Baltic Classifieds Group PLC
LSE:BCG
Earnings Call Analysis
Q2-2024 Analysis
Baltic Classifieds Group PLC
The company kicked off the financial year on a high note, delivering a robust performance marked by over 20% revenue growth and a 22% increase in EBITDA. With a commendable EBITDA margin expansion to 78% and cash conversion close to an impeccable 100%, the financial health appeared robust. Leverage was significantly reduced to a conservative 0.7x of EBITDA. An interesting development was the record-high private segment volumes and substantial growth in core revenue streams, which include B2C and C2C segments, contributing 90% of the revenue with a growth of 25% and 19% respectively. Particularly, the business segment stood out with healthy growth in customer numbers across autos, real estate, and jobs.
Strategic pricing initiatives coupled with product packaging creations for both C2C and B2C segments bolstered the momentum, driving revenue expansion across all business lines. Notably, autos and real estate segments in the B2C category emerged as substantial contributors to revenue. Yield improvement was consistently pursued through scheduled price events and packaging changes.
Diligence in cost management underpinned the company’s success, with a substantial portion of operating costs tethered to people costs, which are closely tied to revenue and constitute the majority of operating expenses excluding depreciation and amortization. Marketing costs were kept minimal, largely benefiting from in-house advertising capabilities. Through effective revenue growth and cost management, impressive cash generation and a 22% increase in EBITDA were achieved, further solidifying the financial stability with reduced leverage.
The company reiterated its commitment to disciplined capital allocation, emphasizing the intent to utilize the cash generated within the same fiscal year. Adhering to a policy of distributing one-third of adjusted net income each year through dividends, an interim dividend reflecting a 25% increase was declared. This approach aligns with the strategy to balance dividends, share repurchases, and debt reduction as primary uses of capital.
The company continued to strengthen its competitive position by enhancing its marketplaces and product offerings. Significant growth has been achieved in the number of active ads, and developments in data products and financial services for B2C propositions have been rolled out. Noteworthy strides in auto and real estate prominance packages were made to boost exposure and branding for business clients.
Experiencing the ripple effects of vibrant economic conditions in the Baltic region, the company benefits from the enhanced purchasing power of end consumers. The cooling of the real estate market after a peak year has not dampened performance, as the business showed resilience and the Board upgraded the full-year 2024 guidance to a revenue growth range of 18% to 19%. The guidance indicates confidence, projecting an improvement in the EBITDA margin by around 1 percentage point with a cautious yet optimistic view of the future.
The company anticipates continued growth, especially from transitioning dealers in the C2C segment to more professional sellers. The underlying driver of C2C ads growth is attributed to longer selling times and the normalization of the car supply chain post-pandemic. Although the timeframe for car sales might see marginal increases going forward, the expectation is that there won't be remarkable leaps in the near future.
While M&A remains a strategic focus, with the company keen on pursuing value-accretive opportunities, no active negotiations or developments are currently underway. The company continues to scan potential targets that align with its portfolio but indicates that the M&A landscape remains static with no immediate updates to share.
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Hello, everyone, and welcome to the Baltic Classifieds Group plc H1 2024 results. My name is Harry, and I'll be coordinating your call today. [Operator Instructions] I will now hand you over to Justinas Simkus, CEO, to begin. Go ahead.
Good morning. The start of financial year has been incredibly successful for our company. We have seen a record number of business and private advertisers. Yield has increased and our competitive position has improved across entire portfolio. This has resulted in a strong financial performance with revenue growth over 20% and EBITDA up 22%. We have expanded our industry-leading margin -- EBITDA margin to 78%, maintained cash conversion close to 100% and significantly reduced our leverage to 0.7x of EBITDA. We continue to implement our capital policy by buying our own shares, reducing debt and the Board has proposed an interim dividend of EUR 0.01 per share to be paid in January. What is really important that our core revenue streams of B2C and C2C, which contributing 90% of our revenue have grown the most with an increase of 25% and 19%, respectively. The business segment has been of the particular note, the number of business customers has been very strong with 5% growth in autos, stable in the real estate and 7% growth in jobs. The yield has improved significantly with 31% growth in autos, 27% in the real estate and 6% in jobs. The Private segment volumes has been a record high. The normalized selling period, which we consider to be more typical now, has increased number of active adds in automotive by 37%, in the real estate by 20%, while services and generalist volumes grew 40% and 8%, respectively. Our lead over the close competitor, which we consider the most important KPI have improved across all major portals and now ranging from 8x to over 30x depending on the portal.
Our strategic pricing and packaging events for C2C in May and B2C in autumn have also contributed to this success, setting us up with a great momentum for the second half of the year. Now I will hand over to Lina to talk more about finance.
Thank you, Justinas. Good morning. We exceeded our guidance by growing revenue 20%. The growth was broad-based, and the core revenue streams, B2C and C2C grew 25% and 19%, respectively, and are now together 90% of the portfolio. Looking at the business lines, we saw a strong growth across all of them with access coming from the core verticals, autos and real estate, which grew 28% and 20%, respectively. These are the 2 biggest business lines and are now contributing almost 63% revenue in the portfolio. Jobs & Services grew 18%, Generalist 9%. Overall, the revenue growth from a growing number of listings, wrong number of advertisers, yield improvement across both B2C and C2C and also growing vendor market, rising transaction values. Talking about the yield improvement, we have continued with our usual schedule of price events. We started the half year by introducing C2C price changes for most of our portals. These changes are fully reflected in the half year numbers. And like last year, we ended the half year by introducing B2C price changes in real estate, auto and jobs, and these will contribute more in the second half of the year. Here is the BCG revenue trajectory by financial quarters. As you can see, despite the different market shocks such as COVID-19, Russian invasion on Ukraine and now also high inflation in interest rates, not only BCG as a group was growing good, but also each of our business lines have maintained growth trajectory. The cost discipline and not too many variable costs continue driving BCG operating leverage. The biggest part of the operating cost is people cost which continues to be close to 15% from revenue and accounts for 66% of our operating costs, excluding D&A. Now that it's capitalized and also worth noting that in the programming system administration, all the developments sold them in-house and that it's all in the salaries and shown under people costs. In total, people costs grew 19%, driven by slightly bigger team than in the comparative half year, annual salary reviews and building up USP costs. Marketing remains below 2% from revenue, roughly EUR 1 million a year. That's mainly because we benefit from being the local loan portfolio of brands and advertise on our own sites for free. Our IT costs include software, service-related expenses, safety services and other costs as everything else we need in the business. In general, BCG operates in a higher inflation environment, where our costs represent always slightly more than 20% from the revenue, and we are also cost conscious. In result of growing the revenue 20% and with continued cost management, our EBITDA grew 22% with 78% margin. We continue to be highly cash generative. Our cash generated from operations grew 21%, and our cash conversion was maintained at 99%. The adjustments to our profitability measures are very limited, noncash and related to historic acquisitions. No adjustments were done to EBITDA and the operating profit adjusted with acquired tangibles amortization is tracking closely to our EBITDA and grew 23% this half year. At the end of the financial year, the outstanding loan was EUR 70 million and leverage ratio of 1x. During these 6 months, we generated EUR 24 million net cash inflow from operations, reduce the debt by repaying EUR 15 million paid final financial year 2023 dividend totaling EUR 8.4 million. And we also returned EUR 7 million to shareholders by buying back company shares for cancellation. We ended the half year with EUR 55 million of debt and 0.7x leverage. Our capital allocation priorities remain unchanged. We intend to use all the cash we generate within the same year or shortly thereafter. We intend to return 1/3 of adjusted net income each year by interim and final dividend split approximately into 1/3 and 2/3. We will continue considering value creating M&A opportunities and we intend using the combination of share buybacks and debt repayment from the balance of cash. The interim dividend for the year 2024 is declared to be up 25%. That's EUR 0.01 per share and will be paid on the 24th January to the numbers on the register on the 15th of December 2023. Thank you. I will now hand over to Simonas.
Hello, everyone. In the next 4 slides, I will walk you through the main KPI business unit. Structured less slide remains the same as usual. Market context is provided on the top left. The C2C performance in the top right, the B2C performance in the bottom right and I will lead again the competition in the bottom left.
Let's start from Motors. As Lina has already mentioned, autos were the growth champion. You probably remember 6 months ago, we are telling about our increased yield, although still facing lower-than-normal supply. This indicated the growth potential in the future when the supply situation normalized. And that's exactly what happened. Car supply has normalized. Dealers no longer have difficulties importing cars from Western markets. Selling times for cars have also returned to pre-COVID levels. The number of transactions increased by 4%, and the average car price grew by 10%. So this environment is beneficial for our business. The number of active C2C ads is 37% higher than a year ago. So we got more paid extensions, and we accumulated more content on the platforms. The growth in content was so significant that it even surpassed the impact of our pricing changes implemented in the spring. As a result, we observed a negative growth in monthly revenue per active ad. In B2C segment, yield grew by massive 31%. Two main reasons behind the growth: firstly, dealers have more inventory and had to purchase more slots; secondly, our pricing and packaging event drove higher adoption of premium packages and increased the price per slot. In the bottom left, you can see that our lead versus closest competitor keeps growing. It's 8x in Lithuania and 39x in Estonia. Real estate market cooled down after the peak in 2021, 2022. Average price keep growing. All the brokers are in the business, time to sell a property normalized. We accumulate more content on our platforms and that is all a tailwind for us, both in C2C and B2C dynamics is similar to autos. [indiscernible] mentioned before, there was a significant 20% growth in active C2C ads. Again, this growth counterbalance the impact of our pricing changes, resulting in a negative growth in average revenue per active ad. The number of B2C customers has remained stable, while average revenue per broker have grown 22%, primarily due to the annual pricing and packaging adjustments. We have successfully introduced a prominence package for brokers. We see the maximum exposure and the highest number of fleets. We have maintained our lead over the competitor in Lithuania, it's 21x. And Estonia we have further strengthened our competitive position, increasing it from 16x to 17x. Now let's move to the jobs and services. So jobs market stays active. The unemployment rate remains at a very low level of 6.8%. The average wage continues to grow rapidly with a 13% increase observed last year. The market continued to provide a favorable environment for our business. Companies are investing in recruitment and retention of employees. As you can see in the bottom right chart, our customer base expanded by 7% and average revenue per customer increased by 6%. Our job board maintains a strong leadership position with an 8x lead of the closest competitor. And I would like to briefly touch on the Services segment. It represents C2C part of our jobs and services unit. You can see in the chart on the top right, this segment is the smallest one but grows very rapidly. The number of active apps increased by 40%, and we are constantly enhancing the monetization. General platforms kept growing as well. Our biggest general scalability increased the number of listings by 8%. This growth was organic and spread across various lower-cost categories. Consequently, the impact of the implemented pricing changes was limited resulted in the modest yield growth of 1%. And our lead our closest competitor in the Lithuania has reached a record level of 23x and in Estonia it is 3x. And traditionally, I have a couple of slides about product development at BCG. Last 6 months, we were -- we have been rolling out data products, B2C proposition, as well as some of other financial services. Starting with auto [indiscernible] side of the slide. At Autoplius, we have launched a data analysis tool for car dealers. This tool enables business customers to analyze the performance of their listings and benchmark against the competitors, providing some insights and enhance their listings and stock. We have also upgraded and expanded our car history check service to entire Lithuanian market, it is a stand-alone product with the brand. Currently, we use our auto marketplace as the sales channel targeted to [indiscernible] car buyers. And this product could be a part of the premium package for the car sellers in the future. Both in Lithuania and Estonia -- both in Lithuania and Estonia, property platforms have introduced a new prominence packages for businesses. This not only effectively increased the number of impressions and leads, but also provides additional branding and exposure for the broker personally. Now let's take a look at the jobs and services. At our service vertical, Paslaugos introduced the option to create a service agreement between the service provider and the customer. So 2 parties can create a legal document within the platform. This is very convenient for the users and available data source for the platform. At CVbankas, we recognized the need to help companies streamline the hiring process. To achieve this, we have developed a tool that simplified the selection of the best candidates from the list where employers can use filters to quickly identify the most suitable candidates and effectively access potential employees in the CV database. On Osta.ee, our generalist marketplace in Estonia, we have introduced a buy now, pay later functionality. Buyers can now obtain financing for their purchases very quickly and conveniently and Osta acts as the sales channel, while the financial aspect is managed by the -- our partner. Thank you. And now we'll be handing back to Justinas.
Thank you, Simonas. The Baltic region has seen a period of unprecedented growth in recent years. This is largely attributed to high export growth, vibrant employment market, and a strong credit profiles, both public and private. This positive environment has created a great opportunities for our customers as well as our company to take advantage of the growth and generate greater profits. This year, the inflation has slowed down, and the region returned to real wage growth with increasing end consumer purchasing power. Despite the recent economic cool down, the Baltic states are considered to be among the most dynamic and vibrant economies in Europe.
For our company, the year has started very well. Our strategic pricing and packaging events have been successfully implemented setting us up with a great momentum for the second half of the year. So the Board is upgrading guidance for the full year 2024 to a range of 18% to 19% revenue growth. The low end of the range is based on unchanged increasingly conservative guidance of 15% revenue growth for the second half of the year. The Board expects EBITDA margin for financial year 2024 to expand by around 1 percentage point and will expand incrementally going forward. We remain confident with the existing capital allocation policy in absence of M&A opportunities, which remains focused on increasing dividends, share buyback and reducing debt. Thank you for your attention. Now we are open and happy to take your questions.
[Operator Instructions] Our first question today is from the line of William Packer of BNP Paribas.
Three from me, please. Firstly, one important growth dynamic for BCG going forward is monetization catch-up potential, which is in other Western markets like the U.K., Australia Germany, et cetera. In the last couple of years, you've just delivered strong ARPU growth. But on the other hand, there's been strong inflation in the end markets. Is it right to think that your take rate hasn't actually increased very much due to that inflation in the end market and significant catch-up potential remains? That's question one.
Question 2 is around [ CoStar ]. So CoStar has caused some upheaval in European classified in recent weeks, leading to some pressure in peers in the U.K. and speculation of similar dynamics elsewhere. Could you talk through the key factors that you think make the Baltic region well placed to manage those challenges? And then finally, your peers in the generalist classified segment across Europe have actually been cutting margin expectations in the last few years. I think a shift that out [indiscernible], et cetera, on the more challenging economics pay and ship at least for the short term, how do you think about those challenges and your confidence in the increased margin harbor today? Do you not think pay and ship investment is needed in the Baltic markets due to weaker competitive intensity or the earlier stage of maturity? Any color there would be helpful.
Thank you, Will, for the very good questions. Maybe I'll start with first 2 and someone could help me with the third. So with regards to monetization and take rates, you're absolutely correct. The underlying market is also growing, not only our revenue is growing, but underlying market growing as well. The take rate is the way we estimate the take rate is we are taking the total commission pool of our customers. And just looking at what is our percentage in these commission pools. And if we look at the last several years, we see that these commission pools continue to grow because the number of transactions either continue to be strong or growing and also the prices of vehicles and the real estate also continue to grow. So our take rate hasn't changed much. It has increased a bit, but basically, the increase is incremental. Secondly, about the competition. Overall, in our opinion, we think that it's very difficult to disrupt a leading marketplace in any country. Marketplace has usually a very high entry barriers, and this is because of a very strong network effect. And -- and also, in our opinion, it's even more -- even harder to disrupt the smaller countries like Baltics because, first of all, we have a different language and cultural environment. Secondly, the marketplaces in the smaller countries usually tend to be more dominant because in the bigger markets, there are more niches where you can establish and target your [indiscernible] and establish your presence. However, in the smaller markets like ours, usually, the platforms which we operate, they usually cover the whole market and don't leave the empty subsectors where the new entrant could build their advantage. And thirdly, about the generalist. Maybe I could just start with the fact that -- it's -- we are developing the shipments and the transactional model in the -- our generalist platform. But still, it's a very small part of our revenue share. So that's why we kind of don't see how it could impact our profitability. Simonas, maybe you would like to add.
Overall -- overall, we have mentioned, I think pretty much all the time when we report our results, that generalist, it's the lowest growing segment in our portfolio. So we don't expect anything. It will not outperform any of our verticals so far. And our business is very light. We don't -- I mean we just the marketplace. We are not selling -- we are not selling anything ourselves and we are just providing basically infrastructure for others to trade. So that the margins are stable, and we don't expect any steep changes so far.
Our next question today is from the line of Alastair Reid of Investec.
A couple from me as well, please. Firstly, in real estate, remind us what contribution you have from the new home development at the moment? What any sort of latest initiatives there are that you might be doing?
And secondly, can you just sort of give a bit more color on when you introduced kind of your new package pricing structures recently in auto or real estate? I'm guessing it might not have been a place for the full first half period.
And then lastly, for jobs and services. Can you just give us a sense for how each is doing in terms of the numbers of customers you already have relative to the total addressable market of potential customers?
Thank you, Alastair. So to begin with the revenue in real estate for the new developments. So in our portfolio, it's not a major revenue contributing currently up to, I would say, 5% of our revenue. Before a year ago, it was even contributing less, just a few percentage points. However, in spring, we updated the proposition for the new developers in our portals. We introduced a much better and higher prominent package for new developers. And this actually increased our revenue from the new developers and that one was a very successful development in our portfolio. The second question -- I remember the third question. Could you remind me the second one? Or maybe I'll answer...
[indiscernible]
Maybe I'll answer about the services. So actually, the services, total addressable market is a very, very wide. Currently, we have around 8,000 service providers in our portfolio. But in our view, there might be -- the total addressable market is far, far bigger, several times, 3x or 4x bigger. So it's a huge market, and it's a very kind of rich market. So that's why for us, services looks every promising market to develop our products. And the second question, Alastair?
I think you mentioned that you introduced a new sort of packages and sort of pricing structures in autos in terms of numbers. So when in the period, when were those introduced?
Yes. So it's in autumn. So we started it in the beginning of September. So the biggest change was September, October. And now we are continuing to upsell and [indiscernible] prominent packages.
[Operator Instructions] We have recent questions here from [ Silver Schuman ] of [ Averon ] who asks, who is the BMPL provider for Osta.ee?
Yes, I will take this one. Actually, it's the local financial institutions that in bank and bank Finance. It's a unbolting company.
Also maybe to add more color. It's our great partner. We have a preparation within Bank Colorado and several projects, including automotive finance, and real estate, consumer finance.
And a follow-up question also from [ Silver Schuman ] of [ Averon ] asks do you expect any more inflation for your operating costs in 2H '24 -- '24, sorry? Or has most of it already been included in 1H '24?
Lina, would you like to answer?
Yes, sir. Yes, I can take that one. Yes, we do expect inflation in the cost in the second half of the year as well. The way currently people costs around 15% from revenue. It's a major investment with people. So we are part of the market. So wage inflation does affect us. So we do expect to continue with that, that will impact our costs. And the rest as well, but our revenues are expected to grow faster than our cost base.
And we have a follow-up question here from the line of William Packer of BNP Paribas.
I suppose it's a question I ask every half. Is there any update that you could provide to us on any of the regulatory sort of investigations/competition authority explorations? Is there anything to note there?
No any news there. So it doesn't feel -- I have explained maybe in the past that these questions usually are very, very long question and where I know any updates here at this stage.
And we have a follow-up question from the line of Alastair Reid from Investec.
[indiscernible] to ask a follow-up question today. So in auto, in your sort of B2C segment, how sustainable do you see this number of dealers you have as now obviously saw some good growth. Can we assume that it remains stable from here?
Thank you for the question. We are still in the situation where the dealers market are -- is professionalizing. So most of the dealers growth is coming actually from C2C segment. The dealers core previously were listing beer ads as a C2C customers, at some stage, they decide that, okay, I'm now kind of more -- acting as a more professional seller and I'm signing a contract. So basically, we assume that this trend will continue, and we assume that it's -- the growth in the number of dealers will be like single digits.
And we have another recent question submitted here from the [ Silver Schuman ] of [ Averon ] who asks, You I mentioned the B2C part for automotive but any further color on what's the underlying driver for C2C ads growth? Do you expect such trend to continue?
I should have explained maybe even more clear during my presentation. The thing -- the main driver why we accumulated such a high number of C2C. The main reason is the longer time to sell this means that the ads are staying on our platforms for a longer time, and that's how we accumulate the bigger amount at a particular time. So the ad stays longer than the car sellers have to purchase additional extensions of their ads. And that's why we have the bigger database, let's say, of the -- of the cars and more automotive marketplaces. And that is our -- it's -- for us, it's a tailwind definitely.
Do we expect it to continue in the next half year? Actually, we don't expect that the time to sell will grow significantly further going forward. It might grow a little bit, but definitely, it won't be such a big leap as it was last year, last 12 months, let's say.
I would add a bit more color. So the biggest impact is coming from longer transaction periods, but also talking about especially automotive. The other component of the growth is the recovery of the supply chain because during the pandemia period, the supply chain of the cars has really shrinked. Now it's recovering to a more normal level. So this additional point of the recovery.
And also I'm talking about the transaction period. So the current transaction period, we consider it to be more typical because the last several years, it used to be too quick and because of the economy booming, because of a lot of money being supplied to the market and also because of a very constrained supply chain, car supply chain. So now it's a more typical periods of the transaction.
I'm moving to the next recent question submitted by Gareth Davies of Numis. This is a 3-part question. The first being a big step up versus closest competitor in autos in both Lithuania and Estonia. Can you expand on the competitive situation here that is allowing that growth?
I can maybe take that one. So basically, it's the nature of the successful leading marketplace. Once you actually win the market, it's quite a natural thing to continue improving your lead over the following years. And we are especially happy with the lead improvement in Lithuania Autoplius portal, which grew from 6 to 8 times. Because Autoplius is our biggest portal overall, and automotive is the biggest kind of revenue business line in the BCG portfolio. So we are kind of very happy with the development. And it's a natural evolution where the leading site is just over the years, becoming bigger because it's just both for both sides of the market for the seller and for the buyer, it provides better service.
And the second part to Gareth question is any update on the M&A landscape and potential pipeline?
Thank you. M&A is something that we are constantly thinking about. And we have done many M&A deals in the past, and we have a desire and ambition to do more deals. So we are constantly screening different candidates and there are a few which we are circling around. However, there are no enacted negotiations, active developments at the moment. And so no kind of update on that.
And third part to Gareth's question is in jobs, your lead to closest competitor has dropped a little. Can you update on the competitive landscape here in jobs?
The -- we need to look -- when we are comparing the lead, we need to look not a single year, but it's better to look like what happened in the last 3 or 4 years. If we were to look at the automotive, for example, what we discussed just a few second ago. So our lead has increased from 4x to 8x in the last 3 years. So this is a significant development. If we look at the jobs, our lead also increased from, I think, 4x to 9x last year, and now it's a bit decreased to 8x. So we do not -- what is important is comparing like a longer period? And what it's important that now our lead is so much more bigger than it used to be 4 years ago. And sometimes, throughout the different years, there might be small movements but it's not important. It does not affect the kind of competitive positions. So I wouldn't even think that it's important, this kind of reduction in the lead from 9x to 8x. It just doesn't change in it.
Just one small add on that. Actually because the lead already is such a big like 8x or 9x, you can feel the multiple effects, let's say, in the absolute numbers, if we're taking last year, last 12 months, and absolute numbers, our platform grew 4x our growth of our platform was 4x bigger than the competitors. But because of the multiples, it feels like we know they like the relative, relative market share has decreased a bit but in absolute numbers, we overgrown our competitor by 4x. So we just some numbers [indiscernible].
And our next written question is submitted by [ Harry Walton ] of Virgin. Please, can you explain the impact of the higher volumes on the revenue per ad, which I think was in auto?
So how we calculate average revenue per active ad in C2C. So we take the whole C2C revenues. Let's take an auto as an example. So all auto C2C revenues divided by the number of active C2C ad. And because the active C2C ads grew so much it's even overgrown the pricing actions. That's why we simply mathematically calculated the negative, let's say, negative in increase in yield. And the active ads means that on amount of the content on the platform, let's say, right now or a month ago and the one particular moment. So we take the average of every single day within 6 months. And that's what we call the number of active ads.
Maybe also elaborate a bit. If we were to look at revenue and the yield per listed ad not per active, but very listed ad in every portal in C2C segment, we would see a double-digit yield expansion.
And our next question is a written question submitted by [ Stuart Petrarch ] of [indiscernible] Pension Fund. Question is, in terms of capital allocation, can you please comment on potential M&A opportunities.
Okay. I think that maybe with Lina, we can answer that. I guess as the targets, which we are looking at, these are in the size from a few million to a few hundreds of million. But as I said, currently, there are no M&A active negotiations activities. There are a few companies which would fit our portfolio well. But currently, these companies are not selling. So it's at such a stage kind of we don't -- we can't give any more update and...
And we have no further questions on the line at this time. So this will bring us to the end of the Baltic Classifieds Group plc H1 2024 results.
Thank you all for joining. You may now disconnect your lines.