Purplebricks Group PLC

LSE:PURP

Earnings Call Transcript 2022-Q4

[Helena Marston, Chief Executive Officer]

Good morning and thank you for joining us. Whether you are in the room of dialing in. I’m Helena Marston and I’m joined today by my CFO, Steve Long. This is my first set of results since I became CEO four months ago and I would like to start with a brief summary of where I see the business today is potential and the initiatives I’ve already implemented to get us moving and quickly towards the better future. So, let’s start with where the business is today.

Clearly, this is a business that has lost its way, but I have way, but I have no doubt as to its potential. Our brand awareness remains incredibly strong at 93% and we remain the largest estate agency brand in the sector. We sell 85% of all homes that list with us the first time in comparison to the high street leader at 75%. With a low fixed fee, our offering remains extraordinary value saving customers on average £2,300 per instruction.

Our business is powered by great technology, for both our customers and our employees. Our employees have the best devices at their fingertips to bring to life our proposition in the living room. For all of our customers, our technology enables us to provide a simple, transparent, and convenient way to buy and sell homes.

Our employed model, which went live last September, now gives us control over all of the levers to drive performance and a better customer experience. The power of our brand, proposition and technology leaves us well placed to diversify our product offering and accelerate our growth when the time is right.

We should be the market leader, but our financial performance tells us an altogether different story. Our instructions fell by almost a third last year, resulting in our market share falling to 3.4% and our revenues falling by 23% and a resulting EBITDA loss of 8.8 million. So, what went wrong?

Well, firstly, our marketing failed to live up to our expectations. We boosted marketing spend significantly, but our campaigns didn't have the impact we'd anticipated and we didn't win as many opportunities at the top of the funnel. We saw 12% decline in unique visitors to our website, compared to the previous year. The business transformation we undertook, while necessary caused some disruption to our day to day business. Conversion in the living room was 8% lower than the previous year.

Thirdly, we have been slow to make decisions and take action when needed, and this resulted in operational issues, which needed time and investment to [put right] [ph]. And finally, as you know, the housing market was seriously constrained with a prolonged lack of supply. I'm not trying to make excuses, but the fact remains last year's performance was just not good enough, but we need to be upfront about what went wrong if we're going to fix it and [beat] [ph] our potential.

I have a clear plan and this plan is focused on four clear objectives. Firstly, looking closely at our cost base to ensure it is right sized and reflective of where we are today, and where we want to be tomorrow. We are ensuring that we are focusing on investments that create financial stability and profitable growth for the business.

Second, we need to capitalize on other revenue opportunities. This will move us away from being solely reliant on a buoyant sales market, providing protection in a downturn market. Third, we need to grow our instructions. We cannot control the market, but we can control how we perform in it and we need to increase our conversion rates no matter what the housing market is doing.

And finally, we need to look at how we operate and make sure we have the right processes and procedures to ensure that we don't have a repeat of the lettings issues experienced last year.

In my first three months as CEO, I have already taken a number of actions in-line with this plan to get back on track. In terms of costs, we have taken out 13 million by reviewing our support and functions and investment choices. We have cut marketing, reduced the size of our field to align with predicted instruction volumes and reduced our office footprint from 4 to 1.

In July, we put up our prices by 20% and to date, we have not seen any impact on conversion. We removed the money back guarantee as it failed to deliver the expected results. Our relationship with our conveyance partner, Simplify, is developing well. We have successfully been selling conveyancing products to our sellers and we are now in a position to sell our conveyancing products to the buyer segment of our customer base.

In mortgages, we are well underway in the design and development of a new mortgage operating model. Pending the necessary approvals, we will become an appointed representative for mortgages and launch to customers by the end of the financial year. This move to become an appointed representative will generate significantly more revenue and allow us to control the end-to-end customer experience.

In lettings, we have dramatically overhauled our processes and procedures following the two audits we conducted at the end of last year. We have retrained all of our staff and also appointed a new lettings director, a director of compliance and a head of lettings operations. Bringing new experience hires into the organization will further strengthen our lettings business.

We have also employed our lettings field, which will enable us to get better control of recruitment, training, and execution of process [Technical Difficulty] in the field and of course provide a better customer experience. I have strengthened the executive leadership team through a number of key appointments, including a Chief Commercial Officer who is responsible for all of our revenue streams.

The directors of our revenue streams each have more than 20 years of industry experience, which I deeply value. This industry experience is vital alongside other expertise in my team, such as growing customer and technology focused businesses. To improve our sales effectiveness, we have retrained our field agents to raise standards, improve conversion, and improve customer experience.

We have implemented a rigorous performance management system and as such, living room conversion has already increased by 11% this year. We need to diversify our revenue streams so that we are not solely reliant on a buoyant sales market. Whilst lettings, mortgages, and conveyancing address this, there is still more we can do. Historically, we have taken too long to test and launch new products. And as a tech business, this pace needs to change.

Last month, we launched our first test on a potential new product to add to our portfolio, and I look forward to sharing the progress of this with you in due course. I hope that you can see from the actions I have taken that I have delivered quickly and decisively in-line with our plan.

I'll hand over to Steve now to summarize the numbers and provide some guidance before I go into more detail on the plan for the rest of the year.

[Steve Long, Chief Financial Officer]

Thanks, Helena. Good morning, everyone. This is my first set of results since joining. And like Helena, I certainly share the belief that this is a business with great potential and I'm confident that we have the right plan in place to deliver on it. It goes without saying that the full-year 2022 results anything, but pleasing, but I'm encouraged by the progress we've already made through the actions we've taken to stabilize the business and turnaround our performance.

Helena has already talked about the key factors that have driven our performance in 2022. These have impacted across the group's core performance measures with instructions, revenue, and gross margin down on the prior year translating into an adjusted EBITDA loss of £8.8 million.

We closed the year with a cash balance of £43.2 million, a reduction of £30.8 million compared with the opening position. This includes exceptional costs of £4 million and timing differences between accounting recognition and cash flows. Stabilizing cash while we reposition the business to grow is my number one priority and we will achieve this through the actions we've already taken and plans that we have in place.

We saw a 31% reduction in instructions, driven by underperformance in our sales and marketing, heightened by the market backdrop. Revenue was down 23% year-on-year largely as a result of lower instructions. This was slightly offset by the increase in average revenue per instruction, which benefited from converting completions from 2021 where instruction volumes were higher.

As I'll come on to later, when we talk about cash in more detail, revenue has benefited from a £3.1 million release of deferred revenue, as well as the tail of conveyancing completions from 2021. The underlying position of revenue is more like [£65 million] [ph] as a result. Whilst these numbers highlight a difficult year, we've acted quickly to cut costs and we've already made changes in marketing and sales to address the fall in instructions. Our approach for this financial year will seek to strike a balance between strengthening margins and growing market share.

Moving on to gross margin, you can see cost of sales has reduced by 16%, albeit in the context of a 31% fall in instruction volumes. The majority of cost of sales is represented by amounts paid to our sales field. Up until August, these amounts were commissions paid to self-employed local property experts. From September, we moved to an employed sales field model and therefore, for much of the year, cost of sales represented both salary and commission costs paid to employed agents.

The largely fixed nature of these costs from September, along with lower instruction volumes, has led to a significant reduction year-on-year in gross profit. However, it should be noted that the full impact of these costs is yet to be seen in the financials as they include a £3.1 million one-off benefit from an accounting pre-payment.

We've already acted to lower these fixed costs through reducing the size of the sales field via performance management measures, and this benefit will flow through from the second quarter of this financial year. Other cost of sales includes the cost of pro photography and 3D tours. These were implemented in September to improve ancillary take up. The resulting increase in costs has supported an improvement in average revenue per instruction.

All-in, this results in a lower gross margin of 60%, compared with 63% in the prior year. This benefited from the accounting prepayment that I mentioned earlier. Adjusting for this, the full-year position was 56% with the reduction in margin coming through in the second half. And the appendix to the presentation includes an H1, H2 split to kind of help draw that out more clearly.

So, moving on to adjusted operating expenses, where our marketing costs increased by 33% to £25.2 million, which as you can see is the driver of the overall increase in operating expenses. In the previous financial year, marketing costs benefited from lower activity in the pandemic effective first half and the associated reduction in portal costs.

Conversely, 2022 includes a significant investment in a new creative and above the line marketing, which has not delivered an increase in instruction volumes. We've reduced our marketing investment for the coming year and will also improve effectiveness by focusing our channel mix on our target customer segments.

We anticipate our marketing spend will be 6 million lower in 2023 than 2022. Support costs include the digital function, customer contact center, and head office functions. In 2022, the business made a number of investments, including the support infrastructure for a fully-employed sales field and technology enhancements such as Salesforce and a CRM platform, as well as strengthening the risk and compliance structure within the business.

These items along with the investment in our new mortgages operating model to drive future RP growth will increase cost this year by around £3 million, but these will be offset by efficiencies elsewhere, including the closure of those office locations that Helena mentioned earlier.

So, moving on to earnings. So, those investments in marketing and the increase in fixed costs from the transition to an employed model, combined with the lower level of instructions, resulted in a fall in adjusted EBITDA to minus £8.8 million. As I said earlier, this has benefited from a £3.1 million release of deferred revenue and a £3.1 million increase in the cost of sales prepayment as a result of the change to an employed model, as well as the tale of conveyancing completions from 2021.

The operating loss of £31.7 million includes exceptional costs guided to previously. The main items being £3.5 million relating to our transition to a fully employed sales model and £3.6 million for the previously disclosed lettings issue. The lettings provision is unchanged from the interim results and is highly conservative in the context of having received less than 15 claims to date.

More broadly, we've taken significant action to enhance the controlled environment, including implementation of a number of process changes in-line with the recommendations from the third party assurance conducted at the time. I'm also strengthening the compliance function, including the appointment of an experienced risk and compliance director who joins us shortly to provide greater challenge and oversight of first line operations.

We've taken the decision to fully write-off our investment in Homeday, resulting in a non-cash P&L charge of £9.2 million. The impairment reflects a downturn in performance and a significant slowdown in the German residential property market, including a reassessment of the discount rate applied to Homeday's future cash flows, in-line with a more challenging macroeconomic outlook.

We're now fully focused on improving the performance of the UK business. The remaining items include depreciation and amortization and our share of losses from Homeday.

So, turning to cash. 2022 saw a total cash outflow of £30.8 million, which is an unacceptable level for the business and which we're already addressing as a priority. The actions that we have taken will reduce the level of cash burn significantly and they will start to impact from the second quarter of this year. By the time we exit the first half of 2023, the run rate in cash burn will be 70% lower than it was exiting 2022.

Coming back to last year, as you can see from the slide, going left to right, the main drivers of P&L items that we've already covered to the extent they've been paid in cash by the end of the period. We also repaid a million pounds of furlough moneys, which were accrued for the end of the previous year.

In addition, you'll see that we have a £6.2 million difference between cash and adjusted EBITDA related to deferred revenue and the cost of sales prepayment that I mentioned earlier. As many of you know, we're required to recognize our revenue and cost of sales over the expected period during which we provide service to our customers. As a result, the timing of cash flows is different than the accounting recognition.

So, in a year like 2022, where instruction volumes reduce, we defer less revenue. We'll see the opposite impact when revenues increased this year. The change in other working capital is also driven by the change to an employed model as commission previously paid in arrears has been accelerated in-line with the monthly payroll cutoff.

So, to summarize, there's a lot of moving parts in the results this year. I hope we've given a good understanding of the key items driving performance, but more importantly, the actions we've already taken particularly around cost.

Turning to guidance. First of all, I want to confirm that our year to date performance is in-line with expectations. We haven't provided quarterly trading updates as a matter of course in the past, but I think it's helpful to give some visibility as to how we've started the year. For quarter one, we're expecting to generate net instructions of around 11,000 and revenue of £16 million and importantly, that does not include the full run rate benefit of the actions that we've already taken.

Overall, in 2023, we expect to deliver revenue of £67.5 million to £72.5 million driven by growth in instructions and average revenue per instruction weighted towards the second half of the year. The revenue position represents growth of 4% to 12%, compared with the underlying position for 2022 that I mentioned earlier and this is net of an increase in deferred revenue in-line with growing RP and instructions.

Finally, from me, we'll achieve a cash generative position early in the first half of full-year 2024 with significant headroom in our cash resources. Stabilizing cash while we reposition the business to grow is my number one priority and we will achieve this through the actions already taken and the plans that we have in place, which Helena is going to explain in more detail now.

[Helena Marston, Chief Executive Officer]

Thank you, Steve. Before I talk to you about the progress we're making in sales, I wanted to take the opportunity to remind you of our revenue model. As you know, going employed has given us greater control over the field, and with this comes greater opportunities for us to generate more revenue per customer.

We believe that every seller is a purchaser of a conveyancing product not only for the home they are selling, but for their onward purchase as well. We can also sell mortgages to our sellers and in the future offer other home moving products. Historically, we have not focused on the buyer element of our customer base, and one of the key changes to our model today is opportunity we now have to generate significant revenue by nurturing our buyers.

When we went employed, we developed the local property agent role. The LPA looks after buyers and conducts viewings. This means they meet more customers face-to-face than any other role in our business. Today on average, we get 15 viewers per property. If we nurture these viewers correctly, we can potentially convert them to 15 valuations, 15 mortgages, and up to 30 conveyancing products.

This year, we are focused on developing and incentivizing our LPAs to generate more listings and sell more mortgages and convincing products. We are laser focused on two key areas of investment coming into this financial year and these areas are sales and marketing. We aim to improve the efficiency and effectiveness of our investments making certain we invest wisely in the right things at the right time.

We cannot control the market, but we can control how we perform in it, and that is why employing our field was absolutely the right action to take. We have worked hard over the last three months to ensure we have the right people in our field who are ambitious, driven to succeed and passionate about the Purplebricks way of doing business.

Today, we have a healthy field engagement score and continue to receive large volumes of applications of people looking to join our business. We have implemented a new performance management process and aligned our renumeration model to ensure it drives the right behaviors and outcomes. We had a standardized best practice putting technology and data at the heart of our sales process.

When we first employed the field, we were not quick enough to adjust the size of the field to the changing size of the market. And as such, we ran with unnecessary costs throughout last year. We have now developed our workforce planning capability, which enables us to be more efficient and quicker to respond to a changing market. This will ensure we do not carry unnecessary field costs moving forward.

Over the last few years, we have tried to be everything to everyone, and this was neither efficient nor effective. Utilizing our data, we have started to understand the market and customer segments where we are most successful today. This is largely informed by house value you on volumes coming to the market.

Using these insights, we have identified the areas where we have high market share and other areas where we should have high market share, but are currently not performing. We have reshaped our field to ensure they are aligned to where our biggest opportunities are. Having a clear focus on these areas of where we choose to play will inevitably drive efficiency and success in the field.

Our sales footprint is grouped into three segments. Segment A represents where we have high market share today due to the proposition cutting through and supported by a strong field performance. We will defend this area and look for additional opportunities to grow it. Whilst having many of the same characteristics as A, segment B has a lower market share. There is no reason we should not be as successful in segment and B as we are in A.

So, we are focused on growing this area through targeted marketing and better field performance. Segment C depicts a lower market share due to the proposition not cutting through and fewer volumes coming to the market, and we are reviewing how we serve customers in this area. We will do further work on customer segmentation this year as it will enable us to target our investments in the right areas and drive profitable and predictable growth.

We are now taking a much more rigorous approach to performance management. This has seen living room conversion increase by 11% since the start of this financial year. As a result, we are seeing a higher mix of better performers and decreasing lower performers. We are also seeing an increase in attachment rates of our pro package by 10% since the start of the financial year.

Sales of our conveyancing product remains strong with over 70% of sellers taking our conveyancing product. There is of course more we can do and we continue to train and incentivize our field in the right way to build on these improvements. As you know, our investment in marketing last year did not pay off.

Over the last few years, we have stopped shouting about our low fixed fee, which is the essence of what makes us unique. The [Will get you sold] [ph] campaign did not differentiate us from the high street. We lost sight of our brand enemy, commission, and good brands need an enemy. Too much marketing budget was spent on fame driving activities, none of which targeted our core customer segments or overcame the barriers to consideration.

We spent too much time and money chasing fame and not enough on chasing customers. And this year, that's going to change, because our marketing investments will be better targeted with the right messaging to align to our growth goals. We're going back to educating consumers on the price and value of our proposition. We will educate them on the benefits of our technology and why this differentiates us and most importantly makes us better than any other agent.

In summary, we need to make our marketing investments work harder than ever before. We need to put the stop sign back in front of customers face before they mindlessly walk into the high street and tell them there's a smarter, better way to buy and sell homes. And I'm confident that the change in our thinking and planning is going to start paying off in the short-term with bold and authentic campaigns that will set us up for growth.

The new creative launch is in the autumn, and I will talk to you about how it's performing when we meet again. I am sure like me, you're ambitious for Purplebricks to maximize its value beyond sales, lettings, and conveyancing. And with 93% brand awareness, we'd be crazy not to utilize this.

I talked earlier about launching our new mortgage proposition and this is an exciting and natural product to add to our portfolio. We're also taking time to understand our strategy to grow the lettings business, having taken the time to correct the historic issues and strengthen our capability. And whilst it's my number one priority to stabilize our financial position, I am working with my team on planning now for future growth.

We have implemented various processes for us to be able to grow additional revenue streams. Future revenue innovation will be largely focused on selling additional home moving products and service. Our recent investments in field training have shown us with the right support and incentives, our field is capable of selling more services to our customers as part of the home moving journey.

As I mentioned earlier, we have kicked off a new trial, which will test the opportunity to sell an additional product to our customer. I look forward to sharing the outcome with you in due course. I hope this overview has given you confidence in my leadership, and a clear plan we have in place to turn around business performance. The size of the challenge does not escape me, but I fundamentally believe that with the brand power we already have, the new executive team I'm building, along with my clear focus and ability to make decisions and act quickly, we will not only turn around to this business, but also give our customers, employees, and shareholders something to be excited about.

I'm now going to hand over to you for questions.

[Robin Savage, Zeus Capital]

It's Robin Savage from Zeus Capital. Could I ask a question about your diversification? And in particular, financial services, it seems to play quite an important role in your future growth. I think I'm correct in saying that over the past few years, Purplebricks has been providing leads to Mortgage Advice Bureau, could you talk about the relationship with Mortgage Advice Bureau and talk more about how you might be developing the proposition over the next year or two?

[Helena Marston, Chief Executive Officer]

Yes. Thanks, Robin. So, historically, we have referred leased Mortgage Advice Bureau, and we will still continue that relationship with them, but we will be moving up the value chain to become an appointed representative. As I said, this gives us much more revenue per mortgage, but also allows us to control the end-to-end customer experience. And quite rightly, you may question why wouldn't we have done this before? But I think that talks to the fact that when we had a self-employed world, we were not able to control the performance or the incentives of the field or train them.

Now that we have an employed field, this is absolutely the right time for us to launch such a product. So, through the progress that we've made with the training around sales conversion in the living room, we know that we will be able to correctly chain the field to talk about mortgages to customers and hence increase the amount of referrals that we sent to our own appointed representatives in the new model.

So, it will significantly increase our revenue and we look to roll this out towards the end of the financial year with deferred revenue to talk about end of year flowing into financial year 2024.

[Operator]

Thank you. We will now take questions from the online audience. And the first question is, will there be any cash or non-cash costs from implementing the 2023 cost saving program? And can you say and give an idea of how much?

[Steve Long, Chief Financial Officer]

Sure. So the answer is nothing material. We've largely already completed the actions to do that. Most of it was through performance management.

[Operator]

Thank you. A follow-up question. Where do you think gross margins will land in the full-2023?

[Steve Long, Chief Financial Officer]

Yes, sure. I think, as I said in the presentation, there's – it certainly come down in the second half of the year on the back of, sort of revenue coming off and the higher fixed cost base. I think if you adjust the second half numbers for the prepayment that I mentioned earlier, you'll see that we are running at about 45% in the second half of the year.

Given the cost action that we've taken and the fact that we're growing revenue, I would expect that to improve as we go through the year. And certainly, over the medium-term, obviously, it's getting back to that, sort of 60% plus that we're running out previously, but it is going to take time for that to gradually flow through as we go through this year into next as well.

[Operator]

We have a final question and that’s have you considered giving vendors an option of paying a commission on success rather than an upfront fee. This might make it easier for vendors to compare your prices with traditional agents?

[Helena Marston, Chief Executive Officer]

So, we're always reviewing our proposition. We believe that our low fixed fee is still relevant in today's market, and we are seeing an uplift in conversion in the living room. So, at this point, it's not something that we're looking at, but as you say, we're always considering it to ensure what we're offering meets customers' needs.

[Operator]

Thank you. As there are no further questions from the online audience, I'd like to hand back for closing remarks.

[Helena Marston, Chief Executive Officer]

Thank you.