Hypoport SE

XETRA:HYQ

Earnings Call Transcript 2021-Q1

[Operator]

Dear ladies and gentlemen, welcome to the webcast results Q1 2020 -- '21, I'm sorry, of Hypoport SE. At our customers request, this conference will be recorded. [Operator Instructions]May I now hand you over to Ronald Slabke, who will lead you through this conference. Please go ahead.

[Ronald Slabke, Co]

Yes. Welcome from my side to the presentation of our results of the first quarter of '21. As you know, you are part of the journey of digitalizing the credit, housing and insurance industry here in Germany. And as you may know already, we had a pretty good start in the year we were growing by 7% to EUR 100 million in revenue and by 15% to above EUR 12 million in EBIT. Record quarter for Hypoport, so a good start in the year 2021. Even when you're used to double-digit growth top and bottom line from us, this 7% top line growth is well on track. There are a some of -- a number of issues, which I will introduce to you, why this 7% is a solid start in this year and why we are going to stick with our forecast and feel pretty well with our forecast for this year based on the first quarter numbers.As always, we start to look in the market environment, what is the German housing market doing, what is the COVID environment doing to this -- to our markets and to our business market.So let's have a look on the credit industry here in Germany, COVID and the response to the third wave in Germany, let's say, are still significant, let's say, pain for the society in general. For the credit industry, it's not a big challenge. The banks are working, you are able to get a mortgage, you get a personal loan, you are able to finance your business. It all works on an operational level. The ability of -- especially the regional banks to adapt to this current environment and to digitalize their processes already during this environmental change is limited. So we see a significant slowdown in IT projects and change projects in the credit industry, which slows down our growth track slightly.Besides this, especially on the mortgage market side, you can say that your own 4 walls were never more important here in Germany than right now. People are looking to adjust to the new reality. They are looking for houses outside of cities to have more playground for their children. They are looking for larger apartments with home office space to adjust to the fact that in the future, home office will be more normal than in the past.So there's a lot of demand in the market. We see a slightly increasing number of transactions when you compare this with summer and autumn last year. And we see rising prices steady in Germany. It's now more than 10 years in a row that we see, from a pricing perspective, a very attractive market. It's a reaction of increasing demand and still a limited amount of supply what happens here.Okay. And the corporate finance market, you can say that the banks in the first quarter realized that P&Ls and balance sheets are not as strong as -- anymore as they were pre-pandemic, because they get the 2020 results now from their clients. So the appetite of banks to fund businesses is lower right now. And with the uncertainty, how long this COVID situation will still last, the appetite of additional risk is limited here.Plus thanks to more subsidies our government wants to put, especially in innovation and ecological investments, we see an increase in subsidies for corporations, which will be effective July 1, 2021. So for corporates, it makes sense to postpone the financing of projects right now to the second half of this year to get higher subsidies than in the first half of the year. So all in all a pretty weak environment for corporate financing in the first quarter.Consumer finance. Consumer credits are down double-digit from the pre-corona level, because it's just difficult for consumers right now to spend money. If you can't travel, it's difficult to make consumption at all right now. So demand is lower than pre-crisis last year and the beginning of last year. And as well, the, let's say, appetite of banks and other lending companies for personal loans is limited right now because of the uncertainty of the COVID situation. So in this market, we see a small decline. And looking forward, we expect a sharp rebound after the economy is fully reopened and consumer are able to fill up what -- the demand which they had to save during the last quarter.All in all, the German housing market is -- and all the megatrends we saw here pre-corona are well intact. We see that the net migration to Germany on a lower level is ongoing still. And we expect with the reopening of the economy and the opening of the borders here in Europe that we will see a massive net migration from Eastern and Southern Europe to Germany, thanks to the huge demand for skilled workers in Germany and the faster recovery of our economy compared to the Eastern and Southern Europe area.Life expectation is increasing systematically and will increase after pandemic as well. We will even be better in managing our health long term. And with this, people that live longer, then we'll need more wiggle space for them. And the fact that more and more people live in single-person households, which is an ongoing during pandemic as well, will not change. So the demand for housing, which is already close to 2 million units here in Germany will keep growing. Our construction site is still weak and slightly dropped in 2020. And we see as well in the first quarter that there is no acceleration in constructions, approvals or credit construction permission here in Germany.So from this, we can expect increasing rent, increasing property prices. And with these increasing property prices, an ongoing process of higher mortgage volumes and increased volume of the [ modification] , even when the number of transactions stays the same, we are looking on a growing market.For the first quarter this year, Bundesbank reported a 7% increase in new mortgages underwritten by banks. This is in line with what we saw on the platform. And later, I will show you the gain in market share Europace could actually achieve in this market environment.So when you look on the different perspective of the real estate market and our propositions here, on the sales side, we see a stable volume of transactions. Our clients, usually, they're real estate agent of banks, because of the less active branch networks, lost some market share, pretty sure, but all in all, are stable in their business model. And we have a stable relation with them, and we are on the way to help them to be more digital and approach consumers more digital and have a higher market share based on their strong brand in the online business as well.In the valuation business, we see that banks are busy. This plus 7% for the first quarter, which was reported Bundesbank, is showing pretty well that there is business, there is valuations to be done. On the other side, we see a slowdown in the processes within the banks. So there's piling up some valuations that needs to be done. So not everything what was underwritten by banks ended up to be in valuation in the first quarter already because of the, let's say, troubling back-offices in the current environment. So something to be to -- to, let's say, fill up the pile and increase the flow as soon as we get to a more normal business environment again here in Germany.On the housing association side, the good news is that we still don't see any defaults on rent, thanks to the social system here in Germany. So housing associations are pretty strong, don't feel any pressure from the risk side of the business. Unfortunately, we are the aggressor in this market and to convince banks to migrate their digital solution to a new player in -- is, let's say, the industry is not used to do this remotely, and it slows down our sales funnel that we are still in a pretty remote environment when you look on the business side.So weird this time, but it's -- let's say it's not luck from our perspective that this industry has -- doesn't feel any from pressure the income and risk side. And on the other side, it's such a stable environment that they doesn't need to act fast. But as banks, this will change as soon as we reopen our economy.So same goes, you can say, for the insurance industry where we operate with Smart InsurTech. There is just a little impact on the new insurances underwritten in Germany here. The main contractual volume and value is slightly increasing, thanks to inflation-based incremental increases in the premiums. So healthy business, no defaults, no losses, no special losses during this pandemic toward insurance industry.Need for digitalization keeps to stay high. Execution excellence is, like in banks and housing associations, low. So we prepared with them the digital future, but need to wait for the execution after the lockdown is over.So how our 4 business segments performed within this general environment? As always, we start with the Credit Platform, in the center there, Europace system. Maybe this is a good part to recognize the funding part, which did their first transaction in the first quarter. So the large in the corporate finance space services platform. Even then corporate finance in general, was weak, as I said, thanks to changes in subsidies and risk appetite of the bank.So -- but all this is credit platform. And we start with Europace to understand how we performed overall. So Europace mortgages, personal loans, building finances, [indiscernible] grew by 30% in the first quarter, which is a really strong growth track. And when you compare it with the older market environment, a double-digit gain in market share. In mortgages, we grew by 34% compared to 7% total market increase. So we outperformed the rest of the market by 27%. So a great dynamic.And this within the pandemic environment, what you see is that partners of us, which are using Europace already in their sales force, are -- they have far better projects on the pre-pandemic and launched it during the pandemic are now outperforming the rest of the market, which is still offline or in traditional IT systems, which are not as well automated and digitalized and integrated as Europace. So without the pandemic environment, we would have been growing faster even because of the ability to bring IT projects and change projects forward in banks. So this plus 34% in the mortgage business just shows how much work we did pre crisis and how well Europace partners outperformed the rest of the market.As a contrast to this, you can say, personal loans, just a black 0% growth. This is happening in a market environment with a high double-digit loss in market volume, thanks to the less demand of consumers for personal loans. So here as well, it's a double-digit growth. Just you can't see it, because it happened in a stressed market environment.Looking forward, latest in Q3, we expect reopening here in Germany of the economy and a sharp increase in demand from personal loan side, and we expect to participate from this. So getting not only on a relative growth track, but as well on an absolute growth track with the transaction volume, what we deliver here on Europace in personal loan growth.Building finance, often linked with the mortgage financing, you see here that risk appetite of consumers has changed slightly. So especially long interest security is right now not as important than the financing project. This is as well in line with the fact that the average duration of the mortgage declined from 14.1 to 13.2 years here in Germany. I will come back to this later. Okay. Looking on the 4 segments of Europace, you can say that all of the 4 segments were growing in the first quarter. Mortgage broker, again, took market share from banks, and they are growing pretty well. We are impressed by the growth track, the mortgage bookers here on in Germany. In addition, especially in the regional retail banks, we see that our long-term investments in key account resources and politics in these 2 sectors helps to stay on the growth track.In the cooperative banking sector, we grew by 85% to EUR 3 billion, first time really outperforming a savings bank by more than EUR 600 million in volume. So this is a huge success. And when you consider that it's really difficult right now to onboard new cooperative banks and bring the projects within the cooperative banks forward because of the pandemic environment, this 85% is even more impressive. So without the pandemic, we would see a 3-digit growth track here. But this is, let's say, it's just a little bit postponed. We will get this volume on the platform as well.On the savings bank side, plus 36% growth rate. This is slightly above the total growth track on the European side. You see here that we have still a very good sentiment and the savings banks honor the new cooperation with Finanz Informatik. They're simply like IT service provider. But the execution in this environment is lagging behind. So it's only 36%. It could be slightly higher as well without the stress in the environment, which we have right now.So well on track, you can say. In all sectors, we are gaining traction. All banks are very well aware that the loss of market share, which they see right now to brokers and to Europace partners is an incentive for them. It's a pressure for them to digitalize as well. So we see a very well built filled pipeline on both sectors, FINMAS and GENOPACE and with private banks to go forward and get on the train of digitalization with Europace as the core infrastructure here for mortgage business in Germany.So when you compare 34% mortgage growth or 30% of actual volume growth with the total growth number of the segment, then this 12% growth rate is a little bit disappointing. So some events to be explained here. First of all, if you just look on the mortgage business, we would see 16% mortgage revenue growth. This compares with a 24% transaction volume growth. And the underperformance is linked to the fact that the duration went significantly down. So this 1 year less duration overall cost us roughly 8% in revenue, because shorter durations are -- has a lower transaction fee than longer durations.So in addition, we see that banks in the first quarter were are not able to process everything. All applications take up from brokers via the platform so that they are piling up. So their process duration is increasing. And this means for us postponing of revenue as well. Both assets lead to a revenue growth of 16% based on the 34% transaction volume growth. So from the 16% to the 12%, the 4% difference is linked to the fact that the personal loan business, especially the white-label personal loan outplacement business where we bring denied, disapproved credit of one bank to other banks is significantly down in this environment. So we are losing revenue in this business.Right now, in the current environment, this slows down our numbers. And the fact that corporate clients postponed their financing projects based on subsidies expected after 1st of July this year declined our revenue in the corporate finance business. So these 2 declines slows down the growth of the overall segment as well.So nice, let's say, nice compensation for this is that we see a strong growth in profitability, even with this slowdown in the personal loan and corporate finance business. You can see here pretty well that as soon as we are slowing down our heavy investment in the future, our profitability and our pretty scalable business models shows up well on EBIT level.Yes, in addition, we saved some costs on travel and hospitality during the current environment. But the -- let's say, the fast increase in profitability when you don't expand your organization is pretty visible in the first quarter in this segment, Credit Platform.So our next platform and next segment, Private Clients. Franchise system on our generation under the bank Dr. Klein performed as well pretty well in the first quarter '21. First, this is pretty important for the near-term future and the growth track there. We are well on track in onboarding new advisers for the network, more than 600 qualified advisers, it's the first time that we disclose the number, and a nice double-digit drop here.In the beginning of the pandemic, this was a bottleneck. And we saw a significant slowdown in new advisers entering the franchise system. This change to the end of the year and this continues at the beginning of the year. So our franchisees are growing together with us.As a result of this growth track, we see a record number in transaction volume in the first quarter. EUR 2.6 billion in mortgages advised here in Germany, plus 40%. And yes, let's say, it could be higher when we wouldn't have had such a strong first quarter in 2020. Just to remind you, in 2020, Dr. Klein was more or less the only large brands, which were able in March already to operate fully digital and remote approach and advice clients video based. And we had a great conversion rate at this time and an extremely high productivity of our advisers.Now 1 year later, other mortgage brokers and even some banks are able to operate in a remote environment as well. And they increased their conversion rates. So you can say our decrease to a more normal level again. And that's why this slowdown, which you see, as well linked to the fact that we had some pretty good outperformance in the first quarter 2020.So what -- we are well on track, and we are running a very healthy brand in Germany. And the demand of consumers for an independent advice is increasing. This 14% transaction volume growth converted to a 6% revenue growth. This underperformance is linked to the fact that we are selling more and more regional banks as well in the network. And regional banks still have a lower income level for the Dr. Klein franchise network than specialized mortgage banks. So the success of FINMAS and GENOPACE helped Dr. Klein to be recognized as the more and more independent and the whole market covering mortgage broker with more than 700 banks available there. But on the other side, the average revenue stream for mortgage is slightly going down. That's why only a revenue increase of 6% right now.Thanks to the investments we did, especially in 2019 or started to do in 2019 and renegotiation, all the business relation that Dr. Klein needs with regional banks profitability is up by 23%, new record high, EUR 6.2 million EBIT, which is, you could say, it is slightly above our expectations. In relation to gross profit, we are above 50% EBIT margin. We expect long-term and healthy probability of something around 35% to 40%. So please don't expect that this 50% will stay forever.We see that we are saving some costs, which would be usually part of the business model to entertain the franchise partners, to host events for them, German white and local. And this hedge cost will come back and will slightly decrease the EBIT margin of this business long term again. But good to see how profitable our business model can be when it's necessary and when the environment fits to our -- to the way how we do the business.So now of the 2 traditional segments, we are coming to the growth segments with -- let's say, half their challenges is in the current environment to deliver the growth track they are expected to have. First, Real Estate, you are aware of this, we are targeting here the homeownership market on one side and the rental market on the other side. Core for the long-term strategy of Hypoport is the homeownership market because of the synergies that we are able to realize in combination with your Europace and our dominant role in the mortgage market in general.We use this position to gain market share on the property sales side with the FIO SYSTEMS and on the property valuation side with Value AG. So during the first quarter, we could see results of this again, especially on the valuation side. Value AG is getting closer to 10% market share in all valuations, let's say, touched by Value AG. I -- in this 10%, not everything is -- not the whole valuation of everything is done by Value AG. So there is still a lot of potential for growth here. And then you see this how Europace is keep growing now at 31% here. There is a huge potential of a very scalable business model here.On the other side, FIO, the property sales platform, let's say, couldn't show growth and market share gain in the first quarter because of our strong links to banks, bank branches, and their real estate agent in branches. The networks are still partly closed. The activities in the branches is low. So the real estate agents of banks right now are let behind the rest of the market.This is a short-term negative for the dynamic that we see here. Midterm, it's positive, because they understand more and more how important it is to fully digitalize their approach and to be part of a digital ecosystem where consumers start their journey to find a new home online and not in the branch anymore. And we are their partner to enable them in this journey and to be part in the digital transformation and in the growth where homes are sold more and more online with some physical touch point and contact and to transmit it. So while short term we see a negative impact from the COVID environment, midterm, we expect an acceleration of our growth track in this segment.Yes, talking about it. When you compare this with the end of 2020, we just slightly increased our market share in savings and cooperative banks. So we are at 88% in the savings bank growth still and 11% in the cooperative bank. So acquiring new clients for the FIO platform during this lockdown was not possible in the first quarter. This is the increased revenue, especially recurring revenue, based on additional services we render to our clients and change in pricing structure because of the fact that we stopped doing project business, with onetime revenues. And decline of this part of the revenue structure this unit shows right now minus 15% year-on-year.If you would take this out, this project business, the recurring business model was growing double digits. And this base of additional services, not additional clients because of the [indiscernible]. Value AG was able to acquire more clients, but in the course, takes to the strong relation with Europace and the fact that they can more easy access this pool of 770 Europace partners, which have a successful business relation with us. And it's just easier to up-sell something, which is integrated in the total -- the whole mortgage process and selling, let's say, different solution back to parent.So they went up to 451 contractual partners, starting new business with lots of them. Total growth for the first quarter, 15% from a very strong first quarter 2020. The numbers would have been even higher if not banks would pile up some applications in their back-offices because of the inability to process them fully and get the necessary data and documents for the validation to Value AG. So could have been higher, but it's still pretty good that we grow in this environment by 50%.Even more important is we do this with a stable headcount in this year. So while end of 2019 and beginning of 2020, we had to scale, hiring more and more people in this still pretty fragmented and not very digital business. We are now able to scale based on more and more digitalization of our business here. So we are building the future valuation platform for Germany. And the efficiency gains that the people who are running more and more business on is linked to the higher percentage of digitalization that we put into our system.I think you are aware of this, we started to gain market share first and build the system on to it, not to first build the system and later try to gain the market share here. Our -- we are still bearing some costs here from the manual work that we still have to do. But step-by-step, we see that our vision of getting more and more digital approach to this process and adding more and more value automated is working and paying back. So Value AG is well on track to get out of the investment phase and to be a positive contributor of not just revenue growth, but as well profitability growth.So last segment, the financing platform for housing associations and their portfolios. Thanks to some volatility in the interest rates and even with a lot of postponed building projects because of the pandemic, we see a stable environment. It was a pretty good first quarter for this segment, and we grew by 6% in revenue. So this has a nice stabilizing factor.And when you look midterm, this is still a market proposition we are in that as soon as we finally start to build social housing in Germany, again, on a scale that will deliver the 2 million missing units, we will see a huge amount of financing needed. And we are ready and waiting for this tool to be financed by Dr. Klein, our real estate platform here.So altogether -- all this development together and especially because of the reduction in project business, we see a slight increase in revenue on it. If you take out the project business, we will see a growth rate of roughly 10%, which is still below our expectation for this segment and for the growth track we want to see it on. So we say 2020 and 2021, there'll be heavy investment phase for this segment. You see this in the profitability of just EUR 0.2 million. This investment will pay back when the pandemic is over and we are getting to a more normal market environment. There -- we are able to acquire new businesses -- new business partners here more efficient and bring the necessary IT projects with them forward so that they migrate on our platform. So right now, we are progressing on the product side. On this market side, it's too much effect that we see not enough growth overall here.So then to the last segment, as well a growth segment, insurance markets here in Germany, a little bit similar to the housing industry. As I said already earlier in the market environment, they had -- let's say, they don't feel a hard time. There are no losses in the insurance business right now. Small decline in new business, that's all. Just a lack of bringing IT projects forward delays our growth track here.But we see that we are, especially with Smart InsurTech, gaining traction in the migration of contractual volume out of the -- let's say, local IT infrastructure, which we -- which is run on licenses of software company, which we acquired, to the centralized cloud-based Smart InsurTech platform. This migration path is the core necessary step to establish an insurance platform for the whole industry. The insurance brokers and insurance companies share the same data and the same vision, and the processes are fully automated based on validated data for them.So the total market in Germany is roughly EUR 200 billion. EUR 8.6 billion of this is in systems, which are -- which were developed by companies that we acquired. Out of this, we are at EUR 2.8 billion migration volume. So out of the total volume of the market, as I say, we are 1.4%. Out of the insurance broker market, we are at roughly 5%. And out of the total volume of systems that we control, we are around 30% share now.So out of this EUR 2.8 billion contractual insurance, let's say, contractual portfolio of insurances in our Smart InsurTech system, 50% are validated. It means there [indiscernible] connection -- a virtual connection. That means the data is in our system and the data in the core insurance system of the insurance company to make sure that all information on our platforms are accurate and our services that we render in an automated way to the insurance broker and to the consumer are based on 2 data. And with this, we are able to get a certain level of execution automated and a certain level of quality, for instance, if you automate advice process.The -- yes, we are struggling to keep this number up now for, you can say, close to 2 years. And we finally now feel that we are gaining traction that pipelines for the migration of existing partner is well filled and our conversion rates are stable there and the pipeline for new brokers joining the platform and migrating their data portfolio to Smart InsurTech is well filled and stable as well. So we see that all the investments that we did in the last years in building interfaces and, let's say, establishing additional services, which you are able to use only when you've migrated all the data, are slowly starting to pay back.And we are having a positive feedback from the market, not just by emphasizing that it's [indiscernible], but by migrating volume to the platform. And from now on every quarter, you will see our growth track on both on the fact how many billions are already migrated to Smart InsurTech and how high is the percentage of validation within this data structure so that we are really getting from being a software solution for agents to a platform for the total market.The impact on the revenue side is still slow. We are still facing a declining license portfolio and project business and replacing business recuring revenue out of the platform business. And still, the growth -- let's say, the gain in additional protection volumes based on the growth that we saw on the platform is compensated mainly by a loss of other revenue streams. So this is -- this transformation from onetime revenue to a recurring revenue is time-consuming, especially when you're in the middle of a pandemic and projects are not going forward as fast as they could. But we see that our -- let's say, our investments paid back and that we gained the traction and we are getting slowly forward.So it's an investment phase still. We expect in the next couple of quarters to see an acceleration in the migration volume and the speed of the migration of the volume on the platform and based on this acceleration of revenue growth as well.So Hypoport, as a total, first quarter ends with double-digit growth on the earnings side and profit side and this new record in the revenue side. We are well on track to scale and expand our business as we did in the last 20 years, more than 20 years. And we feel pretty comfortable with our current estimation for the 2021 figures. So our forecast of the first quarter pace pretty well to the focus of EUR 430 million to EUR 260 million in revenue and EUR 40 million to EUR 45 million in profit.So I would now hand back to Ms. Sandra for the Q&A session.

[Operator]

[Operator Instructions] We have no questions. So I would like to hand back to you, Mr. Slabke.

[Ronald Slabke, Co]

Yes. Thank you. Okay. Then maybe all the questions are answered again. And hope to hear and see you soon here in 3 months, beginning of August, where we present half year figures. We feel pretty comfortable about the ongoing year. And let's see if we are able to deliver again a record quarter after this pretty well start in 2021. So hope to see you soon, and bye-bye.

[Operator]

Ladies and gentlemen, thank you for your attendance. This conference has been concluded. You may disconnect.