Baltic Classifieds Group PLC (BCG.L) Earnings Call Transcript & Summary

Good morning, all and thank you for joining this conference. We feel really excited to announce our first half year results as a public company and even more delighted that the results are very good. I will start with strategic, financial and operational overviews. My colleague, Lina, will follow with detailed financials and Simonas with KPIs and product development. We will conclude the outlook -- we will conclude the presentation with an outlook after which there will be a Q&A session. So to start with strategic overview. In the last 6 months was the most successful and the busiest period in BCG history. The company performance have exceeded expectations set at IPO and we reached the highest ever half year revenue in all 4 business units. Our traffic was at record high and all main sites increased leadership over their closest competitors. In the beginning of the period, we implemented C2C price changes contributing to the revenue growth in the first half of the year. While in the end of the period, we successfully implemented B2C price changes in auto, real estate and jobs, which will contribute to the revenue growth for the second half of the year. Continuing with financial highlights. Our organic revenue grew 24%, reaching EUR 25 million, while maintaining the industry-leading EBITDA margin at 78%. Adjusted EBITDA reached EUR 19.6 million and grew in line with revenue at 23%. The cash conversion remained very high at 99% and we voluntarily repaid EUR 7 million of debt. The leverage was reduced from 2.75x at IPO to 2.1x at the end of October. Moving to operational highlights. The traffic to our sites was like record high, making our company one of the biggest online companies in the region and one of the most penetrated, dominant classified companies in the world. The lead over the closest competitor has improved in all largest portals, while the number of business customers grew by 2% in real estate, 6% in automotive and 63% in jobs, which was unprecedented growth. The yield has increased in all business units because of the price and packaging changes done for C2C and B2C customers, also reflecting the value growth of the properties and vehicles advertised on our ports. As mentioned earlier, our organic revenue grew 24%. The prior year comparables was very little affected by the discounts given to our customers a year ago. In our estimates only 2% of their total revenue, so the organic growth was strong and exceeded our expectations at IPO. The pandemic has accelerated digital adoption led to a very strong bounce back in labor and real estate markets, but disrupted automotive supply chain. Basically, the same trends as seen in other European countries. Baltics economies have shown huge resilience and our main markets, Lithuania and Estonia were among the first countries in Europe to reach recorded GDP level. Starting in the second half of the year, the trading of BCG continues to be strong and in line with the trends during the first half of the year. Now I will hand over to Lina to talk about financials.

Thank you, Justinas. Hello, everyone. Now I'll present you the financial highlights of BCG performance over the 6 months ended October 31st. First of all, looking back to pre-COVID. Excluding the impact of acquisitions, our revenue has grown 28% organically and that's compared to 2 years ago. And even strong this growth rate reflects the fact that because of COVID, we did not introduce major changes to our pricing and packaging in financial year 2021 in what's usually an annual cycle. And then comparing with the period one year ago during this half year just ended, our reported revenue grew 22% to EUR 25 million. However, please note that at the end of financial year 2021, we made a divestment that generated EUR 0.2 million in the comparative half year. So looking at the current portfolio structure, 12 portals, BCG revenue grew 24% organically. And the main drivers of revenue growth were, first of all, the number of advertisers, which has increased across all our business sectors, then an increase in the number of active C2C listings across all business sectors except Autos and also an increase in the yield for customer and ad across all our businesses. I'll now move on to the revenue by business line, but Simonas will cover these revenue growth drivers a bit later in more detail. During the normal economic conditions, BCG tend to see similar revenue growth rates across the business lines. But this year, we saw different organic growth rates based on different underlying conditions. We anticipate that growth rates will normalize going forward and currently believe that this in large part reflects the indirect consequences of COVID, as also seen in many other countries, increased demand of employees, lack of supply in the car market. And now it's touching each business line that we own, our generalist revenues grew 11%, lock downs were actually fueling our generalist revenue growth and during the summer and autumn seasons with opening economy, generalist growth was solid despite exceptionally good weather. Jobs portal was more than twice as big revenue-wise than it was a year ago and during this half year, it's the growth champion within the BCG portfolio as the underlying market for job sector is favorable, number of jobs portal business clients grew 63%. Real estate market is very active across the Baltics. Our real estate business line grew 20% and the majority of growth in real estate revenue came from, first of all, opening economy and market activeness, also C2C pricing event in Spring and also real estate value increase. And as you know, we are benefiting through value-based pricing in C2C. Moving to autos, as also seen in many countries, automotive market is facing supply chain disruption because of global semiconductor shortage, car manufacturers are late to deliver new cars, causing car buyers postponing the sales of old ones. Despite the disrupted market and decreased number of market transactions, our automotive business line grew 10% organically. Overall, the portfolio again proves the resilience and the strength of the diversification. During this half year, our jobs and services revenue share in the business grew from 12%, which was reported for the previous financial year to 19% and now generalists and jobs and services generate 1/5 of group revenue each, real estate generates a quarter and autos roughly 1/3 of the group revenues. Because we became a public company this July, IPO-related costs fell into this half year period. For clarity, in this slide, we have set out our cost to show the underlying costs, excluding one-off IPO fees, EUR 7.4 million value fees were accounted in the income statement and also one-off free share awards to employees. In line with the intention stated in the prospectus, after the admission, the group gifted BCG shares to all employees with the number per employee based on the length of service. That was a one-off opportunity to thank the team for bringing the company to where it is now. The Directors and the management team did not receive free shares under this arrangement and total value of the gift including the tax was EUR 1.4 million. The comparative period is adjusted with EUR 0.1 million of acquisition-related cost. So the adjusted expenses that you see on the slide reflects the growth in the business, underlying cost and it is including the additional costs incurred since our IPO in operating as a public company. In general, the cost trend represents what was planned at the time of IPO. The biggest cost, people costs grew 19% to EUR 3.5 million and almost a half of the increase was primarily driven by annual salary reviews. We invest in talents and review salaries yearly or in some cases, even more often. This half year was the first half year as a public company. Therefore, cost for the first time include Board member fees and the cost of our performance share plan, PSP. For clarity, on the slide, we also show these costs separately. And continuing the public company cost topic, we estimate that the cost relating to being a public company will be close to EUR 2 million for the first full year. However, because by the end of financial year 2022, BCG will have been a public company for around 10 months only. The actual incurred public company cost amount will be slightly lower. The cost part relating to the PSP should increase gradually during the first 3-year period and that's based on the assumption that the PSP will award a list of employees yearly with 3 year nominal value options. And overall, despite all what I've just mentioned, people costs were maintained at 14% of revenue, in line with the period one year ago. It's also worth mentioning marketing costs. We are using a lot of cross-marketing within our own portals and that allows us to keep external marketing costs as low as 1.5% from revenue. If cross marketing was purchased, our marketing cost as a percentage from revenue would be a few percentage points higher. So in total, our adjusted costs grew 22% and in line with our expectations. As mentioned on the previous slide, this half year reported profitability was significantly affected by one-off expenses relating to the IPO. Therefore, we adjust our EBITDA with it to see the underlying profitability. Adjusted EBITDA was 23% higher than a year ago and reached EUR 19.6 million with adjusted EBITDA margin maintained at 78%. Cash conversion for the period maintained at 99%, cash generated from operations before IPO fees payments increased by 36% to EUR 20.9 million. And apart from the IPO fees, other major cash outflows were income tax payment that related to Lithuanian part of the business only. As a reminder, Lithuanian business-based corporate income tax from the taxable income earned, while businesses in Latvia and Estonia would only pay income tax from the distributed profits. During the period, we also show a EUR 6.5 million interest outflow, which is a sum of EUR 5.8 million of interest paid, mainly relating to the pre-IPO debt facilities we paid at IPO and EUR 0.7 million capitalized refinancing related fees. And also on IPO as a part of that arrangement, we paid EUR 1.6 million early repayment fee to the previous third-party lender. So in result, business generated almost EUR 5 million operating cash, which we used to voluntary repay a part of third-party debt. And in this slide, you can see our net debt bridge during the half year period. Before IPO, we lived with 6x leverage, which is calculated as net debt to LTM EBITDA and paid 6% interest on the third-party debt. BCG started its life as a public company with 2.75x leverage and 2% interest on the amount borrowed. Company used its cash generated from operations to reduce the loan liability by being down EUR 7 million debt in October. So by the 31st of October, the end of the half year period, the current gross debt amount decreased from EUR 98 million to EUR 91 million and the leverage from 22 -- 2.75x to 2.1x. We may choose to fund our future potential acquisitions in part or wholly using cash and currently in line with intention stated in the prospectus, the board is not declaring an interim dividend, but intends to recommend a final dividend and provided leverage is below 2x, share buybacks will be discussed as an additional mechanism to return cash to the shareholders. And now handing over to Simonas, who will deep dive into the strategic progress.

Hello, everyone. We are disclosing a lot of details in our KPIs for each of the business unit and they are all in a similar format, which with a market context for each business unit in the top left, the C2C performance in the top right, the B2C performance in the bottom right and our audience lead against the competition in the bottom left. Don't worry, I will go through each of the business units quite quickly, but I will touch on the essential things to understand on each page. And as you only heard from Justinas automotive market in Baltic shows dynamics similar to what you can see in the rest of the year. There are less cars, higher prices, higher dealer margins and in the top right chart, you see average revenue per C2C ad. It grew significantly due to the both pricing actions we took and positive effect of value-based price, which means higher price of the vehicle, the higher price to list. And average revenue per business customer grew slightly. Pricing actions were implemented just in September, October this year. So positive effect of it will fall into the next period. And we see our lead versus closest competitor keeps growing. It's nearly 4x in Lithuania and 36x in Estonia. The real estate market, it's very active the real estate market, number of transactions grew significantly, but time to sell have shortened, it's not great, not terrible for us, less time needed to transact, means less time the ad stays on our sites. But on the other hand, we have higher number of the new ads than previously. And we directly benefit from growing prices in C2C segment, again, as in automotive because we have value-based pricing, plus we did pricing actions in May in the Real Estate segment. And as you can see in the bottom right chart, average revenue per business customer grew 14%, but we have to take into account that we are comparing to the lower basis due to common discounts in H1 2020. And in terms of pricing actions, it is the same situation like in automotive. It was implemented in September, October. So this means, we will see the impact on the second half of the year. And in real estate, we've further strengthened our competitive position. The gap between us and nearest competitor grew to 28x in Lithuania and 10x in Estonia. Let's move to jobs. Jobs market is booming. Again, Baltics is not an exception, a hiring for companies becomes more and more challenging. It is difficult to find employees. It takes more time. Average wage grew by 12% and on specific segments like engineering, it's even higher and unemployment rate keeps going down, currently, it's 7.4%. So the market is very supportive for the business. Average revenue per customer grew by 41% and customer base grew by a massive 63%. At the same time, our lead versus closest competitor increased from 5x to 8.2x. Generalist kind of summarizes all C2C market just on the smaller scale. It was positively impacted by underlying jobs in real estate markets, but less positively by automotive and overall economy growth supports other categories like services, generalists and so on. And you see revenue per listing grew as a result of pricing actions and more listing in expensive categories, more listings in expensive categories and introduction of some more mutual horizontal plus vertical packages, which are relatively more expensive. There are innovations happening continuously in each of our portals, but we thought it would be helpful to highlight one innovation per business unit, just to give you a feel for sort of things that are happening under the covers. So starting with automotive. On the left-hand side, you can see we introduced car pricing tool for business customers. It helps to make decision on buying stock for the right price. It is new for the smaller dealers. So they're starting -- start to use it. They start to understand the value. And so far, the feedback is very positive. In the real estate, we launched strong customer authentication for business customers. It increases account security, credibility of the brokers and prevents usage of single account by multiple brokers. At first, this was launched in Estonia. It is already nearly 100% adoption rate. In Lithuania, it's quite new, just few months old feature and we have already 40% of brokers using it and without any hard push from our side. In jobs, we implemented a tool to help employers to find candidates by reaching passive job seekers. So companies can define the target audience, which meets their criteria and directly promote them and open vacancies. And we have nearly 600,000 job seekers in our database, which represents 1/3 of working age population in Lithuania. So it's a huge audience to promote your ad to. And also in general, as we have greater delivery product to better fit needs for -- of power sellers, who ship items in bulk, sellers can register shipments from different providers in one place. They can pay at once, they get shipping cards and track shipments all in one place. And we saw the number of shipments grew by more than 30% after launching this feature. And for the next period, we have a plan for development and we will work on virtual numbers. I think you're familiar with this technology. This provides bunch of benefits, helps to justify the value of our service, protects privacy of our users and sales for the protection. Also we will continue in simplifying buyers to register and log in to our platforms. This way we can benefit from better user engagement, more subscriptions, better recommendations and so on, plus it's improved security on our platforms as well. So that briefly it from my side and I will hand over back to Simkus.

All right. Thank you, Simonas. As said at IPO, our growth strategy is quite simple. We are early in monetization stage compared to the Western peers and will grow our business from pricing actions and from product development. Also, we will continue developing ancillary services and look for M&A targets. During the last half year, we delivered our promise by implementing pricing and packaging actions in C2C and B2C and we were developing ancillary services, particularly financial intermediation and deliveries. We have also a short list of companies we wish to acquire. However, at this stage, there is nothing new to be shared. Looking forward, our revenue across automotive, real estate and generalists should grow in aggregate with the previous guidance. Jobs likely to be ahead of previous guidance, while we expect to maintain industry-leading adjusted EBITDA margin for the whole year. Taking all this into account, we expect the guide -- to exceed the guidelines for the whole financial year. Majority of the classifieds revenue is recurring in nature, so the growth rates in the following years is likely to follow the previous guidelines of this higher base. Thank you for your attention. Now we are ready to take any questions.

[Operator Instructions] Our first question comes from Jessica Pok at Peel Hunt.

I've just got 3 questions, please. The first one is, the new products that you've shown us today. Firstly, are you already monetizing those products? And second, will those products be included into your packages? Or are they included into your packages? Or are they -- do you have to pay extra for -- to access those tools? And the second thing is every day, new news on COVID. If the pandemic does get worse and the Baltic region goes into lock down and how do you expect that would affect your business in the different segments? And then the final one is just on the car market. Of course, you've had a reduction in the volume of used cars because of the supply issues. In your view, when do you expect that to normalize?

All right. Thank you, Jessica for very good questions. Maybe I will start with product and also maybe Simonas will add anything what was that said. So basically, we should speak about each product separately. So talking about the automotive product where we allow automotive dealers to -- we helped to set up -- to define the price for the stock. So we do monetize it and we include in the premium package the product. In the real estate, authentification product, where we end up -- identify the brokers and in this way, we kind of give them a value that they are more -- increase their credibility and secure the account, but at the same time, it's also valuable for us because in this way, we can actually incentivize the customers and brokers to use their individual partner accounts. So this product, we don't monetize and we think that it's kind of a win-win situation and it's kind of -- for us, it's also very useful that brokers are -- the adoption rate is as high as possible. The third product, which is CV database and improved tools that find the past and to approach the past candidates. So we do monetize the product. Actually, it was quite popular because especially now when it's so difficult to find the employees, so the passive tools actually also -- these tools allows the customers to find a new audience, the passes, which are speakers which are otherwise wouldn't -- would not have applied to their job ads. And the third one, deliveries and generalists, we do monetize. We get a commission from each delivery and also has a very nice trajectory of the growth. Simonas, would you like to add anything?

I think all well said, yes, basically, we -- at the end of the day, we monetize all of those products, some of them are directly monetized, some undirectly by including into the package or pushing users to have their own accounts and so on.

The second question about the pandemic. So the likelihood -- the most likelihood scenario is that it won't affect our results because actually, we have been in the situation a year ago. A year ago, we had the lock down. However, the second lock down was quite different from the first one. We did not provide the discounts to our business customers. There were 2 very little requests and for it. And basically, we currently expect that even with infection rates rising, we don't foresee that it should -- it would affect our business. Maybe the biggest moving part in our -- across the business units are the job vertical. It has maybe the highest risk or uncertainty level. However, in our view, the likelihood is much lower to be affected to have effect on the business and the likelihood it's much lower. So basically, what we are expecting that we will continue -- the trading will be -- will continue in line with the trends in the first half of the year. And actually, also the current trading after the first half of the year that is over. So November, December, we see the same trends. And even though the infection rates are increasing and there are some restrictions in different countries. But basically, we don't see any effect on our business. And the third about the automotive evolving. So that's correct. Actually, the supply chain is disrupted. Last year, we had 15% less transactions than compared to the pre-COVID level. And inventory of C2C customers have decreased 24%. It's mainly because of the stock shortage, but also because of the cars are being transacted very, very fastly, the transaction speed that the cars has decreased by 12 days. So it's a massive decrease. And so -- and it's actually very hard to say when the supply chain will recover. Basically, what we look to other experts and basically, our supply chain is connected to the Western Europe because quite a big proportion of cars are being delivered from Western Europe, from Germany, Italy. So basically, our supply chain will restore when the supply chains will be restored in Western Europe. So we are really interconnected and the experts are telling that it's very likely that in the end of 2022, we will have a normalized supply chain. And this, we see as a really positive headwinds because currently, I think our automotive revenues would have been much, much better, if not supply chain disruption. And once the supply chain are restored, so we would see a positive organic growth in our automotive unit.

The next question comes from William Packer at BNP Paribas.

Firstly, could you help us think through the mix of the 10% revenue growth in autos in H1, effectively yield versus volume at the divisional level and then separately for B2C and C2C. Secondly, could you talk through the latest trends in auto inventory in the period since the end of the reporting period. And then if we do assume as you just previously commented there is a normalization in inventory, could you talk through how that feeds through to revenue and what we see in your peers across Europe is somewhat different revenue models around volumes, maybe very closely related, auto trader perhaps a little bit less? And then finally, could you talk through any impact on your advertising business from recent privacy or technology changes at Aventura, at CMD recently talked reasonably conservatively on some of the challenges there, so it would be great to get your perspectives?

All right. Thank you. Thank you, Will. So again, maybe I will start about automotive business line and the growth next year. So -- we -- the B2C revenue grew 8% compared to prior period and C2C revenue also grew 8%. However, we need to look at the yield in C2C has grown 4% if I'm not mistaken, right, Simonas, 44%. And the number of ads, C2 ads has declined 24%. So basically, if we didn't had such a big shortage of cars, so the revenue of the C2C would have been far -- revenue growth would be far, far bigger because the yield has increased 44% right?

This is correct.

And in B2C, basically, we have the revenue growth 8%. However, it has very little -- last year, revenue was very little affected by discounts, so it's mainly organic growth. And the pricing actions which we took, we took in the end of the period, so the growth rates will be more visible in the second half of the year in B2C. The second question about the inventory levels.

Sorry, just in terms of the decline in inventory in B2C, did you mention that number? Sorry, indeed I missed it.

Inventory in B2C, it's -- actually, we don't measure -- we measure business customers because inventory -- I mean, we monetize business customers per slot, not per listing. So basically, what we have, it's -- the revenue it's less correlating with the number of slots because basically we have quite a high level of unused inventory, quite a high level of unused slots we'll say, so it correlates less. And in terms of business customers, the business customers in B2C grew 6% in automotive. So it was a very healthy growth. The second part of the question in entry level currently, so we don't see any changes at the moment. The inventory level is low and let's say, the last half year, we don't see much movement there. We are expecting that inventory -- well, it will take time and the inventory level will start recovering. As I mentioned, when the supply chain will start recovering in Western Europe and it will affect also our region. And basically, the B2C revenue is less tight to the inventory because we charge very flat. However, C2C revenue is directly tied to inventory because there in C2C we charge per listing. And in addition, C2C revenue, it's also very much tied to the value of the vehicles advertised on our portals because we apply in C2C value-based pricing. And the third question about the advertising. I think that it's advertising is a challenging revenue stream for all the classifieds. Basically, our advertising revenue was 6% higher than the same period a year ago. However, if I'm not mistaken, around 25% lower compared to the pre-COVID level. So advertising is one of the areas which has not recovered yet. And this is kind of the most, I would say, a challenging revenue stream. However, we, as a group, are -- we are less exposed to this risk because the revenue in our company represent only 6%, 7% of the total revenue in the portfolio. So it's a very low number and compared to other classified companies in other classified companies, it's even 20% to 30%. So we are less exposed to this risk. And we expect that in the future, the revenue will continue growing, but in single digits. And I mean, in our view that the other revenue streams like ancillary revenue, it's currently ancillary revenue is almost the same size of advertising revenue. So it will surpass in terms of the volumes, advertising revenue. And I think that advertising all in all, advertising revenue is not kind of a core revenue for classifieds and because of different restrictions appearing and also much tougher competition from Facebook, Google, local news portals, et cetera. So I think in a way, we are lucky that it's very low, percentage wise very low revenue for visage.

[Operator Instructions] We have a question from the webcast from Mark Bottner at Avaron. First question is, what kind of take rate do you expect long term? You are more C2C-orientated, whereas other regions, U.K. and Scandinavia are more B2C? How is this comparable and what should investors expect? Second question, what kind of mix C2C and B2C do you expect long term? And third question, how do you decide to pay out dividends, M&A and share buybacks?

All right, one minute, just not forget any question.

I can remind it.

Would you like me to repeat the first one?

Actually, it would be good.

What kind of take rate do you expect long term? Are you more C2C orientated, whereas other regions, U.K. and Scandinavia are more B2C? How is this comparable and what should investors expect?

All right. Thank you. So in terms of the take rates, currently, our take rates are far below compared to the international peers, currently around 2% to 3%. And we don't see any reason why in long term our take rates shouldn't be the same as in other, for example, international cares like Mobila, auto trader et cetera. So I think that in long term, we just see no fundamental reasons why we should entreat that. However, the take rates yearly growth very slowly even when we are taking our pricing and product actions, we just slightly increase our take rates annually because the underlying market continued to grow, either a number of transactions or the value of the transactions continue to grow. Our customers' wallet continue to grow. So basically, only partly with our pricing and product actions only partly, we affect or increase our take rate yearly. And it's -- I mean, still long time to go to reach the international peers. We want to reach international peers in the next 5, 7 years. So it's a long way to go. That's correct. And in our markets, bigger part consist C2C and compared to international peers, however, B2C is growing faster. Like a year ago, our B2C revenue represented 43%. This year, it's over 50% and C2C around 30%. So it's B2C is growing faster. And in long-term, we envision that it will continue growing faster. And basically, the -- however, we see that both lines will continue to grow, just B2C with higher growth rates. And just why it happened, maybe why we have a bigger C2C part? It's just historically happened, but we as Baltics gained independence 30 years ago, basically, when we were part of Soviet Union, it was illegal to do any business. So basically, there were no kind of big automotive dealers or real estate agencies. And people just learn how to transact on their own. And the industry started emerging in late 2000, early, let's say, just some 20 years ago when already everybody knew how to do transactions on their own. So that's why -- and it's far, far cheaper to do on your own. So that's why the people continue to transact and this part of the market will definitely continue in the future because it's from 10 to 100x cheaper for individual to do the transaction on their own. And once you know it, once the government institutions also support that by the digital products by allowing, for example, to register the car online, notaries helps to do a real estate transaction. So it will continue being the same.