Purplebricks Group plc (OTC:PRPPF) Q2 2023 Earnings Conference Call December 8, 2022 3:30 AM ET
Company Participants
Helena Marston – Chief Executive Officer
Dominique Highfield – Chief Financial Officer
Conference Call Participants
Helena Marston
Good morning, and welcome to our Half Year Results. I’m joined by our new CFO, Dominique Highfield, and we will update you on our progress to create a profitable and scalable business. In terms of agenda, I will give you a brief summary of the second half, followed by an update on our financial performance from Dominique. And then I will finish by giving you an overview of the progress we’re making against the various initiatives that support the delivery of our plan and to return us to a profitable business in the second half.
Our performance was largely in line by plan. Instructions and fees have remained stable despite the significant turnaround the business is going through. Instructions held steady at 21,205. However, revenue was down 16% due to the lower conveyancing volumes we saw at the end of last year. Our total fee income was broadly flat at £34.4 million.
ARPI held well at 1,624 and the low interest [ph] conveyancing volumes were offset by the price increases that were implemented in July and the improved attachment rate for the Pro package. Our work to improve conversion in the living room continues, and we’re up 170 basis points since financial year 2022.
The cost-cutting work we started in the summer is yet to flow through to the adjusted EBITDA, which was a loss of £8.4 million, reflecting lower revenue and gross profit margin. We remain laser-focused on cash, which sits at £31.3 million.
I am pleased with our progress in the first half. We took £13 million out of our cost base, and this has now increased to £17 million of annualized savings, enabling us to invest in strategic priorities and drive revenue streams.
In August, I committed to diversifying revenue, and we have launched our financial services business as of the 1st of November following the FCA approval. To ensure we return to profitability, I committed to ensuring that all of the areas in which our sales business operate are profitable. And I’m pleased to say that today we are operating in areas where we can achieve profitable, targeted and sustainable growth.
In October, we reset our brand going back to chartering [ph] about our low fixed fee. Our famous Commisery campaigns are once again deterring people from the High Street. We launched our new campaign in October against a backdrop of political and economic chaos. Our brand awareness remained as strong as ever over 90% awareness during this time.
Consideration increased by 6 percentage points. This really does prove our proposition has never been more relevant with the cost of living being at the forefront of consumers’ minds. I am confident that our new campaign and our go-to-market strategy will have the required impact to grow instructions in the second half.
Not only have we welcomed some fantastic talent into the business in the first half, but we also welcomed two new Board Directors, Adrian Gill and Gareth Helm, who both bring a wealth of experience from the sector and already adding value supporting me and my team.
I shared at year-end, some of the quick actions I have taken in the first quarter, and I have continued to work at pace taking necessary actions to turn the business back to profitability. This includes a further £4 million in costs being taken out as we continue to focus on our cash burn. I will share more detail on other actions we have taken after Dominique shares the financial performance.
Dominique Highfield
Thanks, Helena. Good morning, everyone. I joined very recently being impressed by the caliber of the people I met and a strong believer in the proposition. In my short time here, I have been so impressed by the dedication and the pace of everyone in the business to deliver sustainable and profitable growth. Helena and I share the belief that Purplebricks has great potential, and I’m excited by what we can achieve together, including, but not limited to, creating a cash-generative and profitable P&L.
On the face of it, the half year ’23 results are as expected, which is not flattering, but our financial results are yet to evidence the progress made by the actions we’ve taken to our operations and to our culture. These results are one of reset and of investment. And what you’ll see is a more effective cost base, a sales line that has weathered short-term disruption in our transformation, a business poised for future profitable growth.
As Helena has already mentioned, in the first half of this year, we have invested in the future growth of the Purplebricks business, and this has impacted several of the group’s core performance measures. That said, our instructions held up well year-on-year despite the material organizational changes that took place.
ARPI reduced marginally. We did see our customers accept the increase in our pricing and continually choose more of the expensive Pro package, meaning the true underlying ARPI increase of 10%. However, that isn’t what’s reported due to the mix of conveyancing income year-on-year. So flat instructions and a marginal reduction in ARPI has led to a total fee income for the half, reducing by 1% to £34.4 million.
Gross margin percentage is down on the prior period, but this is in line with our expectations being a result of the well-publicized move to the employed model. This is an investment into margin. But once the revenue line has grown, we will see not only the benefit of improved service levels, but of a more impressive gross margin percentage.
Flat revenues, a restrained gross margin percentage and further investment choices translated into an adjusted EBITDA loss of £8.4 million. We closed a 6-month period with a cash balance of £31.3 million, a reduction of £11.9 million compared to the opening position. Stabilizing and generating cash remains our priority.
Starting with trading, we delivered slightly higher net instructions in the first half of the year due to the increased conversion rate from a better field performance. Total fee income, which represents business won in the living room, was £34.4 million, a 1% decrease year-on-year as mentioned, because of the mix of conveyancing income, partially offset by our price increases and an increase in the number of Pro packages sold.
You can see that despite instructions remaining relatively flat year-on-year and fee income down only 1%, reported revenue has decreased by 16% year-on-year. This, again, is in line with expectations with the reduction versus the prior period happening as a result of the movements on the balance sheet, with deferred revenue from instructions growing and with accrued revenue from conveyancing declining.
These are the IFRS accounting adjustments to make sure that our revenue is recognized over the correct accounting period. And the reason our P&L has been impacted as it has with these balance sheet movements is essentially because conveyancing income reflects the reduced pipeline having been flattered previously from the hangover of the stamp duty holiday period, and the instruction revenues are increasing as a result of price changes. So more is held on the balance sheet to account for this growth versus last year.
Lettings revenue was down period-on-period from £3 million to £2 million as the business moved to an employed model in half one within lettings, temporarily rationalizing our focus as a result. Conveyancing income was down from £8.8 million in half one ’22 to £5.8 million in half one ’23 driven by the timing of cases referred to our partners. Other revenue was relatively flat at £2.7 million in half one ’23.
Moving on to gross margin. The majority of cost of sales is the amount paid to our sales field. Cost of sales increased by £3.2 million or 21% year-on-year, driven by a higher fixed cost base. For four of the six months in the last year comparative, we were operating on a different model, being commissions paid to self-employed local property experts. But as you know, from September 21, we moved to an employed sales field model. And so now our cost of sales has represents both salary and commission costs paid to employed agents.
So the largely fixed nature of these costs has led to a reduction year-on-year in gross profit margin, being 47% compared to 63% in the prior year. This margin percentage is in line with expectations, being an investment into our field teams, into our data available and in the service standards delivered. That said, we have recently taken action to reduce these fixed overheads through further cost-saving activity. This benefit will flow through in the next half of this year.
Moving on to operating expenses. Operating costs reduced by £1.2 million [ph] versus last year to £24.6 million. And whilst we drove a 28% decrease in marketing costs, this was partially offset by a 14% increase in support costs. We have reduced our marketing investment, focusing on effectiveness and channel mix on our target customer segments. We saw the benefit of this come through in our cost per instructions.
Half 1 ’23 was £490, much more focused and much more effective than the cost per instruction of £686 in half one, ’22. Support costs increased by £1.7 million due to additional investment in our operational capability, including the digital function and our customer contact center.
Moving on to earnings. Lower revenue and lower gross margin, combined with movement in deferred revenue has resulted in a fall in adjusted EBITDA to minus £8.4 million from a loss of £0.8 million in half one ’22. The operating loss of £11.7 million includes exceptional costs, as guided to previously, were the main items relating to restructure activities. The letting provision remains unchanged at £2.8 million, being suitably conservative and against a backdrop of a very low claims rate to date.
Turning to cash. We have seen an unacceptable level of cash outflow for this business, which we have been addressing in the first half of the year as a priority. Our cash position at the end of the first half of FY ’23 is impacted by our trading performance, but we have reduced the burn rate with a total outflow of £11.9 million compared to £15.7 million in the previous half. The cash burn is slowing.
The first half of the year saw us make a marketing investment and costs go through the P&L, which have since been cut. The second half of the year will see the cash trajectory changed significantly off the back of these actions, as well as key trading initiatives in play ready for deferred [ph] cash generation in the first half of FY ’24.
As you can see from the slide, going left to right, the main drivers of this cash outflow are the P&L items that we’ve already covered and the extent to which they have been paid by the end of the period. You’ll see that we have a £2 million difference between cash and adjusted EBITDA relating to deferred revenue and the cost of sales prepayment that I mentioned earlier.
As many of you know, we’re required to recognize our revenues and cost of sales over the expected period during which we provide the customers the service. As a result, the timing of cash flows is different from that fee accounting recognition.
Turning to profitability. Here, you can see our path to EBITDA breakeven by the end of half two, a significant turnaround in profitability to achieve consensus. We will achieve this through three key steps. First, our go-to-market strategy, which Helena will share more detail on shortly. This is the work that we’ll see our volumes grow through improved field performance and higher demand.
Secondly, in line with previous guidance, we will continue to achieve cost savings across the field, marketing and head office with these weighted towards half two. We have attacked the cost line to create a cost-conscious culture as well as a lean and efficient cost base on which to grow. We have cut into fat and not muscle.
I am incredibly clear that cost-cutting will only get us so far in turning this business into profit and generating cash. These activities have been done in conjunction with a focus on the customer and building our new revenue channels.
Finally, the full impact of the price increase we implemented in July will be demonstrated by ARPI growth in half two. What this half two breakeven performance demonstrates is the benefit of the actions in half one flowing through, but importantly, it positions us successfully for profit and cash generation in FY ’24.
So to summarize, there are a lot of moving parts for this half. The results are representative of a business going through change of consolidating its cost base and preparing for growth from new trading initiatives. Our decisions and actions have given us a healthier cost base and a shift in cost culture. And as I turn to guidance, I can confirm that the full year outturn [ph] is in line with previous guidance, which means a consistent revenue performance into half two and a much stronger EBITDA performance than half one.
Stabilizing cash while we reposition the business to grow is mine and Helena’s shared priority. I am confident with the actions being taken we will get there in the time as communicated and with significant cash resources until then. Helena will talk to us now more about these actions. Back to you, Helena.
Helena Marston
We remain the most relevant brand in our sector. We consistently outperformed the competition in multiple areas that matter most to our customers. We are number one in the industry for sales exchanged. We achieved 80% against the industry average of 68%, and our largest high street peer achieved 65%. This 17% differential shows the commitment and skill of our agents to sell homes.
Of the 20% of homes that don’t sell, 15% withdrawal from the market and less than 5% lift with other agents. We are the second fastest estate agent to get your sale agreed, taken on average 33 days. We are 21% faster than the whole market. Our largest peer takes 45 days. Our speed to achieve a sale agreed is a great USP for us. Our brand remains unrivalled. We remain the largest brand in the sector. And as I mentioned, we saw a 6 percentage point increase in consideration following the launch of our Commisery campaign.
I set out a clear plan in August to cut costs and stabilize cash, grow instructions, diversify revenues and raise standards. And I’m pleased to say that we are making progress in all areas. Dominique has covered where we are with our cost reduction plans so I will talk to you about where we are with the rest of the plan.
Diversifying revenue is vital if we want to protect our business from being solely reliant on a buoyant sales market. We are working towards having a greater proportion of our income from lettings, mortgages and conveyancing from FY ’24 onwards.
In lettings, we are focused on retaining our portfolio and growing in our four key cities. We have not received any further claims following the breaches last year. There are significant growth opportunities in lettings, which we are exploring as part of the broader strategy review, which will be shared with you at the year-end.
I am pleased to share that we have launched our mortgage business five months ahead of plan. We are now an appointed representative which means we own the end-to-end customer journey and employ our own advisers who can access mortgage deals through the MAB [ph] platform. This change in our model means that we can achieve up to three times more revenue per mortgage written, as well as selling additional products such as insurance. We also have a significant opportunity in the remortgage space in the future. We will be scaling our mortgage business in a compliance-led and disciplined way.
Conveyancing, as you know, accounts for 17% of our revenue, and this is largely from the seller’s customer base. In Q3, we will launch our digital solution to capture the buyer customer segment. Ahead of the digital launch, we implemented a manual process. The success of this exceeded our expectations with 25% of buyers contacted accepting a quote. We are therefore confident that we will see higher revenue volumes once the digital solution is live, targeting 100% of our buyers.
The key to us returning to profitability is ensuring that all of the areas in which we operate are profitable. Previously, we had a flawed understanding of our demand drivers, and this prevented us from achieving predictable and sustainable growth, which resulted in Purplebricks not being a profitable business.
Our go-to-market strategy uses demand drivers such as market headroom, resource requirement and profitability to inform where we operate. We have modeled the potential EBITDA impact of performance optimization and process standardization, and this shows a material uplift in EBITDA.
We have segmented our sales footprint into three groups. Group one is performing and profitable. These areas have limited headroom for growth. And whilst they are profitable today, we believe there is room for further profit to be achieved through standardization and workforce efficiency.
Group two, our growth areas have significant headroom for growth, which will be achieved through targeted marketing and the right fuel capabilities. Group three, the unprofitable areas from which we will be divesting, largely due to lack of opportunities and less cut through the proposition as it is today.
We were able to define these segments by understanding the characteristics and the areas which we have historically performed well in. We then identify the areas with the same characteristics and where our performance was not as strong, indicating a significant growth opportunity for us.
The graph on the left shows the number of properties which we have identified as being potential Purplebricks customers. The average house price is the x axis [ph] and the size of the bubble reflects the density. Approaching our field in this way has removed significant waste and allows us to target our marketing efficiently. In the second half, we expect to see further efficiencies through the standardization of our processes.
We continue to improve conversion since the launch of our recovery plan. And you can see from the graph that we have consistently improved conversion is going employed by 170 basis points. Underpinning our go-to-market strategy is the commercial excellence work. Through this, we look at consistency of process, adoption of technology, use of data and improvements to the customer journey. This will not only support conversion further, but it will also optimize the end-to-end customer experience.
It has been a very busy first half. We are laser focused on cash. We have reset the brand. Our go-to-market strategy leaves us well placed to grow instructions in a profitable way. And we have started work to diversify revenue streams by launching our mortgage business, and we continue to raise standards across the business.
And amongst all of this, we have made significant progress on defining the strategy for FY ’24 and beyond, which I look forward to sharing with you at year-end. I have built a strong team who like me are energized by the challenge to return Purplebricks to a profitable business and quickly.
Thank you for listening. Dominique and I will now take your questions.
Question-and-Answer Session
Operator
Helena Marston
Thank you. We are available to take any questions, should you have any, we’ll stay on the line for a few minutes longer. See if any questions come through.
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