LSL Property Services plc (LSL) Earnings Call Transcript

Hello, and welcome to LSL's half year results presentation. Thank you for joining us. I'm Adam Castleton, Group Chief Executive. I'm joined by David Tilak, our Group CFO. I'll start by taking you through the key highlights from the first half. David will then take you through the financial performance in more detail before I come back to talk about the opportunities ahead. So let's start with the highlights. I think there are 3 things to take from our first half results. Firstly, we delivered further profit and margin growth. And importantly, this was achieved in markets which developed broadly as we expected. They were not particularly strong, but nor have we seen the deterioration that some of the wider market commentary might suggest. Against that backdrop, the group has continued to perform well. Secondly, we launched our group-wide transformation program focused initially on finance and procurement. We expect this to deliver at least GBP 5 million of annualized benefits with the benefits building through 2027. Transformation will continue to be an important part of how we strengthen LSL. Looking ahead, technology is likely to become an increasingly important focus as we consider how we can use it more effectively to simplify processes, improve how we work and support our businesses. We make these changes from a position of strength -- it is more than cost reduction. It is about creating a simpler, more effective LSL, making better use of our scale and capabilities and providing a stronger platform for future growth. And thirdly, we remain on track for the full year. Trading since the period end has developed as anticipated, and our expectations for 2026 remain unchanged. So overall, a good first half further financial progress, a significant transformation program now underway and confidence in our expectations for the year. What I think is important on this slide is not any of these numbers. It's the combination. Profits are growing, margins are expanding, cash conversion remains high and our return on capital employed has increased again to 36%, around twice the historic level for LSL. That reflects the very different shape of the group today. We are capital light, with structurally stronger margins and the business generates significant cash. And importantly, our revenue mix is much more resilient than many people might assume. The majority of book income is not directly dependent on residential property transactions, given our significant income streams from lettings, remortgaging, platform fees and other recurring or repeatable revenue streams. Our resilient model means we can continue to invest selectively where we see attractive returns, while at the same time returning capital to shareholders. In the first half, we returned more than GBP 12 million through dividends and share buybacks, while maintaining a strong balance sheet, and we still see further opportunity. Our group margin is now 17% and compared with 16% in the first half of last year. Our transformation program supports our ambition to move that above 20%. So for me, this is increasingly a high-return, cash-generative and resilient business with further opportunity to improve its economics, that is a very attractive combination. Turning briefly to our markets. Overall, they developed broadly as we expected during the first half -- the residential sales market was slightly smaller year-on-year as expected, largely because of the stamp duty related pull forward in the comparative period, purchase transactions remaining around long-term averages, with some softness in London where our exposure is relatively limited. The mortgage market continued to recover and remortgaging was particularly strong as significant volumes of fixed rate products reach maturity. That is important for LSL because we're mortgaging supports activity across both Financial Services and surveying. Lettings also remain resilient. We have successfully supported the implementation of the renters rights changes across our network. Contrary to some of the more negative commentary, we've not seen evidence of significant landlord withdrawal. So overall, fairly ordinary markets broadly as we expected and a backdrop against which we have continued to perform. Alongside the financial performance, we've remained very active commercially across the group. In surveying, we've renewed important lender contracts, acquired further allocation wins and continue to develop our AVM proposition. In the state agency franchising, we've expanded the network, acquired letting books, added recurring income and invested further in areas such as conveyancing. We've also completed selective bolt-on acquisitions also in financial services where they improve our capabilities or strengthen our market position -- and pivotal growth has continued to grow profitably building scale through further acquisitions and self-financing. The common theme is discipline. We are investing where we can strengthen our businesses, deepen our relationships and generate attractive returns. So even fairly ordinary markets, there has been a lot of meaningful commercial progress across LSL. We've also been changing how LSL operates. The transformation program is the most visible example -- it is about simplifying the way we work, making better use of great capabilities, group capabilities and reducing unnecessary duplication. There was a broader change taking place as well. We're working more collaboratively across businesses, which historically operated independently. We've strengthened management and expertise. We are improving communication across the group and continuing to develop a more accountable and connected culture. We've also worked hard to improve how LSL is understood externally. The business has changed significantly over recent years, the market understanding had not always kept pace. We've increased engagement with both existing and prospective investors, and we are seeing much greater interest in the group and in the opportunity ahead. So -- there's a lot happening beneath the headline financial performance commercially, organizationally and in how we operate as 1 group. I'll now hand over to David. David joined us at the beginning of the year and have settled into the business extremely quickly. His experience in transformation is already proving valuable with measurable benefits. He will now take you through the financial performance in more detail, including the economics of the transformation program. David?

Thank you, Adam. I will now take you through the group's financial performance and the results from each of our divisions. I'll then cover the transformation program, cash generation, capital allocation and our outlook for the full year. Let me begin with the group's headline financial results. The group delivered well in the first half. Revenue increased by 3% to GBP 92.3 million. Our underlying operating profit increased by 11% to GBP 15.9 million. Profit grew materially ahead of revenue, lifting our underlying operating margin by 130 basis points to just over 17%. This is our highest first half margin for more than 15 years. The group also remains highly cash generative with operating cash conversion of 91% over the last 12 months. Return on capital employed increased from 31% to a record of 36%, demonstrating the attractive returns generated by our capital-light business model. Adjusted diluted earnings per share increased by 14% to 11.7p, benefiting from higher profit after tax and our share buybacks. Taken together, these results show that stronger margins and disciplined capital allocation are translating into improved shareholder returns. I will now explain the principal movement in our underlying operating profit. We started with underlying operating profit of GBP 14.4 million in the first half of GBP 25 million and delivered GBP 15.9 million this year. That represents an increase of GBP 1.5 million or 11%. Changes in our underlying markets contributed 0.7 million with stronger remortgaging and product transfers more than offsetting lower housing transactions. Improved performance across our businesses contributed a further GBP 1.7 million over and above the market impact. And I'll explain these drivers as I take you through the divisions. Salary inflation and higher national insurance combined with GBP 2 million of costs. We also invested a further GBP 0.9 million, principally in the financial services technology platform. Cost management actions contributed GBP 1.9 million, including a further GBP 0.5 million reduction in our central costs. The key point is that our operating actions absorb both wage inflation and investment allowing us to deliver double-digit profit growth and significant margin expansion. I will now turn to the divisional performance, starting with surveying evaluation. Surveying and valuation comprises 3 closely aligned businesses. These are our core B2B valuations operations, our B2C survey business and asset management, which provides property recovery and specialist receivership services to lenders. The division delivered another strong performance. Revenue increased by 6%, underlying operating profit increased by 11% and margins improved to approximately 23%. Within B2B valuations, we successfully renewed every contract during the period and secured additional allocations from 2 major lenders. The B2C survey business also continues to grow with strong customer satisfaction reflected in its 4.8 Trustpilot score. Asset Management was a standout performer with revenue increasing by approximately 44% to GBP 3.7 million and an operating margin of more than 50%. Although it remains relatively small within the division today is already highly profitable and has clear potential for further growth. Alongside our proprietary data and automated valuation capabilities, it also gives the division several routes to further profitable growth. I will now turn to financial services. Mortgage lending performed well in the first half with revenues increasing by 8%, keeping pace with the market and maintaining or increasing our share across our principal mortgage channels. Adviser productivity also improved and overall revenue per adviser increased by 12%. Although product mix reduced the average fee per completion. Revenue reduced by 3% and underlying operating profit reduced by GBP 0.9 million, principally reflecting the investment in the new CRM and lower adviser numbers, including the departure of protection only firms last year. There are clear areas for improvement, including increasing protection penetration and driving adviser productivity. With around 12% of all U.K. mortgages flowing through our adviser network, we have genuine scale and reach. At its core, this is a very good business, and our priority is to translate that position into stronger growth and returns. Turning now to state agency franchising. This division delivered an excellent set of results. U.K. housing transactions were 4% lower in the period versus the prior year, which had benefited from stamp duty changes in April '25. Against that stronger comparator, divisional revenue increased by 2% to GBP 13.2 million. Underlying operating profit increased by 24% with the margin expanding approximately 6 percentage points to a record first half level of 30%. This demonstrates significant resilience and operating leverage. The managed lettings portfolio increased by 4%, while average income per managed property increased by 3%, strengthening the division's recurring revenue base. We are also investing selectively for future growth. 6 new branches and 7 supported letting book acquisitions expanded the network, while the purchase of the natural search services and investment in collaborative conveyancing strengthened the conveyancing proposition. Having covered the 3 divisions, I will now turn to the group transformation program. When I look across LSL, I see a great deal of capability, but also a clear opportunity to bring the group closer together to make it work more effectively. Transformation is a key underpin of delivering 1 LSL, a simpler, more connected and more profitable organization. My immediate priority is our support functions, which have historically operated independently within each of the businesses, redesigning the underlying processes removing duplication and creating better, broader roles for our colleagues. I am confident in our ability to deliver this -- we have put together an experienced team that combines a deep understanding of LSL with specialist transformation expertise, and we remain on track to deliver GBP 5 million of annualized savings progressively through 2027. Over the medium to long term, I believe there is a wider opportunity to use technology across our front office operations to improve productivity and bring us closer to our customers. We will pursue that opportunity with discipline and invest where we are confident that returns will be compelling. I will now turn to the group's cash generation. The group remains highly cash generative with operating cash conversion of 91% over the last 12 months. We began the period with net cash of GBP 27.8 million and cash from operations contributed just over GBP 17 million. We invested GBP 9 million in acquisitions and capital expenditure. Working capital and depreciation movements represented a further GBP 6.4 million of outflow. The next line on the bridge combines the GBP 10 million repayment of loan notes with GBP 1.9 million of exceptional expenditure and GBP 3.4 million of taxes paid. Together, these items produced a net cash inflow of GBP 4.7 million, taking our cash before shareholder distributions to GBP 34.2 million. We then returned just over GBP 12 million to our shareholders, after these investments and distributions, we ended the period with a net cash of GBP 22 million. That cash generation and balance sheet strength support the capital allocation framework I will cover next. Our capital allocation framework remains unchanged. Our first priority is organic investment that can improve the performance and long-term value of our existing businesses. This includes investment in technology, capabilities and the transformation program. Our second priority is selective or inorganic investment through acquisitions and related opportunities that expand our existing businesses or add capabilities. Alongside investment for growth, we maintain an attractive and sustainable dividend. Our dividend policy is based on 30% of underlying operating profit. We have maintained the interim dividend at 4p per share. We also continued to return capital through share buybacks. We completed the previous GBP 7 million program in January and immediately commenced a new program of up to GBP 12 million, which remains on track to be completed by January 27. The balance between investing in the future of the group and returning capital to shareholders will reflect the opportunities available rather than a fixed allocation formula. We will continue to assess each use of capital against its expected return, while preserving the balance sheet strength that gives us the capacity to act when an attractive opportunity arises. I will finish with our outlook for the year. Our businesses continue to perform in line with expectations. For '26, we expect increased revenue and another year of profit growth. This would represent the group's fourth consecutive year of profit growth. We continue to expect operating cash conversion between 75% and 100%. together with capital expenditure between GBP 3 million and GBP 5 million. The group has strong market positions high cash generation and a clear route to further margin improvement. These characteristics underpin our confidence in the outlook and our ability to generate attractive long-term returns. With that, I hand you back to Adam and for the strategic and operational update.

Thank you, David. What you've heard is a business that continues to deliver financially with strong cash generation and high returns and where we've now launched a transformation program that will improve the economics and capabilities of the group. But I want to finish on why I remain excited about the opportunity ahead. LSL is a very distinct position across the U.K. residential property mortgage ecosystem. We work with lenders, mortgage brokers, state agencies, landlords, buyers, sellers and homeowners. We have strong relationships and capabilities across each of those areas. Historically, those businesses have been run independently. One LSL is about connecting them much more effectively making better use of our relationships, our expertise, our data and technology across the group. We've already started that journey. The transformation program is part of it, but it's broader than that. It is about getting more value from the strengths we already have. So to finish, we've delivered another good first half. We remain on track for the year, and we're continuing to improve the quality and economics of the group. We have strong businesses, a highly cash-generative model, and a growing opportunity to create more value by bringing those strengths together. My conviction in the opportunity for LSL remains very high. Thank you.

[Operator Instructions] I'll now hand over to Adam to say a few words before starting the Q&A.

Good afternoon, everybody. Thank you very much for coming to this call. For those of you who haven't already seen the video, I hope you found that informative. I'm looking forward to answering your questions. First thing I want to say is very important this meeting for us in the last year put an increasing amount of effort into getting the story of LSL across more widely into the market and more understood. We're already seeing the benefit of that. And the retail video conference we have now is a very, very important part of our IR strategy. So thank you. and looking forward to now moving to your Q&A.

Thank you, Adam. Let's start with a question on our marketplaces. So what's your view of the market so far?

Well, the markets Obviously, a lot of press and press in the U.K. can be quite doom and gloom. The reality is the markets have been pretty resilient. If we look back to our budget that we set for ourselves internally, what we expect the market to be we set that last October. The market has pretty much been what we expected, notwithstanding all of the bumps along the way, whether it would be unfortunately war declared, change of prime ministers interest rates heading in the opposite direction to what people expected. But the markets have actually been pretty resilient through the year and we expect the markets to finish flattish for the year, a little bit down in residential exchange, a little bit up in lending pretty much what we expected, so resilient. So the important thing about that is that we're not relying on market help -- we wish there would be some. It'd be nice to have some help behind us. But actually, it's not been particularly supportive, and we're moving on with resilient markets. We probably expect the same next year as well. So not particularly helpful, but extremely resilient at the same time.

Thank you. Can you provide more detail on the transformation plan you've just announced in interims? Could it materially change LSL's earnings over the next few years? And what do you think you could do to margins?

I think the first and most important thing is we've announced the transformation program. One of the questions, I think, that we picked up is some will say, another transformation program. I think this is an interesting one because we've -- on the back of a very strong base and from a position of strength, we've decided to change the way that we operate as a group. And that's important. We're not doing this from a position of weakness. We're not doing this from a position of crisis. So we've set out to change the way we operate by bringing together the strengths of this group by leveraging the strengths of this group by operating in a much more efficient way. So #1, that will allow us to reduce costs, and we just announced GBP 5 million. But secondly, it will mean that going forward, the group will be much more effective to deliver both what we do today, but also new propositions in the future. So I'll pass it over to David. Perhaps he'll give a little bit of further detail for you on the transformation program that we've announced and some of the things that we may be looking at next.

Yes. Thank you, Adam. So look, I mean answering the question there. We have 3 very strong divisions, each with market leadership positions, each highly cash generative, strong margins today. But we do -- but they have been operator 3 individual businesses throughout their time with us. We're now looking at how do we bring them together, not just for cost efficiency, but for the effectiveness across LSL as a group, so yes, there is a cost-out element to it, but there's also incremental opportunities that we see bringing them closer together. So that's one. We said at the prelims that our first milestone would be to push through 20% -- and we still -- we're tracking very well against that. And over the last 6 months, we've built the transformation team. We had great engagement across LSL, the talent within LSL are part of that transformation program. and look forward to giving you more details as we execute through the first GBP 5 million.

Thank you. Another question here. Do you think lettings could become a significantly bigger part of the group over time?

I think we'll see lettings steadily increasing. It's a very stable market. We haven't seen the large outflow certainly within our book of landlords coming out of the market. So it's very stable. We expect to steadily grow our lettings presence with what we call assisted lettings purchases where we help franchisees to purchase lettings books, which then become part of their business and then become part of our royalty stream. So I think you'll expect to see us continue that program, which will steadily show that we're increasing the number of properties under management for this company.

Great, next question. Mortgage revenue increased mortgage revenue per adviser increased by 12%. What's driving that? And how much further can adviser productivity improve.