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Edited Transcript of SVS.L earnings conference call or presentation 8-Aug-19 8:30am GMT

Half Year 2019 Savills PLC Earnings Call

London Aug 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Savills PLC earnings conference call or presentation Thursday, August 8, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Mark Ridley

Savills plc - Group CEO, Member of the Executive Board & Director

* Phillippa Dalby-Welsh

Savills plc - Co-Head of Prime Control London & Director

* Simon James Blouet Shaw

Savills plc - Group CFO, Member of Group Executive Board & Executive Director

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Conference Call Participants

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* Christopher James Millington

Numis Securities Limited, Research Division - Analyst

* Clyde Lewis

Peel Hunt LLP, Research Division - Analyst

* Osmaan Malik

UBS Investment Bank, Research Division - Head of Pan European Property Research and Executive Director

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Presentation

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Mark Ridley, Savills plc - Group CEO, Member of the Executive Board & Director [1]

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Good morning, ladies and gentlemen, and welcome to the presentation of Savills' preliminary results for the 6 months ending 30th of June 2019. Thank you all for coming today. So much more exciting than going on your summer holidays. In the last 5 months since I updated you, you'll be aware of a number of macro and economic challenges. I will, therefore, provide you with the highlights from our results. And before we go into more detail, I'll take you through the current dynamics of the main markets in which we operate.

 

Simon will then take you through the financial review, and I will finish with our management focus going forward as well as our outlook, the crystal ball is becoming ever more used.

 

 

Okay. Highlights. In the face of the challenging market conditions that we experienced in some markets, I'm pleased to announce a resilient first half performance reflecting both the geographic diversity and also our breadth of operations.

 

 

Turning to the financial highlights. The balance of our service offer enabled group revenue to grow by 16% to GBP 847 million producing a group underlying profit before tax of $38.4 million, a reduction against the prior year of 9.4% due mainly to the investment in the business we have made, the revenue mix and also the impact of IFRS 16. The drivers of this performance were significant growth from our less transactional business, something that you've heard a lot about in the past. Revenue there up 20%. And also profits up 26%, so dropping down to the bottom line, which mitigated against the reduced activity in some of our transactional markets, particularly the U.K. and Hong Kong, as you can imagine.

 

I'm also very pleased that our North American business, now fully rebranded as Savills, delivered significant growth in the tenant rep and occupier services business with revenues up 31%, reflecting the continued strength of the U.S. leasing markets as well as the benefits of the investment we have made in the business over the prior years. I'm also particularly pleased with the growth of our Property and Facilities Management business, up 27% year-on-year, and also our continued growth of consultancy services with revenue up 5%.

 

 

Finally, Savills Investment Management, our Investment Management business, they increased their revenues by 20% as a result of strong fund performance and also increased activity across Continental Europe with AUM increasing some 13% to a record of EUR 18.3 billion.

 

 

Based on this first half performance, we have declared an increase of just over 3% in the interim ordinary dividend.

 

In summary, the results reflect the balance of our business model across key global markets, the strength of our less transactional business streams and also the continued resilience of our transactional business.

 

 

You will have seen this slide before a few times, but it's important just to look at that business model. And now you can see within the sectors some 59% of our group revenue comes out of more recurring income.

 

 

Of this, Property and Facilities Management is now the largest business segment in the entire global business, some 39% of our global revenues, up from 36% previous year. In absolute terms, this represents growth of 27%. Our continued investment in this area has included selected acquisitions, such as last year Broadgate Estates, as well as very significant organic growth, which has now resulted us managing over 2.13 billion square feet, up 12% with recent wins, including 12 shopping malls for Gaw Capital in Hong Kong.

 

 

And also, we've just been appointed by LNG in the U.K. to manage the assets of 2 major funds, 100 properties nationwide with a value of GBP 3.5 billion.

 

 

The growth of our less transactional revenue has continued and will continue to be a key strategic priority. However, we will continue to grow and maintain bench strength in the transactional markets.

 

 

Moving on then to geographic diversity. On a geographic basis, our platform now provides comprehensive services across the main global markets. We employ over 39,000 people across 71 countries. And recent geographic growth has focused on the Middle East, where we now have 7 offices in 5 countries employing some 245 people, and also in India, where we now have 170 people and growing fast.

 

Moving on to the main geographic areas of the business.

 

 

I start with the U.K. Well, you all know what's been going on. Sentiment in the U.K. transactional markets has become more negative as the underlying risk of a no-deal Brexit has increased. Although the underlying fundamentals remain attractive, particularly in context when looking at pricing against some of the international markets, Brexit and currency volatility means there is little compulsion amongst international investors to transact at this stage.

 

 

You can see on the right there the impact of commercial investment volumes, which fell 32% year-on-year. And in fact, that's national. In London, it was 43% down in the first half. That's the weakest since 2009.

 

 

Retail in particular has been suffering from those continued headwinds, CVA activity, but also there's a structural change as we all know going on with online. Retail investment volumes in H1 decreased some 48% below the 5-year average, so that sector still is very subdued. That said, the fundamentals I mentioned earlier, the U.K. investment market remain positive such that when there is more clarity we anticipate volumes will increase and investor demand will increase.

 

 

And logistics -- let's start with something as a positive. Logistics, that continues to be the star sector performer. And again, take-up in that sector was 28% up. It shows where the investors' confidence lies.

 

 

Within the residential markets, U.K. housing transactions were down 4.5% nationally in the first half. And in London, transactions over GBP 1 million were down 13%; and over GBP 5 million, they were down 16% during the first half. However, we significantly increased our market share in the core residential markets in London, cost at GBP 0.5 million to GBP 1.5 million price band. And in London, our exchanges were up 43%. That shows that we have invested significant in that area.

 

 

Also of note, residential lettings were up 26% year-on-year, again continued growth. Against a challenging backdrop, therefore, Savills acted as leasing agents on 135,000 square feet at Wellington Place in Leeds, a letting to Sky, advised clients of Delancey and db symmetry on the GBP 370 million sale of their business to the Tritax Big Box REIT. And in the first quarter of this year, we sold 3 prime residential properties in London in Belgravia at prices of between GBP 23 million and GBP 28.5 million. The market is not dead.

 

 

Overall, our revenue in the U.K. grew by some 8% in the first half, a very resilient performance particularly from the transactional business, which significantly outperformed the market volume drop.

 

 

Moving on to the Asia Pac region. The recent uncertainty as a result of political unrest in Hong Kong as well as the continued trade war tensions and slowing GDP growth in China has dampened investment activity somewhat in a number of markets.

 

 

Hong Kong, in particular, was evident where overall office investment volumes fell some 34% in the first half. Retail volumes down 52% in the same period. That said, our Hong Kong-based business maintains a market share of 35% and continues to grow. The situation there is probably going to lead to further outbound capital to other principal commercial markets including Australia, Singapore and Japan, where we continue to anticipate stronger second half volumes through that.

 

 

Office leasing volumes across the region reduced by circa 20% overall, but a number of major markets experienced good rental growth, particularly actually Hong Kong, surprisingly, Tokyo and Singapore but also Sydney and Melbourne, where we're seeing strong growth coming through.

 

Outside the commercial markets, moving into residential. Increased stamp duty in Singapore and also a market slowdown occurring over a period of time in Australia and China are affecting the residential sector. We are continuing, therefore, to focus on the more active markets particularly Singapore, Japan and Australia. And indeed, we saw a significant recovery in our Japanese business with an excellent pipeline for the second half.

 

 

Across the region, I'm pleased to report we're involved in some of the largest transactions including 80 Collins Street, Melbourne, the single largest asset sale in Australia at USD 1.2 billion; Cityplaza Three and Four in Hong Kong for USD 1.3 billion; and the largest luxury residential transaction in Hong Kong, 8 Headland Road, for USD 184 million, expensive residential property.

 

 

We also have a very strong pipeline going into the second half in these markets. Our business development focus, therefore, has been to continue strengthening the teams particularly in logistics, valuation, consultancy and property management. Whilst not mentioning India would be a mistake, a new territory for us, which commenced at the end of last year, we now have 170 people across India's 4 largest commercial centers, Bangalore, Mumbai, New Delhi and Chennai. Therefore, our balance across the Asia Pac region and strong market position has helped us to increase the revenue by 19% in the first half.

 

 

Moving on to North America, a very positive story here. The market slowing GDP growth in the U.S. economy as well as the Federal Reserve cutting the interest rate last week, I think is showing that it wishes to maintain economic momentum. However, the tariff war is certainly causing consternation, particularly outside the U.S. Unemployment rates are at record low levels, which continues to show that sort of corporate growth, which we're benefiting from. And in light of this, leasing volumes across the U.S. main markets totaled some 65 million square feet taken up in quarter 2, 8.2% up on quarter 1, again increasing all the time. The strongest markets were New York, L.A. and Washington, but all top-tier markets experienced good growth during the period.

 

 

Commercial investment volumes also rose during the period, up 15.2% across the major metros with the star performers being New York and San Francisco. We have continued to invest in our North American platform primarily through organic growth in the core occupier services business as well as expanding our expertise nationally in the logistics sector.

 

 

In the first half, we undertook a number of key assignments including the relocation of PGA of America to a new 600 acre complex in Texas; advised RSM on a new headquarters in Chicago of some 165,000 square feet. And also, very importantly, our logistics business won 2 global mandates: one from Marmon Holdings, part of the Berkshire Hathaway Group; and also Hain Celestial, operating in over 70 countries. So a very important piece there.

 

 

Our North American business delivered growth -- revenue growth of 31% over the period, and I'm really pleased with that performance and momentum particularly as it is now fully rebranded as Savills, giving us the enhanced profile across a very key region.

 

 

Moving on to Europe and the Middle East. Europe excludes U.K., as you can imagine. Whilst GDP growth has slowed substantially in Germany and Italy, the effect also helped perhaps in France and the Netherlands. We have continued our investment in the region, and this has improved our position and also our increased market share.

 

 

Across the Middle East, the region is being affected by increased political uncertainty in some markets as well as lower oil prices and, obviously, the strength of the U.S. dollar. On the back of this, investor demand remains strong. But many investors are seeking exactly the same type of product, less risky assets in the strongest markets. So liquidity is a big issue. And actually volumes, therefore, dropped 15% year-on-year in commercial investment volumes.

 

 

Across the European markets, Spain, in particular, has enjoyed very good demand in Madrid and Barcelona as well as increased activity also in Sweden and Italy.

 

 

Perhaps not surprisingly, cross-border activity in Europe has significantly increased, perhaps to do with Brexit, up 51%. And Paris, eclipsed London as the most popular cross-border destination. This was perhaps helped by our own acquisition of la Lumière Office Building in Paris for some EUR 1.15 billion to Korean clients.

 

 

Office leasing volumes across Europe were also up 3% with lack of supply being the major constraint there. And in Germany, leasing volumes were up 6.9% with strong increases also in Madrid and Brussels. Therefore, our business focus remains on maximizing the synergies from previous acquisitions, particularly in Spain with our former Aguirre Newman business, Portugal and Italy as well and also the continued integration of our Middle East platform.

 

 

In January, we significantly strengthened our capital market business in Sweden, recruiting a market-leading team, which has already developed a fantastic pipeline for the second half of this year.

 

 

Overall, our transactional teams across Europe have enjoyed improved market share, and we were involved with transactions such as the sale of the Dolce & Gabbana's headquarters in Milan for some EUR 200 million. In Berlin, we also acquired 200,000 square feet of offices for the RSG Group, their new headquarters. And in Madrid, our project management team advised ING Bank on the design of their new headquarters, totaling some 350,000 square feet.

 

 

Overall, revenues in Europe through organic growth and acquisition increased 17% year-on-year, and I'm delighted that the pipeline of work was also substantially ahead of this time last year.

 

 

Last, but definitely not least, Savills Investment Management. As you're aware, this business operates across the U.K., European and Asia Pac regions and, therefore, has experienced the same market dynamics I've explained earlier. The effects of this has subdued transactional activity in general. However, I would highlight the weight of capital targeting the property sector through our Investment Management business is actually continuing to increase. Hence, the increase in our AUM to that record level of EUR 18.3 billion.

 

 

The nonfinancial highlight is definitely the appointment of Alex Jeffrey, who will become our new Global CEO of Savills Investment Management. Alex is currently Head of Asia Pac region for M&G Investments as well as formerly Head of M&G Real Estate in the U.K. and will take up office at the end of October.

 

We've also enjoyed raising very significant amounts of equity in our European logistics in Japan II Fund with a number of also significant mandates secured during the period. I'm also pleased to show you on the graph the relative outperformance of our funds compared with their respective benchmarks over the last 3 and 5 years, the bottom graph there. The continued success of the SIM business allowed us to grow revenue by some 20% over the first half of the year, a very strong performance.

 

 

Before I hand over to Simon, it's important to highlight the strategic investment we have made into the global platform as well as the result in lag effect, which can impact profits in the short term until teams are fully fee generative.

 

 

In the last 12 months, we have recruited almost 400 fee earners globally across Europe, North America and Asia Pac. And that excludes India, as I've mentioned, which we anticipate these teams will come on stream during that period and considerably enhance future revenues and profits.

 

Thank you. Over to Simon.

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Simon James Blouet Shaw, Savills plc - Group CFO, Member of Group Executive Board & Executive Director [2]

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Thank you very much, Mark. Morning, everybody. I'm going to take you through, first of all, the summary results.

 

 

Good revenue growth, weighted, as you'll see in a moment, towards the less transactional businesses in our portfolio and our profit before tax declining by just over 9% for the reasons that Mark stated earlier. And just for your note, the IFRS effect is GBP 1.6 million of that decline. And obviously, that dropped through to the margin, which you see on the following line, which declined slightly during the period. This will translate into a similar movement in EPS. And the success of our less transactional businesses allowed us and support us in the decision to increase the interim dividend by just over 3% during the period.

 

And finally, on this slide, recalling that our first half of the year always represents a significant cash outflow, you can see that our net debt increased year-on-year, and I'll give you a lot more color on that in a moment.

 

 

So let's turn to the segments of our business and their underlying performance.

 

 

What's clear from the line in the middle of this chart is that 20% revenue growth and 26% profit growth in the less transactional business lines as a whole, of which obviously Property Management is a significant component. You can also see from the left-hand side that despite the challenging markets we delivered transactional revenue growth. And overall in our transaction business, there was a much greater weighting towards the leasing side of our business, which represented 63% of revenue versus 59% last time and away from the Capital Markets business, which generally carries a higher margin. And this, together with the incremental period-on-period lag effect of business development that Mark has referenced, which is predominantly in the transactional business, impacted the segmental profits during the first half.

 

 

And obviously, we expect that lag effect to progressively unwind over coming periods. So we'll look a bit more detail at the transactional performance in a moment.

 

 

Our portfolio of consultancy services grew nicely and very much behaved as a portfolio during this period. And finally, the Investment Management division saw a significant recovery from the post-SEB disposal transaction times of last time out, and you'll see a bit more of that in a moment.

 

 

So if we flip to our regional geographical segments. First of all, in the U.K., the Brexit-related declines in market transaction volumes obviously impacted our margin as the less transactional businesses couldn't quite compensate for the shortfall in commission revenues.

 

 

In Asia, much of the revenue growth was in new Property Management and Facilities Management contracts, which didn't compensate for the profit effect of transactional decline specifically in Hong Kong and Australia, of which more later. And obviously, the standout performance is North America, where we saw significant growth and a bounce back in margin of profitability, which isn't where we wanted to get to yet but is well on its way up their trajectory we're expecting over time, as we're still carrying some fairly significant platform growth costs in that business.

 

 

And finally, the effect of growth cost is also a theme, as Mark indicated, in Continental Europe and the Middle East, which saw good revenue growth. But that significant hiring across the region in the last 12 months represented a lag effect, which although reflected very positively in current pipelines at the half year was clearly a drag on profits during the period.

 

So I'm now going to go to cash in a bit more detail before we go into the individual segments. So recalling that our first 6 months is always a cash outflow period, here you can see the difference in operational cash flow with the significant working capital consumption, which is GBP 173 million, that large red line in the middle, compared with GBP 118 million last time. And this is primarily down to the payment of annual bonuses and commissions in the first half of the period at a higher level than compared with the accrual rate on current performance.

 

 

You'll also note a significant reduction in the spend on acquisitions to GBP 6 million from over GBP 50 million in the same period last year. And also to note on this slide, our CapEx increased above our semiannual average of about GBP 11 million to GBP 12 million as we continued to invest in initiatives particularly around technology, both our own operational technology and client-facing around the world.

 

In terms of the working capital swing, as always, we expect that to unwind through the second half. As usual, and subject to unforeseen circumstances, I have to say, we anticipate a net cash position at year-end. And as a point of reference for you, at the end of last month, end of July, our net debt position had reduced to under GBP 110 million in the course of that one month. But as this is a higher than normal midyear net debt position, I thought I would put it into context of the last 6 years or so, so you can see really the components of how that comes about.

 

 

And the next slide is important to understand this. So this is the aggregate cash flow bridge from mid-June, so June 2013, before we embarked on some significant business development initiatives over the last few years, through to June 2019.

 

 

So we start at the left. We started with GBP 3 million of net cash. And during that period, in 6 years, we have generated GBP 730 million rostering of pretax profits, which translates into approximately GBP 530 million of post-tax cash profits during the period. And looked at over the broad sweep of time, as you'd expect, that working capital movement eliminates itself. And you can see the major components of our cash utilization here during the same period: so GBP 215 million of dividend payments to shareholders, which is a 40% distribution rate of our post-tax cash profit; a GBP 100 million of treasury shares plus, which were required to match our deferred share schemes particularly on deferred bonus around the world.

 

 

And then if you ignore the sundry other inflows for a second, that would have left us about GBP 210 million for acquisitions and CapEx. In practice, you can see that we've spent nearly double that, without recourse to shareholders I want to emphasize, in some sizable transactions, the larger ones being Studley, our North American business; Aguirre Newman in Spain; and Smiths Gore here in the U.K.

 

 

And that breakout chart to the top right of this slide shows the weighting of that spend, which is key to understanding the opening balance impact on this 6 months of cash flow performance. And what it tells you is that GBP 222 million or 55% of our total acquisition and CapEx expenditure was incurred in 2017 and 2018, and it underscores the net debt position today is primarily down to our opening position.

 

 

Obviously, it's impossible to dictate the timing of attractive acquisition opportunities, so we do them as and when they emerge. And with our strong cash flow generation capability and conservative balance sheet, we are comfortable with this position and clearly seek overtime to balance those inflows with the investment expenditure on development.

 

 

So I hope that puts cash into context for a second. And we'll now move into the business segment performance starting with the commercial transaction business.

 

 

Excluding the U.K., we saw revenue growth across the globe. And as I've said previously, the bias was much more towards leasing activity. And the strongest revenue growth came from the U.S., which still being in platform investment phase means that, that revenue growth fall through to the bottom line at lower than the group average margin. Our U.S. capital markets business also saw revenue growth, and we substantially reduced the losses from that business as we planned to do so.

 

 

In Asia, we saw decent recovery in Japan with some significant capital transactions and a good pipeline for H2. And that, plus growth in China and Singapore, was not quite enough to offset the impact of declines in activity in Hong Kong and Australia. Although it should be stressed that we were very pleased in Hong Kong to outperform significantly the market volume declines with a revenue decline of only 16% in the period. In the U.K., similar outperformance occurred with our transaction revenues down only 7% against the 30-plus percent volume declines that Mark referenced earlier. And as always, in a very second half weighted business, a GBP 1.5 million reduction in first half profits is quite a big percentage. Indeed, it may come as a surprise actually in the U.K. that revenue from our market-leading retail transaction teams in this market was down only 5% in the period, and that reflects their ability to pivot from transactional activity into asset management advice, repositioning and refinancing advisory services in the sector that's facing some of the challenges as we all know it is.

 

 

And finally, in Europe and the Middle East, we saw slight revenue growth. But the growth costs across the region, and particularly in Germany and Sweden, resulted in losses for the period, alongside a fairly significant second half weighting of activity. But we're very pleased that, that pipeline for the second half is very significantly ahead of the same period last year. Of course, we have to land it, but it is very significantly ahead of the half year.

 

 

If we turn to the residential business. This is a hugely resilient revenue performance in the period in some very challenging conditions, which we've referenced already. In the U.K., our second-hand agency business was only down 1.5% against a market backdrop of around 13% decline in volumes in Prime Central London. And this performance was due to the very significant growth Mark referenced in our core London business, which you will see in the average selling prices of product we sold this year disclosed in the statement.

 

 

New development sales was down a little bit more, about 10% in revenue terms, effectively reflected the fact that there's no massive compulsion amongst buyers at the moment to transact at speed. However, the number of reservations or reserved units we have in the book at the half year was entirely consistent with the previous period.

 

 

And finally, in Asia, government cooling measures in Singapore business affected our business there quite significantly. And weaker markets in Australia and China couldn't quite be offset by some pretty resilient growth in Hong Kong. If we turn now to the less transactional businesses.

 

 

Starting with the large -- the largest single piece and the obvious standout performer in the period, which is property management with 27% growth in both top and bottom line globally. And if we look at the componentry of that, in Asia the combination of increased pass-through costs in Singapore, which have absolutely no impact on profit but do increase revenue; and mobilization costs on some very significant facilities management, in particular wins in Hong Kong and Macau, meant the profit growth didn't quite follow the revenue growth trajectory in the same period. And obviously, we look at those large contract wins to start delivering over future periods.

 

 

The U.K. performed very well and was the hub of the worldwide performance for property management in the period. Organic growth of 14% was supplemented by the acquisition of Broadgate Estates management portfolio last year, for which we got the full period effect this year. And this is not only led to growth in revenue and profits in the U.K., but it also supported our high-rise management credentials globally and helped us to win some significant mandates in other parts of the world, for example, in the Middle East.

 

 

As Mark has indicated, our small U.K. residential lettings business, which, remember, is accounted for in this property management segment also performed strongly with revenue growth of 26% to GBP 18 million at the half year.

 

 

And finally, in Continental Europe and the Middle East, strong organic growth of 16% in revenue was supplemented by the full period effect of the Cluttons Middle East business turning H1 2018 small loss into a profit during this period, all in all a very good performance.

 

 

We flip now to consultancy. Increase of 5% in revenue and 6% in profit. And clearly, the weighting of this business is towards the U.K. largely. Where in the U.K. we really got a portfolio effect of the services that I've referenced in the bullet points on this slide, some of them were impacted by market challenges currently in the U.K., and the activity was then made up by other of our service lines particularly in the building consultancy and projects and planning part of our business.

 

 

In Asia, growth in China, Japan and Korea offset reduced activity in Singapore and Australia. And profit was affected in this particular segment in the short term by the recruitment of the new valuations teams in Singapore, which obviously will start to come up to speed over the course of the coming period.

 

 

And finally, in Europe and the Middle East, we saw good organic growth of 18% driven particularly by the core countries in Germany, France and Spain, which was again supplemented by the Cluttons Middle East acquisition of last year.

 

And finally, if we turn to Investment management. This is a really good performance with renewed growth now that the SEB disposal program has all but completed, which clearly impacted last year.

 

 

In the U.K. and Europe, the reduction in transaction fees from that disposal program was more than offset by growth in base management fees and performance fees on enhanced AUM, as Mark has mentioned already. And that performance across our fund product is absolutely key to this success because what it enables us to do is it really supports our capital-raising initiatives despite currently greater challenges in the capital-raising market particularly in Continental Europe, as you will have seen from Mark's earlier slide.

 

 

In Asia, this performance really reflects the impact of a hiatus between the end of our first Japan fund, which distributed very strong returns to unitholders on its winding up at the beginning of the year, and the investment period in Japan II, which commences imminently.

 

 

So in summary, this business core performed exceptionally well at the same time as navigating significant changes in the prevailing compliance and regulatory environment including the potential effect of Brexit. I'm delighted that actually yesterday we got a verbal approval of our Luxembourg AIFM registration, which is a core part of Brexit planning. And it's in good shape for the arrival of its new CEO in Q4. And with that, I'll hand back to Mark.

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Mark Ridley, Savills plc - Group CEO, Member of the Executive Board & Director [3]

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Thank you, Simon. Okay. Before summarizing, I set out above our core priorities for the coming period, which largely speaks for themselves. I won't go through every line. But thematically, we are focused on continued development of our less transactional parts of our business whilst maintaining and selecting -- selectively adding to our transactional bench strength. In doing so, I want to continue to broaden our service offering across all the sectors. Whilst we can constantly have a target list of acquisitions, always getting longer, with perhaps a couple of exceptions if the opportunities do arise, I do expect the growth emphasis to be primarily on recruitment rather than corporate acquisition over the near term.

 

 

Then if I turn to our summary and outlook. I'm delighted, overall, with the results that the group has delivered at the first half, both reflecting that, that robustness and geographic diversity of the platform and also the position we have in markets generally, and I really do think the strength of our transactional teams in particular have been a highlight.

 

 

Our relative outperformance is shown, as Simon has shared with us, reduced volumes, and it is down to the -- a testament to the professionalism and the hard work and quality of our staff across the platform. We believe with continued occupational demand, which is continuing, as well as the investors search for secure income, that will underwrite the fundamentals for demand in real estate going forward particularly with some of the macro issues which are overshadowing some of our markets. Against this backdrop, we have a very robust pipeline of activity for the second half. And the board's expectations for the full year currently remain unchanged.

 

 

So thank you. Simon and I are now more than happy to take any questions you have. If you would address the difficult ones to Simon and the easier ones to me, that would help. Also, if you could also give your name so that we can record that for the filming. Thank you very much.

 

 

Do we have any questions? We have a microphone coming your way.

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Questions and Answers

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Clyde Lewis, Peel Hunt LLP, Research Division - Analyst [1]

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A couple of questions for me, Mark. It's Clyde Lewis of Peel Hunt. Firstly, if you could say a little bit more about India. Obviously, that's a new market for you. Just as to sort of I suppose sketch out what areas you're looking at first and how that profile of also growing that business over the medium term will evolve. The second one I have was on I suppose sort of how Q2 varied compared to Q1 particularly in Hong Kong and the U.K. around the sort of political uncertainty as that increased through the second half? I suppose the final one I always tend to ask is sort of pressure on fees, again, particularly in the transactions market and exactly what's happening in that area.

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Mark Ridley, Savills plc - Group CEO, Member of the Executive Board & Director [2]

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Okay. I will take one and three. I might ask Simon to pick up two in that. India. So this is, obviously -- as I mentioned earlier, this is a new business area for us. It's an organic growth, and we're thrilled with what the business has already achieved, say, 170 people. It will be over 200 by the end of the year, no doubt. It's a full-service offer. So a lot of consultancy as well as some transactional business in the platform. And I'm pleased to say we've attracted what we believe to be best-in-class people, very experienced operators, some out of our competitors.

 

Why? It's absolutely critical, one, as a market in its own right in terms of its maturity and the opportunity for growth in real estate services. But most importantly, also it links very much into both our Middle East business and also into our Asian business. And the one piece that we are already seeing is that increased activity, occupational, tenant rent and also money moving within those markets. So it's a really important crossroads for us for other parts of our business as well as being a critical market for us to expose ourselves to. So we're very pleased with that growth. In terms of the -- what was your third question?

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Clyde Lewis, Peel Hunt LLP, Research Division - Analyst [3]

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Fees.

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Mark Ridley, Savills plc - Group CEO, Member of the Executive Board & Director [4]

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Fees, that was it. Fee pressures, I mean, it varies around the world definitely. I would say to you that there's probably a flight to quality. So particularly in some of our core segments, Property Management, our transactional business, our residential team are here today, I would say to you that the pressure is always there. The competition is always there, but we are maintaining our fee rates relative to historic levels. I'm not saying they're going up, but they're not going down to the level that you might have anticipated.

 

And of course, we talk about the sort of benefits of that geographic spread in Japan. They have the best fee rates within capital markets worldwide. And so when we get better activity in key markets like that, it's great to see that, that comes through to our bottom line. So I think it's stable, as we speak, but not going up either. Simon, do you want to pick up?

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Simon James Blouet Shaw, Savills plc - Group CFO, Member of Group Executive Board & Executive Director [5]

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Yes. Q1, Q2, it's slightly ambiguous to look at the whole business, different parts of our business perform in different ways. And broadly speaking, less transactional businesses completely consistent through the period. In fact, June was our highest ever June by some distance in terms of overall performance of our business. I think it was -- actually funny enough, a slight decline in residential activity in the U.K. in the month of June itself but we've seen stabilization since then. And -- there's nothing particularly discernible between the 2 quarters.

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Christopher James Millington, Numis Securities Limited, Research Division - Analyst [6]

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Chris Millington at Numis. I've also got 3 if I can, please. First one is just on business development cost. It's kind of been quite a big feature in the presentation. Just wonder if you could put some numbers on it. And also just give us a bit of a feel as to kind of how that slightly has progressed over the next year or so. It sounds like it's going to kind of ameliorate a little bit.

 

The next one is really about margins in the business. So you've given some good commentary around the fees, but also just coming back to what Simon said about the U.S. is you're kind of on a journey to a different level. Perhaps if you can just kind of flesh out kind of where you see that going. And the final one is just about the pipeline. Again, given there's quite a lot -- a good encouraging feel there, but can you maybe put it in the context of last year? It's always quite difficult. It's quite an intangible thing to take on board and get comfort from.

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Simon James Blouet Shaw, Savills plc - Group CFO, Member of Group Executive Board & Executive Director [7]

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Should I start with...

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Mark Ridley, Savills plc - Group CEO, Member of the Executive Board & Director [8]

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You start with...

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Simon James Blouet Shaw, Savills plc - Group CFO, Member of Group Executive Board & Executive Director [9]

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I think a number of those are probably me. Business development costs. What I can disclose is that the incremental lag effect either numbed by which H1 '19 had a greater cost burden in the P&L uncovered than H1 '18 was well over GBP 4 million of pretax profit effect. So you don't have to be Einstein to work out that plus GBP 1.6 million of IFRS 16 alone explains the difference. It will dissipate further in the second half and through the beginning of 2020. Because clearly, as Mark said, this is 12 to 18 months of activity rolling out towards full production though.

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Christopher James Millington, Numis Securities Limited, Research Division - Analyst [10]

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I'm willing to [start watching some space] by H1, so again there should be some incremental headwind...

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Simon James Blouet Shaw, Savills plc - Group CFO, Member of Group Executive Board & Executive Director [11]

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I think we should -- we should see -- put it this way. The stock differential won't be stark during that period progressively. But of course, some people only came in a few weeks ago, others came in nearly 12 months ago. So I think it's -- en masse, we should see it self-cover. The second point was the margin journey, particularly for the U.S. Clearly, we got up to 5% this period.

 

And as I alluded to earlier, we've invested quite significantly in the central platform that supports our transactional teams around the country there. So that is things like research, technology, management, marketing, et cetera. And that will take time because the shoe is essentially larger than the foot that's inside it at the moment, although that foot is growing quite substantially. The aim in life is to get towards double-digits margin over the next 3 to 4 years.

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Christopher James Millington, Numis Securities Limited, Research Division - Analyst [12]

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And at the group level, if I think about transactional businesses and I notice it myself [that the leasings]. Is it actually true for the group on a transactional basis going towards the double-digit level? Or is there something structural which will prevent it?

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Mark Ridley, Savills plc - Group CEO, Member of the Executive Board & Director [13]

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I think...

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Simon James Blouet Shaw, Savills plc - Group CFO, Member of Group Executive Board & Executive Director [14]

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I think, clearly -- if all markets are performing solidly at the same time, which tends to not to be the case, but if that were the case, then, yes. I think in reality, you're looking somewhere nearer probably late 8%, 9%, 9.5% as being a sensible target. And a through the cycle target, it would be probably around 7.5% to 8%.

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Mark Ridley, Savills plc - Group CEO, Member of the Executive Board & Director [15]

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Yes. And I think that's -- as you rightly say, in some markets where we have invested heavily aggressive, in Europe particularly, we invested significant amounts in the transactional business there. That will start to come through in the margin. Overall margin improvement there will come. I'm going to pick up on that pipeline of question, if I may. We -- on cross-border activity on tenant rent, I'm just going to give you a stat. We -- this year, we've already had 3x as much being referred around the group than we would have had last year. So you can see that that's sort of the relationships, the building of our family, if you like, with the U.S. business now is rebranded is really, really paying off in that core occupier work. The same is true in the capital markets.

 

The capital markets mandates that we are carrying subject to being able to both transact them and get our fees from them is better than it has ever been. But there are headwinds in some markets, as we've highlighted as well. So I think the volumetric piece is up. So we do need to make sure that some of the certainty comes through. But we do believe that, that will continue. And the one thing I would say is the investor demand in those markets perhaps where you're seeing some volumes impact at the moment is still there. It's maybe a bit of watch and wait, but we do see it coming through. So that volume is very significant.

 

I'd also just talk about sort of work in progress on our consultancy and property management business. That is better than ever as well. The mandates we're both securing, and I haven't even announced some of the ones that we have secured yet, is better than ever. So I'm very pleased with the position as we speak. Osmaan?

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Osmaan Malik, UBS Investment Bank, Research Division - Head of Pan European Property Research and Executive Director [16]

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Osmaan Malik, UBS. Firstly, apologies just for walking in halfway through. I was at another company's presentation that I cover. So if you've answered these questions, just feel free to knock them back and we can follow up afterwards. So I just wanted to follow up on -- actually a couple of questions have already answered. Could you just put it in headcount terms, just to give us a bit more color, how many people you've hired over this past period maybe relative to the last few years or last year so we get a feel for this reduction in the underlying profit before tax?

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Mark Ridley, Savills plc - Group CEO, Member of the Executive Board & Director [17]

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Okay. So I sort of answered it. I mean you'll see the total numbers have gone from over the period 36,000 to 39,000. But don't forget, a very significant amount of that may be employees attached to property management contracts that come through in that way. Over that period, we -- excluding India, as I mentioned, we have taken on 400 fee owners, just under 400, 375 I think is the actual number. And that is across North America, across Europe and the Asia Pac region primarily.

 

So if you take the 12-month piece and you take the sort of time-lag effect, which is realistically 12 to 18 months before they start to come up onstream -- and bear in mind it's over 12 months not all 12 months ago -- you'll see that there is that lag effect on that many fee earners. So we do anticipate that coming forward over the next year or two. It's that period.

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Simon James Blouet Shaw, Savills plc - Group CFO, Member of Group Executive Board & Executive Director [18]

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And I'd say that's about 60% up on the equivalent preceding 12 months in terms of numbers. And I'd also put that in context. It also reflects a move more towards recruitment from corporate acquisition, which has sort of picked up, was fairly significant than the preceding periods.

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Mark Ridley, Savills plc - Group CEO, Member of the Executive Board & Director [19]

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Yes.

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Osmaan Malik, UBS Investment Bank, Research Division - Head of Pan European Property Research and Executive Director [20]

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Okay, good. Second question on this IFRS 16 change. Just apologies, are you able to put this in layman's term what's happened here? What should we expect for the full year? Is this just a hit to earnings that we're just going to have to somewhat looking forward?

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Simon James Blouet Shaw, Savills plc - Group CFO, Member of Group Executive Board & Executive Director [21]

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How long you got? It's 1.6 million in the half year. Broadly, it's going to be double that for the full year. The first year hit, assuming your stated lease -- the lease stays the same, the first year hit is always the worse, and it amortizes over time. So assume about 3 million -- 3.2 million for the full year effect in 2019. And it will reduce marginally in 2020, assuming we're not taking on further leases.

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Mark Ridley, Savills plc - Group CEO, Member of the Executive Board & Director [22]

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And I think, dare I say, geographic spread-wise, Simon. When...

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Simon James Blouet Shaw, Savills plc - Group CFO, Member of Group Executive Board & Executive Director [23]

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Quite the very U.K. focused.

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Mark Ridley, Savills plc - Group CEO, Member of the Executive Board & Director [24]

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Yes.

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Simon James Blouet Shaw, Savills plc - Group CFO, Member of Group Executive Board & Executive Director [25]

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And obviously we've got -- this building is a long-length of lease, is a big determinant of the impact. So long-leased countries, the U.K. being the largest, we have significant buildings here. We've also got -- the other 2 pieces would be really U.S. and particularly Hong Kong.

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Mark Ridley, Savills plc - Group CEO, Member of the Executive Board & Director [26]

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Yes.

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Osmaan Malik, UBS Investment Bank, Research Division - Head of Pan European Property Research and Executive Director [27]

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Okay. And then final question is on the London residential business. Just noting the quite heavy reduction in the average selling price, and I know this is the direction you've been heading to for the past 3 or 4 years. To what extent is it strategic versus market led? And maybe more importantly, does it leave you open to additional pressures from -- pressure on margin competition from being more mass market driven and potentially more a threat from technological disintermediation, et cetera?

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Simon James Blouet Shaw, Savills plc - Group CFO, Member of Group Executive Board & Executive Director [28]

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Okay. I may bring Phillippa in also from our London business to talk about that. Just in terms of -- it's been a conscious strategic decision. So we highlighted the fact that we wish to take more in the core area of business, and our exchanges in that period in effect are 40% plus up, which for us that's a deliberate strategy. It doesn't mean we've disregarded our prime or -- but we wanted to take more market share in that area in particular. And it's definitely paying off, and volumes maintain themselves in that area to a greater degree. Core is -- Phillippa can perhaps define that, but it's between 0.5 and 1.5. I know it varies on every segment's average.

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Phillippa Dalby-Welsh, Savills plc - Co-Head of Prime Control London & Director [29]

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Yes. So up to 3 million in London core, and our clients in the (inaudible) 3 million London urban market. I think what I would say in terms of the prime London market is if you look at the GBP 5 million prime market there has been a significant reduction in average values to the tune of about 20%. What we -- what I think is very relevant to our prime market is the fact that the price falls that we had seen have slowed dramatically. And what we're finding is that prices from peak now are converging at about 20% of peak, which is quite reflective of the price drops over previous downturns.

And our remit has very much been to take market share, and we do certainly notice a flight to quality in those prime markets in tougher times, and so that can certainly play to our advantage in Central London. But really our drive into core was a deliberate focus in order to have a more balanced business in residential, and that certainly helps enormously.

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Osmaan Malik, UBS Investment Bank, Research Division - Head of Pan European Property Research and Executive Director [30]

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And I guess the second part, to any of you, is this point on does it leave you more open to risk of fee pressure from being competing as, I guess, more players and potentially from...

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Mark Ridley, Savills plc - Group CEO, Member of the Executive Board & Director [31]

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I mentioned the flight quality piece, definitely. And I don't think, Phillippa, our fee levels are either maintained or gone up.

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Phillippa Dalby-Welsh, Savills plc - Co-Head of Prime Control London & Director [32]

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They've actually gone up, yes. So I think that leads on from what I was saying about the flight quality and the look from clients to quality of service and access to information, which is where our sort of phenomenal research department can really give us a huge advantage and our clients a huge advantage. So a natural fact over the country in terms of London and the country, our average fees have actually gone up by 3%. And if you look at Prime London specifically, where we've seen those sort of larger price-led and volume-of-transaction-led challenges, our average fees actually gone by 7%.

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Mark Ridley, Savills plc - Group CEO, Member of the Executive Board & Director [33]

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Any more for anymore?

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Unidentified Analyst, [34]

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On the prime urban markets, you very clearly sort of indicated that organic investment through headcount is the preferred route. What sort of led to that change? Are you just not seeing the deals there? Or the sellers more reluctant to transact? Or do you think that right now is it's a better opportunity or better returns in organic investment rather than sort of doing another [Sudley] or acquire a new one or (inaudible)?

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Mark Ridley, Savills plc - Group CEO, Member of the Executive Board & Director [35]

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I think the spread of our business allows us to look at the organic growth element. It's a better fit as you grow the platform. So looking for something that fits really well into the strategy is -- there's less of it. That's point one. Point two, pricing, market pricing. In some areas, you'd argue that the pricing might be at a high point and, therefore, is the right time to acquire businesses. And we -- so we'll always -- the radar screen always has dots on it. But I do believe that it's more likely to be organic. And it fits our strategy going forward.

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Simon James Blouet Shaw, Savills plc - Group CFO, Member of Group Executive Board & Executive Director [36]

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And if I can say, that's subject to -- a couple of exceptions may go on, which we'll still do.

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Mark Ridley, Savills plc - Group CEO, Member of the Executive Board & Director [37]

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Yes. Yes, absolutely. Any other questions? Well if not, thank you very much for attending, and look forward to seeing you for the full year. Thank you.

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Simon James Blouet Shaw, Savills plc - Group CFO, Member of Group Executive Board & Executive Director [38]

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Thanks.