of consistency and earnings visibility. Direct costs were up GBP 2.6 million, reflecting higher fee earner numbers as a result of acquisitions and higher revenue-linked staff commissions. Contribution margin was held flat at 65%. Overheads were GBP 1.4 million higher, primarily driven by GBP 1 million of incremental overheads relating to acquisitions. The underlying cost base was broadly flat despite inflationary headwinds and GBP 0.5 million of higher national insurance costs in the period as part of our focus on driving margin growth. Depreciation, amortization of non-acquired intangibles and share-based payments were GBP 0.8 million higher than the prior period. Together, these movements delivered adjusted operating profit of GBP 12.3 million, a 31% increase on the prior period. Profit before tax was GBP 10.2 million, which is GBP 2.7 million higher than the prior period. In the first half, we also delivered on a material future cost saving program by negotiating an early exit from the Chiswick Park headquarters lease and agreeing a new lease for a smaller space in order to rightsize our headquarters footprint. This proactive move has been enabled by the better use of branch space and growing our lower-cost Property Management Center outside London. The rightsize will result in cost savings of approximately GBP 1.5 million per year from January next year. No early exit premium is payable under the terms of the surrender. The Chiswick Park rightsize is part of a wider program to deliver cost savings in the property portfolio without impacting revenue generation capabilities. Including the saving on the Chiswick Park lease, the group's 2026 underlying lease cost base will be approximately 20% lower than 2023 as a result of rightsizing, consolidating branches and successful lease renewal negotiations. Turning now to Slide 12 and performance in Lettings. Lettings revenue grew by GBP 2.2 million or 4% to GBP 54.6 million. This is a result of GBP 2.9 million of incremental revenues from Lettings acquisitions, broadly flat like-for-like Lettings revenue, which reflects strong property management revenue growth; offset by lower like-for-like transaction volumes, primarily driven by phasing; and GBP 0.5 million lower interest earned on client monies due to lower Bank of England interest rates. Overall, transaction volumes grew 2% and revenue per transaction increased by 3%, reflecting 2% higher rental prices and improved revenues from property management, supported by a 9% increase in like-for-like upsell versus last year. This is in order to grow our portfolio of noncyclical earnings and to drive customer lifetime value. Contribution grew 6% to GBP 41.5 million off the back of revenue growth, whilst the contribution margin grew by 90 basis points, which is primarily due to margin-accretive property management and cross-sell of related ancillary services. Adjusted operating profit grew 13% to GBP 15.5 million. And adjusted operating profit margin grew 210 basis points to 28.4%, reflecting the stronger contribution margin and the delivery of acquisition-related synergies. Moving to Slide 13 and an update on the Sales business. Sales revenue grew GBP 5.3 million or 25%, reflecting GBP 3.1 million of like-for-like revenue growth and GBP 2.2 million of incremental revenue from our commuter town acquisitions. In total, volumes were 44% higher and revenue per transaction was 14% lower. On a like-for-like basis, excluding the commuter town acquisitions, revenue was 14% higher, reflecting 21% growth in transaction volumes as we effectively capitalize on a buoyant Q1 market, driven by the 31 March stamp duty deadline and 6% reduction in average revenue per transaction due to a higher proportion of lower value first-time buyer properties transacting in Q1 ahead of the stamp duty deadline. H1 2025 market share across Foxtons London markets was robust at 5%, ahead of the 4.5% target set out in March 2023. The adjusted operating loss in Sales narrowed to GBP 2.1 million, an improvement of 42%, reflecting higher revenues, improved productivity and a profitable contribution from the new commuter town acquisitions. Moving on to Slide 14 and Financial Services. Revenue in Financial Services was flat compared to the prior period as good growth in new purchase activity was offset by lower refinance revenue due to timing of mortgage renewals. Specifically, new purchase mortgage revenue was up 22%, with Q1 benefiting from particularly strong year-on-year growth. And refinance revenue was down 19%, driven by the timing of mortgage expiries, which are weighted towards H2. Average revenue per transaction was up 4%, driven by growth in higher revenue new purchase activity. This was offset by a 4% reduction in volumes, reflecting lower refinance expiries. Adjusted operating profit was low in the half, primarily reflecting investment in fee earner headcount, up 8% year-on-year as we scale up the business. New fee earners typically breakeven around the 12-month mark. Moving now to Slide 15 and cash flow. There was a GBP 3.6 million net free cash inflow in the period, reflecting improved profitability and a lower working capital outflow. The operating cash to net free cash flow bridge on the left-hand side shows the items of note. Operating cash before working capital movements was positive at GBP 19.2 million, 16% higher than the prior period. There was a GBP 6.5 million seasonal working capital outflow. The group also paid GBP 0.8 million of corporation tax and made GBP 6.9 million of lease liability payments in the period. And GBP 1.4 million of cash was used in investing activities, primarily relating to branch fit-out CapEx and internally generated software development. Looking at the opening to closing net cash bridge on the right-hand side, we started the year with GBP 12.7 million of net debt and ended the half with GBP 18.2 million of net debt. This reflects GBP 3.6 million net free cash inflow, GBP 3.1 million of acquisition consideration paid, primarily relating to the acquisition of Marshall Vizard in February; and GBP 5.7 million of total shareholder returns, which includes GBP 2.9 million of dividends paid and GBP 2.8 million of share buybacks. In the year, we successfully extended the RCF by 12 months to June 2028. The interest cover and leverage covenants have remained unchanged. At 30th of June, the leverage ratio was 0.7x, comfortably below our limit of 1.75x. And the interest cover ratio was 27x, comfortably above our limit of 4x. Finally, we have declared an interim dividend of 0.24p per share, a 9% increase on the prior period under the group's progressive dividend policy. I'll now hand back to Guy, who will provide an operational update.

Thank you, Chris. As we've demonstrated over our recent results calls and at the Capital Markets presentation, our operating platform is highly sophisticated, industry-leading and a key differentiator, allowing us to drive a level of growth unheard of for an agent of our size. Before my return, the once game-changing platform hasn't evolved, with new products and improvements put on hold and high levels of tech debt building up. Over the last 2 years, the platform has been comprehensively rebuilt, and we're once again developing and bringing to market new innovative products to drive our performance forward. I frequently challenge not just my senior leadership team, but everyone across the company to always find ways of innovating and work better to deliver superior customer outcomes. In fact, innovation is one of the core values that underpins our culture, and this approach is really helping us deliver a culture of continuous improvement. By always ensuring that we're driving the capabilities of our own platform forward, we'll not only maintain our competitive advantage, but create even more distance between us and the competition. Improvements to the platform this half were focused on the group-level growth enablers that we presented last month, namely lead generation and conversion, customer experience and lifetime value and our people and culture. We continue to roll out new technology solutions to enhance the customer experience. Our real-time feedback system is now enabled across every stage of the customer journey and delivering incredibly valuable insights, which is unique in our industry. This is now supported by an AI-powered sentiment analysis system, which uses natural language processing to measure the customer sentiment at every interaction. This system highlights our strategy of investing in AI products where they can show a high ROI and make a meaningful operational difference. We can now scientifically identify what drives our customer satisfaction, tailor our service approach and identify training needs instantly. Crucially, we're using these insights to reengineer processes and incentivize service delivery to deliver exceptional service that drives customer retention and lifetime value. To support lead generation and conversion, we've totally reengineered and launched a new version of our customer website. Our website is totally unique for the level of traffic that it generates in the sector, ranking only below the aggregators and significantly ahead of all other agents, including the largest national chains. As Foxtons' largest source of leads, the new site will play a key role in driving growth. The code base has been totally modernized, making the platform more robust, flexible and future fit. Customer experience and functionality have been significantly upgraded, including a full redesign of MyFoxtons portal based on customer feedback. Pleasingly, we are already seeing stronger digital engagement and higher satisfaction levels with further future enhancements planned over time. Moving now to a hub-and-spoke model. As Chris mentioned earlier, I am really pleased that after several years of review, we can significantly reduce our HQ lease cost as we move into a new space. Having been in our current building for over 20 years, this gives us a chance to create a new modern office setup without impacting the culture of our HQ, a culture and level of energy that many of you will have experienced on your visits over the last 2 years. The HQ rightsizing is part of a wider branch optimization program. We forensically reviewed our branch requirements over the last 2 years, reducing costs without impacting the ability to serve our customers or deliver growth. These savings are part of a wider laser focus on costs and tightly managing the cost base without impacting top line growth is a key lever in delivering our profit and margin targets. Moving now to our acquisition strategy. At the Capital Markets presentation, we outlined our enhanced strategy to rapidly expand into and consolidate within high-value commuter markets and in doing so, rapidly win market leadership. We term this our buy, build and bolt-on strategy. In H1, we made further progress against this strategy. Firstly, we integrated Watford-based Imagine properties into the operating platform. The business has been rebranded to Foxtons and is already leveraging the platform's capabilities in lead generation, delivering a massive 60% increase in the share of new sales instructions. To support the business further, we rapidly completed the bolt-on acquisition of the third largest lettings agent in the area in February. Today, Foxtons is the #1 agent by some distance in this valuable market, an achievement delivered in just under 12 months, highlighting our ability to rapidly consolidate markets, deliver reoccurring lettings revenue and turbocharge returns with organic growth. We have a good pipeline of opportunities. And aided by comprehensive market and agent analysis, our acquisitions team are identifying and sourcing off-market deals to drive our acquisition strategy forward. Moving now to the most important part of our business, our people and culture. It is my fundamental belief that estate agency is a people business. Having the right talent, developing great leaders and embedding and really demonstrating our core values is critical to our success. As part of our continuous improvement drive, we've worked with external advisers to understand how we can build on our strengths and ensure that we are always driving our culture forward. Key upgrades delivered in H1 include further embedding our company values, delivering enhanced training to strengthen our culture and ensuring that we have the right people data and management metrics across the business. And we're seeing good progress with fee earner productivity and revenue per fee earner both growing in the half. And finally, to Slide 19 and an outlook for the rest of the year. Lettings is displaying good momentum, benefiting from the seasonal uplift of summer, building on the instruction market share growth delivered in H1. More generally, with healthy stock levels, strong tenant demand and inflation-linked rents, the market will continue to deliver consistent and predictable returns. Further strategic acquisitions will enhance the returns here. In contrast, the pace of growth in Sales has moderated versus the industry's expectations at the beginning of the year. As mentioned, the key driver is borrowing costs, which have remained at elevated levels for longer than anticipated. Weakness in consumer confidence, economic outlook and uncertainty ahead of the Autumn Statement are compounding this. The pace of any interest rate reductions will be the key factor in determining how quickly demand grows, with market commentators forecasting a rate drop in August. Financial Service revenues are expected to remain resilient. Refinance activity is expected to see good growth in H2, driven by the volume of mortgage terms expiring, whilst demand for new purchase mortgages will reflect sales market trends. Despite the wider macroeconomic uncertainty, our financial profile is strong, underpinned by stable and reoccurring earnings from Lettings, giving confidence in our ability to deliver our growth strategy. That concludes our formal presentation. Thank you all for joining us today. Chris and I look forward to meeting with many of you in the coming weeks. And I'll now pass back to the operator for any questions that you may have.

Your first telephone question today is from Greg Poulton from Singer Capital Markets.

Just a couple from me, please. Could you talk a bit about the depth of the M&A pipeline and how active that is, please? And then could you also talk about M&A pricing and whether you've seen a change in valuation aspirations as a result of the weaker sales market post Q1, please?

Great to hear from you. Yes, as you may remember, we have an internal acquisitions team who focus every single day on two things. They're constantly reaching out to agents, independently owned agents across the Southeast of England. And as you know, we're looking at in these larger commuter locations as well as trying to infill within the M25. We have a really strict investment criteria. We're looking not just to spend any money, we're looking to make the right acquisitions. We use data to lead all of the decisions about where we want to be. Generally, if it's outside of London, that will be a formula of volume and value and making sure that collectively, we want to try to buy in to become either the first, second market leader within the letting space. Now that's an always-on strategy, and the team are doing a great job. We're talking -- we're always talking to lots of people, and we've got a meaningful pipeline that we're looking to transact with at any time and some people that we're looking to transact with this year as well. Of course, timing is always critical with these acquisitions, but we're pleased with the state of the current pipeline, the people that we're talking to. And Chris might want to talk about the actual multiples and the values that we're seeing for these.

Yes, they're very stable, I'd say, year-over-year, Greg. So similar position we talked to at the Capital Markets Day. And yes, looking forward to reporting progress as soon as we can in the second half.

The next question comes from Andy Murphy from Edison Group.

Two questions, please. First of all, can you just remind us about the size of the share buyback program and how much of it you might be planning to spend in the second half? And secondly, more sort of a broader question. Just thinking about your M&A in the commuter towns so far, I was just wondering, what lessons you've learned from the deals that you [Technical Difficulty] and how that has shaped your thinking in terms of speed, pace, type of business that you're looking for, location, et cetera?