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

Good morning, and welcome to the Baltic Classifieds Group Full Year Results Presentation for the year ended 30th of April 2023. My name is Charlie and I'll be coordinating the call today. [Operator Instructions] I will now hand over to our host, Justinas Simkus, Chief Executive Officer, to begin. Justinas, please go ahead.

All right. Good morning, all. I'm pleased to announce that our second year as a public company was a great success. We have exceeded our guidance and met all our commitments, including financial, governance, capital allocation and ESG. Our revenue grew 19%, exceeding EUR 60 million. Adjusted EBITDA grew 17%, reaching EUR 46 million with an in leading margin of over 76%. Cash conversion was close to 100%, and we have significantly reduced our leverage from 1.7x to below 1x adjusted EBITDA. We are implementing our capital policy by buying our own shares. And the Board has proposed a final dividend of EUR 1.7 per share to be paid after AGM. In our view, this has been one of the busiest and most successful year in our company history. We had a strong annual revenue growth across all our business lines. We initiated a pricing event for our private customers a year ago in April and May and then improved our pricing and packaging for our business customers in autumn. The number of business customers has been strong with 3% growth in Autos, flat in Real Estate, a slight decrease in Jobs, although still much higher compared to historical average. The yield has improved significantly with 30% growth in Auto, 22% growth in Real Estate and 17% growth in Jobs. The Private segment has been of a particular note with significant growth in both listings and yield expansion. Overall, our core classified revenue was a major success with both B2C and C2C contributing close to 90% of the total revenue. Revenue from the business customers grew by the impressive 21%, while revenue growth from the private was even higher, increasing by 25%. Our lead over a close competitor, which we consider to be the most important KPI that remains strong across all major portals ranging from 5 to 29x depending on the quarter. Additionally, we have successfully launched the new subscription model in our newest acquisition GetaPro based on our experience in our service vertical in [indiscernible]. BCG has achieved an impressive towards 45% reduction in CO2 emissions and maintain carbon [ neutral ] across Scope 1 and Scope 2. This achievement was driven by the majority of electricity used from the new world source. Additionally, BCG has maintained a balanced gender diversity ratio with 51% of employees being in May and 49% male. Moreover, BCG was ranked as the second-best performer within the technology sector of [indiscernible] with 45% of female in leadership positions. We completed our first employee engagement survey this year, and over 95% of employees are proud to be part of the team. I just want to discuss the number 95%. This dedication and commitment is what makes BCG such a successful company, and that it directly leads to such a high average tenure of 8 years, which is remarkable in such a technology-driven company. Now I will hand over to Lina to speak about financials in more details.

Thank you, Justinas. Good morning, everyone. We ended this year with higher established revenue. Target is 15% growth for the group and very happy to announce that revenue grew 19%. This also means that we are now 44% bigger than we were 2 years ago at IPO. It was a very balanced and qualitative growth, first of all, because it came from the core classified revenue streams, B2C and C2C. Those are together representing 88% of the revenue. B2C grew 21% and C2C grew 25%. And second of all, growth was also consistently strong across the business lines with Autos, Real Estate, Jobs and Services and Generalists, 22%, 21%, 20% and 13%, respectively. The portfolio we manage is diversified across both the revenue streams and business lines. The split by revenue streams is 49% from B2C, 39% from C2C and the remaining 12% comes from advertising plus ancillaries. And as you can see in the upper right corner, 37% of the portfolio's Auto business line, 25% Real Estate, 19% Jobs and Services and 19% Generalists. We have continued with our usual schedule of pricing amounts. In April, shortly before the period currently reported on, we introduced C2C price changes for most of our portals. These changes are reflected in the yearly numbers. And in the middle of the period from September, we introduced B2C price changes. We did it in Real Estate, [ old ] and Jobs portals and these contributed to the second half of the year. And because the majority of jobs contracts or yearly, the price changes in jobs are rolling out throughout the 12 months since September 2022. Later, the operational KPIs will be discussed in more detail. But overall, in both Auto and Real Estate business lines, we have more ads plus we have increased the yield from both B2C customers and C2C listings. Our job board, which doubled in 2022, continued to grow 13% this year. It's now 130% bigger than it was 2 years ago. The services revenue grew 88%, which is including GetaPro and the growth mainly came from more ads and yield improvement and generalists growth was also driven by growth in the number of listings and revenue for listed app. The resilience of our portfolio has been improving many times. Over the past 3 years, there were different market shocks, starting with COVID-19, Russian invasion of Ukraine, energy and food price shocks, high inflation and rising interest rates. None of these had a significant effect to overall BCG portfolio. And despite the turbulences we went through, each of our business lines have maintained growth trajectory. The operating cost to EBITDA had 0 adjustments this year. The biggest part of the operating cost is people-related costs. It accounts 65% of our operating costs, and we do not capitalize any of it. The growth in people-related costs came from the fact that the team grew to 134 FTE employees, mainly a result of the [ M&A ] done in July, wage inflation, long-term incentive plan costs, which base is building up to the accepted level and one of deal-related awards to acquire business founders. Wage inflation last year was 13%. 1/3 of the team is indexed, so higher wage inflation is now new stocks, and we do yearly solid reviews. Also, the expected public listed company cost materialize, BCG has employee long-term incentive plan, which is structured as a performance share plan. The cost base relating to is expected to be grown during the 3-year period since IPO because it's a 3-year award program. In July, the group awarded a list of employees with the second portion of 3-year awards And we also had one-off GetaPro deal-related work to GetaPro founders. And because of it, the PSP cost base growth accelerated this year and it's already closed the expected annual level. Our marketing costs remain at approximately EUR 1 million a year. In absolute amount terms, we think that we outspend our competitors. But if looking at the percentage from revenue being 1.6%, this is a benefit of the fact that we are locally well-known portfolio of brands. Our websites are among the most visited in respective countries, and we benefit from cross-marketing. In terms of other costs, this year, we had the first AGM-related legal cost and the more significant other cost growth came from audit fees in relation to new accounting standards. So overall, BCG operates in a higher inflation environment. But the most significant confident inflation was energy prices to which BCG is not too much exposed to. The majority of growth in costs related to being a public listed company. Our EBITDA this year had zero ad-backs. It grew 17% to EUR 46 million with 76% margin. At IPO, we were confident in the sustainability of group margin prior to the impact of listed company costs and we outperformed that. And in terms of profitability, we are now 40% bigger than we were 2 years ago at IPO. We're highly cash generative. Our cash flow from operating activities grew 18% to EUR 48 million, and our cash conversion was maintained at 99%. After we have the IPO behind this year, adjustments to profitability measures are limited. As noted, no adjustments were down to EBITDA. And the only adjustment then to profitability measures are non cash and related to historic acquisitions. That's the amortization of acquired intangibles and deferred tax from it. Our adjusted operating profit is tracking closely to our EBITDA and grew 17%. We started the period with EUR 84 million loan and leverage ratio of 1.7x. And since then, during the year, we acquired the services portal for 1.6 million pay the first final dividend for the previous financial year in the amount of EUR 7 million, reduced the loan liability by partially paying down EUR 14 million of debt, about 1.5 million of company shares for future employee awards. Post AGM, we started buying back company shares. We've been doing that for 7 months this financial year, and we purchased 3.4 million shares for total of EUR 5.7 million for cancellation. And we ended our year with EUR 70 million of debt and leverage ratio of 1x. After the year-end, we also want to repay EUR 7 million of debt, and the gross debt currently is EUR 63 million with no near-term maturities. Our capital allocation priorities remain unchanged. We intend to use the excess cash that we generate in the year within the same year or shortly thereafter. We will continue considering value-creating M&A opportunities and all options for financing attracted acquisitions remain open. However, using cash is the most likely and this will most likely not the type of dividends. We intend to return 1/3 of adjusted net income each year by interim and final dividend split approximately 1/3 and 2/3, respectively. And interim 2023 dividend of EUR 0.8 per share was paid in January, and the Board is pleased to be recommending a final dividend of EUR 1.7 per share to be paid in October. We believe that share buybacks create the potential for significant value creation to our shareholders, and the board would like to accelerate the allocation of excess cash towards the share buyback program will continue to reduce the gross debt. Thank you. I will now hand over to Simonas, who will elaborate on KPIs and product development.

In the next slides, I will provide you guys some dates [indiscernible] business unit structure on these slides remain the same as usual. So market context is provided on the top left. C2C performance in the top right. B2C performance on the bottom right. And the lead and closest competition is at the bottom left. So let's start from Autos. In 2023, automotive market in Baltics remained stable, but the number of transactions still 12% lower than recovered. In a nutshell, supply is recovering, average car price keeps growing, dealer margins keep growing as well, and we increased our yields. So we are in a good position to grow in the future together with a further supply recovery. The number of C2C ads is [ 94% ] higher than the last year. The first reason is supply normalization and the second reason is car selling time. It was very short last couple of years and now it more and less back to normal level, like in the pre-COVID years. And that is beneficial for us because we get more paid extensions, and we can accumulate more content on the platforms. In C2C, we have [ back-to-back ] pricing, which means that selling that the listing price grows together with the car price. So as you can see, average car price grew by 19% in 2023. So there's a positive effect on our yields. And we also successfully implemented pricing actions and increased the number of ads as well. In B2C segment, yields grew by mass 30%, 2 main reasons behind the growth. First one is the dealers have more inventory and to see that they have to buy more slots. Second reason is our pricing and packaging. And in the bottom left, you can see that our leads versus cost competitors keeps growing. It's more than 5x in Lithuania and 29x in Estonia. The real estate market is normalizing. A number of transactions in 2022 was at a similar level of the COVID years. I will remind you that 2021 and '22 was a normal year, selling time was very short and the price were extremely quickly. In 2023, [ USA ] market dynamics was more sustainable, even though average price grew significantly by 17%. And we directly benefited from the growth of price in C2C segment as we have based pricing. An additional pricing actions we implemented in the beginning of fiscal year '23. And as a result, we have 14% revenue per ad grow and number of active ads grew also 14% due to the longer-selling client. And bottom right chart, you can see that the number of agents is very stable because we already provide penetration, but as a result of pricing actions, our average revenue per broker grew by 22%. And in real estate, we further strengthened our competitive position, between us and the nearest competitor is 20x in Lithuania and 16x in Estonia. And let's take a look at the drop on services. Jobs in market stays active. Unemployment rate in calendar year 2022 went down to all-time lows to 5.1% and average wage is growing rapidly. Last year, the growth was 13%. And market is very supportive for our business. It is challenging for companies to find employees. So companies tend to invest more in hiring and we grew our average revenue per customer by 17%, main driver for the growth of the pricing actions we implemented. And the customer base remain nearly at the same record high level as last year. Our job work keeps strongly of nearly 9x over closest competitors. And I would like to briefly touch on the Services segment. It represents C2C part of our Jobs and Services unit. So you can see the chart on the top right. This segment is the smallest one but grows very rapidly. Last year, average revenue per head by 51%, and it was supplemented by a 24% growth in the number of ads. The generalist platforms had a good year. Growth of our biggest generalist scalability wasn't impacted by several sources. First of all, the pricing actions on the platform itself, including implementation of the [ lease ] pricing as well as the pricing actions on verticals because we have neutral packages, combining verticals and horizontals. And as results mentioned [indiscernible] yield by 14%. And our lead where the focus competitor in Lithuania grew from 15% to 19% in '23. So we came back to extremely high lead we had during the first coming years. And as always, we are rolling out a lot of improvements to our platforms. I would like to mention a few of them in the next slides. So starting from Autos on the left-hand side. On Autoplius, we have new strategic partner who is behind the car financing product. It is the same bank we are partnering with in Estonia. Now we have better commercial conditions than before and higher growth visibilities. In Auto24, we also have graded financial products. Now we can offer better terms for the car appliance, and we can finance more expensive cars. In the real estate, both in Lithuania and Estonia platforms, we introduced a new product for the real estate developers, which is focused tailored for the new construction. There is more prominence in branding from developers and more convenient way to explore new properties for the buyers. And we also implemented the new monetization model, which is based on a per-project basis. And in Arudas, we also further develop virtual numbers for our private customers now they can manage phone leads. And this way, they can maximize the value they are getting from our platform. Now let's move to Jobs and Services. On our newly acquired services marketplace, GetaPro, we implemented subscription-based monetization model and our experience operating services marketplace in the [indiscernible] this is the best monetization model at the moment. And on the job board in CVbankas, we developed our own role-based access management. This feature is essential for the big customers. They can create individual lanes for the employees so they can send different limits for the usage of our various services on the platform. In the general section, we actually introduced packages for business customers on Osta.ee. This improves monetization and it helps to control the amount of B2C content on the platform. This way we prevent C2C content from being flooded by B2C. And in Skelbiu, we introduce the factor unification for the high-risk loggings. It helps a lot to secure both buyers and sellers on our platform. And aside from all the consumer-facing development, substantial progress has been made under the bone. We successfully tested disaster recovery plan for our biggest Estonian website. So websites were switched to be served from the different data center in a different geographical location. And this development is very important to ensure our business continued. And at this point, I will hand over back to Justinas.

Thank you, Simonas. It's always exciting to talk about the future. The [ teacher ] slide, our growth is finally significant and offers many opportunities for our company. To begin with, we have a strong focus on monetization. And our take rates are significantly lower compared to international peers. This means that our pricing and packaging could be improved to drive our revenue and profit growth. This will consider to be the core of our growth strategy. Secondly, we are developing ancillaries like financial intermediation and data products and continue to explore M&A targets. This we call additional opportunities. The Baltic region has seen a period of unprecedented growth in the recent years. This is largely attributed to high export growth, strong trading balance, vibrant employment markets and low unemployment rates. The region has also a strong credit profile and increasing the overall purchasing power. This positive environment has created a great opportunity for our clients as well as our company to take advantage of the growth and generate greater profits. Despite the recent economic slowdown, the Baltic states are still considered to be among the most dynamic and vibrant economists in Europe. The year has started strongly. At the beginning of the new financial year, we implemented C2C pricing and packaging changes across all our business units and the early signs are encouraging. We will implement B2C pricing and packaging changes from September. The Board is guiding to 15% revenue growth in 2024 with Auto, Real Estate and Jobs and Services expected to grow marginally ahead of this number and generalists below the overall group average. The Board expects the company to maintain adjusted EBITDA margin for 2024. During this financial year, the Board would like to accelerate the allocation of excess cash towards the share buyback program whilst continuing to reduce the gross debt. So thank you for your attention and now, time for questions.

Yes, a couple from me. At a higher level, first, how do you think about the elasticity of your demand when you put prices up just given the low level of prices in absolute terms and compared to the asset values and the profit pools of your customers? Presumably, those growing makes actually hard we grow your take rate even if you are putting prices up a reasonable amount. And secondly, on the packages and the range of products that you're offering increasingly, you give us a sense of the penetration of some of those more premium packages within your customer base. And then lastly, you touched on the services expansion. How do you think about the opportunity from that on a 3- to 5-year view in terms of where it could get you to decide?

So to begin with, the price was discussed so I think I won't define [ put a separate ] basket, the business customers and private customers. So once we have a pricing round for our business customers, we measure the churn rate, but actually, the churn rate is disclosed to zero. And so usually, when we take our pricing amount, we go with the price increase, but as well as the package improvement. And we see that actually – and we believe that actually our product for our business customers are the cheapest available product or with the highest ROI. So we accept the price increases and the packaging. Also, maybe partly answering your first question, but once we are looking, for example, at our penetration of the more expensive or premium package [indiscernible] actually more than half of their customers are on the premium packaging. So it's never a good indicator that actually the value and they consider the classified some marketplaces that most or the highest ROI place to advertise. Speaking about the private customers. So basically, we measure the bond rate from the payments vendor. So once the customer is in serving the ad, we measure what is the [ troupe operate ] from the payment window. We have the internal metrics, which is what is a healthy one and that does not help anyone. So basically, we optimize our pricing based on this metric. And usually, the pricing or the products we have at the value-based pricing. So basically, we are charging and applying a higher fee for a more higher-value items. And basically, a similar pace to the business customers, we see a very healthy [ operation ] here. Once we get the prices through what we measure here the health metric [indiscernible]. Currently, we think that with our pricing runway investment. About the service industry, actually, in the last few years, we consider service to be the major growing vertical. And actually, we see it by the results. For example, this year, the revenue service grew over 80%. For the year, it was a small business. Now it's a decent business. And we are measuring the total addressable market in a way that actually service providers usually are professionals. And they are ready to pay for the lead. They are ready to pay for additional businesses. And we see this category as a very rich category. Currently, here, our services are being used over 6,000 customers. But overall, we see the market being much wider, much bigger. Currently, they are paying around EUR 20 per month. We consider that actually, the fees could be much higher. So if we think about the next 5 years, we think that it will be the services and be it a very big category, maybe as big as the [ USA ]. The second question was -- have I answered?

Yes, [ it's replying ] to the penetration [indiscernible].

Can you just talk a bit about -- you've given as a good highlight of what's happening over the last year in terms of macro. But looking forward, I know you've given the state to the Baltic regions compared to Europe. But what are your thoughts in terms of the car market and supply all means in the next year and also housing and also the jobs market? Just a quick overview will be helpful. The second thing is just related to the previous question, it seems to be there'll be a set and see that you will do the price increases this year. But what kind of range can we be expecting because you've already got the benefits of the value-based pricing together with the increase in price which will help you this year? And the final one is just on M&A. Services subset the vertical has the potential to become quite big, as you say, but do you see quite a lot of M&A opportunities to grow that as well?

It is to begin with macro. I think that we had a slowdown now like by the GDP growth and had a slowdown in macro environment. But in the past, I think that overall, we don't deal with in daily lives. If we look at, for example, household income, it's growing 10% annually. The wage inflation is higher than the cost inflation. Unemployment was affected very, very weakly. So basically, [indiscernible], we would say that it doesn't feel that the slowdown in the economy and also if we take a bigger picture, let's say, in the last 20 years, I think the multi-region has never ever been so raged and so [ prospered ]. So this slowdown of 0.2% or something doesn't deal dramatic, quite contrary. And already the next year is forecasted that the economy will continue to grow single digits to 2%, 3%. So it's on the shortlist. If we are looking at the underlying market, so basically, the automotive market feels very healthy because there are a number of transactions are on the historical averages. The vehicle price continued to grow strongly. So our customers are feeling good because we are charging the commission and the car price. So the automotive deals very positive. Real estate, we have a decline in the real estate transactions. But I think that we need to do very well remember we are a benchmark in the last 2 years. And the last 2 years were abnormal number of transactions. It was a lot of money printed and people were trying to find the safe investment, and they were investing buying real estate. So now if we are comparing to those 2 numbers, we have a decline, but if we're comparing to the last 10 years average, we have a normal number So also when we are looking at the underlying real estate markets, we don't expect let's say, or customers getting into trouble or we don't expect the bank [ process ]. So we still see the real estate also continue to be healthy. About Jobs, I talked that the employment rate is not increasing. The wage inflation continued to be double-digit. Employment markets, very vibrant. It's good, [ station, it feels ]. So our view on the market is better, let's say, than the numbers suggest. So basically, according to -- we are doing this according to our previous year's practices. So basically don't change our approach. We consider about 15% annually. It's a sustainable healthy growth. We are targeting a revenue growth of 15%. It includes both pricing and repackaging, adding additional value to the customers, adding new promotional services, which we can buy and get more leads. Basically, we are continuing the same trend trajectory of the past. I think that overall, the market is becoming at least what we have seen in the last 12 months, it's becoming more active. I think more M&A targets are being on the market. Although I would beat our strategy in M&A that we are very conservative in the strategy. We would like to expand through M&A, but we are looking for a good quality assets. And I think that we have a huge experience and we know how to recognize good quality assets. And I think that almost every month, we look at the trend target. But those currently so far, we looked, they're not good enough and we don't -- we consider our portfolio to be a very high quality. We don't want to dilute. So we will continue looking at the targets, the M&A market growing in terms of the, let's say, potential candidates, but currently, we are not an active growth talks with any targets.

Yes. Will Packer from BNP Paribas. Firstly, in terms of your revenue growth, I think you've given us 15% every year since IPO beaten it by a wide margin. Could we still through the upside and downtown risks? You've been putting through price increases materially ahead of 15% in recent history. Inventory is bouncing back from historic lows. Why shouldn't we think that there's upside risk to that 15% understanding that you want to make sure that you put a number out there that you can be -- that's the first question. And I'll come back to the others.

Okay. So I think that one of the biggest reasons why we had a higher number this year, exceeding our guidance, was a higher inventory growth compared to the one we were expecting. Currently, the inventories are close to the solid levels and the real estate are even higher. So we think that actually next year, the growth of the inventory will stabilize. And our pricing actions targeting 15% revenue are something what we do consistently over the years. So basically, I think next year, what we are guiding 15%. It's not conservative. It's a good guidance. I think that overall, it's a strong guidance because very few companies continue to grow 15% annually. And I think that it's, in our view, to help a sustainable offering.

And how should we think of local inflation in that context? So inflation has been very high in the Baltic region. How do you expect this to develop?

It's been very high. So we pick up the inflation was last August, it was around 20%. In June, the inflation was 8%. Already the beginning of next year, it is forecasted that it's likely that inflation will be 2%, 3%. So we will be back to the normal level.

And my second question was on margin. Generally, execution has been very strong. The margin level has dipped a little bit on some of these audit fees, et cetera. Are you confident now of the worst of those [ things ] are behind us? And some of your peers in European classifieds have been disappointing on margins in their generalist business because of paying ship an investment. Is that the thing we should worry about in the medium term for BCG because with [indiscernible], tax and everybody's loans, that's a potential source of capacity risk, if you don't invest there?

Do you want to take…