Hypoport SE

XETRA:HYQ

Earnings Call Transcript 2018-Q3

[Operator]

Dear ladies and gentlemen, welcome to the conference call of Hypoport AG. 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 as well. So we are presenting great numbers for the first 9 months of 2018, and I will [ detail ] you for this presentation.Let us start with this. Hypoport is a network of companies working closely together in the mortgage, housing and insurance industry. We enforce synergies between the different platform companies to enable a growth of each of them. It's important to understand this when I later explain the performance of the different segments in the overall market environment to remember and recognize Hypoport as something -- a special something unique, a digital networks company. So we delivered growth in an overall market environment of, let's say, low one-digit growth in German housing market. So how does the German market look like for us right now? For the last couple of years, we had net migration to Germany. Most recently, we got to know that again, jobs were added in the last month, and Germany has the highest number of employed people ever in history. In addition, we have the lowest numbers of unemployment as well in Germany for a long, long period, more than 20 years. So in the combination, Germany stays attractive as a region for labor within the European Union. And as you all know, there is a free movement of labor within the EU, so the process of net migration to Germany is likely to be continued in the next years.For 2018, we are pretty sure already that we see a net migration, so demand for housing is high. This demand leads to a huge increase in market forces. We see a demand for housing in the metropolitan areas of roughly 1.5 million, which is not met. Currently, roughly 300,000 apartments are added in whole Germany, not only in the metropolitan areas. So just as a quick calculation, it will take us decades to meet the demand in the metropolitan areas.So beside the fact that this new construction needs to be financed and feeds a slowly increasing mortgage market, and the exceeding demand creates a huge pressure on the pricing side as well. We see in 2018 again rising prices in Germany, especially in the metropolitan areas, with a price increase of around 7% to 8% in the main metropolitan areas. This price increase, plus the slowly increasing pace of construction, leads to a mortgage market which is, for the first time, past the previous year. We are at the plus of 5% -- 4% after 2016 and 2017 decline in overage volume.In addition, for consumer it stays very effective to finance their own home or even apartments for let because the interest rate, typical 10 years fixed interest rate in Germany, is still around 1%. But extremely affordable to own your own house. The only issue is that there is not enough supply to the market even for homeowners who are able to acquire.Besides these macroeconomic trends, regulation plays a big role in the housing industry and the credit industry. It's a typical area where legislators try to gain votes. In the last couple of months, we saw a housing summit in Germany with a hot discussion before and after about the right technique to tackle the issue of exceeding demand. We see some small steps by the government. They introduced some subsidies, for instance this so-called Bausparvertrag, which eased some small, let's say, issues in the market. But let's say, a general change in the policy and really a focus on expanding the supply side was not agreed on and is not going happen soon.So this -- looking on this and the, let's say, the high regulated environment, it's quite easy to predict the housing market in Germany for the next couple of years. Expect a further increase in prices, expect further increases in rents and expect a slowly increase in construction volume. This all should lead to a healthy, slightly increasing mortgage market for us as well.So how does the different segments perform in this environment? We start usually with the credit platform in the central EUROPACE marketplace. EUROPACE gained market share. In addition to this 4% market growth, EUROPACE gained an average of 40%, resulting in an 18% growth to close to EUR 43 billion in the first 9 months in contract volume. I highlight the personal loan sector, something we are operating in for a long time, which keeps on a steady pace and a nice 2-digit growth in the first 9 months, now 38%. Our proposition here is to be not only the solution for advisers which want to pick the best loan offer for their client, but as well for banks. At that time if their own product is not feasible, they are -- they use EUROPACE and add additional products to their sales force to meet the demand of clients.The mortgage volume as a core of the marketplace, up 15%, again, 2-digit growth above the market. Here, we see an increase in dynamic during the year. So third quarter gained even more speed and more market share than the previous quarters during the year. I will come back to this -- why this happens in a minute.Building society finance is quite a typical German product. It's a savings product, very secure, long-term your interest rate for a future mortgage. Because of the extreme low environment, but as well some spikes and some moments of increased interest rate, consumers understand that there is -- that we touch the button and there is opportunity to secure this as long as possible. And the German consumers do this by 2 ways: One is expanding their initial fixed interest rate period, plus adding some building, financing contracts, post Bausparvertrag to secure even farther for the future. So all this is a nice development across all sectors. The mortgage brokers, private banks, cooperative banks and savings banks gained market share on volume on EUROPACE.Let me talk about this partner structure. We gained 120 new partners net over the last 12 months. You can translate this as every week, we gained an additional savings bank and additional cooperative bank to partner with EUROPACE. Partner usually means they start as product supply. So they put their products on EUROPACE to be able to be sold by mortgage brokers. So they get to know the marketplace, they understand how a digital mortgage product looks like, how efficient it is and how you are able, as a bank, to expand your balance sheet by leveraging your proposition to the market, your products on EUROPACE. Greatest development in the savings banks area, FINMAS now already has more than 60% of all savings banks under contract. From the top 25 savings banks, only 1 is missing. So we close the areas and we close the gaps. And this with high-speed [ instance ]. Similar development in numbers for the cooperative banks. Just they are close to 900 out there so we are now roughly above 30% there. But the migration speed, so of partners sign up to use EUROPACE as an additional sales channel is high in this sector as well.What is more important for us than getting them as product supply is their sales site. Their sales channel, their branches. And here, we see great development in the savings bank industry. The last quarters we always were above 50%. The last 3, around 70% growth year-over-year. So for the first 9 months, we are able now to report 72% growth of activity of transaction volume out of savings banks sales infrastructure. This is great because it -- it's a huge opportunity for us. Savings banks control roughly 25% of the German market, and they are getting more and more into using EUROPACE for their business.On the cooperative banking side, this transformation process is a little bit slower still. We are ahead a couple of years, I would say. During the first 9 months, we saw an increase in 31%. This incremental increase during the quarters, especially the second and now even the third quarter, set new dynamic levels. We closed at 40% for cooperative banks in the third quarter. So they are increasing as well their speed in transferring their sales infrastructure to EUROPACE. Just still not on the level as the savings banks do it. But the competition is high in the market with only 4% growth. There are winners and losers in the market, and the ones who migrate to EUROPACE are clearly on the winning side.So including our other activities linked to the mortgage business, the segment overall had a great performance and the best first 9 months and the best third quarter ever. A plus of 30% in sales volume and revenue to above EUR 80 billion and EBIT, which got close already to EUR 20 million, is a great performance of the teams in all subsidiaries in the sector. The -- would you please -- what I need to remember to tell you is this is achieved -- this EBIT of EUR 18.8 million is achieved. This huge investment in engineering and sales force to drive EUROPACE forward in their mortgage market. We invest heavily in the cooperative savings bank area with additional trainers and coaches and project managers to bring this organization forward, and we invest heavily in software development to keep the pace and keep EUROPACE as the technological, let's say, #1 in the market. With a far distance to any other solution out there, and even increasing their gap between us and the #2.So we're coming now to the second sector, Private Clients, and the core, the Dr. Klein franchise network. The Dr. Klein network, we were able to achieve exceptional growth in this market environment. In a 4% growing market, we gained heavily market share and grew by 28% to EUR 4.8 billion in mortgages brokered. This gain in volume was contributed by additional advisers of our franchise network, at plus 70 people to 590. In addition, we gained efficiency based on the further development of the EUROPACE system, and we gained from an incremental increase in average mortgage volume. The price increase reflect -- is reflected as well -- the price increase in the housing market is reflected as well in the increase of average mortgage volume, and from this we profiteer because the productivity of each adviser and each franchisee is increasing this way as well.Overall, the segment where Dr. Klein is core showed a strong growth and a new record level of revenue and EBIT as well, EUR 66 million revenue, EUR 9 million in EBIT for the first 3 quarters. It's a clear statement that an independent-run franchise network which independently advises consumers is still a huge game changer in the German mortgage advice market. We are doing this not only profitable, we are doing this professional as well, with a high level of quality, so we get awarded by newspapers, by consumer organizations every quarter. And we gained, again, a couple of section ratings and our -- the brand, Dr. Klein, a very positive reflected financial service brand in Germany.So coming now to our new segment, our Real Estate Platform. As you know, we acquired FIO system and Value AG, and consolidated them started on 1st of May 2018. This changed the overall structure of the segment, which was dominated before this acquisition by the Dr. Klein business in housing -- financing for housing associations. So the big municipal and cooperative-owned housing companies in Germany.How the market changed, you can see best in our breakdown of the revenue of third quarter 2018. Roughly 1/3 of contribution comes now from software-as-a-service in the core FIO; 1/3 comes from property evaluation in the core Value AG; and roughly 1/3 comes from mortgage advice and loan transactions handled by Dr. Klein Firmenkunden. So this Dr. Klein Firmenkunden business is a volatile one. This you know as an educated investor. Hypoport software-as-a-service and property valuation are both segments which are very stable from their cash flow, long-term client relation, let's say, a huge number of transaction, a steady structure linked to our platform business. So something which will incrementally grow and distribute a steady growth path for the segment in the future.On top of this states this now, let's say, still volatile but not so important business anymore. This mortgage transaction for housing associations, which, especially in the last 2 quarters, delivered below expectation regarding the transaction volume. So we saw a strong first quarter in 2018, but second and third quarter were weak. This is volatile. The business is highly linked to change of interest rate, motivation for housing associations to close mortgages because of regulatory issues. And even then, we saw some small spikes in the interest rate in the third quarter, the holiday season plus the housing summit and all the discussions didn't bring a lot of transaction to closing in the segment.But this minus 15%, the good news comes that we were able to close some pretty good deals and end up just with a small incremental -- small minus 1% total of more than EUR 10 million revenue in this segment for the first 9 months.Just memorize it's only this part was taking into account for the whole 9 months FIO systems and Value AG only 4 or 5 out of this 9 months. So when you look on the overall figures for this segment for 9 months 2018, this 53%-plus doesn't reflect the full strength of this segment because of the missing first 4 months of FIO system and Value AG. But you see already the dynamic this segment got because of the acquisition.So it's growing heavily and it's getting less volatile. And let's say, the underperformance on the EBIT level is, on one side, linked to the weak 2 quarters in the housing association business of Dr. Klein. On the other side, in heavy investments in team and sales and integration of FIO system and Value AG to bring them up to speed. Both companies were run pretty well. They were profitable, they were growing, some at a single-digit level, but we want to speed them up and bring them in on the Hypoport level, Hypoport speed, double-digit, as soon as possible, and with this comes some investments. And right now, we are focused here on bringing them on our speed.So last segment, Insurance Platform. Here was a big event. At the end of last quarter we acquired ASC, a company which expands the services of Smart InsurTech, especially in the area of, let's say, generating contracts for insurance firms and handling the payments of consumers to the insurance company. So collecting them and forwarding them as a payment to the insurance company. These 2 additional services, which are outsourcing solutions for insurance companies, increased the value of the Smart InsurTech platform in the whole industry, and leverages the already existing level of implementation on the safe side for every insurance company. So it gets very attractive now for insurance companies to integrate the Smart InsurTech and use for a certain amount of products, even the ASC services, to get more efficient. With this acquisition, we accelerated the speed of growth in this unit. We guided 50% growth rate before acquisitions. Just 1 quarter, the consolidated ASC now brought us to 100% revenue growth and a 67% gross profit growth in that segment. We are still losing money when you look back on the last 9 months. A loss of EUR 1.5 million in EBIT. If you compare this with the half-year figures, you will see that we earned a small amount in the third quarter. It was pretty good, lots of positive things happened and came together. So this -- let's say, the cash burn rate and the negative distribution to the group overall profit statement declined by this unit.Looking forward, we keep here our focus on topline growth. We want to get not only the commitment from the market that they want to join our technology, we want to make it true that as much as possible of the sales side and the production, the product supply side of this market joins the Smart InsurTech technology and drives this technology to a standard. So we are willing to keep heavily investing in this segment and we accept even negative EBIT on a quarterly level to keep this growth path of the segment up and running.So there we are. Overall numbers. The best visualization is our long-term development. We got pretty close with our 9 months figures to the results of 2017. So we closed with EUR 192 million in revenue compared to EUR 195 million in the whole year last year, and our EBIT level is equal. Here, you see the dynamic. So this scaling of the existing business models, which we are happily doing and which are contributing double-digit growth, top and bottom line, is now leveraged by programmatic acquisitions that we do where we focus on synergies and companies that we acquired. And together, we reach an exceptional growth speed for a company our age and our size.So we are pretty happy with the performance of the Hypoport network in the first 9 months and look forward to fulfill our guidance, which we keep stable. We expect for this year a revenue of up to EUR 260 million and an EBIT between EUR 29 million and EUR 34 million. So you're invested in a very special company, a network of digital business models working closely together, using synergies to expand the market position, gaining market share in 3 very important industries in Germany. And I hope you stay with me and you like what we are doing. And now, I give back to [ Paul Heimlich ] to moderate our Q&A section.

[Operator]

[Operator Instructions] There are currently no questions. [Operator Instructions] There are currently no questions on the phone. I hand back over to Ronald Slabke.

[Ronald Slabke, Co]

Yes. Thank you. Okay. So then I close this call with the -- I'll tell you that we will come back here, talk with you at the beginning of March and look back on a record year 2018. Thank you. Bye-bye.

[Operator]

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