Hemnet Group AB (publ)

STO:HEM

Earnings Call Transcript 2024-Q1

[Operator]

Welcome to the Hemnet Q1 conference call. [Operator Instructions] Now I will hand the conference over to the speakers: CEO, Cecilia Beck-Friis; CFO, Anders Ornulf; COO, Lisa Farrar; and IR, Nick Lundvall. Please go ahead.

[Cecilia Beck-Friis, executive]

Good morning, and welcome to Hemnet's presentation of the results for the first quarter of 2024. My name is Cecilia Beck-Friis and I am the CEO of Hemnet. And I'm joined today by Anders Ornulf, our Chief Financial Officer, as well as Nick Lundvall, our IR Manager. And as always, there will be an opportunity to ask questions at the end of the presentation.Let's jump right in and turn to Page 2. This is yet another strong set of results from Hemnet with a net sales growth of over 33% and EBITDA growth of over 37% and perhaps most importantly, a growth in revenue from sellers of almost 50%. The growth in seller revenue is driven by our continued ability to drive ARPL through a number of levers as well as a more confident property market that resulted in 11% more listings on Hemnet.Demand for our value-added services is growing as more sellers choose to upgrade to maximize the chances of a successful sale. Conversion to Hemnet Premium is double that of last year, and that is a testament to the high demand and success of that product. We have also begun rolling out the full digital publication flow. And finally, we continue to execute on our strategy to constantly improve the consumer experience on Hemnet with a number of new [ sutures ] such as, for example, updated app navigation and energy classifications on listings.Now turning to Page 3 to dive deeper into ARPL. 33% ARPL growth is driven by a combination of factors shown on the right-hand side of this page. We will provide details on conversion, recommendation levels, demand for pay when listing is removed and pricing later in this presentation.The purpose of this is to give evidence where ARPL strategy is working and to give some insight into the key metrics and thinking about the impact of our new compensation model. I want to underscore that Premium continues to be a success story that contributes significantly to ARPL growth with consumption twice as high as last year.Turning to next, Page 4, for a few words on the property market. We are seeing a positive market momentum as the number of listings grew over 11% this quarter. We are also seeing more transactions, higher price expectations and lower inflation. Last year we saw a listing decline of 19% in the quarter. So I don't think it's fair to say that we are fully recovered. But from our perspective, we are definitely seeing a higher degree of confidence in the market. Not only does the positive market contribute to the number of listings, but we have also historic [indiscernible] correlation between new listings and traffic.Moving on to Page 5 for net sales per customer group. Net sales from sellers is almost -- up almost 50% and continues to be the main growth driver of the business. Many of our business-to-business customers, especially property developers, continue to be impacted by market uncertainties, and this is reflected in lower sales of our display advertising products. However, the decline in business-to-business revenue was partially offset by continued demand and revenue growth from our Hemnet unique business-to-business products.Turning to Page 6, where we will dive deeper into the ARPL drivers. During the previous report we talked about the levers, and I will not go into these drivers in detail.Instead, let us turn to Page 7 for an update of conversion. By choice, we do not want to provide regular update on conversion. And the reason for this is that we are on a journey to drive ARPL growth. And this is the ultimate goal, not increasing conversion per se, although an interest conversion is one way to achieve this. However, so with pricing, hence the contribution of conversion and pricing to ARPL growth may vary over time.Having said that, we think it's time for an update on conversion as the last update was at the end of 2021, and we want to demonstrate the success of our ARPL strategy. Approximately half of all sellers upgraded to a Plus or Premium package in 2023. Due to the effectiveness and attractiveness of Premium, this is the most common package that seller upgrade to. This is up from about 1 in 3 at the end of Q4 2021.Turning to Page 8 for agent recommendations. Approximately half of all agents that published a listing during Q1 recommended Plus or Premium. This metric is increasing over time, and last time we reported this number equals 1 in 3. This is an important driver of conversion. And as a reminder, approximately 2 [ interim ] sellers will follow the recommendation of the real estate agent in deciding which package to choose.We need to continue educating the agents on using the recommendation tool as a way for them to help the seller in their package selection and also a way to impact [ their ] commission payments. We attribute this increase in recommendation level to the fact that agents are more aware of this process and better understand the added value in the Plus, and especially Premium listing.Now on to Page 9 for an update on pay when listing is removed. Between 40% to 50% of all sellers selected pay after a listing has been removed from Hemnet. This varies over time. Hence, we have provided you with a representative range. And as a reminder, every listing will eventually be sent an invoice 4 months after publication at the latest. But the majority of listings will likely be sold before them.The price that we show to consumers are always to pay when listing is removed the price, but an option to pay now is shown in the publication flow that gives a slightly lower listing [ fee ]. This has been the successful launch of a [ suture ] that is much appreciated by sellers and agents alike.Finally, let's turn to Page 10 to talk about pricing. Well, we started monetizing Hemnet in 2013. All listing would cost the seller SEK 600. This did not reflect the value of that Hemnet provided. Even though we have increased our pricing leverage since then, we are still confident that we provide the best value for our sellers looking to maximize the number of potential buyers to [ their ] property.What we are telling with the chart on the right is that as time goes by, we strive to rely less on price adjustments for the [ all ] listing and more on Plus and Premium, which are products that the consumer elects to upgrade to. We believe that, that creates a sustainable ARPL journey. Today, we look at the asking price and municipality of listing to determine the sale for any given property, and we will continue doing so in order to find the correct price for every listing at Hemnet.Those were the updates on ARPL. And I will now finish my section with 3 slides on product updates, starting with a full digital flow on Page 11. The partial rollout of the full digital flow has come out and has been successful. The rollout will be complete in May and the vast majority of remaining agent [ offices ] will be added. We are currently testing and improving the flow before a wider launch.I have included a few screenshots of what the publication flow looks like from an agent perspective on the left as well as from a seller perspective on the right. And on the left, you can see what the flow looks like when an agent recommends Plus or Premium. It is a simple click of a button, which is then shown to the seller, as in the photo on the right. The seller [ clearly ] lists agent's recommendation as well as a photo of the agent and the live example of their listing.Remember that Hemnet is unique in our direct contact with the property seller as the seller selects package and pays for the listing directly to Hemnet. The new flow will streamline the listing process by automating some of the administrative tasks for the agents as well as make it possible for the agents to select the time for the publication of their listing.Now on to Page 12 and an update on the changes to the compensation model that will go on -- live on July 1st. As a reminder, the purpose of the updated model is to increase awareness, simplicity and to align the incentives between Hemnet and the real estate agent's community. This model will better reward agencies that also recommend Plus and Premium, while encouraging more passive agencies to understand the effects of these products better. We are allocating a significant portion of our time on a successful launch, including individual meetings with office managers, webinars, emails and other forms of communication to collect feedback, answer questions and raise awareness.And on the right you can see remainder of the most important changes to the model. We have done innumerous conversations with agents since we informed about the new model in January. And generally, that's been well received. Many understand the change in the potential upside. We want to trigger a new behavior that [ build ] from active recommendation. Those not having this behavior today might question the new model or worry that the payout from Hemnet will decrease. Well, this is understandable, it is quite common for commission to [ build ] on performance. And in general, this part is understood by agents.For my final slide, let's turn to Page 13 on the consumer updates. 3 updates that I'd like to highlight from this quarter. Firstly, we have updated the navigation bar in our apps. This might seem like a small update, but the spirit of this update is to make it easy for consumers to access the personalized part of the Hemnet experience, encouraging more users to create account and enhance a Hemnet [indiscernible].Secondly, we're happy to have added energy and classifications to properties and helping consumers make an environmentally conscious decision in their home search. And thirdly and finally, we are in the process of updating our map search experience to provide even more functionality to our users and to better their browsing experience. So I hope you found this app [ that ] helpful.And with that, I will turn to Page 14 and hand over to Anders for the financial updates.

[Anders Ornulf, executive]

Thank you, Cecilia. Let's turn to Page 15 and the financial highlights for the first quarter. As you have heard, we are starting the year with 11% higher number of listings compared to the first quarter of 2023. With double-digit underlying volume growth, we are experiencing a strong impact in our core business. Although Hemnet performed strongly in 2023, we are observing a completely different financial outcome as the underlying volume evolves.So starting off on the left-hand side of this page, we have net sales increasing 33% to SEK 253 million. As Cecilia mentioned earlier, we want to highlight a strong development for our property sales revenue, which increased by close to 50%, driven by the ARPL growth, of course.It's also worth highlighting that due to the increased average time in our listings, we moved from 40 days in Q4 last year, now increasing to 42 days in quarter 1. And remember, it's a rolling 12-month number. There are 2 effects to consider. As always, with increasing listing time, the revenues are recognized over 42 days, meaning that more revenues are moved into April next quarter. Furthermore, there is an effect of more revenue being shifted in from December '23 and '22, but since March is significantly larger month [ and ] in December, the overall effect becomes negative.The net effect of the increased listing time is negative SEK 9 million in the quarter. It's worth noting that with increased listing time, the seasonal effect is strengthened in our quarters. We communicate this effect all else being equal. So we don't take into account that we have strong growth, which in itself also means that with larger net sales, a larger proportion of revenues move to the coming quarter when compared to a previous period. Sometimes I recommend to look at our quarterly ARPL growth as LTM value. There are some seasonality effect that you [indiscernible].Moving then to the right. Despite the negative effect, we saw ARPL increasing 33% in the quarter. The drivers are a combination of conversion to more expensive value-added services and price adjustments across all cellular products.Our EBITDA came in at SEK 120 million, up 37% from last year. We will dive into the EBITDA development on the following slide. It is, of course, the case that a combination of underlying volume growth combined with our ARPL results in a very favorable profit development in the quarter.The EBITDA margin came in at 47.2%, up 1.3 percentage points from last year, and we will come back to the cost side later on. As expected, we continue to see high cash conversion, which was at 89% LTM in the quarter and is further proof of our strong business model and cash generation in line with the figure in Q4 2023.Leverage came in at 0.8x rolling 12-month EBITDA, which is the same as the previous quarter, well below the financial target, of course. This is an expected development with the current earnings and an effect of our dividend and, of course, due to the continued return of capital to shareholders through our share buyback program, and I will come back to that topic in a few slides.Let's move to our EBITDA bridge on Page 16. As we have mentioned, very strong EBITDA development in the quarter, an increase of SEK 33 million. We have covered the drivers for the revenues earlier in the presentation, so let's instead look at the cost side.The compensation to real estate agents continues to grow and is up SEK 23 million from last year. Worth noting is that the share is increasing slightly as a result of higher conversion, meaning more upselling, but also because more and more agent offices have commission agreements in place, which is promising ahead of the new compensation model starting on 1st of July.Other external expenses, excluding compensation to agents, increased with SEK 1 million. It's a small figure composed of several components, of course. What's pleasing is that we are seeing some efficiency in other expenses and a slight increase in marketing. Nothing major, but a mix [ we favor ] at least.Personnel costs increased by SEK 8 million, mainly an effect of recruiting first half year 2023 and of course, seller inflation. There hasn't been significant recruitment over the past 3 quarters, for example, just on net increase in headcount during the quarter. This may fluctuate between quarters as we succeeded in recruiting talent in the [indiscernible] previously consulted.In summary, regarding the cost side, we can note that 2023 was a year where we were careful with the cost and investments driven by the [ uncertainty ], especially in the first half of the year. 2 conclusions can be drawn from that. Firstly, we are facing relatively low cost levels in our comps, but more importantly, we have been very successful investments in prioritization we made in new products and features, and we look forward to continue actually meeting our growth plan going forward. Good cost control is an important component when investing in future products and features, ultimately improving profitability, of course. These are the drivers behind the SEK 120 million in Q1 EBITDA.Moving on to Page 17 and some spotlight on the cash flow. If we start with the graph on the left, it shows a rolling 12 figure for free cash flow. Being able to generate such a stable and increase in cash flow is a very strong endorsement for the business in our model, close to SEK 0.5 billion in LTM Q1 2024.During Q1, we also bought back 390,000 shares equaling SEK 116 million. The share buyback program announced in April 2023 is hereby completed with slightly over 2 million shares repurchased at a total amount of SEK 450 million. We have stated before that Hemnet's intention is to continue buying back shares and distribute excess cash to shareholders. We await the shareholders meeting on the 25th of April for a decision regarding the cancellation of old shares as well as authorization for future share buybacks.As a final remark, we want to keep an eye on our leverage ratio. As you can see, it has remained stable at around 0.8, which is pleasing. Net debt should be viewed in light of our growing EBITDA and thus a stable net debt-to-EBITDA ratio and again, clearly below the financial target of 2.0.With that, I will hand over to Cecilia to wrap things up before the Q&A.

[Cecilia Beck-Friis, executive]

Thanks, Anders. So this has been yet another strong set of results from Hemnet as we continue to execute on our strategy for consumers, sellers and business-to-business. And with that, let's jump into the Q&A.

[Operator]

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

[Daniel Ovin, analyst]

First question on the listings and when you -- how you talked about the market, because it seems like -- despite the relatively strong rebound you have seen here in the beginning of the year, it seems like you still believe there is a pent-up demand here still, which perhaps mean that strong listings would perhaps continue. Could you talk about a little bit where you see the market is right now, if it's far from balanced again or where do you see it heading? That's the first question.

[Cecilia Beck-Friis, executive]

Thank you, Daniel. So I think for us it's fair to say that what we are seeing during Q1 is more positive signs. I think -- I know we communicated last quarter that we started filling a more positive signal and more optimistic market. And that has continued throughout, I would say, the first quarter with, for example, looking at our listing volumes, 11%, but also transactions being up in the market where it's present and also more buyers expect [ the ] prices to go up. With that I think it's fair to say that there are still -- we're not really on the other end, I would say yet. I think that there's -- it's a good trajectory in the start of the year. There will probably need to be more stable positive signals when it comes to interest rates and inflation for it to become fully kind of, if you would call it recovered or balanced. And we don't give any forecast, but we are definitely seeing more positive signals during Q1.

[Daniel Ovin, analyst]

Then another question on the expense side here. So if we turn to other external expenses, so they grew now 5% year-over-year, and we have previously seen them falling and they were down throughout 2023. So I just wonder how to think about the rest of 2024 here? Is there a rather big catch-up that you need on this line? Or is the -- kind of 5% growth is the round up level that we should think about rest of the year? Any heads-up on that would be great. Second question.

[Anders Ornulf, executive]

No, without giving any forecast, I would say that the run rates are a bit higher, mostly due to 2023 was -- yes, not the best comparison year. But yes, I would expect a bit higher run rate of the cost, but nothing, I mean, extraordinary or anything.

[Daniel Ovin, analyst]

And just a last question here on -- for every listing and this seasonality impact that we get from -- in this quarter, it was a negative down from getting from December, but given from March. But I'm thinking about the Q2 then, what would be the impact there? Is that more of a positive impact? I would just -- would be my guess, but I don't know maybe you can talk about how that's for Q2, how that should impact?

[Anders Ornulf, executive]

One thing is for sure, and that accounting principle won't change. So the effect is still going to be there. So it depends on how the listing time evolves together with -- you have to look then in our weekly listings how big of a month March is compared to June then. And you will have the same effect, but depending on how much listings there are in March versus June.

[Operator]

The next question comes from William Packer from BNP Paribas Exane.

[William Packer, analyst]

Three for me, please. Firstly, the EBITDA mix today was primarily driven by the higher than expected commission payments. The percentage of listing revenues paid out was up from 26% to 29% year-on-year. I suppose it could turn out to be transitory with the change in the commission model coming in July with better upsell, the key driver. Could you help us think through what your commission payment would have been in -- [ than ] you had the new model already? Or some kind of qualitative commentary about how to think about the trajectory of commission rates in H2?Secondly, you talked to a doubling of Premium product penetration, which is impressive. And you've also commented on the 2023 performance and upsell. Could you give some qualitative commentary around 2024 trends? Is the digital workflow, for example, helping drive an acceleration in upsell?And then finally, transactions and listings are back to growth, but non-listing revenue remains very weak, considering your value-add in the marketplace. When should we expect those trends to inflect back to positive growth?

[Cecilia Beck-Friis, executive]

So Anders, maybe you can take the first one on the EBITDA, and I can follow up on the conversion and the trends and also the non-listing revenue.

[Anders Ornulf, executive]

Yes. The first part of your question comes to the EBITDA mix. Yes, we did. We're looking to the absolute figures. We saw that the mix on net sales were SEK 3 million and EBITDA, I think it was SEK 6 million or SEK 7 million. So very low absolute figures. And as you say yourself, but the main reason is that the commission ranges were, I think, SEK 2 million more than -- with the same effective commission as last year. So very small figures. It's difficult to put that -- that was the first part, [ the ] answer to your question.The other part is what we expect in the second half year. We don't know. We have a lot of simulations ourselves how will the recommendation rates grow, the conversion rates and how will they mix together. That will affect how -- the commission for the second half year. It's a model that -- we will incentivize upsell. So hopefully, the absolute figures will absolutely go up, I'm sure, but hopefully, we can match that with the increase in top line. That's the whole meaning within the [ compensation ] model. So what that will mean in effective commission, whether it will be [ '26, '28, '30 ], we will see in Q3.

[Cecilia Beck-Friis, executive]

And the second question on Hemnet's Premium. So we're obviously very happy to see that there's been an increased demand for Hemnet's Premium and 2 things also to take with you with the value that we add in -- that you're getting Premium. One is obviously, [ interest ] feasibility and increasing the number of potential buyers leading to better sales. The other one is also what we added into [indiscernible] [ republishing ]. So those 2 things have been a key driver for this.And looking into the trend, I think that what we addressed also in the presentation was, obviously, all the different levers we have in order to increase ARPL. So our strategy and our goal is to increase ARPL, and we have several levers. One is definitely products and what we're doing in the products, adding [ suture ], we might add products over time and so forth.And then obviously, to your point, that on the back end of things in the publication flow and how we price and so forth, those are also important levers in order to make sure that as many sellers as possible going to the flow and also that you're -- so we capture some of the growth also there, and then we have pricing. So we don't disclose how we view things. But I think it's fair to say that you should view all these levers that we also gave more [indiscernible] around in this presentation as important levers to grow ARPL in the future.And the third is, yes, it's true that we've seen a great growth when it comes to our core business delisting, while the non-listing revenue, the advertising sale has been declining. Yes, there are still the same story as during last year. That was a positive signs when real estate agents adding more of our -- choosing our more [ native ] products or [ interested ] products, which is in line with our strategy. That's one thing, but also looking at banks as a customer segment that also have increased their revenue.But 2 things, why the listing -- [ where ] those revenues have declined. One is definitely the market -- the market sentiment last year, and that kind of continues, especially when you look at property developers, for example. So when we talk about market being more positive, there are still, when it comes to marketing investments, some hesitations. And I think that will take some time before we're back on a more normal path.The other one is also coming back to, I would say, also the investments and what we did. So what we communicated last year was that during the market -- or in that market we sell that we will not push forward with everything at the same time because that's not really sensible. We need to make sure that we prioritize our cost and investments in the right way. And we -- so we focus a lot on our core business, the business through our listing revenue, but also in building and starting to build out the product for agents and the [ native ] products where we also still have a great [ uptake ].So it's also -- the market is a big [ reason ], but I would also say that we have by choice been less -- more cautious on that side. And throughout this year -- and I will come back to kind of a more -- what do you say more [indiscernible] when it comes to product development. So we foresee the market to stabilize over time and also the way [indiscernible] come back to the product development. Long answer, but maybe giving some more colors.

[William Packer, analyst]

Just one quick follow-up on the previous answer around the run rate on costs. When you talk to a bit higher run rate of costs, do you mean versus Q1 or versus 2023?

[Anders Ornulf, executive]

2023.

[Cecilia Beck-Friis, executive]

Yes, 2023, I would say. So I think it's important to note that last year was not a normal year per se. And we were also very clear when going into that year, that's -- due to the market uncertainty we said that let's be a bit more selective. And we're very happy that the product development investments made last year, I mean they have really paid off. But -- so last year was not kind of a normal year.

[Operator]

The next question comes from Giles Thorne from Jefferies LLC.

[Giles Thorne, analyst]

First question is on the new compensation model, and there were some prepared comments around the consultation you've been doing with agents, and it sounds like the feedback has been balanced, if not positive. But it would be interesting to hear that when you have had pushback, what is the nature of that pushback then?The second question is picking up on the Hemnet Premium conversion and the doubling year-on-year. It's a bit of a simple question, but we've obviously now had 2 full quarters of the pay on removal option for vendors. Is that conversion [ uplift ] purely a function of the pay removal or there are other factors that you would want to call out?And then the final question was on ARPL. And again, thank you for the prepared materials around ARPL drivers. Picking up on the price adjustments one, it looks like you're doing every 3 months or so the price adjustment sequentially -- obviously sequentially since you're changing your price. But those price adjustments sequentially are at mid-single digit, sometimes double-digit, a little bit all over pace. If we could have a better commentary piece around how much ARPL growth this year will come from price adjustments? That is it.

[Cecilia Beck-Friis, executive]

So on the first question on compensation model and questions and potential pushback, I mean obviously, this is a change to the model, and that also obviously wake a few questions from the market. I would say that overall, it's in good set back, and I think it's appreciate because it's a more simple model, so it's easier to follow and track and it kind of makes sense. But in those conversations where we've had more of -- I wouldn't say a pushback, but there's obviously a few also agents that I think -- I mean, with the model -- what we're aiming for is that we want to have changed behavior. We want more agents to learn about our products and spend some time and effort into learning about our products, so -- and also recommend to sell this product.And for some agents, they are already there, in the sense that they are already on top of. Whereas, other agents are maybe not as on top of. And obviously, from their point of view, they want to understand more what this actually means. Because for some this will mean a lower payout if you don't change your behavior. So those kind of conversations we've had, but we're very proactive in our communication. We spent a lot of time, I would say, from many parts of the organization in both wider communication with, for example, webinars, but also a lot of one-to-one and being very transparent with the data around how it looks today and how it will look tomorrow. So that's the answer on the first question.And I would say when looking at the doubling of Hemnet Premium, the main reason for this is, I would say, the value we deliver. So absolutely -- and pay when listing is removed. It just in our view one part of kind of making the process as simple as possible and kind of not putting any barriers to put your listing on Hemnet. But I would say the main reason for that product growing is because it's a good product of value. It's very appreciated by both sellers and agents.And third, on pricing, and then I can start and Anders can jump in if you want to add something also. I mean, when we look at pricing, we do it in conjunction with, for example, updates on products or other things. We don't disclose how we'll work with pricing. It's kind of ongoing. Sometimes we work with pricing on a broader range when it comes to all listings, but also sometimes we are changing depending on in certain areas where we feel that we can work with pricing more actively. And I don't know, Anders, if you want to add some more...

[Anders Ornulf, executive]

No. Maybe yes, it's -- I understand why you ask and it's not that we have all the answers for ourselves because we don't have a fixed price list. It's differentiated. So it may be that we changed it due to uptick and uptake, whether it's pay when listing is removed or the pay now price. But yes, we'll continue to look at that. But yes, we'll see how it evolves.

[Giles Thorne, analyst]

And just to come back on your compensation model for [indiscernible]. Will there be any changes in the timing and in the structure of the new model?

[Cecilia Beck-Friis, executive]

No.

[Giles Thorne, analyst]

-- [indiscernible] not, but just to [indiscernible].

[Cecilia Beck-Friis, executive]

No.

[Operator]

[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any written questions and closing comments.

[Cecilia Beck-Friis, executive]

So thank you all for listening in, and thank you for your questions. Have a good day.