Gruppo MutuiOnline SpA

MIL:MOL

Earnings Call Transcript 2020-Q1

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the presentation of Gruppo MutuiOnline First Quarter 2020 Results Conference Call. [Operator Instructions]

At this time, I would like to turn the conference over to Mr. Marco Pescarmona, Chairman; Mr. Alessandro Fracassi, CEO; and Mr. Francesco Masciandaro, CFO of MutuiOnline. Please go ahead, gentlemen.

[Marco Pescarmona, executive]

Hello, this is Marco Pescarmona. Welcome, everybody, to our call. We will rely on the presentation that we put on our website and start from Page 12, 13 -- on Page 15 with the Q1 highlights. And as you can see in the first quarter of 2020, we had revenues of EUR 58.1 million, which is up 8.4% year-on-year compared to EUR 53.6 million in Q1 2019. So that's positive, given the COVID situation. Regarding the operating income, it is equal to EUR 11.2 million in Q1 2020, and that's minus 9.8% year-on-year compared to EUR 12.4 million in Q1 2019. The operating income margin is 19.2% in Q1 2020, and -- which is obviously lower than the 23.1% of Q1 2019. In terms of net income, also, we have a slight decline. It is equal to EUR 7.9 million in Q1 2020, which is down 11.8% year-on-year compared to EUR 9 million in Q1 2019. The net income margin is therefore 13.6% in Q1 2020 and 16.7% in Q1 2019.

If we look at the performance by division on the next chart, you see that we had growth of revenues for both divisions with the BPO Division at EUR 35.2 million, which is up 7.4% year-on-year compared to EUR 32.8 million in the first quarter of 2019, while the Broking Division is at EUR 22.9 million, which is up 10.1% compared to EUR 20.8 million in Q1 2019.

On the other hand, the performance in terms of operating income of the 2 divisions is different, and we will comment a bit more on the 2 divisions later. But you see that the BPO Division has an operating income of EUR 4.4 million, which is down 31.3% compared to the EUR 6.4 million of Q1 2019; while the BPO Division has an operating income of EUR 6.8 million, which is, in the quarter, up 13.4% compared to the EUR 6 million in the same period of the previous year. And obviously, this also translates into changes in the operating income margin, which is 29.5% for the Broking Division, which is slightly higher than the 28.6% of the first quarter of 2019, while it is significantly lower in the previous year for the BPO Division at 12.5% in Q1 2020 compared to 19.6% in Q1 2019.

Obviously, we have to keep in mind that this was a quarter that was severely disrupted by COVID and so the results should be read in this slide. And to understand better what happened to our business, we will give an update on the Italian residential mortgage market on Page 17. And first of all, the first point is that in terms of recent evolution, we started 2020 with 2 very strong months, January and February, for the mortgage market. Because this acceleration was already visible at the end of 2019 and was driven by both growth in house purchases and also by strong growth of the mortgages because mortgage rates were again very cheap, and so it made a lot of sense for people to switch once again.

But again, we had COVID-19 and the main impact on the mortgage market, the main immediate impact on the mortgage market came from the lockdown. Basically, the containment measures brought by the market to a very sharp slowdown. There was possibly an impact on demand, so people no longer -- or fewer people applying, obviously, but also all the mortgages that were in the pipeline, they -- a lot of them were blocked or delayed. And different factors, mostly public or semipublic factors, contributed to this freeze of the market.

For instance, public notaries decided that remortgages were, in their mind, not urgent. And so they, in many cases, refused to do them and they postponed them, and also many purchase mortgages were also delayed for the notary considered them non-urgent. But also many public offices were closed, which were central for the housing transactions like the technical offices of the municipalities or even the -- basically, the side of all the contracts and the mortgage bids, which is also needed for the closing...

[Alessandro Fracassi, executive]

The public registry.

[Marco Pescarmona, executive]

The public registry, exactly, where ownership bids and link are registered. So in some cases, they were closed for several weeks. So all these things basically brought the market to a substantial freeze.

And in fact, if you look at the data from Assofin, which reports basically the actual transactions from the majority of the mortgage lenders in the country, you can see that the origination flows were up 22.8% in January year-on-year, more than 30% in February. And then they went down by 27.8% year-on-year in March. So 27.8%, maybe not such a big number but if you compare it to where we were in February, it's a very significant drop. And basically, obviously, all the things that we closed -- the majority closed in the first 8, 9 days of the month. And then in the subsequent period, the drop was much more significant.

And so this is how the quarter evolved. And the issue is how things are going to evolve. Now as you probably know, Italy is rolling back the restrictive measures that have been put in place. And the majority of the rollback was -- happened between the beginning of May and this week. So the majority -- the largest part of the economy now open again, shops and so on. There will be a final leg of the rollback at the beginning of June. And with this easing of restrictive measures, many of the transactions in the pipeline will be continued and then closed.

And in the short term, we expect for the market, we expect to see a recovery just because what was frozen now is closing. And the point is, to date, it's very difficult to make a forecast. So after this recovery, which could be just a completion of what was already there, it is difficult to make a reliable forecast for the future in terms of demand. Obviously, as long as we have low interest rates, we can have a continuation of, at least for a while, of the mortgage demand. Normally, the low interest rates depend on the -- to a certain extent also on banks and the funding costs of the banks. For now seems okay, but it's -- this is never 100% certain.

And whereas the mortgage market is likely to be affected by a much weaker economic situation, we really have to see what happens. So until yesterday, people were not even able to go and visit a property they wanted to buy. So here, it's a matter of whether people will go and visit properties and if they will make offers and if they'd be comfortable making commitments in this situation. And on this, we don't have an idea. I mean it's impossible to have visibility for now. So again, some recovery because of closing the pipeline and then a question mark, especially for the purchase part. So this is for the mortgage market.

And now on the next page, we can make some comments on how the Broking Division was affected and also the outlook. Basically, the Broking Division, as you have seen, overall, given the situation, a good performance in Q1 2020. Here, what really helped was E-commerce Price Comparison. Basically, we had the first 2 months that were good in general. And then we had a big issue with particular credit products but also with insurance in -- because of the lockdown. At the same time, during the lockdown, people started buying more on the Internet that benefited the operation. And so that mitigated the impact of the COVID on the Broking Division.

Regarding Mortgage Broking, we -- the market was up significantly, and so we -- you can imagine we were also up significantly in the first 2 months. And then we saw a significant drop in originations during the entire lockdown. And now April, you can imagine the month of full lockdown. So probably, it will be the most impacted mark. But then the things that were in the pipeline will eventually close, and so this will lead to a recovery in the second part of the second quarter. For the rest of the year for the market, it's hard to make any forecast.

Regarding Consumer Loan Broking, here, maybe, this is the only area that was not doing great at the beginning of 2020, so it was already down year-on-year and it has been weak in the final months of 2019. Here, the impact of the lockdown was significant but just as in mortgages, but the thing is that here, we expect -- we see less of a recovery, also, there is loss of a pipeline here. The other point is that while banks -- still there is a good appetite for mortgages, finance houses have become much more prudent and so the credit has possibly tightened. And also, demand is also -- is possibly weaker, especially demand of good quality. So here, we see less of a recovery even in the short term.

Regarding Insurance Broking, we were up in the first month of -- 2 months of 2020, then the growth that we were seeing disappeared. And also we had during the entire lockdown, we had a lot of people that were no longer renewing their policies because they're driving the cars and the policy expired basically. And so this impacted us.

Now we have started seeing growth again year-on-year in May. This is possibly -- you have to see where this comes from but, to a large extent, this is possibly from a shift in demand from the previous months. And the people that have the policy expired or also in Italy, there are seasonal policies for motorcycles that people normally taking the strain, they drive the motorcycle until the fall and then they put it in the garage. And normally, they would buy these policies in March and April. With the lockdown, many of the people obviously were forced to leave their motorcycle in the garage and they're buying the policies now.

So this is also possibly the reason why we are seeing good growth in May. And again, what will happen in the subsequent quarter is more difficult to say. But here, this is a mandatory product, so demand will be there. So it's easier to expect some continuity compared to mortgages, where it's really a big question mark.

E-Commerce finally was already growing at the beginning of the year. We are also spending more in marketing, in online marketing. Here, the lockdown was quite positive because basically, people were shopping online, many shops were closed. So the only place to buy a number of items was on the Internet. And also Amazon, they basically narrowed the product selection so people started shopping around on more merchants than just Amazon.

So overall, it was a very good environment for operating. The only thing is we still have issues with organic traffic with Google, et cetera, but apart from that, we were in a very favorable environment, and so we had a pickup in growth. Obviously, if it happens, stores reopen, people will possibly buy a bit less on the Internet. So there will be a double adjustment, but possibly, I mean, we believe, to levels above where they were before.

Basically, in general, if you look at the Broking Division, which has to do with online distribution offer a number of things. Basically, our hope, but we don't see it in the numbers and we don't know how big the impact is, we believe it has to be there. Basically, this period is probably educated people that are not used to doing things online to the channel. And hopefully, online penetration for all of our businesses will be permanently higher after this period than before. But again, this is just logical reasoning.

Now it's too early to say based on actual figures because even when we see growth, it's possibly just a recovery of what had accumulated the math before. So this is the Broking Division. And again, April will be the weakest month of the year in seasonal terms, moment of seasonality. For the Broking Division, some recovery expected in the rest of the quarter and then some uncertainty over what happens next because of the economic situation.

With this, I will hand it to Alessandro for the comments on the BPO Division.

[Alessandro Fracassi, executive]

Yes. Thanks, Marco, and hello, everyone. Regarding the BPO Division, even if the numbers are not particularly satisfying in terms of margins, we are actually happy because the real risk that we are running here was not to be able to ensure operating continuity, which is obviously of paramount importance for banks and financial institutions in general. And even if it doesn't show in numbers, I would say that this is seriously important because not being able to do that would have undermined, as it has happened for some competitors, the confidence and the trust of the banks.

So looking at the results of the quarter, as Marco already said, that they are a mix of 2 months which were basically the continuation of what was happening at the end of last year, which was, as you might recall, the comments were generally positive for almost every business lines apart from the BPO in Insurance, and so we have seen that. And we were also riding the wave of the mortgage market, which was performing strongly, especially for remortgages. So these 2 months were, I would say, really satisfactory and then we had the impact of COVID in March, which as you have seen, has impacted mainly the margin.

Let me -- there are a number of reasons why it has impacted margins. Let me give you the main ones, which are summarized in that long paragraph on Page 19 of the presentation. And basically, we're picking 3 of them and there are others but these are, let's say, the main or the most interesting one. First of all, there was a reduction in productivity, meaning we kept pushing to be able to finalize all the things we had in the pipeline. But we were not able to turn everything into revenues, and this is not because we did fail in our part of the -- of, let's say, of the operating continuity but because some other third parties didn't do their part.

As Marco has already mentioned what has happened with the public registry, in part with the notaries decided to really cherry-pick things they would do and postpone all the other things. But for example, in the leasing and rental sector, the registration of new vehicles was completely shut down basically after the 20th of March. And as you know, you normally register vehicles at the end of the month, so that was a really -- we were really hit in terms of being able to transfer -- to basically generate revenues and that has impacted the bottom line.

A second point is nonrecurring costs that we had to sustain for implementing the smart working. Last time we talked, we said we were happy because we had basically delivered the possibility for almost anyone or anyone for whom it makes sense, the possibility to work from home that has involved purchasing PCs and stuff like that. Because remember that in the BPO, we are over 2,000 people. You can quickly do the calculation of what that means.

And then a third point is this was, frankly, also somehow in our budget. We -- in the good part of the year, the first 2 months, we had, for the Mortgage BPO, a significant share of para-notary services. This is where we basically buy notary services and repackage them and then sell them to banks. This is a totally variable cost business, but it's very -- but it doesn't add the high margins that other had. So there is a mix effect when you look at that overall good number in the turnover, when you compare it to last year, it's not in quality in terms of margins. Still very good business anyway because it's totally variable so even if you have margins that are lower than 20% on that kind of business, you don't complain because basically, you're not exposed to risks there.

Okay. So that was a general discussion on why margins were impacted. Now let's overall look at what the COVID crisis and the lockdown has done to the different areas of businesses in the BPO. And as Marco has commented, basically, it was progressive to March and April is where you will see most of the impact. In terms of new credit origination, which is to -- we saw a progressive weakening of the demand so obviously, the pipeline was there. As I said, we were not able to deliver -- to finish everything we have in the pipeline. We used part of the month of April to do it.

But in terms of new flows, it weakened through March and it remained low in April especially for the CQ loan and especially for everything that is originated through traditional channel. The banks had basically closed their branches. They didn't really close them but you had to take an appointment if you wanted to have a new mortgage, and obviously, people were not at getting new mortgages. So if they had a sale that they had already signed or a preliminary contract they're already signed for, they would go in the branches to get an appointment and they could get a mortgage, but obviously, this was very low. For example, also, as you know, we are the engine of Intesa SanPaolo through the post offices. We saw a very, very sharp decline there of the new flows coming in.

What has remained decent and actually, in some cases, even over last year is the demand for new remortgages. People were at home and they were looking at ways to save money, given the fact that maybe they were put on a paid leave of absence without decreased salaries, and so they were looking at opportunities to save money and the remortgage is a great opportunity to save money, and so the demand for remortgages has remained high. You don't see that impact already in the numbers, but we believe that if the country will restart, as it is restarting now, that demand could transform itself then into business for banks and for us.

And then on -- going on to the following pages and the other business line, also -- appraise also what we call real estate services were hindered by the situation and not because of demand. I mean the pipeline was there that we needed to work. But again, there were some limitations on documentation you could get from public registries or the offices in the different municipalities or even the mobility was hindered by the lockdown, so people would not let you in the houses or police could stop you that you could not actually go around. The law wasn't totally clear, and so there was that kind of a mix-up situation whether you could do this or not.

And then still, finally in the credit area, the things that have remained stable are the portfolio businesses. So those businesses where we basically do servicing of our portfolio, both in the CQ loan, so that remained stable. And also, we have a performing portfolio of mortgages that -- where the activity has remained stable. Actually, there's been a little bit of increase because people are asking to have vacation periods for payments, which has been enabled by the law so you need to process this and this increases potential revenue.

Then in terms of the services for investment companies, we saw a reduction in our remuneration for those services that are linked to the assets under management. Let's say, half of our revenues are with this driver and how the market went, and that obviously has seen a decline that is there, and then we will go with the market for that but other services instead have remained stable.

Then if we -- as I mentioned, the BPO service for Insurance was -- were already weak in terms of demand last year. And so the -- also this year, you will see -- we have seen a continuing decline and the COVID obviously has not helped. Although as a sector overall claim processing is not that impacted, I mean, we're not doing traffic motor claim processing. So in terms of property damages, more or less, they are not that impacted by COVID.

And then finally, the service related to the rental companies have, as I mentioned, have been really severely impacted. It's probably the single business that has been most impacted in our portfolio because it was a complete shutdown, meaning some of the things we were doing could not be done and not on our side but because the public counterparts decided to totally close out. So what we have done is to reduce our cost is that when we realize more or less where the volumes were, we used the social shock absorbers that have been made available by the government during in the crisis -- the crisis. So one was possible, so direct people costs, personnel cost, we have tried to contain them, thanks to these shock absorbers.

Now as Marco mentioned, things are reopening. The speed at which all the services will regain traction, it's really hard to imagine. Let me give you an example. Today, everything was technically reopened and then once again, the public registry in Lombardy have shut down, the reason being that the regional authorities have decided that all workers need to have their temperature tested by law. While the general law in Italy is that is recommended, in Lombardy as compulsory. And while private companies obviously did their part and they were ready very quickly, public counterparts, which have to obey to the same law are not ready, for public offices, are shut down or a number of them are shut down because they are not ready to do the things that the region has imposed.

So these things are really difficult to predict. So if things -- if the reopening continues, we expect to see traction in the services, as Marco has said, but the speed at which this happens remains to be seen. And obviously, also the long-term impact or the midterm impact of the economic crisis are hard to tell at this point. So as we said, some services still have high demand like the mortgages. What will happen to new house repurchases is obviously harder to predict in the medium term.

Then to end on a positive note, in this difficult scenario, a lot of new things are happening. This COVID is probably bringing a lot of digitalization to Italy more than CPOs and CEOs have been able to do in the last years. And this means the bank and insurance company, in general, are very interested to what -- to the way we can help them with digitalized processes. But this is really one of our specialties, as you know, if you follow the company, on the BPO side is one of our selling points. And so there is lots of demand for new things that we can do.

And also in the sectors, as I mentioned at the beginning, we were very trustworthy for banks because we were able to continue with our services. And so now in this emergency, if they need something new for something that -- for a business that is actually growing -- let me give you an example of something that is growing. As you all know, one of the things that the government has done is to back -- to give collateral to backup services, to backup loans to small and medium enterprises. So banks have a boom in this kind of loans, and they have us to see whether we can help them. And the reason why they have us is also because they know that we have reacted quickly in the situation.

And with this positive note, I leave it back to you, Marco.

[Marco Pescarmona, executive]

Okay. Thank you, Alessandro. I will just give some information just this time on our financial position because obviously, this is -- these are not ordinary times, so you might be interested in knowing also what we have done on that front. And we will refer to Page 33 in the appendix of the presentation, where we have the figures of the net financial position.

And basically, we already said we were intervening to -- we're already in a safe situation, but we decided we wanted to be in an even safer situation that would also give us a lot of flexibility. Basically, what we have done is we have -- well, we sold some shares, first of all, that you already know and we are able to sell them before the price went down, so in the neighborhood of between EUR 8.50 and EUR 9, the ones that we sold. And then we had one short-term loan expiring in June, and that was EUR 12 million and we replaced that with another one, basically the same, very similar terms and conditions, expiring in 12 months from now -- sorry, 18 months from now, almost 18 months from now. So that's no longer short term and that was the bullet.

And then we took a new corporate loan from Cariparma Crédit Agricole (sic) [ Crédit Agricole Cariparma ] with terms very similar -- terms and conditions very similar to the ones that we already have from the same bank for another EUR 15 million. And so basically, this enabled us to have, first of all, more cash in the bank as of March 31. Also, we had positive cash flow during the period. We had, as of March 31, we had around EUR 75 million in the bank account compared to EUR 35 million as of December 31, 2019. The current investments has gone down to EUR 16 million as of March 31, 2020. That compares to EUR 39 million as of December 31, 2019.

And finally, the net financial position so this has nothing to do with getting the loans, et cetera, but cash generation and the fact that we sold those shares. Basically, the net financial position is negative EUR 70 million that compares as of March 31, and that's much better than the negative EUR 100 million as of December 31, 2019.

Also, it's important to keep in mind that in the that financial position that we report in the official year report, we also include, according to the standard definition, the debt for IFRS 16 and also the debt for the put and call liabilities for Agenzia Italia, in particular, or for any other basically forward sale and purchase agreement. Here, it's EUR 41 million so if you -- by the way, in the covenants that we have with the banks, these are not included. So when the banks look at the covenants, they would look at a financial position not of EUR 70 million negative but of EUR 30 million negative. So this is to say that, as we said, we will do, basically, we have put ourselves in a very sound position, both for risks but also for opportunities.

And with this comment, I think we are done with the presentation and we can open the call to questions.

[Operator]

[Operator Instructions] The first question is from Filippo Prini with Kepler.

[Filippo Prini, analyst]

I got a couple. The first one is on the source in margin. If I got it correctly, the decline of margins despite the total revenues in the first quarter is a combination of mix effect and higher G&A compared to last year. So I would like to ask you if how do you see the mix effect of the -- between the different business line of this process sourcing for the next quarter. The second one is basically on share price that you took advantage from higher price to reduce the stake. So should we expect going forward that as soon as share price of share -- that could recover, you could sell down the remaining more than 2% stake?

[Alessandro Fracassi, executive]

Okay, I'll take the first one, Marco. Yes. Well, some of it -- some of the mix affecting even between -- within the business line, so it's difficult to comment at that level of detail. As I said, on mortgages, for example, we saw an increased share of para-notary services. I think that is there to stay because they are connected to the financing. So some of that mix effect will not go away for the next quarter, it will go away to some of the extraordinary G&A and we hope also some of that productivity effect that was due to the difficulty to bring home the services. And so that should also be counteracted as all the lockdown goes away.

[Marco Pescarmona, executive]

Yes, regarding the second question, well, now we have plenty of cash on the bank account. And on top of that, we also have the shares. So already, we don't need the cash that we have, so we will be very relaxed and decide based on opportunities. So of course, if there's some likely reason, prices skyrocket, we'll be sellers. But normally, we have more liquidity than we need so we'll be very relaxed.

[Filippo Prini, analyst]

If I may, just a follow-up, still on the financial position, you mentioned in your presentation and new corporate loans with Cariparma. Maybe if it's our situation, but which is the maturity of these new corporate loans?

[Marco Pescarmona, executive]

I don't know what we wrote, but it -- I think it's 6 years and it should be -- I think, Francesco, correct me then, it is the maturity of debt?

[Francesco Masciandaro, executive]

Yes, it's until 2026.

[Marco Pescarmona, executive]

Of course, we will provide the details.

[Technical Difficulty]

[Alessandro Fracassi, executive]

If there are any other questions for maybe the BPO, I'll be happy to take them.

[Operator]

[Operator Instructions] Gentlemen, there are no more questions. Excuse me. There is a question from Paolo Cipriani with CP Capital.

[Paolo Cipriani;CP Capital;Analyst, analyst]

I have a question regarding Trovaprezzi. Could you please -- it's tenure because regarding the vertical in which you are going, which is horizontal and we're assuming the potential for [ loans ] to grow. And the second one regarding the last slides here. Is there a way to produce, say, a bit more [ EBIT ] prices which is operated from the first quarter in terms of revenue and profitability?

[Marco Pescarmona, executive]

Sorry, sorry, I didn't get the last part. You were saying the growth and profitability of the last...

[Paolo Cipriani;CP Capital;Analyst, analyst]

In the first quarter, in the first quarter.

[Marco Pescarmona, executive]

Yes. Okay. Well, in terms of where we see growth, basically, people during the lockdown have started buying more in some shops than others. Like for instance, this is true for all of e-commerce and Trovaprezzi is just representative. For instance, mobile phones actually were, in general, down year-on-year, while sporting equipment, especially fitness equipment was up, like pharmaceuticals were up, like laptops were up, printers were up, fashion was down. So basically, Trovaprezzi is very representative of the evolution of e-commerce in Italy. And some categories, I think there are some maybe reported. I don't have them in mind right now so I cannot provide you now the reference, but there are some reports out there that talk about what has been growing in terms of e-commerce in the last few months, and I think we are aligned to that.

But clearly, e-commerce, at least for -- during the lockdown, increased its penetration. And in terms of the actual growth that we experienced, I mean, my -- I cannot disclose any figures for now. We'll obviously reveal the revenue figures for the half year results. My suggestion is that you take a look at the tool. It's very qualitative, but this is an idea, which is a similar web, basically reveal the external tracking of website traffic. And you'll see that there has been growth or even you look at the searches for the Trovaprezzi brand on Google trends and you see that people were searching for us more than before. So this is all I can say in terms of precise figures regarding the business for now.

[Operator]

[Operator Instructions] Gentlemen, there are no more questions registered at this time.

[Marco Pescarmona, executive]

Okay. Then thanks, everybody, for participating to this call, and we'll speak to you in the beginning of September because that's when we disclose our half year results or one-on-one, if you want, we're always available. Thank you.

[Alessandro Fracassi, executive]

Thank you all very much.

[Francesco Masciandaro, executive]

Thank you. Bye-bye.

[Operator]

Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.