Gruppo MutuiOnline SpA

MIL:MOL

Earnings Call Transcript 2018-Q2

[Operator]

Good afternoon. This is the chorus -- this is the conference call operator. Welcome, and thank you for joining the presentation of Gruppo MutuiOnline First Half 2018 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; Mr. Francesco Masciandaro, CFO, Gruppo MutuiOnline. Please go ahead.

[Marco Pescarmona, executive]

Thank you, and welcome, everybody, to our conference call. As usual, we will refer to the presentation that we published on our website, and we will start on Page 15 of the document with half 1 highlights. And first half of 2018 was actually a good period with growth across the board, especially in Q2. And you see already from the aggregated figures. Revenues in the first half 2018 are EUR 85.4 million, which is up 8.6% compared to the EUR 78.7 million of first half 2017. The operating income is, in the first half 2018, EUR 23.2 million, which is up 13.4% compared to the EUR 20.4 million in the first half 2017. And consequently, the EBIT margin is 27.1% in the first half 2018, which compares to 26% in the first half 2017. Net income is accelerating even faster with EUR 16.7 million (sic) [ EUR 16.6 million ] in first half 2018, which is up 19% compared to EUR 13.9 million in first half 2017. And this corresponds to a net income margin of 19.4% in first half 2018, higher than the 17.7% of first half 2017.

By the way, this increase -- this acceleration of the net income compared to the operating income is also due to the fact that we are now using the patent box regime, which is it allow reduced acceleration regime for some of our subsidiaries. And few more details in the actual a report. But those that are not Italian and are not familiar with this, basically, this is recent tax -- reduced tax -- taxation regime, introduced for companies that have intellectual progress. It allows you to -- if you are able to obtain -- to fulfill the conditions and obtain a ruling from the tax authorities, you are able to be taxed for only a part of the income which is attributed to the intangibles. And for some of our companies, we were able to obtain such rulings. And so the impact of this reduced taxation is included here. Obviously, it also includes some adjustment for the previous years.

And then if we go to the next page, we look at the performance by division. We see that in terms of revenues, we have growth of both divisions. Broking Division report EUR 37.2 million of revenues, which is up 9% compared to the EUR 34.1 million of the previous year. And this is with the same perimeter.

Whereas, the BPO Division reports EUR 48.2 million of revenues, which is up 8.2% compared to the EUR 44.6 million of the previous year. Here, however, the growth also derives from the inclusion in the consolidation area of Agenzia Italia, which we acquired at the beginning of the second quarter, and is fully -- therefore, it is fully included in the quarter, whereas it was not present last year, of course, but also, it was not included in the first quarter of the year.

The operating income in the first half 2018 is EUR 12.1 million for the Broking Division, which is up a strong 38.4% compared to the EUR 8.8 million of the first half 2017. While for the BPO Division, the operating income is EUR 11 million, which is down 5.3% compared to the EUR 11.7 million of the first half of 2017. The operating margin consequently is increasing for the Broking Division, reaching 32.6% in the first 2018, which is significantly higher than the first half 2017, when it was 25.7% and also compared to full year 2017, which was 27.4%. For the BPO Division, on the other hand, the operating margin is 22.9%, which is down, both compared to the first half of 2017 and full year of 2017, even if by a lower amount.

The aggregate operating margin that we already saw is 27.1%, and that's about 1 percentage point higher than the previous year.

If we look at where the performance comes for the 2 divisions, for the Broking Division, we can highlight the significant growth of the Mortgage Broking business line, which is up 24.7%, which is EUR 16.5 million of revenues in the first half 2018. But there is -- we have a decline of revenues for the personal loan Consumer Loan Broking business line, and we'll comment a bit more on that later. And we have growth for Insurance Broking, which is up 9.8%, which is EUR 7.1 million of revenues. And on the other hand, we have much expected [ pleasing ] in the revenues of E-Commerce Price Comparison, which is down 6% in the first half [ compared with the ] [indiscernible] [ the previous year ]. With other revenues which are mostly linked to utilities, the promotion, up 9.6%.

Looking at the retail division revenues, we see that the overall performance is driven by 2 main factors: one is a drop of 15.6% of the revenues of Mortgage BPO, which are now EUR 23.6 million in the first half 2018, which compares to the EUR 27.9 million in the first half 2017. And the other business lines show the stable or single-digit growth of the revenues. And we partially have said this drop in Mortgage BPO, while we have the addition of Agenzia Italia, which is, what we call, our Leasing/Rental BPO business line, and this leads to an overall growth of the revenue of the BPO Division. We'll comment in more detail in a second on what happened to the single business line. Regarding the market, our main reference market, which is still the mortgage market, one of the thing that is interesting to point out is, by the way, that we have growth in Mortgage Broking, whereas we have the opposite situation in Mortgage BPO, but that's linked mostly due to market share dynamics. And obviously, the market, however, is the same market.

The residential mortgage market had a slow start of the year, actually started with a contraction, and we saw this across the board. And then the market overall is showing a progressive acceleration. So it's going from negative to mildly positive but with increasing speed in the last few months, at least, this is what we see from publicly available information. And what has happened in the market is that there is, both a recovery of mortgages linked to real estate transactions, but also a temporary recovery, we say temporary because we don't see any reason why this should be long term, of remortgages. And because we still have very good interest rate, and there is this idea that the interest rates could go up in the future, so this is what is helping the remortgages, of course, but also the purchase mortgages are showing growth. And the data from Assofin, which is industry association, which includes the biggest mortgage lenders in the country, highlight a year-on-year increase of new originations of 6.9% in April, 5.9% in May and 11.3% in June. So -- and here there is a title -- I'm sorry, no title. So we have this growth, while there was a decline in the first half of 2018. CRIF, which is the credit bureau, CRIF data is a bit more conservative because for the entire [indiscernible] bureau inquiries were down but the sequence of negative year-on-year figures ended in June, with a positive number, and possibly in the following months, we should see also positive numbers but they are not out yet. And one more thing to keep in mind is that whether the credit bureau inquiries tend to be possibly higher when people are refinancing more than -- for purchase mortgages. So it's also possibly because with refinancings people will do an inquiry maybe they will not refinance, or they do a negotiation. And whereas for purchase, so single refinancing carries, on average, probably more inquiries compared to purchased mortgage. And for the amount which is, as a whole, the percentage of refinancings is continuing to decrease.

For 2018, the outlook, we think, is a continuation of the current trends, so continuing growth of purchase mortgages. As we always said -- I mean, as we said in the last, at least, 1 year, the market is very advantageous in terms of affordability. And so rationally people should be buying houses because it is a very good moment, and feel -- it was feared it was keeping them from doing this, and apparently, the fear is slowly going away. Or also, we want to take advantage of the same level of interest rates that are available today. And so we expect that purchase mortgages will grow, and obviously, they are at the beginning, at the very beginning of a recovery of the real estate market. So that would be the driver. And on the other hand, we expect to see, for the rest of the year, some stability or even some more recovery of remortgages. And this is, however, as we were saying [indiscernible] already seeing, at least part of it will [indiscernible]. The main risk that we see is the evolution of financial market. As long as the situation is reasonable, we think we'll continue like this. Obviously, the financial crisis would have a significant adverse impact, but that's -- but we don't see that situation, and we don't have that gut feeling having been through the financial crisis in 2012, so in 2011, 2012. It is very much different. But we've just put it out because it's the main theoretical risk.

Looking at the detailed performance of the different business lines of the Broking Division, we -- the overall comment is that the Division did quite well in terms of revenues and very well in terms of margins, mainly thanks to Mortgage Broking. And the main negative, let's say, or counteracting -- counterbalancing for us is the contraction of E-Commerce Price Comparison. And looking at Mortgage Broking, we have growth, both in the online and in off-line distribution. The first half is -- was a bit surprising. The first months of the year were down compared to 2017. And in fact, the comment of Q1 was not so enthusiastic, I would say. We were already seeing at the end of Q1, an acceleration, but Q1 in itself had some contraction in the first part of the year. End of Q1, we said, we expect our market share to grow because -- so we have seen the stable market and some acceleration of inflows. And then this growth continued to accelerate. And this resulted in a strong performance in Q2. And again, compared to North America, which was up single digit, clearly, this is increasing in market share.

And by the way, we see some more demand for remortgages again, but compared to the first half of 2017, the first half of 2018, our proportion of mortgages compared to remortgages is increased. So we continue to see a normalization anyway, maybe it slowed down a little bit in the very recent months, but we continue to see the final phase of the normalization of remortgages, which now represent a minority of the open market. And given what we are currently seeing, we expect, at least, the second half of 2018 to see a continuation of this strong performance.

And then looking forward, obviously, to begin to the expected recovery of the real estate market. Regarding -- so this was the most positive part of the picture. Regarding Consumer Loan Broking, basically here, we -- the first half of 2018, we did what we already announced at the beginning of the year. So it was -- basically we optimized the marketing spend for consumer loans, because we have been spending, in our mind, too much in the first half of -- during the full year of 2017. So we cut down that, at least, not to acquire business at a negative margin. So we cut down on the margin of business. The result was a decrease in revenues, however, with higher operating income in absolute terms. Now the issue is whether we cut down too much or not, we will continue to trim this.

But in any case, here, our expectation is to see, more or less, a continuation of what we saw in first half 2018. We are also doing some work on the product offering and so on, and this -- with, let's say, a completion or an adjustment of this adjustment or a readjustment, even of the marketing spend, we will then expect to see recovery of growth. So overall, I think this is very much as expected and announced. And again, this is giving a bit of improvement in the bottom line contribution.

Insurance Broking was, in the first half, characterized by a moderate growth in volumes, both in terms of broker contracts, but also in revenues and with some acceleration of the activity starting in the second quarter of the year. So -- and also based on what we are seeing in the months of July and August, we expect that this growth could accelerate. It's very hard to say exactly why but this could be also because the insurance cycle is finally starting to happen, and we'll know this over the coming months or a year. But the signals are, I mean, what do I see is an acceleration that could be explained by this. And so we are positive about the development for the second half of the year for Insurance Broking.

The weakest business that we have in the Broking Division is E-Commerce Price Comparison because this continues to suffer because of the deterioration of organic traffic. And this is linked to the fact that a lot of the traffic to our website are coming from organic results in Google. And so changes in ad billings, et cetera -- there was, for instance, one, in the spring. We sometimes gain but in this case, we are getting less than before. And what we are doing to counter these effects are to improve the service, but also, this is important for indexation on some changes, they're working on the content available to the users on the website.

We are also now advertising through operation television to generate greater demand directly linked to the Trovaprezzi brand. So that -- because in the other businesses and also the additional businesses, say, in insurance but also mortgages, a large portion of the clients come because of the branch because they know us and they can explain to us. Here the idea is to increase the proportion of people that come straight to Trovaprezzi which is anyway, already a well-known brand, instead of arriving from a result in a Google Search.

For the second half of 2018, as of revenues, we continue to suffer because of the organic traffic but also, as we are standing mainly on the TV advertising, we will also have a deeper impact in the contributions of this business to the business -- to the bottom line. And then we don't have any special comments regarding the utilities part, et cetera. There is growth there but it's still minor for us, and we are working on making it grow anyway. Now, Alessandro?

[Alessandro Fracassi, executive]

Yes. Hello, everyone. Good afternoon. I'll comment on the outlook of the BPO Division. Marco has already commented the results of the first half. We have a drop -- we have an increase in revenues, which is anyway only due to the consolidation in the second quarter of our new business line, which is constituted by Agenzia Italia. We have a drop in the margins, basically because we are missing revenues on traditional parts of the business. And as Marco has already commented, what we are missing is especially, the contribution, which was particularly exceptional in 2017, as you remember, of the Mortgage BPO business line. We have said and announced that the BPO -- Mortgage BPO would not be as good in 2018, and it's basically exactly showing that.

The second -- anyway, we remain, in terms of percentage margin, not far from -- operating percentage -- operating margin percentage, not far from our targets. We are at 23%, with the targets of 25%, and we expect that the second part of 2018 will show a stabilization of the rational part, and so not such a significant decline as we have seen it in the first half. And also, we'll see the full contribution of the consolidation of Agenzia Italia.

As we look at the medium term, which is what I expressed also recently, we remain particularly positive, because we still see high demand for our services, and we have recently reached a agreement in the mortgage area and in the CQ Loans area, which will probably start giving results in late 2018, and we'll see the full impact for revenues in 2019. I'll comment it when we go through the different business lines.

So let's start with Mortgage BPO. We had a significant decline. The decline is basically due to, on one side, para-notarial services, so anything connected to remortgaging, we saw a decline there, which is due to the market, and it's the part that we were really expecting. We were also expecting the nonpresent contribution in terms of revenues of a contract with a bank that we discontinued at the end of 2017. We had commented on that, if you remember, basically a year ago, when we knew this was happening, with a very low margin business. But now, we see the impact in terms of revenues. And the third point, we also had 1 client that was starting some IT migration and was a little bit slower in catching up to the budgeted volumes and now it is going better. So as we look at H2, and then prospectively at 2019, we are positive, and this is basically for some factors that I've already mentioned. And one is the agreement with Intesa SanPaolo, which has signed a distribution agreement of their mortgages and potentially, in future, other products, with the Poste Italiane with BancoPosta, and we will be supporting the underwriting and closing of these mortgages for Intesa SanPaolo. So we will be their delivery engine, let's say. This is already in the pilot phase, so with low volumes, and we expect that the BancoPosta -- that Intesa SanPaolo will scale it up in the last part of the year. And so will -- should also the revenues for us do similarly. We also have a positive impact in the second part of our -- the increase of the turnover generated by real estate valuations, because we have signed a new agreement at the beginning of the year, and we see volumes that are going up and are reaching the steady state in the second half of 2018, so that will also be a contributor. And then we'll also have the stabilization of the business from the historical client, as I mentioned before, that had some post-merger integration issues.

So we said that at the beginning of the year, we expect the results of the business line to be in line with 2016, a little higher than 2016. Basically, we expect that the H2 will be similar to H1 and that will basically bring us to the results I just said. For -- the CQ Loan business line is basically stable, a little lower, but we're talking about some one-off projects that we did last year and weren't present this year, so nothing significant. And what is important to say is, we've always said that it's difficult here to grow, because we already have a significant market share. The good news is that we have reached an agreement with Banca Mediolanum, which has entered this segment through the acquisition of EUROCQS, and we will be providing them services for the origination phase so the underwriting and closing, also again. And also here, we'll see the impact in -- especially in 2019, but this is good news for the prospect of the division. And I've also said that this is our first [indiscernible] operation with Banca Mediolanum with a very noted player, and therefore, we're particularly happy to be on this path.

Insurance BPO is growing. It is happening both in the claim and settlement -- claim settlement outsourcing services and in the credit collection services for insurance companies. Also, we see that there are 2 medium-term trends that could impact us positively. I've commented in the past that the management of insurance companies tend to be very tactical in using outsourcing services. These 2 trends are more strategic, and therefore, could also offer to our business line the opportunity to grow. And these 2 trends are, on one side effect that on the non-motor field we are -- the companies have started experimenting with the so-called “risarcimento in forma specifica,” which basically means that instead of paying the party that has had a damage, there will be a reparation and a -- physical reparation of what damage has been done, for example, in the house. So we are able to provide these services to the company, to insurance company. This means that is a more complex process, it's -- and we have the ability to add more value, and therefore, retain also a larger part of this also, and it will be a more structured company to offer these services, relative to just operating what was the damage that had been done and then let the insurance company liquidate the damage.

For -- and the second trend is instead that with a little more of strategic sourcing policies, the insurance companies have started to consolidate the -- their appraisal company base. So instead of having a multitude of small companies and some large ones, they are now consolidating their supply base, into, let's say, 5 or 6 or 7 large suppliers, which means that this needs to be -- this company needs to be structured and this is what we are. And so we hope to be able to gain market share, thanks to these trends that we are seeing. Obviously, there will be some pressure on margins too but this is a trend that we see positively in the end and can gain market share.

The Asset Management BPO is growing. It's growing organically, thanks to the volumes of the clients and also to -- of the main clients and also to the acquisition of new clients, which has [indiscernible], by the way. But we hope to be able to differentiate further our clients. There might be a strengthening of the growth trend in the second part of the year connected to some special projects that our main client is currently evaluating.

And then as regards the new business line, which, as I said, is constituted by Agenzia Italia, we are pretty happy on how it is going. And obviously, we cannot make comparisons to last year, because we were not consolidating anything. But, let's say that the results before we -- of the first half of 2018 for the company taken separately are growing and they are growing more than 10%, and we expect this trend to continue also in the second half of the year. So we'll see if the contribution -- basically, what you see here, the EUR 7.6 million is just 1 quarter. So you can easily do the math of what will be the impact of Agenzia Italia or Leasing and Rental BPO business line on the results of the division for the whole year. And with this, I'm done. And back to you, Marco.

[Marco Pescarmona, executive]

Yes, and we are done with the presentation of the results, and we'll -- now we are ready for questions. So, operator, back to you to see if there are any questions.

[Operator]

[Operator Instructions] The first question comes from [ Rafael Moro ] with [indiscernible].

[Unknown Analyst]

Two questions on my side. The first one is on the Mortgage BPO, with the drop of para-notarial services, if you could provide any more details on what's going on, if it's structural or more temporary drop? And on a more positive side, with the contract with the Intesa SanPaolo and Poste Italiane, what kind of size could this contract be? It could be rather significant, I assume, both short-term but more importantly, longer term?

[Alessandro Fracassi, executive]

All right, thank you for the question. So in terms of the para-notarial service, we're talking about services which are connected to the remortgage market. Therefore, the decline of the services is not due to any market share impact or clients not liking us anymore, it's just the market, as we said, it's fading away. What we do here is basically be a sourcing center and -- or -- for banks that needed to find notaries and pay notaries and will do remortgaging deed. So -- and we basically guarantee that the process will be speedy, and we definitely need SLA, and we choose and select notaries that are able to comply with the standards and with the prices that we're negotiating on behalf of the banks with them. So as this market is fading, I would say that it's cyclical, but -- and I don't know if you want to call it structural, but it's definitely not -- we will not see go back to the -- to what we had in 2017 for a while, I believe. Nothing to worry about. Most of this is, anyway, on a valuable cost base, so it doesn't require much effort to adjust. And some other of the services that we do in these area instead are growing and the market share is growing, but they are smaller and cannot offset the impact of the decrease of remortgaging. Instead, regarding the Intesa SanPaolo deal and because [ Poste ] deal, yes, we -- it is difficult to comment, meaning that the -- I know as much as you know in terms of what they expect to come from this. Basically, Poste is widening the product suppliers that they have for their products, and they also want to grow, as they mentioned in their business plans. So we expect this to become a significant client, it doesn't mean that will double the revenues of our Mortgage BPO. Anyway, we expect next year this agreement to generate revenues, which will be in line with our strong clients, so we'll see. And it's, frankly, a little early, as we are in the pilot phase, to see how the 2 partners will cooperate and how effective the whole thing is. Obviously, we are part of the oil to make this agreement work and run smoothly, and we'll do our best and all the interests are aligned. But it's actually difficult to, say, forecast. Obviously, we don't expect these things to be trivial. We expect it to be a significant contract, but we'll see also the timing of when this happens.

[Unknown Analyst]

And a significant contract means, what, 15% of...

[Alessandro Fracassi, executive]

Let's say, 10% of the business line would -- today would be a significant contract.

[Operator]

[Operator Instructions] The next question comes from [indiscernible] with [indiscernible] Capital Management.

[Unknown Analyst]

My question just centers around the tax line, and as you mentioned earlier in the call, the increase in net income was, in part, due to decreased tax. I'm not extremely familiar with the Italian tax regime. I just want to understand, is this lower tax amount something that is continuing into the future? Or is it the regime for a couple of years? Or how does it work?

[Marco Pescarmona, executive]

Okay. Yes, this is a new regime that was introduced a few years ago, and it's starting, it is initially valued for 5 years. This would extend to how many years in the future?

[Francesco Masciandaro, executive]

No news, but only for the mentioned platform, but not for...

[Marco Pescarmona, executive]

[indiscernible]

[Francesco Masciandaro, executive]

But not for how many years.

[Marco Pescarmona, executive]

So what is the ruling declared is for?

[Francesco Masciandaro, executive]

The ruling is for 5 years. But we don't know it whether the ruling would be...

[Marco Pescarmona, executive]

Yes. Basically, the way it works is that the first version of this tax flow, it basically allows you to get reduced taxation on the income that according to these rulings that you can try to obtain is attributable to an intellectual property right. The first version of the law, the one that is currently in force, this includes both the income which is attributable to intangibles, such as software, but also as to the trademark. And so -- and the law will be a permanent law but the reduced taxations for the trademark will not be available as usual because it was against some -- we see the principles or rules. So basically, this means today, we got rulings that are quite advantageous, especially in the businesses where the importance of intellectual property, that is the software and brand, is more important. And this will last for, I think, a couple more years, right?

[Francesco Masciandaro, executive]

Yes.

[Alessandro Fracassi, executive]

Yes, and until '20. No?

[Francesco Masciandaro, executive]

No, '15, '16, '17, '18, '19.

[Marco Pescarmona, executive]

Okay, until 2019. This will be valid until 2019. After 2019 -- this is not just us, it's the way it works. After 2019, we will need another ruling, we will be eligible only for the software part and not for the income attributed to the brand. And all these things are not completely predictable, of course, and we are not disclosing the details of the individual rulings that we have and so on. But the year is compared to the baseline taxation regime. We have a favorably impact today, we will have it in 2019. And we will probably have a favorable impact, but to a lesser extent, in the coming year -- in the subsequent years. And probably with the full year report, we will provide more details and so on. And so it's part -- going back to the answer, part of this is the structural, is long term, as long as they don't change their law. And the target is going to be available for the long term, [ either whether ] a portion of what we are seeing today. So -- but I cannot give you an [ exact ] answer. We are going to pay less, exactly on margin, will be more precise, as we do the pretax calculations at the end of year, and we disclose more information on this.

[Unknown Analyst]

No, that's helpful. Just -- maybe just 1 last follow-up question. Are you able to give an indication -- this benefit that you guys have received in this year, what proportion is software and trademark? And is it half, half? Was it a lot more software than trademark?

[Marco Pescarmona, executive]

No, we are not able to disclose it because of the way the rulings are done. Maybe we'll say something more at the end of the year. The truth is, for us, these things are big, so -- and it's matter of how you present it and how you discuss it and how it is interpreted by the authorities and so on. So...

[Alessandro Fracassi, executive]

Yes, but also in current rulings, it was not separated. So it's difficult to comment.

[Marco Pescarmona, executive]

Also, all these rulings cannot be disclosed in detail because of the way they...

[Alessandro Fracassi, executive]

Yes, because they are negotiated. They are negotiated.

[Marco Pescarmona, executive]

Common sense is a good way to look at this.

[Operator]

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

[Alessandro Fracassi, executive]

All right.

[Marco Pescarmona, executive]

Well, thank you then. Thank you, everybody. And as always, we are available for individual calls, if you have any specific questions. So thank you.

[Alessandro Fracassi, executive]

Thank you, everyone.

[Francesco Masciandaro, executive]

Bye.

[Alessandro Fracassi, executive]

Have a nice weekend. Bye-bye.

[Marco Pescarmona, executive]

Bye-bye.

[Operator]

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