Hemnet Group AB (publ) (HEM) Earnings Call Transcript & Summary

Good morning, everyone, and a warm welcome to this presentation of Hemnet Group's Results for the Second Quarter of 2021. My name is Cecilia Beck-Friis, and I am the CEO of Hemnet. And I'm joined today by CFO, Carl Johan Akesson. And together, we will present the summary of the quarterly report published earlier this morning. We are thankful for the continued high interest in Hemnet as a company and are pleased to be presenting yet another quarter of strong results. Kicking things off with the highlights on Page 3. You will see that we had strong revenue growth of 47.4% this quarter, underscoring our ability to capture significant monetization potential from across our whole range of customers and business partners. We'll, of course, elaborate on the underlying drivers later on in this presentation. We continue to enjoy the benefits of a business model with high operating leverage with adjusted EBITDA margin increasing by 14.5 percentage points to 52.2% as we leave behind the first full quarter with our new agent compensation model and the Hemnet Bas pricing model. Business-to-business has been an important contributor to this great outcome with revenue growing by 27.5%. This is driven by strong advertising sales, including an all-time high display revenue in May. Clearly, advertisers are seeing the benefits of increasing their marketing spend on our content-close platform. Let's take a closer look at the underlying drivers of our revenue growth, starting with Page 4. As you can see on the left, the number of listings grew 18.8% in Q2, driven in part by an active property market. This, coupled with a lower than average number of listings in Q2 2020, which saw lower volumes driven by the onset of the pandemic has resulted in an exceptional growth rate when comparing quarter-on-quarter. Looking at the average revenue per listing, our main operational KPI with the continued growth in the uptake of our value-added services for property sellers. Furthermore, this was the first full quarter of the new pricing model for Hemnet Bas, which has resulted in ARPL growing by 33.1% quarter-on-quarter, as you can see on the right. The exceptional revenue growth is a testament to our ability to execute in line with our strategy. On Page 5, I would like to give you some concrete examples from Q2 of how we are delivering on our 3-pillar strategy. I would first like to remind you that our strategy consists of 3 target groups: consumers, property sellers and agents and business partners with a defined strategy for each, seen here in the orange boxes below. To grow consumers' loyalty beyond the buy-sell moment, we have launched more comprehensive sale price statistics on listing cards. We have also made it easier to save your favorite properties and searches when logged into your Hemnet account. We see personal accounts and the improved user experience this gives as a key area for increasing loyalty to Hemnet, and it's something that we'll continue to invest in. On the property seller front, we are working towards making upgraded listing the obvious choice. Here, we have redesigned our purchasing flow to help make Plus the natural choice for property sellers. Another important change is in Hemnet Plus, which now ranks higher than Hemnet Bas in the search result list starting on day 2 after publication. We are already seeing how these changes have a positive impact on the conversion rate to Hemnet Plus. We have also made significant progress in creating unrivaled products to meet our agent and partner needs. Firstly, we have enabled agents to recommend a specific value-added product to their property seller. This is an important change as it allows agents to have a greater impact on the product choice made by the property seller. Secondly, we have launched agent profile pages. This includes contact details, for-sale, upcoming and sold listings by any given agent. A new way for agents to market themselves on Hemnet. Thirdly, we have changed the way we show listings with verified bidding in an effort to increase transparency and trust in the bidding process. And finally, we have been testing new ways of visualizing new development projects on Hemnet in an effort to create even better products for this important customer group. Looking at Page 6, we can see the impact of these and other changes on our revenue by product category. Revenue from value-added services, driven by growth in uptake and pricing continues to be the fastest-growing revenue stream. This is underpinned by a healthy growth in revenue from listing fees, driven by an increase in the number of published Bas listings, as well as the implementation of the new Bas pricing model launched in Q1. As mentioned before, business-to-business revenue was a significant contributor to the total revenue this quarter, and I'm especially pleased with this result as it continues to demonstrate our ability to monetize business customers in addition to property sellers. Finishing off with Page 7 and a few words on our ESG progress. Hemnet continues to grow alongside our product offering, and we are now 115 employees, up from 111 in the previous quarter. We see stable employee satisfaction despite not being able to meet regularly, demonstrating our continued resilience as a company. I am very proud of how our teams have tackled the many months of COVID, but now I think we all look forward to meeting back at the office on a more continuous basis. We appreciate the need to meet more frequently and have, therefore, decided to increase the time spent at the office in a slow and responsible manner. We will continue to adhere to guidelines and monitor the situation, but now expect most teams to work from the office at least one day per week. Furthermore, we are testing a new model for post-COVID work that revolves around flexibility and trust and includes both the work from home and an office component. And with that, we will turn to Carl Johan, who will provide us with the financial highlights.

Thank you, Cecilia. So if we turn to Page 9 in the presentation, the financial highlights, I want to reiterate that this is an exceptional quarter for Hemnet. As you have seen and heard from Cecilia, we increased net sales by 47.4% in Q2, clearly exceeding our financial growth target. The second quarter has historically been strong, but this year, we have seen an active property market in terms of listing volumes, as well as having favorable comparables from last year due to the onset of the pandemic. The strong growth in net sales has, of course, also had a positive impact on our adjusted EBITDA as our business model comes with significant operational leverage, and we posted adjusted EBITDA of SEK 110.9 million in the quarter, up 103.9% from last year. This resulted in an adjusted EBITDA margin of 52.2% in the quarter, up 14.5 percentage points from last year. During the quarter, we had items affecting comparability of SEK 27.7 million, out of which SEK 25.9 million were related to the IPO in April. With that, we have now more or less reported all IPO-related costs. Cecilia already mentioned the strong ARPL growth and the underlying reasons with ARPL up 33.1% year-on-year. Finally, we continue to be highly cash generative and delever at a good pace and net debt is now down to 1.2x trailing 12 months adjusted EBITDA. Let's turn to Page 10 to look at 4 factors that have led to this quarter being particularly strong. First of all, our published listings grew 18.8%. The combination of high volumes this year and low volumes last year is behind this larger-than-usual growth in the quarter. Historically, we have seen that over a slightly longer period of time, for example, a year, listing volumes have been relatively stable, driven by an underlying demand in the property market, while individual quarters naturally can fluctuate more. Secondly, the conversion to our listing packages, Hemnet Plus and Hemnet Premium, have grown significantly. During the last 12 months, we have worked a lot with the product and how we present them to our customers, and they are now firmly established as part of our product portfolio. These products have also benefited from the general rebound in listing volumes that we saw in Q3 and Q4 last year, something that we then carry with us into this year. Thirdly, Q2 was the first full quarter with the broker [ instant ] compensation model and the new Hemnet Bas pricing model, both contributing to strong top line growth and margin expansion. Finally, we saw a strong development for business-to-business revenue as Hemnet's content-close platform continues to deliver ROI for our B2B partners. In summary, the growth is a combination of underlying and long-term changes that we have made in our business, as well as factors that are unique to this quarter. Next, we turn to Page 11 to look at the building blocks of our adjusted EBITDA growth. As you can see from the waterfall, the vast majority of the increased results comes from top line growth. You will also notice the operational leverage that we referred to, meaning that as net sales increased significantly, there is a more modest growth in our operating costs. We continue to be cost conscious and invest selectively in our organization to support future growth. Looking at the compensation to real estate agents. This consists of 3 components in this chart. Firstly, the administration fee paid on the base listing. Secondly, the commission paid on the value-added services to property sellers and thirdly, the education compensation that is specific for this year. The new compensation model that was launched in Q1 this year is a way for Hemnet to align our strategic objective of moving towards optional value-added products with that of the broker community. The total compensation increased with SEK 2.6 million in the quarter. Over time, it is reasonable to think that this cost item can continue to increase from current levels if brokers continue to more actively promote value-added products. This should then also have a positive effect on our top line. Next, the change is small in other external expenses, excluding compensation to real estate agents, up by SEK 1.4 million from last year. While the change for personnel cost is slightly more significant with an increase of SEK 6.5 million as we slowly but steadily expand the organization with a focus on product development as well as sales. The final item includes other operating income and other operating costs as well as capitalized development costs and has had a small positive contribution of SEK 1.7 million in the quarter, out of which capitalized development contributed with a positive SEK 1.2 million. And that brings us to the adjusted EBITDA of SEK 110.9 million for the quarter. Now, we turn to Page 12 and the revenue per customer category. Revenue from property sellers is the main growth driver, both in percent and in absolute terms, and we have covered the underlying factors on the previous slides. The real estate agents category grew with 25.3%. In this category, you have the display product, along with the subscription product Hemnet Business and also Maklartipset. The majority of the increase comes from display illustrating that Hemnet is an important platform for both brand building and winning new customers. Real estate developers are showing more modest growth, 7.2%, and this has been a sector that in general has been somewhat subdued for some time also for Hemnet. Finally, the advertisers category grew 47.4%, illustrating again the value of the audience Hemnet provides to all its business-to-business clients. This category also includes SEK 2 million of items affecting comparability this quarter compared to SEK 0.6 million last year. And this is related to marketing activities conducted together with Maklarsamfundet. Moving on to Page 13, where we look at the cash flow and leverage. Hemnet continues to be highly cash generative, which in combination with the strong result reduces our leverage significantly. Looking at the left-hand side, we see that cash flow from operations before changes in working capital increased with SEK 35.5 million to SEK 72.9 million. Included in that number is the SEK 20.4 million adjustment for noncash items, and this is almost exclusively depreciation and amortization. Amortization and purchase price allocation, PPA, makes up SEK 15.9 million of this, and the remaining part here is a combination of depreciation on tangible assets and amortization and capitalized development costs and leasing. Interest paid and received was a negative SEK 6.6 million, while paid income tax was 6.6%. Change in working capital added an additional SEK 3.3 million to the operating cash flow of SEK 76.2 million. Working capital has historically contributed positively to a larger degree, which you can see when comparing to the figure for last year. This is due to revenue and therefore, accounts receivables normally being lower in June than in March. However, June this year was a strong month. And together with timing effect of payments, we had a smaller contribution this year. There is, however, no underlying change in the nature of our cash generation. As we mentioned already in the Q1 report, we replaced our previous credit facility with a new facility as part of the IPO process. While doing so, we also reduced our drawn amount. And as a result, we have a net SEK 233.5 million outflow in the quarter, which you find on the cash flow from financing. Here, you will also find the cash inflow from the long-term incentive program of SEK 10.8 million along with an outflow related to lease liabilities of SEK 1.9 million. To conclude this page, we see on the right-hand side, I have [ net delevers ] at a quick pace, we leveraged down 0.6 turns from the previous quarter to 1.2x trailing 12 months adjusted EBITDA. Our cash and cash equivalents position was SEK 122.8 million at the end of the quarter. So we're now finishing off this chapter by looking at our financial targets on Page 14. Across all 3 targets, we have made significant progress this quarter and particularly when looking at the net sales growth for the trailing 12 months to June, which now stands at 31.3%. We're also approaching our target range when it comes to profitability, while leverage continues to be below the ceiling of 2x adjusted EBITDA. I want to finish off by saying that this was an exceptional quarter, driven by a strong operating performance, with growth also supported by somewhat lower listing volumes in Q2 last year. Looking ahead to the third quarter, we expect net sales to show a year-on-year increase that is again above the upper end of our financial target range of 15% to 20%, but to clearly moderate from the second quarter. And with that, back to you to Cecilia to summarize.

Thanks, CJ. Yes, we will finish off this presentation with a quick summary on Page 16. A Q2 results saw strong revenue and EBITDA growth driven by an active property market, continued growth in ARPL, driven by both increasing uptake and pricing. This was the first full quarter with both the new agent compensation model and the new Hemnet Bas pricing model, and we enjoyed strong demand from our business-to-business partners on our products, highlighting our potential to further monetize this important customer group. And with that, we will open up for your questions.

[Operator Instructions] We have a question from the line of Andrew Ross from Barclays.

Well done on a very good quarter. I've got 3 questions if that's okay. First one is to ask about how listing volumes are trending in Q3. I think on Slide 4, you've got a chart there, but I'm not sure it actually continues into July and August. So could you just tell us what you're seeing in terms of volumes into Q3? That's the first question. Second one is, can you update us as to the penetration now of Plus and Premium in terms of listings? I think it was 15% of listings on Plus and 5% of Premium in January. So what are those numbers now? And then the third question is, how many of your agents have now migrated to the new pricing model? And maybe update us as to how long it's going to take to move over those who haven't?

Thank you, Andrew, for your 3 questions. Unfortunately, it might be hard to answer precisely, but I'll give some flavor on #2 and 3 and then CJ can talk about #1. So when we talk about the conversion rate, what we can say, we don't disclose exact conversion numbers. But what we're seeing is that, it's growing. What we have been doing during Q2 is also to work with improving the Hemnet Plus product, adding new feature and functionality to that product. And so we see the uptake of that product is growing during this quarter. On the compensation and the agent compensation model, what we can say is that, we also see that more and more agents do sign the commission agreement. And maybe the most important thing also is that, we also see more agents recommending our value-added products. So what we have done during the quarter is also to improve in the purchasing flow, giving the agents a possibility in an easier way to recommend our products. And we can see -- and we're very happy about that, that agent starts to recommend in high degree. And maybe with that, CJ, maybe you can say a few words on the listing volumes.

Yes. So we publish our monthly market report, and we've done so for July. And what we could see there is that, listing volumes were stable. So that is sort of an early indication for Q3 that we shared with the market.

Stable year-on-year, right?

Stable year-on-year, exactly.

And the next question comes from the line of [indiscernible] from Carnegie.

[indiscernible] from Carnegie here. I just want to follow up actually on that July report, CJ. And one of the key findings was that an increased number of buyers expect falling property prices. This was also, I think, the third consecutive month where the buyers [indiscernible] fell. And I'm just wondering how that affects your ability to push more Plus and Premium and value-add products and also how that potentially affects price hikes into the second half of the year? And I also have a follow-up question, I think that's for you, Cecilia. You talked about seeing more agents recommending your value-added products. And in terms of that uptake in value-added products, are you guys able to single out kind of how much of the improvement that's driven by brokers actually pushing these products versus just sellers going on hemnet.se and opting for the Plus and Premium packages because you guys are more successful in presenting on Hemnet?

Okay. If we then start with your first question and the sort of price expectations, yes, we also noticed that there is sort of a shift in what property actors are expecting. For Hemnet, we don't see that as a major issue because we're concerned sort of with the volume on the market and sort of the interest in the market rather than the price expectations. So I think that's one key thing to take with it when you consider Hemnet's financials. In a very strong market, I think there could be a tendency to sell quicker and perhaps outside the marketplace in the more sort of [ normal ] market, it could be even beneficial for us that we have our central place in sort of the property ecosystem. I think that's also the case when it comes to value-added services, where we have been very happy, I should say, with the uptake and the increase in conversion rates. But if price expectations are shifting, we don't think that would be negative for us either. It could be -- continue to support the growth that we're seeing.

And to your other questions on the uptake. So I would say that it is in our ability, I mean, to present the products and working with the purchasing flow we have, during this quarter, made a lot of improvement as well and highlighting, for example, Hemnet Plus in another way. So in some sense, we do have -- if you could take control over that flow. With that said, the agents are our main partners, and we do see them as ambassadors and partners in this. And, of course, we believe that having them with us will kind of -- will gain a higher uptake. And we, of course, follow. I mean, it's still early days. But we, of course, have a lot of data, and we do follow the data very closely in order to improve it even further.

[Operator Instructions] We have another question from the line of Catherine O'Neill from Citi.

On the leverage, it's quite significantly below the target of 2x. I just wondered if you could talk about the potential for cash returns and timing of those beyond the ordinary dividend. Then the other question I've got is around the margin, which was 52.2%, I think, in the second quarter. How should we think about the margin outlook into the second half because clearly, that's also above your medium-term guidance range? And then I just wanted to ask about product rollouts and plans in the second half if there's anything meaningful or sort of notable we should take into account?

Okay. So if we start with the leverage question then, as you say, we're below the ceiling that we set. So we don't -- we haven't communicated the floor. So from that perspective, I think we feel we are in range, so to say. And given that we don't have any sort of particular plans other than the ordinary dividend that we plan and communicate also as part of our financial targets. But we will, of course, continuously monitor this. And if we have any news on the capital allocation, we'll be sure to communicate that. On the margin outlook, I think worth again, just reiterating that our financial targets are for longer periods than quarters. Q2 is -- has been historically a strong quarter, and it is obviously a very strong quarter this year as well, but we see the 45% to 50% margin range as something that is still appropriate for us over time. We don't guide on any other way on the EBITDA margin, but just the Q3 outlook on net sales. We are continuing according to our plan when it comes to costs. And for example, we're sort of selectively recruiting new colleagues to expand our team. So there could be fluctuations in costs as we don't manage these particularly to a quarter that would not be rational, but we continue at a steady pace.

And on the product rollout, so we don't disclose our product road map. But what I can say is that, we work continuously with improving the products we have and adding new function and features and testing a lot. If you look at the product rollout that we had during Q2, maybe it's worth highlighting a few things that we will continue working with. For example, we are talking about that we have put some focus into logged-in users at Hemnet, and that's something that we will continue working with. We believe that that will enables us to create an even better experience going forward as well as, of course, when you look at the property sellers and the products we have, that is -- we are still in a scaling phase and learning a lot along the way. So a lot of effort is put into improving and adding features and functionality in those products as well as like we are also saying in this presentation is that, we've been testing a few new business-to-business products. A lot of focus have been put into product developers and so forth. So we will continue and monitor that and develop from there.

And as there are no further audio questions, I'll hand it back to the speakers.

We do have some questions via e-mail, and I believe we have some questions from Miriam Adisa at Morgan Stanley, and we have touched on most of these. But here is one, advertising revenue, very strong in Q2, but developer revenue has slowed sequentially. Could you share more on the growth drivers for these segments for the second half?

So we don't sort of share anything for the second half. What we said briefly in the presentation was that, we are very pleased with the advertising revenue and that developers as sort of a category segment generally in Sweden has been a bit subdued for this year. And Hemnet has followed that as well. We've seen the same trend as the rest of the market.

There are no further questions from e-mail. If there are no other telephone questions, I suggest we wrap things up.

We have just a follow-up question from Andrew Ross from Barclays.

Just on Hemnet, it sounds like you've made some changes to byproduct recently. When did you make those changes? And, I guess, I'm thinking of your ARPL growth in Q3 against Q2, should we be thinking that there's kind of a big positive impact in Q3 to come through because of the changes you've made around the conversion of Hemnet Plus or am I overreading into that?

It is again a question which we have -- it's a little bit difficult for us to ask you some sort of a detailed forward-looking statement. So I think what we sort of refer back to again is strong development and uptake. And we have a plan where these products over time should continue to increase, and we are working continuously to improve them. I think so far, it has worked really well. And our growth targets obviously indicate that we need to continue to work with these products so that they perform better over time.

And there are no further questions at this point.

Okay. Thank you for listening in. Okay. Bye-bye.