Hemnet Group AB (publ)

Good morning and welcome to the presentation of Hemnet Group's results for the third quarter of 2023. My name is Cecilia Beck-Fries and I am the CEO of Hemnet. And as always, I'm joined by CFO Anders Ernaus and IR Manager Nick Lundvall. We have a number of exciting updates to share with you, so let's dive straight into the presentation. And I will start, as usual, with the summary of the key updates on page two. I'm pleased with the financial and operational outcomes for this quarter, during which we delivered stable results that underscore the strength of our business model, as well as the results of the investments in our organization and product development. We continue to deliver consistent and predictable results in an unpredictable market. Our continued work with ARPL, supported by a normalization in listing volumes, meant that revenue from property sellers grew by 23.5% and ARPL by 27.9%, and this is despite listing volumes decreasing by 4%. A noteworthy achievement is the all-time high EBITDA margin of 57.4%, which highlights the operating leverage of our business model. Yesterday, we launched pay when the listing is removed, and I will talk more about this later in the presentation. And finally, we are seeing signs of a more active and stable market, although we are not completely out of the woods just yet. Turning now to page three for an ARPL update. ARPL grew by 28% while listings declined 4%. Premium has proven to be especially important for ARPL growth with revenue from premium up 2x from last year. We are seeing sales duration continuing to increase up to 37 days from 35 days in Q2. This has a negative impact on ARPL as listings are spread out across more days. Looking ahead, I'm encouraged by the launch of pay when listing is removed as we believe this will create yet another tool for artful growth by making it easier for agents and sellers to make the decision to list on Hemnet as well as to upgrade their listing. Now turning to page four and an update on the property market. You have heard me say this a number of times in the past, but I believe that this is worth reiterating. Sweden is a buy-to-live market, and this is especially evident in the listing trend that we have seen during this year. Listing volumes are now broadly in line with last year as we approach Q4, during which we saw a 10% decline in 2022. Also, transactions have recovered, with the latest data from Svensk Mäklarestatistik showing a decrease of 3% in Q3, compared with a decrease of 19% in Q2. This is no reason to believe that there have been any fundamental changes to the market driven by uncertainty or the economic climate. In the past, we have seen periods of fluctuated listing volumes, which are usually followed by periods of higher than average volume. Although the signs are encouraging, we have observed three months of decreasing price expectations, and it's too early to say that things are back to normal. We keep a close eye on the market and focus on that which is in our control. I want to turn to page five and illustrate the current listing trends in light of historical trends. This chart shows rolling 12-week average volumes of property listings going back to 2014. As you can see on the left side of the chart, 2023 was not only way below 2022 figures, but also the lowest listing volumes for which we have data. That is in stark contrast to the right hand of the chart, where after the summer, volumes have normalized and are now above historical average and in line with 2022 trends. Now turning to page six to talk about net sales by customer category. Despite the 23% growth in seller revenue, NetSales was up 40% in Q3, largely driven by a challenging market for display advertising. Real estate agents continue to be a focus area for product development, where we are creating win-win products for agents in Hemnet that makes their lives easier and more efficient. Here we have managed to offset the decline in advertising spend with an increased demand for Hemnet's business-to-business products aimed at agents. We see this as a testament to our resilience and relevance to this customer group. Decline in revenue from property developers is driven by continued challenges for property developers who are making cost reductions across the board, including on marketing spend. And as a reminder, new product development aimed towards property developers has been paused and allocated towards product for agents instead until that part of the market recovers. With regard to the broader advertising category, we saw that spend from media agencies in Sweden dropped 23% during August, based on external data, and coupled with lower traffic than last year, this has resulted in an 80% decrease in revenue from other advertisers. Now turning to page seven and an operational update. We continue to invest in our future growth through product and team. We added six employees in the quarter and are now 154 employees at the end of Q3. The majority of these additions are in development and product. Some consultants have been moved to full-time positions, which increases headcount but reduces other external expenses. We continue to operate in a market that is favorable to Hemnet, being both a growing and profitable tech company, and our investments in technology and teams are yielding results, evident in the strong pace of product launches as well as our ongoing work with ARPL. Now turning to page 8 for an update on corporate governance. Our corporate governance and management team structure has been largely unchanged since I joined Hemnet in 2017. However, we have grown a lot since then, and with the addition of Lisa Farrar as Chief Operating Officer on November 6, I have reviewed our corporate governance structure to see how we could improve alignment and execution across the company. The result of this work is a smaller and more focused management team called the Group Management Team, consisting of all my direct reports, This group will be the main decision body with responsibility for setting the company's direction and goal. It will also provide strategic and operational oversight to the company and employees and ensure its success. For better alignment and priority setting, we will also establish an extended leadership team composed of experienced key individuals representing important business functions. This group will act as a bridge between high-level structures and operational execution and ensure execution runs smoothly, as well as play an active role in strategy and planning. You can see the competition of both groups on the shown page. Now turning to page nine and a brief ESG update. We continue to actively develop our ESG agenda and have mapped out all of our indirect emissions within scope three of the science-based target initiatives. This means that we can now commit to a long-term net zero emission target, and the aim is to have this target approved by the science-based target initiative by year end. This follows our steps in 2022 to commit to a short-term emission target to reduce emissions in scopes one and two by 42% by 2023. We are also preparing to step into the European Corporate Sustainability Reporting Directive Regulation to report accordingly to ESRS from 2026. Moving on to page 10 and the product updates section. Starting with page 11 for a note on how we can create value to really serve agents. Agents continue to be our most important business partner and creating products and services that empower agents is a key strategy for Hemnet. This is especially important in the current market, which continues to be challenging for many agents and broker firms. Two examples of how we have done this in the last quarter is through the sticky bar and images on sold properties. These two changes have resulted in 150% and 50% more traffic, respectively. That is 150% more clicks than it didn't get in total by having Hamlet add the sticky bar in our apps. Images on sold properties is a feature we've used during last quarter, but we can now see the impact of this in that clicks to listings with sold properties receive 50% more traffic. That is 50% more potential seller context to the agent. Both products are free of charge to all agents in line with our strategy to create products that offer a win-win proposition to Hemnet and our users. Now turning to page 12 and an update on the pay when listing is removed product. Speaking of win-win propositions, this is another example of a product that helps us realize this ambition. By connecting the timing of the Hemnet payment, we make it easier for both sellers and agents to buy and recommend the most relevant Hemnet listing products. Payment listing which removed was launched yesterday on October 24th and is now live across Sweden. As a reminder, there is no change in credit risk from our current model and aging compensation is paid once Hemnet receives the payment from the seller. There are two different price points, one to pay directly and one for payment after listing has been removed. Like all other seller products, pricing varies across the country and depending on the asking price. Let's now move to page 13 and an overview of an upcoming new product. Sold by us is a new agent product that leverages sold properties to attract new sellers. Through this product, we are targeting the 1.1 billion second annual marketing spend by the real estate industry, much of which continues to be spent offline. The product provides exposure in HEMS result lists and uses proprietary targeting and smart retargeting to maximize value. It is a low-maintenance product that will automatically self-populate with new listing as agents sell new properties. Sold By Us will be sold through a monthly subscription with an unlimited number of available slots. Sales are currently ongoing and will end towards the January 2024 launch. We have taken inspiration from companies such as Rightmove and their Sold By Us product to create an exciting way for agents to further differentiate themselves on Hemnet. I want to finish off the product section with a quick word on our work in AI on page 14. I have no doubt that generative AI provides an opportunity for Hemnet and other real estate portals to streamline and improve products and features. We are today using AI for two purposes. Firstly, our automated valuations model is trained using our data sets to provide valuation for property across within. Secondly, we process and tag all images uploaded to Hemnet. Today, this is to determine which photo is the floor plan to make this easily available to our users. We're currently exploring future use cases with the most potential, including search data, customer workflow, and internal processes to see how we can leverage off-the-shelf tools or build our own tools using the power of generative AI. We have a unique and comprehensive data set of market statistics, listing data, search patterns, and images that can be used to create powerful tools that empower our users, including agents, sellers, and buyers. With that, I'm finished with the product update, and we'll now turn to Anders, who will give us a financial update starting with page 15.

Thank you, Cecilia, and good morning, everyone. Let's turn to page 16 and the financial highlights for the third quarter. As you know and heard today, first half year started very challenging, but the result is around 20% fewer listings published during the first half year compared to 2022. Even though Hemnet performed strongly in the first half of the year, we're seeing completely different financial development as the underlying volume listings return minus 4% in the quarter. So starting off on the left hand side on this page, we have net sales increasing 14% to 272 million Swedish krona. As I mentioned earlier, we want to highlight a strong development for our property sellers revenue, which increased by 23%. Reduced investments in marketing and display advertising from our B2B customers, particularly property developers, is behind the decline of 13% in B2B revenue over the quarter. However, we continue to see increased revenue from value-added services to real estate agents and a stable demand from our bank customers. It is also worth highlighting that due to the increased average time on our listings, From 35 days in Q2 to 37 days in Q3, and these are 12-month rolling figures, we have an accrual effect on net sales of 3 million in a quarter, all as being equal. This means that already listed objects income is recognized over 37 days instead of 35. That effect will return positively when the listing time comes down again. Our EVPA came in at 156 million, up 21% from last year. We will dive into the EBITDA development on the next slide. The EBITDA margin came in at an all-time high, 57.4%, up 3.6 percentage points from last year. This is, in the current market conditions, a strong rating for our business model to be able to deliver the best EBITDA margin ever. Moving then to the right-hand side, we saw ARPL increasing 28% in the quarter, Celia talked about the drivers for this earlier on page three, which were a combination of product updates, conversion to our more expensive value-added services, and three price adjustments across all seller products. As expected, we continue to see a high cash conversion, which was 100% in the quarter, and it's further proof of our strong business modeling ability to generate cash. Leverage came in at 0.8 times, rolling 12-month EBITDA, which is a slight improvement compared to the second quarter. This is an expected development with current earnings and an effect of our dividend, and of course, due to the continued return of capital to shareholders via 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 17. As we have mentioned, very strong EBITDA development in the quarter, an increase of 28 million. We have covered the drivers for the revenue earlier in the presentation, so let's instead look at the cost side. The compensation to real estate agents continues to grow at a pace similar to our seller revenue and is up 12 million from last year. It is, of course, recorded as an expense in our P&L, but we also view it as an investment in the agent's commitment to our business. As a proportion of seller revenue, this means that the compensation was around 29% for the quarter. Other external expenses, excluding compensation to agents, is down 9 million, despite increased costs for our new head office and other costs related to an increased organization. Lower activity is generally driven by market conditions, but in this item we also find to some extent an effect of successfully recruiting consultants as permanent employees for specific expertise, for example, iOS developers, which naturally has a positive impact on this cost item as well. Personal costs have increased by 4 million as we have continued to invest in product development for future growth, which Cecilia talked about earlier in today's presentation. In summary, Good cost control, which is one important component when investing in future products and services, ultimately improving profitability for our growth journey ahead of us. Moving on to page 18 and a few additional words on the buyback program. If we start with the graph on the left, it shows a rolling 12 figure for free cash flow. You've heard me say this before, but being able to generate such a stable cash flow around 470 million Swedish krona in the market conditions we had in the first half of the year is a very strong endorsement for the business and our model. We now live with a 2023 AGM decision to buy back 450 million for the coming period. Hemnet's intention is to continue buying back shares and distribute excess cash to shareholders. During Q3, we bought back 640,000 shares, equaling 119 million SEK. Please note that the buybacks for this year started in the beginning of May, so it's not a full quarter in Q2. The buybacks have also played a part in the increased leverage. This means net debt to EBITDA during 2023 to the current level of 0.8. It is gratifying to see an improvement in the third quarter, driven, of course, by the increased earnings. Before handing back to Cecilia to wrap things up, the final slide in this section is the financial targets perspective on page 19. Short recap on the targets. The company's financial targets for net sales growth are 15 to 20 percent. When it comes to leverage, it is below two times net debt to adjust to DBTA. In conjunction with our year-end report for 2022, we introduced a new long-term EBITDA target of exceeding 55%, but at the same time reiterated the old profitability target of 45% to 50% for 2023, considering the market conditions going into the year. In a more normal-like market, the company believes that the investments that are made into future growth combined with operating leverage of the business creates good opportunities for margin expansion going forward. Our growth rate measured as an LTM, the latest 12-month figure, is now at 8%. Our profitability measured as an LTM EBITDA margin is at 51. Leverage was 0.8, as previously mentioned. Financial targets play an important role to transparently follow performance versus ambition over time, and a balanced assessment of the third quarter is a good return on a core business and gratifying to see the increased EBITDA margin in 2023. It's important to keep in mind that the decrease in volume began during the fourth quarter of 22. So even though we never can predict how the market will evolve, our comparative figures will somewhat be easier from now on. So that concludes my section here today. And with that, over to you, Cecilia.

Thank you, Anders. And I will now turn to page 21 for a summary before going into Q&A. We deliver a predictable result in an unpredictable market supported by a strong ARPL execution and the recovery in listing volume. We are assuring past investments bear fruit through a number of exciting product launches, including pay when listing is removed, pictures of sold properties, and the agency key bar. Finally, we saw an all-time high EBITDA margin of 57.4%, and we will continue to deliver new products and features that generate concrete value for our users, partners, and customers going forward. Thank you for your attention, and we will now move to the Q&A session.

If you wish to ask a question, please dial star 5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. The next question comes from Pete Kujala from Morgan Stanley. Please go ahead.

Hey, guys. Thanks for taking my questions. A couple from me. Maybe the first one on the buy now, pay later. product, which has now gone live. Can you give any kind of indication on what the price uplift is on average versus the upfront option? And what do the economics look like for the increased price in the buy now pay later between you and Karna? That's the first or two questions, I guess.

Thanks. Start off by answering the first part of your question. It's too early to tell. As we said, it was launched yesterday. So how it will convert, we will have to come back to later on. So the results, again, we will come back to that maybe later. And then, of course, it's not about competing with Klarna. You said buy now, pay later. For us, we present the packages with two prices, either when publishing or when delisting the listing. And, of course, we take consideration when it comes to pricing our packages. But we will monitor how well it progresses and the uplift we will have in different categories. So, yeah. Did that answer your question?

Well, I mean, the question wasn't really on conversion. I understand that three may have to be seen, but I mean, because you do have the two prices now live, like the first one is pay when the listing is removed and the other one is pay right away. And there's a different price for those two services. So is there some kind of average that you could give? Like, what is the difference on average between those two options?

No, we cannot. You know that we have a dynamic pricing and we set our prices based on overall offering, including the pre-op options. So we have prices today, but they might shift tomorrow, depending how we progress and develop.

All right. Yeah, all good. But then on the cost side, I'm trying to understand the personal costs a little bit, like Because is there something happening with average salaries or how are they developing? Because your headcount is growing quite a lot faster than what your personal cost is growing. So that's the first cost-related question. And the second one is on basically like other expenses. Because as you mentioned, you've cut marketing and the consultant spend. But is this more like a short-term adjustment for this year or is this the level that we could also expect into next year? Because the differences in cost are quite sizable. So I'm wondering what should we think about in terms of next year for these lines?

So starting then with the first part, the personnel costs, the FD costs, you have to take into consideration that we have a full year effect on all the employees entering Hemnet together with, of course, the wage inflation. So it's nothing funny there or nothing strange in that line at all. The second part of your question when it comes to the cost, yeah, it's a year marked by uncertainty, and we have been responsible in handling that. However, as you know, that Hamlet is not a cost-saving case, but instead, I mean, we should be smart and invest in the right projects and initiatives going forward. All right. That's all. Thanks.

The next question comes from Andrew Ross from Barclays. Please go ahead.

Great. Good morning, everyone. I hope all is going well. My first question is on your margins this year, which are clearly running ahead of the 45 to 50 guidance that you have given. I appreciate that the Q4 margin is seasonally lighter, so there are reasons why it might come down. But it's going to have to be a lot seasonally lighter to come down to get into that range. So can we just touch on if there's anything we should be aware of in Q4 that means that range is realistic, or are you just being conservative?

So I think it's important, and I want to emphasize that we don't give any guidance. We don't give any forecast. We provide our targets, and those targets are on a longer-term basis. So we don't adjust our long-term targets depending on one quarter.

But for this year, you do have a target of 45 to 50 margin. And it's running, I think, at 53 in the first nine months of the year.

Yeah, but you know that Q4 is also a weekly quarter. So looking to the LTM figures, it's at 51%. So we'll see how the fourth quarter evolves. But 51 compared to 45 to 50, I would say, are the figures you should look at.

Okay, just to be clear, Ben, it's not like that's something we haven't understood, but you're factoring into the costs in Q4 might mean we end up, you know, anywhere near the middle of that range. Just to be totally clear about it.

Yes, so we will not comment on Q4 separately. That's why we report the LTM figure. So that's maybe more relevant when it comes to a full year figure at least. But we will, of course, come back to the full year when we report it.

Okay, cool. And then my second question was going back to the pay later product for you launched yesterday. I guess we've touched a bit on the ARPOL implications, but can we touch a bit on the listing volume implications? And I guess directionally, you know, whether you think this might end up being a tailwind to listing volumes as well. I appreciate you weren't putting numbers on that, but I'm sure you've done survey work or A-B testing work and would be interested to hear what you've kind of heard back directly on that.

Yeah, so we don't give any numbers. We don't provide any numbers, but it's correct. Yes, we have been testing this function for quite some time. And we have some positive signals. And we've also seen positive signals that when you pay less, you also tend to invest more in your marketing package. So that's a positive signal and one of the reasons also why we pushed forward. So I would say that we're into two different things here with this function of this feature that I'm One is to make sure that we get the listings on the platform, and that's clear feedback from agents and sellers that they want the flexibility, but also to drive growth and also give the opportunity for sellers together with agents to also invest in the marketing spend. And we have seen positive numbers during the test. And maybe also I would say that I know that we maybe ended after this. We're talking a lot about this product or this function during the year. I would say that this is one out of many other improvements we are doing in order to make it easier for sellers and agents to list and also make it easier for them to upgrade. So it's part of the overall art of growth going forward.

Cool. Thanks.

The next question comes from Catherine O'Neill from Citi. Please go ahead.

Great, thank you. I've got a couple of questions. First of all, on ARPL, I think you said that the sort of longer days, listening days, negatively impacted. Again, in 3Q, I just wondered if you could provide a bit more detail there or quantify it in some way. And secondly, I think the new COO starts, and you talked about putting in place a a new management team structure. It starts in November, sorry. I just wondered if you could give us some idea on what Lisa will be focusing more on as you move into 2024.

I can start answering the question about the listing time since we had this similar issue in Q2. So this is an accounting principle, so it is what it is. Normally, for Hemnet, this is not a question since the base figure we use to calculate this is 12-month rolling. So, it doesn't really mow that much. But in this market with higher uncertainty when it comes to buying and seller meeting each other and listing period then, we see some longing period. And that's why we commented. So, the all-else-equal effect in Q3 is 3 million.

And on your question on the new corporate governance of the up to the management team. So Lisa's role is to be the chief operating officer and she will focus on our commercial development in the company. She will oversee the product pricing, packaging, and go-to-market. So it's an important recruitment. And we have been scaling the organization and grown and also grown in complexity. And though we're still a quite small company, I mean, it gets more complex in a way. So she will focus a lot on improving the overall process and make sure that they also scale that part of the organization and deliver all the very exciting initiatives that we are working on.

Okay, thank you. I just wondered if you could actually talk a bit more about on the agent side, because I guess what we're seeing is sort of fairly flattish trends on agent revenue, but I know it's been an area you've talked about increasing product focus there. How should we think about trends as we move into 2024 and the proposition for the agents?

So one of the focus area also for Elisa is obviously to work both on the business-to-consumer and business-to-business side together with the team respectively. We still have high ambitions when it comes to growing our business-to-business area with the focus on creating great products for agents. And I think that if you look back a year, you can see that we have expanded our universe. We have built the find-a-broker product. We have launched the first commercial product. Within that part, we have also improved a lot of different features and functions, and now we will launch a new product in January, hopefully. So we're moving in a direction where we want to make, you know, we want to build great products so the agents will, you know, so they will invest in those products and the Going forward, I think it's fair to say that when you look at the business to business segment overall this year is that we have seen the market, the overall market has put some pressure on that part where we feel that the investments overall are decreasing from our business to business customers. But under the hood, if we look at the agent, we can see the encouraging, you know, strong demand for this new product that we have built, which is a positive signal. But for sure, it has put the pressure on the disability advertising, the current environment. But we haven't changed. We haven't changed our ambition. We haven't changed the view or changed the strategy. We rather need to make sure that we kind of move the market and make sure that we build the products and improve the products we have.

Great, thanks very much.

As a reminder, if you wish to ask a question, please dial star 5 on your telephone keypad. There are no more questions at this time, so I hand the conference back to the speakers for any written questions and closing comments.

So thanks everyone for joining today. Have a great day. Thank you.