Hemnet Group AB (publ)

STO:HEM

Earnings Call Transcript 2022-Q1

[Cecilia Beck-Friis, executive]

Good morning, and welcome to this presentation of Hemnet Group's results for the First Quarter of 2022. As you can see on Page 2, my name is Cecilia Beck-Friis and I am the CEO of Hemnet and I am joined today by Carl Johan Akesson, our CFO. And together, we are excited to be with you today and to provide you with an update on Q1, in which we have seen both strong growth, as well as new and exciting product launches.But first, I would like to acknowledge the anniversary of our IPO, turning to Page 3. So, yesterday, April 27, 2021 was the first day of trading of Hemnet shares on the Nasdaq Stockholm Exchange. Since the IPO we have delivered 4 strong quarterly reports, 5 including this one, and I'm hugely proud of the Hemnet team, consistently working to achieve great progress and results along the way. I have truly enjoyed meeting many of our investors in the past year. And as we continue to progress back to a more normal post-COVID life, I also hope to meet some of you at our office in Stockholm in the near future.Turning to Page 5 to go over the quarterly highlights. This is yet another strong quarter for Hemnet with net sales growth in excess of our growth target and adjusted EBITDA margin in line with the upper end of our target. Net sales growth of 26% is largely driven by growth in ARPL, the Average Revenue Per Listing of 41.3%. Despite the current economic and geopolitical uncertainty, the Swedish property market has remained stable and published listings actually grew by 3.9% for this quarter. We have, since the IPO, underscored the historical stability of the Swedish property market, driven by organic demand for property and due to the lack of both the buy-to-let market and the functional rental markets.More important than the market though is that we are confident that we can rely on our product development and pricing strategy to continue driving growth in ARPL. On EBITDA margin, we saw a positive impact from the change in the agent compensation model implemented last year on March 1, 2021. This will be the last quarter where the comparable figures include the old compensation structure. Overall, margin increased 7.5 percentage points to 47.6% as we continued to grow net sales in the business with high operational leverage.We continue to enjoy high profitability and cash generation with a cash conversion in the last 12 months of 102%. Our ability to quickly generate cash results in a rapid deleveraging and with the leverage decreasing to 0.3x adjusted EBITDA this quarter. And on that note, we have announced plans for both the dividend and the share buyback to be voted on the AGM tomorrow. Our proposal to the AGM is to pay a dividend in line with our financial target of about 1/3 of net income and to return excess cash via our share buyback program. And more of that from [indiscernible] later on this presentation.Towards the end of 2021, we turned our focus in product development towards business customers, especially real estate agents. We deliver significant value to this key customer group, but a great potential in further developing and refining products for them. As a first step, we have launched a new section on Hemnet that connects property sellers with real estate agents, and we'll continue to develop these products throughout the year to give agents a greater opportunity to market themselves and to win new mandates. We have also launched a new Hemnet Business Pro product for our bank customers, and I will come back to that later on in this presentation.So now let's spend a minute on Page 6 to discuss ARPL development. I want to highlight that despite consistently strong growth in ARPL, we are still early in our monetization journey. We have at our disposal a number of tools to grow ARPL. The first one of this is product development. We are still early on in our product journey, having launched Plus and Premium in 2019. And there are significant upgrades that can be implemented across our listings portfolio to increase the value of those products in order to pursue more sellers to upgrade their listings.We have also tools that can impact conversion. This includes our direct relationship with the seller and our ability to communicate directly to the seller, the value of our products. At the same time, we see more and more agents recommending to their clients that their listing should be upgraded to one of our premium packages. And finally, we are working with pricing through our pricing team. Here, we make small and iterative adjustments across products, asking price categories and geographies to see how the prices of our products can mirror the value provided in the best possible way.Turning to Page 7, we will simply put, highlight the fact that Hemnet is the #1 property portal in Sweden. Since starting in 1990s, Hemnet has had a great opportunity to build an unmatched market position [ amount ]. Hemnet is known by virtual all sellers 97%, and 84% vote Hemnet as their #1 choice for a property portal. And interestingly, the second choice with 14% of votes is Blocket Bostad, which no longer allows the publication of brokered listings.We are the fifth strongest media brand in Sweden, jumping up one place from last year's survey and passing the public broadcaster assets in the process. Only international giants like Spotify and Google surpassed our brand in the Swedish media space. And finally, Hemnet is in the fact a query when searching for property is widen. On Google, the word Hemnet is searched 8x more frequently than the word for property and 10x more frequently than our closest competitors. And this gives us a great advantage when it comes to the audience and the volumes of traffic to Hemnet.And all of this leads to a key component of our business that 90% of all properties sold in Sweden at some point are listed at Hemnet. This results in unmatched network effect, cementing Hemnet's place as a natural part of the property sale process. This number has been stable over time, fluctuating a few percentage points depending on the market, but there are -- there has always been a small number of transactions conducted without Hemnet. Examples of such transaction can be inheritance, buying in known properties such as your neighbors or sales where the seller values are in a discrete process. That said, the vast majority of properties are published on Hemnet, and we do not see any significant trends in our data suggesting otherwise.I will bring up those examples to highlight the strength of Hemnet's brand and our market position and also to underscore our confidence that this is a position from which we can build products of great value for a sustained period of time. Those of you familiar with classified model know that the network effect mean that once the portal has established its position as the go-to player, the market position is hard to change.Now turning to Page 9 and the business update. We have a clear company strategy focused on 3 customer groups; consumers, property sellers, and real estate agents and business-to-business. For consumers, our focus is to increase personalization of the Hemnet experience to create an even stronger bond and to continue to encourage users to use Hemnet when researching the market. For sellers, we have developed a portfolio of value-added services that we will continue to refine whilst also working with product conversion and pricing to drive ARPL.For agents and other business customers, we've seen great growth the last couple of years on the back of a great gains in our -- on the back of great gains in our market share of display advertising. And we saw significant untapped potential in this area as we are today limited by our relatively narrow product offering. And that is why we have now started working with introducing new and more integrated products to better match the needs of our individual customer groups and generate growth in the process.Turning to Page 10 to talk about our business-to-business plans going forward. Our primary focus so far this year has been the customer groups closest to our business, namely the real estate agents and property developers. In the coming years, we will broaden our product portfolio to include more integrated products for both these groups. With regards to real estate agents, we have already made significant progress by launching a new section on Hemnet that highlights real estate agents in an area, giving home sellers and agents new ways to find each other on Hemnet.We recognize the value in building real estate agents most important business partner, and we believe that the best way to achieve this is by addressing the crucial move to find new property sellers. In doing so, we not only provide a clear value to the agent community, but we also increased the market mobility by making it easier to buy and sell real estates in Sweden.On Page 11, you can see a couple of visual examples of our recently launched products. Starting from the left with consumers, we want to continue to deepen our relationships in the research phase, encouraging their use of Hemnet long before the publication of the listing. One step to achieving this is the launch of the first version of a property valuation tool, allowing logged users to track the value of their property over time. The first situation is limited to the Stockholm region and our plan is to develop this product over time.The second illustration shows the entry point to a new section that I talked about on the previous slide. Today, real estate agents investing grandly on Hemnet as a way to attract new potential sellers. But we can clearly say that there is so much more we can do to help property sellers to find a broker. This is why we recently launched a first iteration of our find-broker product where we listed brokers in the areas based on their last sale.Going forward, we will improve and develop this section further from a user perspective, as well as adding commercial opportunities for agents to market themselves towards potential sellers. During the product development of this section, we have collected extensive input from the broker community, making sure that the product meets the concrete needs of the customer group.Let's turn to Page 12 to talk about our latest product updates for banks. We have a unique position in that we are still the only place where consumers can compare mortgages from all the large banks in Sweden. To improve this experience for both consumers and banks, we have launched a new product called the Hemnet Business Pro, which gives subscribing banks more exposure of their logo to consumers looking to compare mortgages. We have also improved the functionality of our mortgage calculator, adding data points for the overview of housing costs. All-in-all, it has been a busy and productive quarter from a product launch perspective.I'll now conclude this chapter with a couple of comments on recruitment and marketing on Page 13. We added 9 FTE during the quarter, totaling 121 FTE at the end of Q1. This is a strong recruitment pace, aided by our attractiveness as an employer and as can be seen in various awards given to Hemnet in the past few months, as well as a proactive recruitment strategy. Most additions are in product development and we continue looking for talent to strengthen the team that has the most significant direct impact on the pace at which we execute our strategy.On the marketing front, we will be launching a new marketing concept during this year to reinforce our market position. This is the first time in many years that Hemnet invest in paid marketing, and it's something that we strongly believe will add value as we seek to deepen our relationship with consumers and customers.And finally, the Guldhemmet Award Ceremony will be held in Stockholm City Hall in May. I am very excited over that opportunity to once again gather the Swedish real estate community in an event that has become an important and very appreciated part of the calendar for the whole industry, one where we acknowledge and celebrate outstanding achievements in areas such as sales, customer care, and innovation.With that, we'll leave the operating update, and I'll hand over to CJ to provide us with details of our financial results.

[Carl Johan Akesson, executive]

Thank you, Cecilia. Let's start on Page 15 with an overview of the quarterly results. We have had the opportunity to say this a few times since the IPO 1 year ago. So, this has been yet another strong quarter for Hemnet. Net sales grew by 26% to SEK179.6 million, and adjusted EBITDA is up 49% to SEK85.5 million. This growth in both net sales and profit is driven by our ability to increase ARPL, which was up 41% compared to Q1 last year and reached SEK2,681.Over on the right-hand side, you see that our EBITDA margin increased by 7.5 percentage points to 47.6% as a result of this. And cash conversion measured as free cash flow in relation to adjusted EBITDA for the last 12 months was 102%. And while leverage stands at 0.3x adjusted EBITDA by 31st of March. We're, of course, very pleased with the start to this year as it again demonstrates Hemnet's ability to generate growth and profitability. We now have a couple of quarters with high comps in terms of listing volumes and traffic due to COVID, but our underlying ability to generate growth is unchanged.Looking at Page 16 and net sales by customer category, you will see that net sales from our most important customer group property sellers grew by 47%. This is driven by growth in ARPL, a KPI that captures both product innovation, product adoption by customers, as well as pricing. Cecilia commented on this earlier in the presentation. This quarter, we also had a positive contribution from higher listing volumes, but this of course is a much smaller part of the revenue growth in this category. In Q1, revenue from property sellers made up 2/3 of total net sales, so it's clearly our most important growth driver.For the 3 other customer categories, which then makes up 1/3 of our total net sales, the combined growth was a negative 2.6%. However, last year included items affecting comparability of SEK2 million. So excluding that the change from last year is actually positive with 0.7%. Looking at those individual customer groups, we see that our primary business customers, real estate agents continue to invest in Hemnet, both in terms of display and specific brokered products. We do, however, feel that there is much more that we can do for this customer group going forward. And as Cecilia talked about earlier in the presentation, this is something that we are addressing.For the last 2 categories, developers and other advertisers, we see negative growth, but for advertisers, as I mentioned, this is due to items affecting comparability. We have quite high comps for traffic from last year, which short-term puts some limits on what we can deliver in terms of display growth from developers and other advertisers. We also continue to see some signs that the very active property market leads to developers not needing as much marketing as you perhaps would have done in a less hotter market. So in summary, we continue to generate high growth from our 2 key customer groups, property sellers and real estate agents.Turning to Page 17 and the net sales split by service category. Here you will notice that we have updated the way we report net sales for service category. We now have 2 rather than 3 categories, listing services and other services, after we split the old category value-added services across these 2 new categories. The reason for the update is to more clearly illustrate what portion of net sales come from our product portfolio for property listings as opposed to other services. Listing services then include all revenue from Hemnet Bas, Hemnet Plus, Hemnet Premium, as well as Raketen and Renew ad. So the listing-related part of the old category value-added services have moved into this new category.The category other services consist of all other revenue, including the part of the old category value-added services that was related to business customers, which is Hemnet Business and Maklartipset, the broker tip. The split by service category in many ways reflected split by customer group that we have just talked about. So, I won't comment any further on this specifically. And going forward, we will be focusing our comments on the split by customer category.Let us now turn to Page 18 and look at the growth in adjusted EBITDA. Adjusted EBITDA grew almost 49%, a combination of high top line growth and good cost control. This is the last quarter where the comparables include the old compensation model for real estate agents. In this case, January and February 2021 included compensation based on the old model. Last year, we also had expenses of SEK5.5 million for the educational compensation to brokers, which we don't have this year.So those 2 factors together are the reason why we see a positive contribution to adjusted EBITDA this quarter, while going forward, the compensation will increase compared to last year as we grow revenue from property listings. Other external expenses, excluding compensation to real estate agents, as well as personnel costs are growing at a managed pace.Now turning to Page 19 to talk about our financial position. We are highly cash generative with a cash conversion of 102% for the last 12 months. This metric does, of course, vary somewhat over time, but the underlying characteristic of Hemnet's business model is that we are highly cash generative, as we don't need any significant working capital as we grow and also have very limited needs for actual CapEx. From this quarter, you can see that we reduced the drawdown on our revolving credit facility with SEK65 million, and we ended the quarter with about SEK96 million of cash on the balance sheet. The leverage was 0.3x adjusted EBITDA. So with that, what is our plan for capital allocation.Let's turn to Page 20. We have previously mentioned our intent to distribute excess cash to investors and have proposed both a dividend and a buyback program to the Annual General Meeting that will be held tomorrow. The proposed dividend is SEK0.55 per share or about SEK56 million, in line with our dividend policy of at least a third of net income. Excess cash will be returned through buybacks, including using our balance sheet in terms of the already existing revolving credit facility. And it will be conducted between now and the next AGM. We foresee that the buyback would keep leverage somewhere around that level we will have after the dividend has been paid out. So staying well within our leverage target of 2x EBITDA.Speaking of financial targets, let's turn to Page 21. We have consistently exceeded our growth for net sales in the previous quarters, and this quarter is no exception. We have also met our profitability targets, coming in towards the upper end of the target as we continue to invest modestly in our business through recruitment. We're well below our leverage targets. But as I said, as we conduct buybacks, you should expect this number to stabilize.With that, I hand it over to Cecilia again.

[Cecilia Beck-Friis, executive]

Thanks, CJ. And let's turn to Page 23 and a brief summary of the quarter. First, I would like to once again thank the team for their hard work since the IPO and our investors for your continued support of Hemnet. I have enjoyed speaking with many of you, and I'm glad that the increasing number of listings now occur in person at our office, so we can better illustrate the Hemnet culture.So, strong quarter with net sales up 26% and EBITDA up 49.5%. ARPL continues to be the main driving factor for growth as we work with both products and pricing. And finally, we will accelerate our business-to-business product development and kicking things off with a number of significant product launches such as our first find-your-broker tool and Hemnet Business Pro for banks.Thank you for your continued support, and we will now take any questions.

[Operator]

[Operator Instructions] The first question comes from Pete Kujala from Morgan Stanley.

[Pete-Veikko Kujala, analyst]

Yes. A couple of questions from me. First of all, on your recruitment plans for the remainder of the year, you added 9 FTEs in Q1. If recruitment is optimal from your perspective, are you targeting similar trends for the remainder of the quarters? Or how should we think about it?

[Carl Johan Akesson, executive]

Yes, I would say the Q1 is relatively representative of our ambition. And then of course, quarter-by-quarter this will fluctuate, but this is what we feel is a managed pace in recruitment.

[Pete-Veikko Kujala, analyst]

All right. Great. That was helpful. Then on Hemnet Bas or Basic, the new pricing model that you did for that launched in March 2021. If we talk about year-over-year growth in ARPL, is there some kind of a defense when we look at January, February and then again March when the new pricing model was in the comparison period?

[Carl Johan Akesson, executive]

Yes, I would say so in one way because historically, or let's say, up until 1st of March when the new segmented pricing was introduced to Bas. We didn't touch the Bas pricing for quite some time. This was due to the pandemic where we didn't want to sort of adjust prices. So 1st of March, we had, I would say, more room to adjust them at any time, I think, in the history of Hemnet, because it was almost 2 years since we did the previous adjustment. So that is definitely one difference for March versus January and February.

[Pete-Veikko Kujala, analyst]

Great. That was helpful. And the Business Pro for banks that you mentioned, can you tell us a little bit about the monetization of that product? And do you have some kind of different tiers for banks in that pack?

[Cecilia Beck-Friis, executive]

So we have had for quite some time, an offering for banks, which is a bank -- if you want to be part of our bank mortgage calculator, so that is the first tier, and we're very happy that we'll have all the major banks on one platform. This step and this product launch that we did during Q1 is ones that furthering in adding another layer, so you can add more exposure. So you could say it's another tier in that sense. And we will kind of continue working with this product going forward.

[Operator]

Thank you. The next question comes from Andrew Ross from Barclays.

[Andrew Ross, analyst]

My first one is just a follow-up on that previous one and to push you a bit harder on the ARPL growth in March and in April to-date. Could you actually give us a number, because it's really important when thinking about the kind of growth for the rest of the year, now you're lapping against the pricing model change?

[Carl Johan Akesson, executive]

So we don't provide any sort of more current or forward-looking statement on the ARPL growth actually.

[Andrew Ross, analyst]

Okay. So I mean maybe direction as we think into the kind of last 9 months of the year, should we be assuming that there's going to be a decent size slowdown against the 41% you did in Q1? Or do you kind of think that you can keep kind of close to that run rate going despite lapping against the pricing model migration?

[Carl Johan Akesson, executive]

So again, we don't want to sort of move into that specific discussion. But I think what we said historically is that, we have sort of a managed pace in terms of how we work with pricing as well. So, it might fluctuate a bit over quarters. But overall, we have this significant gap in terms of what we charge and the value we bring. And nothing has changed fundamentally in our view after this quarter, even though we increased with 41% in Q1. So there will be room for growth for sure, without going sort of deeper into exactly what that number would be.

[Andrew Ross, analyst]

Okay. That's helpful. And maybe if I can just follow up with one more. Has there been any or is there any kind of timing of price increases we should be aware of? Because I know you tweaked the increases regularly in different bits of Raketen in different regions, but should we be kind of thinking about there are a series of Raketen increasing plan through Q2 and Q3 that will support that growth? Or are you saying there may be some phasing that we need to be aware of on that pricing front?

[Carl Johan Akesson, executive]

No, I wouldn't say there's any particular phasings. So we review, I would say, on a monthly basis to give some sort of indication. So we don't want to touch this too often, even though we have the ability to do it more often. And so based on that, annually, there could be some sort of up and down movements in terms of the growth rate. But overall, we hope to keep sort of a nice managed pace that can last for years rather than quarters.

[Operator]

Thank you. The next question comes from Eric Russell from Carnegie.

[Eric Russell, analyst]

Yes, hi Cecilia, hi CJ. I guess it's kind of a different way to ask some of the other questions that have been asked, and I know that quantitatively we don't disclose the drivers around ARPL growth. But could you just give some more flavor on the effects between pure price hikes, underlying housing, price inflation and positive mix effects, is the growth kind of evenly distributed between the 3 or how should we think about that for the quarter?

[Carl Johan Akesson, executive]

As you say, it is something we don't sort of dive into all those factors are, of course, in the growth. So I mean, Bas is, I would say, that's of course the majority of the revenue, given that we classify or maybe excess above Bas as sort of being value-added services. So from that perspective, given that the base is big, I think it will also has potentially a big effect on sales. But we've seen a nice increase in the uptake of our value-added services, as well as have a little bit of sort of a tailwind from property prices, although that's something we can sort of factor in ourselves in our pricing also. So if we're not relying on prices to move in a certain direction, but it helps a little bit very short term.

[Eric Russell, analyst]

Okay. Perfect. And I was wondering on the agents increasing or more actively recommending the services. I saw you called that out Cecilia in the intro. Do you have any numbers on that evolution over time compared to last year, how many more agents are actively recommending the plus and premium?

[Cecilia Beck-Friis, executive]

So we don't disclose the numbers. But what we can give you is, that we launched the recommendation the first year a year ago during Q1 as part of rolling out the new compensation model. And we've seen a continuous, I would say, the interest in the recommendation levels, which is -- which will find -- it's great. So -- and we expect that to continue going forward.

[Eric Russell, analyst]

Okay. Perfect. That was all my questions.

[Operator]

Thank you. [Operator Instructions] The next question comes from Daniel Ovin from Nordea.

[Daniel Ovin, analyst]

Yes, hello Cecilia and CJ. I only have one last question actually, and that was on the Plus-Premium conversion. I know that you gave this level for Q4, I think you said it was around 30% combined. So I wonder if you could -- if you care to give that level again for Q1 or maybe give any indication at least of where the conversion levels are at this point?

[Cecilia Beck-Friis, executive]

We don't disclose that number, but we are telling that there is a continued growth in that number.

[Daniel Ovin, analyst]

All right. So it's basically higher than the combined Plus -- the combined 30% that is [indiscernible] basically?

[Cecilia Beck-Friis, executive]

Correct.

[Daniel Ovin, analyst]

Okay. All right. All right. Perfect. That's all my questions.

[Operator]

Thank you. And the next question comes from Andrew Ross from Barclays.

[Andrew Ross, analyst]

Sorry, guys. So I came back in the queue. I've got 2 more, if that's okay. On advertising, can you just remind us on how the comps look in terms of traffic and engagement through last year and when we should kind of expect that advertising line to start to grow again as you kind of work through the normalization post pandemic? And then the second question is, anything you can help us with in terms of your outlook for listing volumes in Q2?

[Cecilia Beck-Friis, executive]

So maybe I can take the first one and -- so when we talk about the engagements and traffic levels, I mean, we have, since the start, growing with an average 6% in the early during the pandemic, especially during the first half year of 2021, we have exceptional growth in traffic. And I think it's -- we were in more normal levels during the fall. So the comparables are higher during -- compared to last, I would say, the first 6 months compared to last year.When we are looking into product development, one key thing here is that we have had great growth in the business to business the last few years. We have -- the majority of our product portfolio is within display and what -- there is an increased demand from our customers, especially the real estate agents. So what we are now looking into with these new products that we have launched and that we will continue working with is more integrated products. So that is more kind of broadening our product portfolio. Display will continue being a very important part of our product mix, but we will add more [ nerves ] to the integrated products as well. So it's not only display going forward.And the second part was on the listing volumes, I believe. And we don't speculate in the future, I think that you can see some uncertainty in the market that could, I would say, affect the volumes at very short term. And like I said in the presentation, to kind of remind everyone that if you zoom out and look at the Swedish property market in general, we have historically had very stable volumes -- and that it's driven by, what we said, the real demand people need to move, and we don't say that, that would change going forward.

[Carl Johan Akesson, executive]

And I think maybe to add just quickly to that. I mean, Q2 last year, we grew volumes almost 18%. So that is, of course, a very sort of difficult comp to beat. So to have some sort of correction this year, I think, would be very, very natural to expect that. So Q2 is a bit of an outlier.

[Operator]

Thank you very much. There are no further questions at this time. Please go ahead, speakers.

[Cecilia Beck-Friis, executive]

Thank you so much for joining this presentation today, and we're looking forward to continued contact and discussions going forward. Thank you. Bye.