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Edited Transcript of FOXT.L earnings conference call or presentation 26-Jul-19 8:30am GMT

Half Year 2019 Foxtons Group PLC Earnings Call

London Jul 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Foxtons Group PLC earnings conference call or presentation Friday, July 26, 2019 at 8:30:00am GMT

TEXT version of Transcript


Corporate Participants


* Nicholas Budden

Foxtons Group plc - CEO & Executive Director

* Richard Harris

Foxtons Group plc - CFO & Director


Conference Call Participants


* Samuel Berkeley Cullen

Joh. Berenberg, Gossler & Co. KG, Research Division - Senior Analyst




Operator [1]


Good day, and welcome to the Foxtons Interim Results July 2019 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Nic Budden, CEO. Please go ahead, sir.


Nicholas Budden, Foxtons Group plc - CEO & Executive Director [2]


Thank you very much. And good morning, everyone, and thank you for joining us for our 2019 half year results call. Today, I'm pleased to introduce Richard Harris, our new CFO, who joins me alongside Patrick Franco, our COO. Prior to joining Foxtons last month, Richard was group financial controller at Laird plc, and before that, he spent more than 11 years at Marks and Spencer in a number of senior financial roles, and I look forward to introducing you personally to Richard when we next meet up.

Today, I'll begin by providing an overview of performance and update on the market before handing over to Richard to go into detail around our financial results for the first half. I'll then come back to finish up with an update on our strategy, core positioning, summary and outlook and, of course, Q&A.

So turning first to Slide 4. Let's start with a summary of our financial performance for the first half. So as expected, the prolonged downturn in the London sales market continues to impact performance with an increase in political uncertainty during the first half, exacerbating what was already a weak sales market. A consistent performance in lettings, however, limited the impact of the declining sales market on group revenues to minus 3.5% and, importantly, the cost input actions we implemented in 2018 helped protect profitability, allowing us to deliver an adjusted EBITDA of GBP 0.1 million, which is flat on last year. Richard will run you through the effects of the accounting policy changes on our financial metrics later in the presentation.

The lettings business continues to prove resilient, with revenues flat at GBP 31.7 million, and that number includes the negative impact of 1 month of the tenant fee ban, which came to effect on the 1st of June.

In sales, although the market remained very challenging, we actually saw more property this half compared with the same period last year. And the 10% reduction in sales commissions from GBP 17.2 million to GBP 15.4 million was driven by a combination of 3 factors which impacted average revenues. First, a softening of property prices in general of around 3%. Second, a change in the mix of properties we sold towards the lower value and due largely to a greater proportion of Help to Buy and new home sales, and they're typically 6% lower value than our average property sale. And then finally, you'll remember in the first half last year, we sold a very high-value property

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meant that our average revenue per deal last year was unusually high.

Revenues in Alexander Hall, our mortgage broker, were down 3%, which was driven by a small decrease in volume.

Our balance sheet remains strong. We have no borrowing and net cash of GBP 14.5 million. But having said that, with the continued uncertainties facing the sector and in line with our policy, the Board has taken the decision not to pay an interim dividend.

In terms of our longer strategic focus, we're currently running the business prudently for the prevailing market conditions but always with an eye to future opportunity. That means tight cost controls but balanced with appropriate investment in key capabilities to ensure that we build on our core proposition throughout the cycle. This approach continues to drive competitive differentiation. And during the first half, we retained our #1 position in London listings for both sales and lettings.

The lettings business remains our priority and to reflect that focus, we've made a further investment recently in that business by taking the decision, unlike many of our competitors, to freeze landlord commission fees following the recent tenant fee ban. We've done that because we recognize the challenging conditions facing our landlords and because we believe it may help us to win market share over time.

The investments we made last year in people, technology and brand have enhanced the business further and have helped deliver the resilient performance that we've shown this half. And I'll make some further comments about those later on.

Now to Slide 5 and some thoughts on the lettings market. The market in lettings remains a very attractive proposition in London, with over 30% of households living in private rentals and a growing professional PRS and build-to-rent sector backed by very significant institutional investment. Increasing regulation and legislation will continue to require further investment in operations from us, but long term, we see that as a positive development driving demand for high-quality agents like Foxtons, who are best able to protect the interest of landlords in a more complicated and riskier environment.

In the period, we saw small increases in rents of about 1% compared to last year, but rents are still 3% lower than before the Brexit though suggesting that they may rise further in the future should the stock of lettings properties further decline. And there is some evidence of that happening already with stock levels in the market down around 15% compared with the year ago.

That dynamic reflects a combination of very low levels of new investment in buy-to-let property among private landlords who see the recent removal of tax relief as a significant disincentive, together with very high levels of tenant renewal rates, which results in tenants being in properties longer and fewer properties being returned to the market for relet.

We've now seen 1 month of the tenant fee ban in place and although it's very early days, we're hearing of significant landlord commission increases among competitors as they attempt to recover lost revenues from landlords. As I mentioned before, we've taken the decision to freeze our landlord commission fees for the time being. We believe this makes our high-value service provision even more compelling.

Our proposition in the institutional PRS and build-to-rent sector continues to be market leading and we're seeing good growth in this area. We have great relations with many of the key players in this space. Although the majority of their new rental developments are still in the build phase, we're investing capability now so that we're well positioned in the future when this sector becomes a much bigger proportion of the overall lettings market.

Now on to sales on Page 6. Unsurprisingly, as I mentioned before, weak market slowed further this year due to the increasing short-term political and economic uncertainty as the country continues to wrestle with Brexit and its impact and implications for consumer confidence and the economy more generally.

Property sales fell in the first half with Land Registry data for the first quarter showing a 16% fall in transactions and we would expect Q2 to show a similar trend.

Against this market backdrop, I believe our flat volumes in H1 will be shown to represent relatively good performance and market share growth once Land Registry data for the full first half is available.

We're now operating in a market where sales volumes were at or around the levels which immediately follow the credit crunch in 2009, '10. And this has also impacted the mix of properties we sold in the first half. As I mentioned earlier, we're seeing more significant numbers of Help to Buy new home sales than we did historically and this has had an impact on our average revenue per unit.

For the avoidance of doubt, however, our sales commission fee remains stable at 2.4%. I'll come back to talk more about strategy and our customer proposition in a moment, but I'll hand over now to Richard for a more detailed review of our financials.


Richard Harris, Foxtons Group plc - CFO & Director [3]


Thanks, Nic. Good morning, everybody. I want to start by taking you through the summary income statement for the first half and then we can delve into some of the details that sit behind the results.

Group revenue, as Nic mentioned, is down 3.5% and we'll look at the component parts of that decrease in a minute.

Operating costs were GBP 45.7 million, a reduction of GBP 7.2 million on the prior year. The reduction is driven by 2 key factors. The first is the implementation of IFRS 16 accounting for leases. As you know, the new standard is effective for this financial year.

I'll take you through a complete summary of the impact shortly, but specifically on our operating costs, the impact was a GBP 5.5 million positive impact as rental expenses are no longer charged to the income statement.

The remaining improvement of GBP 1.7 million is driven by cost actions taken over the last 12 months, in particular, the closure of 6 branches at the end of last year.

As a result of these factors, adjusted EBITDA on a reported basis was GBP 5.4 million. On a consistent accounting basis, stripping out the impact of IFRS 16, the profit would have been GBP 0.1 million, in line with the results seen in the first half of 2018.

Depreciation, amortization and share scheme costs were GBP 7 million in the period, of which GBP 4.7 million relates to the new depreciation on the IFRS 16 right-of-use asset.

Adjusted items were GBP 0.4 million and that reflects a true-up of provisions taken in previous periods but also the impairment of one branch that hasn't grown at the rate initially anticipated. All of this charge is noncash.

Net finance costs were GBP 1.2 million, again, driven by the impact of IFRS 16. And the loss after tax was GBP 2.9 million.

Moving on to lettings. So revenue in lettings was flat on the year at GBP 31.7 million with units down 2% and revenue per deal up 2%. Having been up 2% in quarter 1, we saw a decline of 2% in Q2, and this was driven by the tenant fee ban which took effect from the 1st of June that impacted the results in the half by GBP 0.5 million.

The total impact of the tenant fee ban is expected to be GBP 3 million in this financial year, around GBP 4.5 million for the full financial year.

As Nic mentioned, we have not changed our letting fees following the tenant fee ban.

Contribution margin in lettings was 72% and that was pretty much in line with last year off the back of the flat revenues.

Moving on to sales. Revenue in the sales business was GBP 15 million, down 10% on last year. Within this, volumes are flat and average revenue per deal was down 10%. Nic touched upon these factors, but just to reiterate, as a mix effect, a higher proportion of properties were sold on Help to Buy and that attracts a lower fee percentage. Secondly, the average price of properties sold was lower than last year. In particular, there's some softening of prices in the market and the market was generally slower at the higher rent.

As Nic mentioned, our commission rate remains unchanged at 2.4%.

Again, the contribution margin sales, along with lettings, was 51%, in line with last year, so flat.

Moving on to mortgage broking, so Alexander Hall. Revenue here was down 3%. This reflected a decline in new mortgages, partially offset by growth in remortgages. In total, volumes are slightly down, but -- and the lower average fee attached to remortgages drove the revenue decline.

Contribution at GBP 1.9 million and 47% was again in line with last year.

On Slide 12, I just want to summarize the key points of IFRS 16. There's also a little bit more detail in the appendix. The key points to note are the new accounting standard does not impact on how we run the business. It doesn't change the cash position or the cash flows of the group, but it does have a significant impact on the financial statements of the group.

The new right-of-use asset recorded in PP&E at the point of transition is at GBP 61 million. And the discount present value of lease liabilities were also included in the balance sheet and current and noncurrent liabilities. At the point of transition, they total GBP 62.4 million. So the impact of net assets of the change was therefore GBP 1.4 million negative.

Moving to the income statement. Adjusted EBITDA in the first half increased by GBP 5.3 million as the rent expense of GBP 5.5 million is no longer charged to the income statement. This was offset by an GBP 0.2 million reduction in revenue.

Depreciation increases by GBP 4.7 million. Finance cost increases by GBP 1.2 million.

Overall profit in the first half was reduced by GBP 0.6 million as the combined effect of the higher depreciation and the higher fixed -- higher finance costs exceeded the previously recognized rental expense.

The expected full year impact of IFRS 16 is noted on the right-hand side of the slide. Total impact on profit before tax is expected to be around GBP 1.5 million for the full year.

Looking at the balance sheet on Slide 13. You can see here the grossing-up effect the new accounting standard has with higher PP&E and the addition of lease liabilities.

Moving on from IFRS 16. Our cash position remains really healthy at GBP 14.5 million, up from GBP 11.8 million this time last year.

During the period, we signed a revised RCF agreement with a GBP 5 million facility, which is currently undrawn and has been undrawn through the period.

Maintaining the strength of our balance sheet is a key financial priority at this stage of the cycle.

On cash flow on Slide 14, we started the period with a cash balance of GBP 17.9 million and the chart shows the movement in the period as we finished with GBP 14.5 million. The key thing I'd like you to take away from the slide is that the business has minimal cash requirements in the current market conditions. There was a small working capital outflow of GBP 2 million, which reflects the business seasonality. And the cash cost of prior year adjusted items was GBP 0.7 million. The full year expectation for these items is around a GBP 1 million outflow.

CapEx was GBP 0.2 million in the period and this continues to be really tightly managed.

Full year guidance expect CapEx to be under the GBP 1 million that we previously guided to.

Full year guidance for depreciation, amortization and share-based payments remained at GBP 5 million and that excludes the depreciation on the right-of-use asset, which is expected to be around GBP 9.5 million.

Finally on Slide 15 to summarize. The resilient lettings performance and the cost action taken in prior year has helped to offset the decline in revenue from the sales business. Sales volumes are flat. The revenue decline was primarily driven by the mix of properties sold and some softening of prices. IFRS 16 impacts on the presentation of our financial statements but does not impact on the way we run the business. We've maintained a healthy cash position and signed a revised RCF agreement that gives extra headroom if needed. We continue to maintain a strong infrastructure that allow us to capitalize on future growth opportunities.

That's all for me and I'll now hand back to Nic.


Nicholas Budden, Foxtons Group plc - CEO & Executive Director [4]


Thank you, Richard. Let me finish up today by updating you on our strategic focus, customer proposition and outlook. I mentioned earlier that we're currently running the business prudently for prevailing conditions but always with an eye to the future. And what that really means is tight cost controls but with a balance of focused investment in key capabilities to ensure that we build on our core position for the future.

From a cost perspective, we've actively moved GBP 11 million of cost in the last 3 years and we're on track for a further GBP 3 million cost reduction in full year terms reduction this year.

At the same time, we built on our sales capability, strengthened our brand, invested in new digital marketing programs and developed innovative online tools for our customers to enhance their journey.

Today, the lettings business remains a priority and it continues to deliver stable revenues in what is a dynamic and competitive market. As I said, the big news in lettings most recently has been the tenant fee ban and we believe that will have a significant impact on agents over time and could potentially lead to some interesting opportunities for Foxtons should fee premiums narrow and lettings portfolio become up for sale at more reasonable prices than historically.

And our strategy is working because of our ability to leverage digital marketing technology and data whilst delivering high service levels. Our brand continues to be #1 in the market for listings in both sales and lettings.

Moving on to Slide 18. Our sales -- our customer proposition, what does it look like from a customer perspective? Well, as we look across the market at the variety of estate agency models operating today, from a customer perspective, we believe Foxtons' proposition is more compelling than ever. Our mission is to deliver exceptional service to our customers and we achieve that through our centralized business model which brings together our bespoke technology platforms with our highly skilled agents and head office teams and our network of integrated branches across London. The additional investments we made over the last 2 years have strengthened these competitive advantages, enabling us to respond to changes in customer behavior and to exploit new opportunities in marketing and technology, which lead to great results for our customers.

The landlords, we maximize returns by providing a responsive service to minimize void periods whilst ensuring they remain fully compliant with the increasing levels of regulation and legislation in the sector.

For sellers, we have a particularly strong service proposition with independent research showing that we achieve on average a 7.5% premium on sales prices compared with our top 20 competitors.

And for tenants and buyers, our people work tirelessly with them to find them the right property. Buyers benefit from our London-wide network, a huge choice of listings to view and our award-winning integrated mortgage broker, Alexander Hall. And tenants benefit by working with an expert negotiator who show them any property on our London-wide network. The quality of this service is outstanding and leads to tenants securing their ideal property within just 9 days of registering on average.

Our branches remain important to us and despite making a handful of closures, we've chosen to maintain a significant physical network across the capital and to extend its reach by using technology and digital marketing to establish our brand more widely.

Unlike a lot of agents, our branches are explicitly incentivized to work together across the network to deliver the best results for customers. That's a significant advantage for us and it leads to better outcomes for customers with nearly 1/3 of our buyers and renters, for example, choosing to live in a different part of the city where -- from where their search initially started. Providing that sort of flexibility is difficult without an integrated branch network like ours, without people that are incentivized to work across the whole of London.

We believe fundamentally estate agency remains a people business and our proposition is based around knowledgeable, experienced and committed people who go the extra mile for our customers throughout the increasing complicated process of selling or letting a property.

Finally, we've always been a technology company. The innovative application of technology throughout our business model has allowed us to offer exceptional service levels, deliver high levels of productivity and enable the business to interface with buyers, renters, landlords or sellers in a way that best suits them. The MyFoxtons online portal, for example, continues to be extremely popular, offering 24/7 service access to customers and with 19,000 tenants and landlords using the property portal every month to transact online.

Let me finish on Slide 18 by summarizing where we are now and with a few comments on outlook. When you combine the strength of our brand with our clear proposition which I've just outlined, we're confident that we have a compelling offer that is still relevant as ever for customers. We'll continue to deliver exceptional results for our clients and that differentiates us from our competitors. The combination of our highly motivated and experienced agents, our market-leading tech and our network of interconnected branches enables us to deliver the premium high-touch service that the Foxtons brand is synonymous with. And the strength of our balance sheet positions us well during these difficult market conditions.

Outlook, obviously, it remains a mixed picture. We're pleased with the progress and momentum we're making in lettings, and this continues to be our priority for the business. We hope our commitment to freeze commission fees for landlords in light of the tenant fee ban will further improve our proposition and potentially improve market share in lettings.

The sales business is, of course, cyclical and is currently operating at a period of very low volumes with continued uncertainty making it difficult to predict what will happen to volumes and prices in the short to medium term.

But our focus remains on controlling our own destiny. We are focused on efficiency, maintaining cash and selected investment. Fundamentally, we believe London is an attractive global city and over the medium to long term, prospects in its property market will improve.

That's all I wanted to say today. And with that, I'll now conclude and hand over to any questions you might have.


Questions and Answers


Operator [1]


(Operator Instructions) Our first question over the telephone comes from a Sam Cullen from Berenberg.


Samuel Berkeley Cullen, Joh. Berenberg, Gossler & Co. KG, Research Division - Senior Analyst [2]


Just a couple of questions really. Can you just comment on any kind of diverging trends you've seen within the London regions or price points in terms of demand given the kind of mix shift you've talked about?

And then secondly, I guess, obviously, it's early days post the lettings fee ban. But when you talk about kind of potential gains in market share, just looking at the kind of the right move statement today with agent numbers falling, when is your expectation that you might see kind of increased signs of stress on smaller agents?


Nicholas Budden, Foxtons Group plc - CEO & Executive Director [3]


I'll take those. Thanks, Sam. In terms of average property values, as we said, we're seeing a mix shift slightly towards Help to Buy properties, and they're typically newbuild properties. And they're typically lower value. So we're seeing 2 impacts, one from the lower value itself and obviously from new home sales with developers, we shave our fee a little. So that's really the impact on average values, the 2 elements that were combined to deliver what you saw in reduction in average values.

In terms of stress on landlords, I think -- sorry, on lettings agents, I think it will take a little bit of time. I think, obviously, Q3 is a really busy time for lettings agents generally. And so I expect over the next 3 to 4 months, most agents will find themselves being able to survive through that period. I think when things will become a little bit more tough will be in Q4, Q1 next year. So I think that by the end of the year, we'll have a very good assessment of the extent to which we've been able to mitigate the impact of lettings fees and I suspect in the new year, a lot of lettings agents will be reconsidering their position. So that's my sort of a view on timing.


Operator [4]


(Operator Instructions) It appears there are no further questions over the telephone at this time, sir. I would like to turn the conference back over to our host for any additional or closing remarks.


Richard Harris, Foxtons Group plc - CFO & Director [5]


Okay. There are a couple of questions that have come through, certainly not quite sure why they didn't come through on the call, but from Gavin Jago at Peel Hunt. So there's a question around new homes volumes, which Nic has touched upon, I suppose, at the moment and these account for around 20%, just under 20% of our total volumes. And they've grown quite significantly in the period by around 23%, so I'll just kind of give you a bit of context around the growth in new homes and how that's contributed to our performance.

Second question was around how our lettings commission rate compares to our competitors. It's a little bit early to say exactly what people are going to be doing in this regard, but I think it's fair to say our headline rate is the same as it's always been, at 11% excluding VAT for new landlords, whilst other competitors might have a similar headline rate that have historically negotiated away from this rate and our expectation is that they'll be unable to do at, I think, quite the same rate they had previously. But as I said, it's a little bit early to see exactly what's going to go in the market.


Nicholas Budden, Foxtons Group plc - CEO & Executive Director [6]


If I may, I'll probably just give a bit of color to that as well, Gavin, thanks for the questions. I mean, if you take our position vis-à-vis competitors in relation to tenant fees, we published I think about 8%. So tenant fees revenue for us is about GBP 4.5 million in the full year, likely to be a GBP 3 million impact this year. What you see with other agents, because typically their commission fees for landlords was slightly lower and they tended to charge relatively high fees to tenants, we've seen occasions of anything from 15% to 30% of revenue being made up from tenant fees for competitors. And obviously, if the average commission fees they're sort of charging in the market are sort of 8% to 9%, you can imagine in order to fully mitigate those losses in tenant fees, their fees would have to increase to landlords up to about 10%, 11%. We're not suggesting that everybody is going to do that or they'll do that by that extent, but that's the sort of broadbrush dynamics in terms of the numbers. (inaudible) way and we'll hopefully see some of you on the road.


Richard Harris, Foxtons Group plc - CFO & Director [7]


Thank you.