Adevinta ASA

OSE:ADE

Earnings Call Transcript 2019-Q2

[Operator]

Good day and welcome to the Adevinta Q2 2019 Q&A and Conference Call. Today's conference is being recorded.At this time, I would like to turn the conference over to Mr. Rolv Erik Ryssdal. Please go ahead, sir.

[Rolv Erik Ryssdal, Chief Executive Officer]

Thank you very much, operator. Hello from Oslo, and thank you for joining us on our Q2 2019 investor call. I'm Rolv Erik Ryssdal, I'm the CEO. I'm here with Uvashni Raman, our CFO. I'm sure you've all had the chance to read through our results report published this morning, so I'll keep my introduction short.Overall, I summarize the results as being a good quarter. We have enjoyed a good second quarter with strong performances in core verticals across our markets. On a proportionate basis, revenue from verticals was up 16%. Total operating revenue improved 13%. We're making good progress, and we're on steady course to deliver on our strategy or strengthening our positions in the verticals.Our 4 key segments, all made good contributions in the quarter. Verticals in France and Spain were both up 16%. Brazil enjoyed a 33% uplift in revenue on a local currency basis. EBITDA reached EUR 50 million and the margin rose to 27%. Global markets continued its progress with positive EBITDA of EUR 3.4 million in the quarter, which is a good improvement from the EUR 1.1 million in the first quarter this year.We continue to experience some softness in display advertising and this reflects a combination of global advertising industry factors and tougher economic conditions in some markets. Advertising growth has been below expectation and has continued to negatively affect overall revenue growth. This issue was addressed in more detail in our presentation this morning. And we are doing several things: we are resolving some technical issues, we're launching new formats and we're reorganizing and educating our sales force.I'm pleased to report that actions we've taken from Q1 onwards have had some positive effects and that we are improving in this area. Meanwhile, we're continuously enhancing our focus on operations and are always looking to strengthen our positions across our portfolio. We're continuing to evaluate market growth and consolidation opportunities to strengthen and optimize our portfolio mix. Products and technology is a priority for all our marketplaces, and we will continue to invest to improve our competitive strength organically and inorganically.Adevinta is now established as a stand-alone independent company. We have been very well received by many stakeholders. Feedback we receive from investors, shareholders, customers, employees is that they appreciate our position as a pure play in digital marketplaces with excellent growth prospects. I firmly believe we're well positioned for expansion and that we're on track to play a leading role in the marketplaces industry going forward.All right, that concludes my opening address. We will now move to questions and answers. So then, let me turn it over to you, moderator.

[Operator]

[Operator Instructions] We will now take our first question from Silvia Cuneo from Deutsche Bank.

[Silvia Cuneo, Research Analyst]

It's Silvia Cuneo from Deutsche Bank. I have a couple of questions, please. The first one is on the growth of the verticals. Overall, including the JVs, you have reported 16%, which compares with 19% in Q1. The differential seems to be driven by your geographies, but mostly in Brazil. So can you please explain what vertical was the main driver? Is it because of the tough comps created by the introduction of car financing in Q2 last year?And the second question is related to that. Can you talk about monetization of new products that you have introduced in Q2? It appears that you're factoring your product spend on the user experience rather than the under-professional customers in meeting the ability to grow ARPU. So the question is, what makes you comfortable you can keep growing verticals revenue by more than 15%? And any color in terms of number of customers and ARPU growth would be great.

[Rolv Erik Ryssdal, Chief Executive Officer]

Yes. So let me start by the second part of your question concerning our positions in the verticals. The verticals is, of course, the core of what we're doing. So we are working hard to continuously improve our position there. And we have a number of initiatives that we're working on over time. And I will not give you any ARPU figures today, but what I can tell you is that if we start in France, so the verticals -- I think in real estate, we have a strong market trend with a high number of transactions. There, we're going to launch in the second quarter, several things, such as a new version of a performance dashboard and new and more modern design of AVendreALouer, et cetera. On cars, we will come with new offers based on data and performance that were just launched, and there'll also be some pricing impact.Then, in Spain, we're also working on several things. So in the second quarter, we'll work to look at -- in jobs. For instance, what we're doing there: we are looking at pricing to revise existing discount policies; we're further developing our applicant tracker systems; we are in real estate introducing many new things, new alerts and new apps, et cetera, et cetera, this is a long list. In cars, we'll also have a new pricing and package strategy, et cetera. So same thing for -- in Brazil. There I think the financing marketplace has worked very well for us. It's a strong lead generator. Insurance will follow now in the second half. We'll introduce the financing marketplaces in -- also in real estate. So I mean, not going into too much detail, I can say there are a number of initiatives that we're continuously working on, which makes me confident that we'll continue to have a good development in the verticals. I think Uvashni, for -- the first part of the question was specifically regarding Brazil?

[Uvashni Raman, Chief Financial Officer]

Yes, regarding Brazil and also quarter 2 last year in Brazil, which was quite outstanding in terms of the quarter performance. So when you look at it year-on-year, it does show quite a differential in -- compared to quarter 1. And that was, as Rolv Erik stated earlier, it was because we started to introduce then in quarter 2 last year some of the financing elements, and we had 1 or 2 big customers come online in quarter 2. So in terms of that, I mean, as you -- as we see in Brazil, strong growth on the verticals in local currencies, and we continue to see that as more products come online.

[Operator]

We will now take our next question.

[Lisa Yang, Equity Analyst]

It's Lisa from Goldman. A couple of questions, please. I mean firstly, could you maybe share your views on the opportunity for consolidation in the cost side, please. I mean clearly that was activity from private equity or eBay reviewing some of their cost side assets. So yes, just keen to hear your thoughts on how big is that opportunity for Adevinta.Secondly, could you give us an update on the timing of the share class merger at the end of the year? And further, could you also give us some color on display advertising? I mean that we saw a big improvement in Q2 versus Q1 already. Are you seeing further improvement so far in Q3?And the final question is related to Brazil. You mentioned you're rolling out the finance product and you did say that you're also launching the insurance product in cars, what benefit do you -- should we expect in the second half?

[Rolv Erik Ryssdal, Chief Executive Officer]

Right. So I think let me start with the -- some of the operationals things. So you talked about the display advertisement. And I think that we're working hard to improve our position there. So partly there are some technical issues between our supplier or app server, AppNexus, to have a better flow with some of the other players, such as Google. So we're working hard on that. I think things there are gradually being resolved. Then, we're also launching on -- we're launching new products and then improving -- making better products for our advertisers, new formats for mobile and video formats, et cetera.And we're raising the educational level of our sales force. I mean we have reorganized in France with a special dedicated sales force to the big advertising agency in the second half. So we are doing what we can there. Having said that, I think, whereas the verticals are very predictable revenues, I have to say that it's not -- the display advertisement market is less predictable. So yes, we are doing a number of actions. And I would say, I'm -- we're seeing some results of it. So I'd say I'm cautiously optimistic, but I cannot give any guarantees or firm guiding for all the different months. It could also vary a bit from month to month, but we're doing a number of actions. So I'm cautiously optimistic that we'll improve in that space.Then, I think you did mention something about Brazil on the operational side also on the car financing. And that is right. We launched that last year within a collaboration with a local bank. It turns out to be a very effective lead generator for banks who wants to finance car purchases. So we're quite happy with that and that has continued to develop. And I think also we're seeing that the financing marketplace will be also tested out in the real estate now and will also provide a similar service for insurance services for cars. So I think that we're pretty comfortable that we're -- that we have a good product there that we'll continue to build out.Then, let me address your first big question, which was on consolidation in the industry, and I think I'll leave the final question to you, Uvashni. And well, let me say that -- what we've said all the time that we will continue to do more in markets that we're already in and bolt-on acquisitions. We did a couple of small acquisitions in France in the last quarter that you saw, and we will continue to -- we're interested in doing more in markets that we're already in, so France, Spain, Brazil, Italy, et cetera, bolt-ons there.When it comes to the kind of the bigger game that you're referring to with the other big players, I would say that I feel that we are in a good position because we -- I think we have an exciting portfolio. We have one strong anchor shareholder in Schibsted who said that they're supporting the development of Adevinta to the best of all shareholders and also being willing to be diluted if there's a bigger transaction coming up. So I would say that we are in a good position and that we're watching carefully what's going on in the marketplace.Then, I think the final part was about the...

[Uvashni Raman, Chief Financial Officer]

Collapse of the shares.

[Rolv Erik Ryssdal, Chief Executive Officer]

Collapse of the shares.

[Uvashni Raman, Chief Financial Officer]

Yes. So what we did say post the IPO that we would look for a period of time where we could track the A and B share and how they perform. So we believe that a 6-month period will be an appropriate period to how they track in terms of pricing. And therefore, we would look to collapse that towards the third -- probably the third quarter -- at the end of the third quarter or beginning of the first quarter where we have sufficient...

[Rolv Erik Ryssdal, Chief Executive Officer]

Beginning of the fourth.

[Uvashni Raman, Chief Financial Officer]

Yes, probably beginning of the fourth more appropriately, where we have sufficient view of the trading or the pricing between the A and B class shares.

[Rolv Erik Ryssdal, Chief Executive Officer]

We'll do it as fast as we can. And...

[Uvashni Raman, Chief Financial Officer]

Yes. But we'd generally say that we would want to do it before the end of this calendar year.

[Rolv Erik Ryssdal, Chief Executive Officer]

Yes, absolutely.

[Lisa Yang, Equity Analyst]

Can I have a follow-up question? I mean regarding your comments about the bigger, larger-scale consolidation. I mean could you share maybe what benefit do you see from having a -- maybe a larger, global, central-type platform as opposed to having, at the moment, this local-type platform? Do you think there could be significant synergies?

[Rolv Erik Ryssdal, Chief Executive Officer]

Well, I think there could be some synergies for further product development. When it comes to future product development, then I think if you have more scale as new technologies coming along, voice, artificial intelligence, those kind of things that you have to use to provide to continue to develop the services, I think that's -- there you have some scale benefits on technology. And then, of course, size also gives you a certain resilience and power and make you a more interesting partner in many respects. So I think there are some advantages. And then that has to be weighed up against potential complications. So what I can tell you, it's not like if you go together with someone else that you immediately switch to one platform, it's not that easy. But I think that you will certainly realize some scale benefits when it comes to future products and tech development.

[Operator]

We'll now take our next question.

[Hubert Jeaneau, Director and Research Analyst]

It's Hubert Jeaneau from UBS. I have 3. The first one on real estate in Brazil. I think in the presentation, you mentioned you assess that you're #2 in terms of listings in that market whereas at Capital Markets Day if I remember well, I think the #2 player had a 50% lead in terms of listings. So I was just wondering if you could give some color on what happened there.The second question is on display advertising, and I appreciate here that you're saying that it's less predictable, but just wondering what you would expect to be a good number in, let's just say, 2020 in terms of recovery. Is it mid-single-digit growth or high single digit? Or what are kind of your targets there?And finally, third question is on France. Just wondering if you could give a little bit of color on the potential -- on the impact of the 2 acquisitions you made.

[Rolv Erik Ryssdal, Chief Executive Officer]

Right. So let me start by the Brazil. So we are the #2 player in terms of volume. I'm afraid I don't have the exact gap here to #1 player, but it has been narrowed. But we're kind of pursuing an active strategy of increasing our volume and that volume then is more important than price at the moment, so we've been pursuing that strategy. I don't have the exact gap here, but we can get back to you on that.Then on display ads. Yes, as I mentioned, we are doing a number of measures and things that we believe will make us -- make our inventory both available and attractive. And then, of course, we're expecting to go -- get back on the growth here. I think based on both our normal policy for guiding and also that volatility in that market, it's a bit hard. I don't want to give you exact -- more guiding on that. But we are, of course, expecting and hoping to be back on growth there.Then I think it was France, those 2 acquisitions. So I think it's interesting to do a number of acquisitions in markets that we're already in. So remember, we did Habitaclia in Spain. I think that was very successful. We have taken a position in France in terms of MB Diffusion, which is heavy machinery on agriculture and [ managed that ] with -- traffic-wise with leboncoin, that works well. And these 2 acquisitions, let me first mention Locasun, so Locasun is a specialized holiday vertical mainly for French users, and they have a lot of offers on holiday homes in France and Spain. It's a very popular service, and we expect -- and this is a big niche. So we expect that again with the power of the traffic we have in leboncoin, we could further stimulate and enhance that marketplace.Then -- so as you know, we're very happy about that one. Then, let me take PayCar, just a couple of minutes. That's a small acquisition. What these guys have done is developed a safe and good technology for C2C car purchases to take care of the payments in a safe and good manner. And this, again, then, I would say, will [ lubricate ] the marketplace and help create security and trust among our users. So I think this is a good way of taking away friction. We're always working on reducing friction in the transactions on the marketplace.

[Operator]

We'll now take our next question from Henriette Trondsen from Arctic Securities.

[Henriette Trondsen, Research Analyst]

Henriette Trondsen from Arctic here. One question on investment phase losses in global markets. As Shpock and Mexico are moving towards breakeven, where do you see investment phase losses in the second half? And your investment phase losses this quarter were quite low, so I assume that you are on track to reach at least in the low end of the guidance range. And secondly on France, the potential digital tax, when do you expect the conclusion? And will it have an impact on revenues or tax? And I guess that likely lowered corporate tax -- income tax in France towards 25% eventually could, in contrast, be a positive?

[Rolv Erik Ryssdal, Chief Executive Officer]

Right. Thank you. So I'll just go to your first question. Yes, I think you're right. We're definitely on track to be at the lower end potentially, even lower than that. But I think experience has taught us that it's important to have some room for [ maneuver ] to meet competitive situations or something. But yes, you're right, we're definitely on course for -- to be at the lower end of the range we guided, but potentially perhaps even better. Let's see how it goes to second half. For the tax, I think, Uvashni?

[Uvashni Raman, Chief Financial Officer]

Yes. Just on the tax in France, so effectively the digital tax in France does not impact on your company income tax. What we do get there is a deduction should the tax be applicable on the tax payable for the digital tax. The first payment for the tax based on 2018, effectively revenues as a prepayment has to be made in November. So our anticipation is to have a view of whether firstly we meet the threshold or not. And if we do then meet the threshold, what exactly the tax payable will be based on our taxes in France before that date. And once we have a view of that, of course, we will bring it to the attention of the markets in greater clarity.

[Operator]

We'll now take our next question from Paul Martin Stenshall from Danske Bank.

[Martin Stenshall, Senior Analyst]

Yes. So hopefully, you could help me with 3 questions. First, you acquired Locasun and PayCar in the quarter. Could you please comment on how much revenues and EBITDA these acquisitions contribute with on an annual basis just to get an idea of the magnitude of maybe on margin dilution for leboncoin? That was the first one.The second question I have is regarding net working capital, which was materially lower than what we have seen in previous quarters, now in the second quarter of 2019 and then what kind of net working capital in percent of sales we should expect going forward, let's say, on an annual basis.And then thirdly, in the presentation this morning it was mentioned that this DST tax in France, the payment could be between EUR 4 million and EUR 9 million, that's quite a large or wide range, could you please be a bit more specific on what kind of assumptions you have based this range upon?

[Uvashni Raman, Chief Financial Officer]

I'll take the last one first. So the range -- and it was very clear that there's a clear differential between the definition and what we believe should be included in the taxes. So what we have done is, we've done an analysis based on what we think bodes within the definition of the tax versus what -- at the high end if you just take 3% of the total revenue generated in France based on that. So that's the EUR 9 million, the high end of it. But if certain elements of the services we provide don't fall within the context of that, we believe it could be at the lower end. And those are some -- these key assumptions are around the definition and what is targeted versus what is not, and how we actually sell in our businesses. And the key thing to understand is first, we have to meet the threshold of the EUR 750 million and that is where the key uncertainty lies initially. Because if we don't meet that EUR 750 million revenue in total on our global scale, we will not be -- tax won't be applicable in the current year. Of course, we believe from 2020, it will become applicable.

[Rolv Erik Ryssdal, Chief Executive Officer]

When it comes to the first question, Martin, I think Locasun and PayCar are relatively small businesses still, especially PayCar, which is small. And then that's more of a start-up. Locasun is not a big company -- is not a very big company yet. So let's get back on that, but the 2 of them won't have any very significant effect on the total dilution of margins.

[Martin Stenshall, Senior Analyst]

And then could you please have some comments on the net working capital going forward?

[Uvashni Raman, Chief Financial Officer]

So effectively the net working capital going forward we believe should not be drastically different from what we put out in terms of our guidance in the IPO documentation, et cetera. Of course, this time around there were a couple of changes because of some of the transaction steps that we put through, but we believe there'll be a pretty stable working capital element. Of course, as you move into the transaction of models, et cetera, there is a shift in working capital because it -- but at this point in time, they're pretty stable and they're pretty small relative to where we are.

[Martin Stenshall, Senior Analyst]

Could you please remind me, Uvashni, what the guidance were in the IPO document in terms of net working capital and percent of sales?

[Uvashni Raman, Chief Financial Officer]

Oh, sorry, I can't remember the direct numbers, we'll get back to you on that.

[Operator]

We'll now take our next question from Sophie Julienne from Bank of America.

[Sophie Perrine Cecile Julienne, Associate]

Two very quick questions for me. One on Brazil. The revenue growth comps is 10% easier in H2. Do you expect some reacceleration of at least the same level? And in France, could you quickly confirm that the digital tax would hit your EBIT in the P&L rather than come as an income tax?

[Rolv Erik Ryssdal, Chief Executive Officer]

In terms of digital tax, I think we've commented on that.

[Uvashni Raman, Chief Financial Officer]

Yes. On the digital tax, it's very clear that it's not going to be part of the income tax. It'd either be -- hit your revenue line as an offset or as a cost. That's why we said there's impact on EBITDA because there's no clarity around how that will actually be dispensed...

[Rolv Erik Ryssdal, Chief Executive Officer]

Yes. When it comes to Brazil, I think the -- it was a tough quarter in terms of display ads because it was a decrease versus increase in the first quarter, but we're confident about our long-term perspectives in Brazil and I expect -- I believe there's a lot of growth there to be taken out and potentials in the verticals in the several years to come. So it will vary a little bit from quarter-to-quarter, but we're -- I'm very confident about the growth prospects there.

[Operator]

[Operator Instructions] We will now take our next question from Bob Liao from Macquarie.

[Hai Thang Liao, Tech Analyst]

The question is on consolidation in the market. I guess there's 2 types of consolidation that you can look at. One is consolidation maybe between competitors and then, of course, acquisitions to expand into new and adjacent markets. Is it fair to say that you would be prioritizing acquisitions that would allow you to consolidate competitors in order to realize more synergies because it sounds like, from your previous answers, that the synergies associated with simply owning an additional asset seems marginal versus a consolidation of competitors?

[Rolv Erik Ryssdal, Chief Executive Officer]

Well, I think we've said actually that, that top priority for us is to do more in-market consolidations where that's possible. With the rules concerning competition authorities, et cetera, we have to be a bit watchful of that. So of course, we cannot consolidate in some markets with the competitors, but where there are opportunities to do more in the markets, consolidation, we're definitely interested in doing that. We can also do more kind of along the value chain, so I think PayCar is a very small example of that. So to build further on our strong assets in the main markets we are, yes, that's very top priority. Then to the second one, kind of a bigger consolidation, well, I believe there are some synergies to it, but I think we'll have to -- and we will definitely be interested in looking what's happening there and follow that very closely. But of course, we'll have to assess what are the real synergies in such a situation, and I think that would depend on the asset or the group of assets that's potentially going to come up for sale.

[Operator]

We'll now take our next question from Andrew Ross from Barclays.

[Andrew Geoffrey Ross, Research Analyst]

I've just got one more. Just to follow up on that comment on moving further down the value chain. I'm wondering if you can share anything on what you're learning from Kodit. I saw they're raising up around in June, which I think you guys participated in. So anything you could share there would be great. And I guess I'm thinking have you learned anything that has changed your view versus what you said at the Capital Markets Day earlier this year about whether you want to get more into these iBuying kind of inventory carrying models over time?

[Rolv Erik Ryssdal, Chief Executive Officer]

Right. Okay. So we have a venture arm that will be doing some -- a few selected investments and one of them has been in Kodit, which is kind of experimenting with the iBuyer model. We're a small stakeholder there, so it's important for us to learn what's happening in that marketplace. I think the U.S. market is quite different from the European market. So we have not changed our plans about going into -- that we would be doing iBuyer model for Adevinta on any scale or any significant scale. I think we'd be very careful before entering into anything like that. But I think it's important for us to follow the market and learn what's happening in the marketplace. And so far, Kodit has, to my knowledge, interest -- an interesting position, both in their home market Finland and also have done quite well in Madrid where they're experimenting. Was that...

[Operator]

We'll now take our next question from Nathalie Casali from MFS.

[Nathalie Fiammetta Casali-Deacon]

In the IPO disclosure, you talked about the number of professional car dealers and agents in Brazil. And I just wanted to ask whether you saw -- the numbers that you gave, I think you said there were 64,000 dealers in Brazil, but I think that includes car rental agencies, perhaps branded dealers. Do you think all of those are addressable or only part of that is addressable for Adevinta?

[Rolv Erik Ryssdal, Chief Executive Officer]

I think a large part of it is addressable. I'm actually not able to answer your question precisely about the rentals, so I think we need to get back to you on that. But I think the point from my side is that this market is still relatively underdeveloped and especially in rural areas, there's many who are not digital at all and there is a huge growth potential, even in the bigger cities.

[Operator]

[Operator Instructions] So it appears there are no further questions, sir. I would like to turn the conference back to you, sir.

[Rolv Erik Ryssdal, Chief Executive Officer]

All right. Well, thank you so much for your interest, and thank you for the participation. And we're very encouraged that -- of all the questions and such a great interest. And of course, we're happy to serve you on a one-to-one basis as well. So please contact us if you have further questions. And then in the meantime, I wish that you have continued good day. I'm looking forward to meeting you soon. Thanks a lot. Bye-bye.

[Operator]

Thank you. Ladies and gentlemen, this will conclude today's conference call. Thank you for your participation. You may now disconnect.