Gruppo MutuiOnline SpA

MIL:MOL

Earnings Call Transcript 2018-Q4

[Operator]

Good afternoon. This is Chorus Call conference operator. Welcome, and thank you for joining the presentation of Gruppo MutuiOnline full year 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 of MutuiOnline. Please go ahead, gentlemen.

[Marco Pescarmona, executive]

Thank you, and welcome, everybody to our conference call. We will rely on the usual presentation published on our website, and we will start from Page 15 of the document with the full year highlights. Looking at the revenues, revenues for full year 2018 EUR 185.1 million, which is up 21.2% compared to EUR 152.8 million of 2017. The operating income for the full year is EUR 46.1 million, which is up 16% compared to the EUR 39.7 million for 2017. This corresponds to an EBIT margin of 24.9% in 2018 compared to 26% in 2017. The net income for 2018 is EUR 34.1 million, which is up 33.9% compared to EUR 27.5 million in 2017. This corresponds to a net income margin of 18.4%, which compares to 18% in the previous year.

Looking at where the performance comes from, and we can move to the next page with the breakdown by division, and you see where the growth of 4 divisions, with BPO Division growing in revenues EUR 206 million in 2018 from EUR 85.6 million in 2017, which is up 23.9%. This is, however, also due to the acquisition of Agenzia Italia, which was not present the year before.

Regarding the Broking Division, it generated revenues of EUR 79.1 million in 2018, and that's up 17.6% compared to EUR 67.2 million in 2017. In terms of operating income, the BPO -- the division generated EUR 22.6 million in 2018, which is up 6% compared to EUR 21.3 million in 2017. One thing to point out here is that the operating income of the BPO Division is affected for a bit more than EUR 2 million by the amortization of some intangibles from that purchase price allocation of the acquisition of Agenzia Italia. So this is like an accounting effect that is affecting the 2018 performance.

The operating income of the Broking Division is EUR 23.5 million in 2018, and that's up 27.5% compared to EUR 18.4 million in 2017. In terms of EBIT margin for 2018, the Broking Division is almost at 30%, 28 -- 29.7%, in fact, and it compares to 27.4% in 2017. While the BPO Division is at 21.3% in 2018, that compares to 24.9% in 2017. Again, there is an impact of bit more than EUR 2 million from the purchase price allocation of Agenzia Italia in 2018. And this is regarding the performance by division. Before going into the comments on the lines of business in the mortgage market and starting from the results, we will also comment on the dividend proposal. Actually, we put the chart in the appendix in the -- anyway, the proposed dividend is EUR 0.30 per share, which is a bit more than the sales of the operating income per share, which is EUR 0.88. So that's the dividend proposal to the shareholders meeting.

Now continuing with the flow of the document. On Page 17, there are some comments on the evolution of the Italian residential mortgage market. And what we can say that 2018 was a good year for us with some positive surprises in particular, what happened was that after the elections in the spring, we started seeing tensions on interest rate and sovereign debt. In Italy, this created a lot of attention to also to mortgage rates and a lot of people that have not done it before decided to refinance their mortgage. So there was a confusion expected such in the mortgaging activity, which took place from the summer in terms of closed mortgages until the last few months of the year. And -- so that was -- after years of normalization that was a positive boost that we had not anticipated. And that was for the market but we benefited a lot from that, as you will see on commenting on Mortgage Broking. Now what is the situation and the outlook -- just a second.

[Francesco Masciandaro, executive]

[indiscernible]

[Marco Pescarmona, executive]

Okay, okay. Now we apologize because we were just told that the presentation was not initially uploaded on our website or not visible, that should be fixed. Anyway, we apologize for that. So we continue with the presentation. And regarding the mortgage market, what we see now in the recent months, we see there's some growth in originations for the market. For the full year, the originations were up 7% in -- as an aggregate and that was due to 6.6% of growth in purchase mortgage originations and 8.9% in other mortgage originations, that was for the full year. The proceeds -- the year was weak at the beginning, as we said, and then boosted by -- the remortgages in the central and final part of the year and with the progressive income of purchase mortgages. At the end of the year, we see the growth and -- around single-digit growth. And even January in 2019, according to -- for last few months, it was up 7.2% in terms of gross mortgages. But if we look at more forward-looking data like credit bureau inquiries, on CRIF, we see that there is now a contraction in mortgage applications for the market as a whole, and affecting negative in December, and the negative sign was minus 7.8% in February 2019. And this was due to the fading demand for remortgages. And obviously, the year-on-year impact of this would be bigger in the coming months, which was from months in 2018. So all in all, for 2019, we expect for the mortgage market a normalization, I would say, a significant normalization of remortgage demand. And with progressively more significant year-on-year decline during the year.

Regarding purchase mortgages, the positive news that we've seen moderate but some recovery in real estate transactions throughout the year, and we think that this is likely to continue. And so both housing transactions and the house purchase mortgages support these transactions will be at year-on-year. So this is what will drive the evolution of demand. Going in to more detail and looking at different business lines of the Broking Division, we know that the Broking Division in 2018 did particularly well. Specially thanks to the some growth of Mortgage Broking, and this, in turn, was linked, to significant extent, also to the recovery of refinancing, significantly also, of course, in purchase mortgages. Also, we have growth in Insurance Broking while the other business lines were moderately down. For 2019, we expect more sales and we can close the biggest business line, Mortgage Broking would decline because of the normalization of refinancing if that -- we see positive contribution for purchase mortgages. While the other business lines we think should all grow even if at quite different speed. Then going to Mortgage Broking, you see the performance was really strong and especially, if you look at the growth of the second half in terms of revenues, that's really strong. But that is also the period that benefited the most from the closing of remortgages. So clearly, an exceptional effect. In any case -- you have seen the market figures, you see our Mortgage Broking figures, it's clear that our market share went up in 2018. And I just would like to remind you that our market share value is higher in remortgages than in purchase mortgages. So the market evolution was quite favorable for us also because of this. Regarding house and no longer the market, we could see -- we could still expect possibly some growth in revenues in the first quarter. Also, because first quarter of the previous year was not a strong one, was the only weak quarter of the year. And also, we have the effect of the things that we gather at the end of 2018. For the rest of the year, we can assume a slight increase in purchase mortgages because of the recovery in real estate purchases, but a significant decrease in remortgages and the net result -- and as we have surprised this, we think, is likely to be negative compared to 2018, which was, again, an exceptional year. But that's still -- it will be negative years but hopefully, it's a reasonable performance. Looking at Consumer Loan Broking, here that is needless to say, we already commented on this, we optimized marketing spend in 2018, which caused reductions in revenues and an expansion -- some expansion of the operating income. Now this is done and we will evolve and see if we can grow the business in a stable market, we're going to expect very good surprises here, the issue is -- mostly concerns do I get margins with the supply of products and the competition among the product providers for personal loans is less than what is present in other variables and it is important for the growth of an aggregate. Regarding Insurance Broking, we had growth in -- both halves of 2018, we've seen acceleration in the second half. With the market characterized by progressive capitalization of average premiums after years of decline. At the same time, we don't see an increase in average premiums. So since we're at the bottom but there are no signs of a real acceleration. So for 2019, we can assume a continuation of the growth of 2018, but not strong growth unless as we have been expecting for long time but until now it is quite elusive premiums start to pick up. By the way there are all the conditions in place for hardening of the insurance cycle. But again, it has not happened yet so we value the EBIT more conservatively.

Regarding -- on the next page, E-Commerce Price Comparison. 2018 was a difficult year because we started from its declining and then started from Google. And also with some issues with minority shareholders and that would only result at the end of the year and that reduced our ability to effectively manage the company. Now however, we have 100% of the company, and we have and we will continue to rationalize things and increase focus especially on the main products. And so we expect the consequence of progressive year-on-year improvements in the results and go through revenue growth also because we are spending more money on marketing, also in offline marketing and reduction of the fixed cost as of the company.

Still we face a significant dependence on organic traffic, and Google Shopping continues to represent a threat, and they are continuing to experiment things and sometimes they increase their visibility. So Google Shopping is still a competitive issue for us.

Finally, regarding the other small things of the Broking Division, of which the biggest is utilities, and we continue to grow there. But the growth was actually -- was here in aggregate of the different things together. But utilities by themselves were slightly positive year-on-year, and we expect to have growth in utilities also in 2019. The fund supermarket from your line did grow on percentage players, but is still quite small and it's less than expected. But we believe in this and we will continue to develop in 2019 with some new initiatives. And finally, you remember we had started experimenting a couple of years ago with mobile couponing activity, and we realized that we couldn't make this work in a meaningful way for the long term and also we get some limited synergies with the rest. So we decided to stop this type of activity at the end of 2018, obviously, as you can imagine this activity was not making money for us. So this ends the comments on the Broking Division, and I will hand the call to Alessandro for the BPO Division.

[Alessandro Fracassi, executive]

Yes. Hi, hello, everyone. 2018 was a good year for the BPO Division. Let me add a little personal note here. In 2018, we reached the EUR 100 million mark in revenues, and given the fact that we've been following that for quite some time now, this is a mention that makes all of us particularly proud. Having said that, the numbers, as Marco said, most of the growth, actually all of the growth came from the acquisition of Agenzia Italia, and the exceptional businesses were basically little below the recorded 2017, which you will remember were record high, even beyond what we expected. Now as we looked at -- Marco already commented on operating margin. The operating margin is below what we consider our target. Due mainly -- sorry, exclusively to the impact of the amortization of intangible assets that resulted from the fixed price allocation of Agenzia Italia, that would be of effect. As we've said, we wouldn't be far from our target. As we look to 2019, net for the overall division, we expect growth to continue. So -- and sort of, we grow both thanks to the new team that we have acquired and also organically. So let's get into the details of the different business lines. Mortgage BPO, not exactly as we said 1 year ago, it was mainly down, unfortunately, but it remains over the number of 2016. As we look forward, we are confident that we will be back up again with the growth, this will come from the new clients that we have acquired during 2018, that we're ramping up nicely. And it will also -- the impact of the acquisition of Eagle & Wise and the commercial synergies of this acquisition. And we acquired Eagle & Wise at the beginning of 2019, an Italy solution company, real estate solution company.

Now looking at the BPO line dedicated to [indiscernible] loans. We had a positive growth, even beyond what we expected especially in the second half of the year, and which is thanks to some new client acquisition. This prospects we made quite favorable on this side. You have been hearing the same for quite some time. That is difficult to grow here because we already have very significant market share, which remains true. But for the medium term, we expect this market to -- we have to see when, and we expect this market to grow, to be more active and to grow higher than in recent years, thanks to our regulatory change. In particularly, it has been announced that the capital absorption rate for this capital form will go down for lenders from 75% to 35%, it means a significant moves in the ROE of this product. And so we expect lenders to be particularly active in pursuing opportunity for origination. All of this means for some potentially new entrance, all of this is a new opportunity for us both with existing clients and with potential new ones. Insurance, as insurance BPO has engaged very nicely this year. And the growth is negatively related to the activities in credit collection which decided to insurance claims. We're talking about private policies basically, or CTI policies where we enter and do the credit collection once insurance can surrogated out to the bank and go back and get the money from the customers. So this will be the boost to performance especially in second part of the year. Sales prospects for 2019 are not that positive, actually we're expecting a bit of challenge in reaching the planned results. We expect a slight decline. We also lost 1 cap conversion in the outside claim management that was [indiscernible] last year and we were not able to defend our business. Not a big issue but anyway, it will not be possible probably to get it different from as opposed to EUR 10 million that's anyway, a little high for 2018. Asset Management BPO basically remained stable. If you look at what we expect for 2018, outlook for 2019, we basically expect, again, to be either little over between EUR 8 million and EUR 9 million of overall business revenues expect this year, so a stable environment. Then we have the [indiscernible] BPO, sales cannot be easily compared to what happened last year because it was not consolidated. It was not yet in the parameter of the group and of the division. Anyway the division's sales grew nice both in terms of revenue and margins, and we expect it to continue to grow in 2019. In 2018, we grew over 10% of -- roughly around 10%. We expect continued growth but we expect it will be a little over probably in the high-single digit area, which I guess concludes the BPO part. And I think it also concludes the overall presentation of the results. So I guess, operator, if you want to get into the Q&A phase, we can answer the questions.

[Operator]

[Operator Instructions] The first question is from Giovanni Razzoli with Equita SIM.

[Giovanni Razzoli, analyst]

I have 3 questions. The first one is that you dictated the numbers of the Broking Division, I would like to know whether you are ready to share with us what was the amount of mortgage broker in 2018. If I remember correctly, you reported EUR 2.5 billion in '17 with EUR 1.4 billion of the mortgages and then in the last year at the same periods for 2018? The second question relates to the -- what was reported in the press release. You've mentioned that you are the temporary breach equivalent. If you can please clarify what was the reason behind this breach, which I understand is just probably related to the account -- due to some accounting changes. But if you can clarify whether my understanding is correct or not? And last question, related to your recent announcement on this [indiscernible] target. I would like to know if you can share with us what is the rationale of this move.

[Alessandro Fracassi, executive]

Okay. Thank you for the questions. Well, the first one, we will -- when we publish the results in the annual report and -- that would be that information for now I'm not able to provide it. Obviously, it is likely to be higher than EUR 3 billion because of the revenues, they're significantly higher than in past years. But we cannot be more precise here. And regarding as the covenant that was mentioned in the press release, this is a French covenant that we have on the loan with Intesa SanPaolo, which is configured at Intesa SanPaolo. Of course, it relates to the gross financial position, not with net financial position divided by the consolidated shareholders' equity. And the reason why we missed this is because it turns out after we really spent time starting this in recent days. There is a strange accounting seashore of how you deal with the acquisition of minorities and the IFRS. So this comes from the acquisition of the minority of 7Pixel. Basically, the acquisition of the minority of 7Pixel that resulted and then I'll explain how it decrease in the consolidated net equity in Q4 of 2018, which is -- and in fact, you see that the net equity is despite a very good quarter and everything, that is lower at the end of the year than at the end of as Q3. And the impact is the following: According to the IFRS -- maybe I'm not fully precise but according to IFRS 3, you -- when you make an acquisition, this is what we did, we -- because the auction that we want -- the auction that we took was, we recognized the goodwill only on the 51% -- sorry, on the portion of 7Pixel that we acquired, so we did not recognize the full goodwill. We only recognized goodwill on the portion of the company that we acquired. And then the way acquisition of minorities is treated and IFRS and this is IFRS, I think, 10. When you acquire the remaining part, you are not allowed to recognize goodwill on the remaining part. So from the original acquisition, the minority stake was not very good, the third-party equity, third-party interest was not very good except where you -- was very good at book value basically and -- so at a low amount. When we acquired the remainder, obviously, we paid maximum for -- we pay EUR 23 million, and with the significant value may be -- with a significantly lower value in terms of third-party equity. And the difference between the 2 cannot be put to goodwill according to the accounting principle, but has to be brought to -- taking as a reduction of the net equity -- of net consolidated equity. So basically, we had to reduce the net consolidated equity of the group by the difference between what we paid and the third-party interest, which was below book value but -- because almost book value that came from the original acquisition. So this is the reason. In this case, we feel the accounting principle is a very French consequence because there was no real economic impact, this particular way it was. And this is the reason for this technical breach, which we think will be okay, and we don't think there is any issue getting a waiver, which we already requested. So it's really for us a technical matter, and so this is regarding this context. But I think it's -- I think we will explain this also in press release. And finally, regarding [indiscernible] well, [indiscernible], the company that is not a competitor of ours because it is a different engine. And they do mainly, by the way, in an area that has to do with credit corporate. But anyways, so it is a different -- it is not a competitor but has had many -- also contact points and it's a type of business that, to some extent -- which we can understand many aspects. And we think we can help, to some extent, the company with our experience and we are quite active at the board of chairmen proposed [indiscernible] because we think he is the right person for the job, and we know him pretty well. And we'll see if we can contribute in different ways. One possibility for instance [indiscernible] that of presenting a minority list for the Board of Directors of [ Chairman ] and for us that issue is always to do things for -- with the objective of long-term value creation of -- for all the shareholders. And in this case, I mean, also doing everything that is under our control to help create value for our shareholders. So this is what we are able to say, and then we'll see if we present additional [indiscernible] data. But it's an adequate money. So this is it. So we are back to the operator for other questions.

[Operator]

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

[Alessandro Fracassi, executive]

All right. So we will wrap it up, and so we thank everybody for participating. And everybody have a nice weekend and we'll see you next time. Thank you.

[Francesco Masciandaro, executive]

Thank you, everyone. Bye-bye.

[Operator]

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