Hypoport SE

XETRA:HYQ

Earnings Call Transcript 2020-Q2

[Operator]

Dear ladies and gentlemen, welcome to the webcast results Q2 2020 of Hypoport SE. At our customers' request, this conference will be recorded. [Operator Instructions] May I now hand you over to Mr. Slabke who will lead you through this conference. Please go ahead.

[Ronald Slabke, Co]

Yes. Thank you. And from my side as well, welcome to the half year report of Hypoport. And some deep dive in to certain issues. Okay. As you all know already, we had a pretty good start in 2020, plus 20% growth rate in an environment where Germany, like most of the economics around the world, we're hit by the coronavirus plus some developing recession after this because of the lockdowns. And compared to this, 20% top line growth is a pretty good start in the year. We start as always with a detailed look on the market environment for you to understand better what's going on. And a little bit untypical for us, we will focus on this short-terms event. So what especially happened during coronavirus time, the lockdown in April, May, and what you may expect because of this, let's say, significant change in the environment mid to long-term from us and the surrounding markets. Okay. We started our major core business platform unit in the Private Client division. Here, mortgage financing, for consumers' centered product that we offer for the market we are in, together with the credit industry, who as a whole was hit pretty hard by coronavirus, both on the risk side as well as on the branch network side. For us, March to May, in the lockdown period means that our market share in both segments were growing fast because of the full digitalization that we offered, either to the -- on the one side to the advisers of banks and financial intermediaries and on the other side to the consumer directly. So during lockdown, Hypoport directly profited from the environment, and could pretty well monetize on the investments we did in the last years in technology. Midterm and long term, there will be a significant impact of this COVID pandemic regarding the housing demand in Germany. What we saw after a couple of weeks in the lockdown is that people started to reconsider their previous decision about how they are living. And after already 3 to 4 weeks during the lockdown and during the crisis, we reached a precrisis demand on the housing side because everyone learned how important your 4 walls are when it comes to the pandemic and so their own living situation got much more important for a lot of Germans, not to say, most of the families, especially. And everyone learned that having a house maybe outside of the city is better than having an apartment plus a balcony inside the city and having an apartment with balcony is better than to have an apartment without balcony. And the same goes as well for your home office. An apartment without home office is less valuable than an apartment with home office. So there are lot of triggers in there, which happened during the lockdown that increased the demand for housing space here in Germany. So what we see that since May, you can say, demand is exceeding the precrisis level and the supply is still low as it always was in Germany because of the crisis time or the lockdown time, even a little bit suppressed. So demand is rising, supply is, let's say, best case, stable, you see a price rise. And this price rise happened during the last month. So the development of the last years continued. And the development in this housing market is not affected by the recession environment. So people are not nervous about their future income. There are more people who are willing to spend more of their household income on housing than before and so prices goes up. And because of increasing prices, mortgage lending volume is going up long term. And so we expect pretty well market environment for the next quarters in the next years. A little bit different perspective on corporate financing. Here, we are more into this market for the last now 12 months since the acquisition of REM CAPITAL in the last summer. During the peak of the lockdown, we saw a heavy increase in demand for subsidized loans from KfW, a state-owned, government-owned agency, which is providing, let's say, special financing vehicles, for instance, for the corona environment. So -- and all in all, it was a busy time for banks as well in the German Mittelstand financing business, so a lot of uncertainties, a lot of liquidity demand. It's a lot to do for the banks, including us as an adviser to, let's say, stabilize the relation between banks and corporates, midterm -- at the mid and large corporates here in this business. Long term, we will see a change in the market because of the coronavirus because of the recession, which is currently, let's say, eating through the economy, it's going to hit some of the businesses hard. Banks try to prepare themselves for the losses, which they expect to come the -- let's say, the equity of the banks will get some damage, some loss. So we expect that bank loans will not be as easily available as it were before for German businesses. So their structures will get more complex. They will involve not only German bank loans, but capital from third-party sources is more and more. So we expect an increase in demand for advisory products and as well a platform in this environment in the near time and long-term future. So good for our acquisition of REM CAPITAL and good for our investment in fundingport where we are building the platform, which will make it possible that German Mittelstand will be financed as good as in the past. So last segment of the credit business -- the credit industry where we are in the consumer financing in short-term areas. Here, we saw a more restricted lending by the banks. As you can imagine, this is an upcoming recession, banks fast reduced their appetite for, let's say, outstanding loans to consumers. So we saw a decline in the market, minus 13% for the first half year of this 2020. Long term, we don't expect any major shift in the appetite of banks in this area. Consumer financing is high profitable business, high-margin business still in Germany here, it was 200 to 300 basis points of net credit margin. So we expect a fast recovery, especially where we don't expect major losses of banks in this environment because of the, let's say, overall well-handled crisis environment by the government. So we don't expect major losses, and we don't see that banks will change the strategy in the consumer business here. Okay. So just to add, our Private Client division especially gained market share in the mortgage business because of the ability to remotely advise clients using video interfaces with our clients. We were well prepared for the situation and could monetize on this. In addition to using the Europace platform for the transaction, the interaction with the client remotely were well-established and Dr. Klein advisers outperformed the market pretty well. We will come back to this in a minute. Okay. Now we are moving on to the Real Estate Platform. And our 2 target groups there. On one side, it's again the credit industry. They are the largest agents for real estates in Germany. And on the other side, they are the core target group for our valuation offers. On the agency solution to sell properties, we saw a huge decline in the usage by our clients. Thanks to the traditional pricing model we are still working in, it didn't interfere with our income during this time. But we saw that our clients were hit pretty well -- pretty, let's say, hit a lot during the 2 months of lockdown, or 3 months of lockdown. From there we recovered already. And for the mid- and long term, we expect that because of the increasing relevance of living space these agencies of the banks will recover. They will come back to their old transaction volume. And actually, because of this learning, it may be easier for us to transfer the business model to a transaction-based model and go away from this, let's say, license-based Software as a Service model, which we are running right now on.Yes. What we will -- what this industry learnt is that the more digitalization is good even in this part of the value chain because agents who were more digital, who were able to offer digital inspections of the property for the clients or could interact in a more modern way, exchange documents fast and so on, outperformed the agents which adapted very traditional approach to interacting with clients. So the offerings of FIO here will be more needed mid- and long term. And the solution is a nice reminder of how important the digitalization of the selling process of the properties as well. On the valuation side, we saw 2 slowdowns. One slowdown was that banks who are the major customer group of Value AG slowed down their processes in their back offices because of, let's say, lack of employees or shutdown of the whole operation. So they started to stockpile their requests for valuations. And on the other side, we were as well for a couple of weeks uncertain how to deal with the consumers and our evaluators because of the needed physical inspections and physical contact, which was linked to this. So on both sides, we saw a slowdown. And so this business was actually affected by corona within the Hypoport Group. Midterm, we see a little changes here. First, and this is a positive outcome of the corona lockdown is that the regulator, BaFin here in Germany, allowed remote inspections of properties, so there is not a physical human-based inspection is needed anymore. And we started to offer this over the end of March. And more and more of the banks are switching to this product. On the other side, bank stockpiled, they had needed valuations. So we have to, let's say, start working this out and reducing the backlog banks that we have now. So midterm, no major changes in the valuation process because of this episode of pandemic. So second target group of the real estate platform is the housing industry. The large landlords here in Germany, specialized in the social housing sector. I think normally, you could expect that such pandemic leads to some losses for their landlords. But because of the government-backed subsidies for social -- let's say, or the social net that we provide here in Germany, you don't see a significant losses in rents on the landlord side, especially this municipal-owned and cooperative-owned that we serve. So this -- this industry actually was not affected in their core business by corona. The only things that affected were building on modernization projects where some supplier have failed to deliver product or services. So we -- they started with some delays in their construction processes or projects. And this -- it a little bit effects their financing pipeline with us because when you're -- when all your processes slow down a little bit, you are not so fast in financing the next project. But it is really -- it's a minor issue. Sure. It was a minor issue, and it's just a minor issue from this lockdown. When we look on the long-term period, then we expect this industry to go for more digitalization as well. It's -- let's say, it's not a need they feel when they look back on the corona crisis, but somehow to not be able to control what's going on in your business, it feels a little bit strange and with more digitalization, you may have more control over this -- the whole value chain and for such a housing company, they felt a little bit uncertain, especially when they had to close their headquarter, and were not available and datas are not accessible for employees and management. So there is some expectation from our side that digitalization is more needed here and more accepted in the near-term future, even then for some traditional industry. So talking about traditional industry, the insurance board here in Germany, let's say, selling new insurance policies were hit by corona crisis, especially insurances who need to be sold like life or health insurance. Insurances where there's a demand, a trigger event, slowed down slightly in the new selling process because when less cars are sold, less car insurances are sold as well. So new business slowed down. The management of the existing business of their huge stockpile of outstanding insurance portfolios was not affected by coronavirus. And this is actually core for Smart InsurTech and our insurance platform that we focus on this management processes, not so much on the selling of new product processes, or let's say, our pricing model is not affected by this. So we saw a slowdown in the industry in the new business and in their ability to generate new business. In the core process, they were not affected. As well, we don't expect any losses which are relevant for this industry on because of claims or something like this. Long term, it was one more time event to convince every management in the insurance industry that the digitalization is necessary, that a complete digitalization is necessary. If you digitalize on the parts of your value chain, this doesn't secure you in case of such an event as long as there is 1 offline process needed, your whole operation gets to an hold when you're have a pandemic like this corona virus. And because of this that at any time, in any moment, another local shutdown can occur again, or you'll have to just shut down your office again, the need for a fully digitalized process in insurance on the new business side, on the underwriting side, and on the management side of the whole portfolio, is needed. And let's say, this may help us in our process of convincing the whole industry that the distribution is there. It's ready. We're the one to provide it, you just need to migrate. About this in a couple of minutes more as well. So all in all, corona was a major event for us as well. The corona crisis offers a lot of opportunities for us. It is strengthening our positions regarding the digitalization of the workflows in all 3 industries and all 3 industries needs more of our services in the near-term future than before. So now we look back again. What happened in the first half year? As always, we start with the credit platform? As you know, in the center is the Europace platform, which provides 3 core products. The mortgage product for consumers were up 36% in the first half year of 2020. New record high, no question. Just as a comparison, one more time, the total market volume grew by 8% in the first half year. So we outperformed the market by 28% and gained a lot of market share. We get market share in all 4 target groups: private banks, mortgage brokers and at the regional banks as well, as well pretty strong were the growth in the [ Bausparvertrag ] taking building financing here plus 21%. So long-term interest rate, securing products, they are linked to the mortgage business and were up even when total market was negative here. And as well as personal loan business, we were able to grow by 3% even when the total markets were down double digit. So major gain in all product areas and in all target groups. When we look on the target groups, what gets more and more clear is there is no successful mortgage brokerage business out there, which is not using Europace. More and more of the mortgage brokerage business is going through Europace. Private banks keep handling or keep using Europace, keep checking out which part of their sales force, their branch network they may have to migrate. We expect that the corona crisis gives some additional impetus for banks because they learned that their current infrastructure is able to power their branch network, but is not capable of powering remote work for employees. And you need to be able to work remotely in the next couple of quarters to be safe to operate in the mortgage business. So we expect here some positive impacts in the sector. Even when this will be, let's say, black swans because there are not so many private banks left to decide for Europace. Where you can see already that they are -- made a lot of small positive decisions regarding Europace is the cooperative banking and service bank sector, more than 1,000 banks in these sectors, with a lot of small decisions in our directions. We reached 10% market share in both groups now. In the cooperative banking sector, we were growing more than 100% compared to last year, new record high, EUR 2.2 million and then in the second quarter, the cooperative banks were even on a close run with the savings banks, which they're growing for a longer time on a steady basis and the coops now accelerated in the last 2 years. And even during corona crisis and even when there were a lot of branches closed of local banks, you see that our growth record stays intact and even the savings banks were growing an additional 40% compared with the last year. In both sectors, we expect this growth to continue because, again, the corona crisis showed that if you're able to work remotely, you are dealing much better with such an environment than when you are only able to work in your branches. Okay. And another small positive signal is that in the savings bank sector, the major IT service provider Finanz Informatik acquired the joint venture share of FINMAS, which was hold by now by the Society of East German Savings Bank. So now we are in the team to make FINMAS successful together with the centralized IT service provider, and we expect here some positive impacts from this new joint venture partner as well. So with the strong growth of the Europace world, and let's say, the other businesses, so our servicing businesses, 2 small intermediaries, our corporate loan business on the advisory side, the REM CAPITAL, they were growing as well and distributing as well some growth, but not as much as the Europace platform itself. So in average, the segment was growing by 31% to EUR 80 million in the first half year, new record high. And let's say, is closing on a new volume level here, distributing EUR 60 million in profit to the group. When you take into consideration that we are investing here right now, still a lot in key account resources for this local banks, still a lot in developing Europace. And now even the fundingport development is in the segment, we are happy that we show some profitability gains here as well in this in the current environment. Okay. Next slide, next segment, Private Client business as well. Mortgage financing in the core here, the Dr. Klein franchise network, with lead generation on the Internet, using Europace and in the branches ask the franchisees to advise clients and close mortgages on behalf of Hypoport. Mortgage volume closed is up 30% to a new record, EUR 4.6 billion. And this even with adjusted increase in advisers by 7%, which is a slowdown compared to the last year's. So the productivity of the Dr. Klein franchise network grew massively in the first half year. I would say, half of this productivity gain is thanks to increasing property prices and mortgage volumes. And the other half is because of the astonishing quality of the way how Dr. Klein was remotely treating and advising their clients. So the well-trained approach of video advice made Dr. Klein a very successful advice organization during this time, while a lot of banks or even smaller mortgage brokers struggled to handle this environment we were in, and we may be again in from time to time. So Dr. Klein had a strong growth on the revenue side. The slowdown on the adviser side is linked to the fact that it is a little bit more tricky to convince people to sign up a new employment contract with the franchisees leaving up a local bank and getting an independent adviser. In such an, let's say, crisis environment, people stay on the secure side and keep their current job and not switch to a new one. And so during the pandemic, we saw the slowdown. On the other side, we expect these people to see as well who's operating well in the market and who's offering the right technical solutions to give these clients so that after this environment is over that we will be able to close this gap again and increase the pace of hiring new people to the network. And we'll get back to double-digit growth rates on the headcount of our advisory network as well. So as a result of this growth in sales, Dr. Klein was able to achieve new record highs on revenue and gross profit side as well with a similar growth speed because of the huge investments we capitalized last year, capitalized direct through our P&L last year, we see an amazing increase in profitability. This is not a little bit -- it's not fair fully. It's a little bit overstated. When you compare with the 2017 or 2018 profitability level, you understand that we are back to a normal situation that EBIT margins above 35% on gross profit is normal in this kind of business and we are back to normal. We had a good run in the first half year. And Dr. Klein was contributing a pretty good share of profitability to the group. And it's because of this, one of the core business units, which we are running. So after these 2 core segments, now we are coming to the 2 growth segments. First, the real estate platform. As you know, we are serving 2 client groups, 4 platforms. And let's say, trying to get as fast as possible market share in all these 4 segments of the housing market here. We are doing pretty well on the consumer side, using our stronghold in the mortgage platform, with a market share of 25% to, let's say, gain control of markets along the value chain. If you look from the mortgage financing to the front, to the property transaction, with the acquisition of FIO, we service now 7% of all private housing transactions in Germany in the first half year, let's say, a lot of potential, as you can see here, with the steady growth of the importance of Europace and then combined offering between the property and the mortgage, we are pretty sure that we are able to help the agency of the credit industries, the credit industry to gain market share. And we gained with them and in a world where we join with our pricing model their interest [ fast ] revenue grew up fast as well. And if you look for the value chain from a process side, then with every mortgage, the asset valuation necessary in the world of evaluations, we as well reached already a market share of 7%, so only 93% to gain still? So first, a more detailed look on the agency side. The -- while FIO was already strong when we acquired this 2 years ago, we steadily increased the market share of FIO within the savings banks industry by a combined offering with Europace and FINMAS. We reach now 85% of all savings banks, which are under contract with FIO. On the cooperative banking side, FIO was [ virgin ] when we acquired it. And over the last 3 years, we could increase the market share now to 10%. And with the increased growth of GENOPACE in the cooperative banking sector, we see as well a huge potential to accelerate the growth speed of FIO in the cooperative banking industry. So the growth rate continues and FIO was able to gain 33% in revenue to a new record of EUR 10 million for the first half year. On the valuation side, Value AG gained another 80 contractual partners compared with the half year 2019. So their relative share in the group of all Europace partners is steadily increasing. We hired a lot of people. We invested a lot in the digital valuation process and in an underlying software platform to fully automate the valuation process or depending on the regulatory requirements and the size of the property automate as much as possible. And as a result, even within this crisis environment, we were able to increase revenue by 53%. This is a major slowdown when you compare with the first quarter. There we still had an increase in revenue from more than 90%. Here, you see the impact of the coronavirus and the slowdown on the rental side to request the valuations and as well as the consumers to inspect their properties, which we saw in April and May. Since June, you can say it's normalizing again, and we expect an increase in growth rate again for the second half of the year. So not continuing this slow growth which we saw in the second quarter. So second target group, housing associations. Here, the piloting platform is a major revenue driver. These social housing companies, let's say, signed mortgages of EUR 1 billion, again, this first half of the year, with the plus of just 3% compared to last year. Next to this small slowdown, which we saw in the projects caused by the coronavirus, a positive impact had the general interest environment. We have the lowest interest rates in Germany ever still. This typical mortgage of 15 -- 10 to 15 or 20-years duration, starting with a below 1% interest rate for this fixed term period. And the housing associations are, let's say, in need of this finances, especially when they have new projects. Thanks to some volatility in the interest rate, we had as well some trigger moments to close mortgages in the second quarter, so a pretty good interest rate environment. Unfortunately, the political environment for social housing construction is still weak. We have intensive discussion here in Germany about rising rents and what you can do about this and a lot of local regulators try to implement rules to slow down this rent increase process. This is making the -- especially this long-term focused housing associations a little bit uncertain about the future prospect of their investments in new housing. So a slowdown in the renting construction or renting unit construction, which is really not helpful. So a misunderstanding between government and economy, which we see over the last years, you can say, already here in Germany. Yes. And the good news is we are lacking roughly 2 million units in the metropolitan areas. So there's a huge exceeding demand pressure side on government and housing associations to do something. And with the fact that Germany will recover much faster from this coronavirus-linked recession than other European areas, we will see additional migration within Europe to the center, the economic power here in Germany and so more people will demand living space and the need for housing, especially social housing will be even increase more and we will exceed this demand of 2 million units soon. So the pressure will increase and in some moment, politics will hopefully remember what it has to do to set up an environment where social housing is built and constructions are started. As far this situation, we are waiting for this unit because then we expect a strong growth in the needed financing of this sector and, let's say, additional growth for our Real Estate segment. Okay. Digital growth, first half year, plus 28% top line. So we are on -- this is the fastest-growing segment right now within the group, even when it's still expensive to grow here. We invested a lot in the last quarters. And plus this impact from the coronavirus, we see a reduction in profitability. Let's say, all in all, it was planned. We want to grow here. We want to have a significant double-digit growth rate in this sector even when the environment may be a little bit struggling because we see this as a huge opportunity for Hypoport using our stronghold in the mortgage process to build here, or to gain here market shares and gain control of market along the value chain next to the mortgage processing. Talking about controlling market and gaining market share. We are entering the third segment, the Insurance Platform with the offering of Smart InsurTech as a full technical solution to cover all insurance processes within the German market. We did 2 acquisitions in the first half year, where we acquired minority shares in 2 companies. One on the commercial insurance side, one on the corporate pension side, both helped to make one more time clear to every participant in the market that we are going for the full game that we want to digitalize the whole industry and that even in this, let's say, side products of commercial or tension product there, we are going to drive digitalization forward to come to a whole solution for 1 market -- 1 marketplace for all insurances, 1 technical solution for the whole maintenance process of all insurances. So on the operational side, we are getting forward with a lot of projects with medium-sized clients. We publish on a monthly basis now some medium-sized insurance company, or insurance sales company, or a broker company, which is migrating their sales force or decides to migrate the sales force or parts of their traditional infrastructure to Smart InsurTech, just the projects, the underlying IT projects, they are tough. They take a lot of time, they, let's say, consume our resources and stretch our -- I don't know what the insurer capability is. So it all is pretty hard work to do here. And let's say, still, we are lacking this trigger event where the process itself is accelerating that sales organizations migrate fast to us and drive their IT projects with us with faster forward. So what we do in between is, we switched the pricing model away from one-off fees, license fees or paid projects to recurring SaaS revenue linked to the transaction volume. And let's say, because of the different speed and impact, so skipping some one-offs and a onetime revenues and transferring this to recurring leads to visibly slow growth of only 2% or 3%. This is not reflecting the real success we see on the client side. It feels higher. And let's say, with the projects which are ongoing, we know that our growth speed is in reality higher than what we can show here from pure revenue side. There are investments in the slide you see in there our EBIT margin. We increased our loss in the first half year by a couple of hundred thousand euros again. But we stayed with our expectation that we will have double-digit growth and positive profit to the end of the year here in this segment. So all in all, Hypoport Group is gaining market share in all 3 industries. The offering is not just competitive, it's outperforming most of all other businesses in these 3 sectors right now. So top line growth of 20% to new record high for half year and even profitability growth, including that we in certain areas we had to deal with the corona crisis as well. So what you could see on a long term is that our growth record is intact, our growth speed even accelerated in the last 2 years. We are gaining market share constantly, and our investments are paying back short-term. So the EUR 35 million, which we spent last years within our P&L are paying back already. So because of this and what we see in recovery in the third quarter already, we stick with our forecast for 2020. We expect above EUR 400 million in revenue and something between EUR 35 million and EUR 40 million in EBIT. With this, we keep our long-term growth record of double-digit growth, and we will grow this year by more than 30%. So I hand back now to the moderator for your questions. Thanks for your attention.

[Operator]

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

[Ronald Slabke, Co]

Yes. Okay. I hope I answered all your question already. So let's focus now on the third quarter. We will do our best to use the chances that we see in this crisis environment and keep growing this company. And we will hear again in 3 months. And I expect to report to you some -- another good -- pretty good third quarter results. Let's gain market share. Thank you. Bye-bye.

[Operator]

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