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Ronald Slabke - Co-Founder, Chairman of the Management Board & CEO

Presentation

Operator

Ladies and gentlemen, welcome to the webcast Q3 2019 results of the Hypoport AG. At our customers' request, this conference will be recorded. [Operator Instructions]

May I now hand over to Ronald Slabke, who will lead you through this conference. Please go ahead, sir.

Ronald Slabke

Yes. Welcome from my side as well. Hypoport is looking back on a great year 2019. We continued to digitalize the credit business, the housing business and the insurance business in Germany. We were successful in 2019. And today, we are going to give you a quick update on how we proceed it, how it was different for the year 2019 and what's going to happen in 2020.

Okay. When I talk about Hypoport, you already know, we are talking about a network of independent-run subsidiaries, daughter companies, which are structured along value chains and use that synergies along this value chain to support their business, which are the major change in 2019 with the acquisition of REM CAPITAL and with this the expansion of our Credit Platform to corporate financing, corporate loans. Besides this, the strength of the network space, that's EUROPACE, and the strong support from the Private Clients side is DR. KLEIN; the expansion insurance, Smart InsurTech; and our fast developing Real Estate Platform.

When we talk about Hypoport and the success in 2019, our goal right now is to grow as fast as possible to, let's say, expand our position in these 3 industries and gain traction and gain momentum in -- along the value chain. And so for us, revenue growth is very important right now, and there's a 20% revenue growth to EUR 337 million. We achieved our goals in 2019.

We expanded in all 3 industries. You can see this in the breakdown of the segments. In our core segments, Credit Platform and product lines, we grew about 20%. There are 2 growth segments with the Real Estate Platform and Insurance Platform. We were growing somewhere between 40% and 50%. Exactly the dynamic we wish for our network and for our company to gain market share and control here.

In the same moment, we were able to increase our profitability. Our EBIT went up to EUR 33 million, new record, plus 13%. You are aware of this that we're highly investing to support future growth. And so when we talk about this, we may have a look on the next slide and give you a little bit, for the first time, a detailed update on where we are investing. So major investments go to the Credit Platform. They are still to key account resources for retail banks and especially the regional savings and corporate banks, where we invest in manpower. We invest in development resources to scale and further develop modules for the EUROPACE platform. We invest in the development of the funding platform for corporate loans, and we integrate here with the Real Estate Platform and the services there.

Medium investments we did in 2019 in the Insurance Platform and Real Estate Platform, especially in the scalability of the business models. To adjust the speed of growth of the acquired companies, investments in humans are required to be able to scale this business models, to integrate IT platforms which we acquired and speed up the development process. And especially in the real estate world, with the still very human-based valuation, property valuation services, we invest as well in headcount of evaluators to meet the demand. This all is costly and sums up to EUR 35 million on a group level. So next to our EBIT of EUR 33 million, we had expenditures cost of EUR 35 million for future growth, which are not related to the current revenue and the current profitability in 2019.

For 2020, you're going to expect that this number will increase. We will keep the pace of expanding our positions in this different market and stay in the lead from a technological perspective but as well from a presence on the consumer side or partner side to grow our role along value chains. So these investments will guarantee the future growth of Hypoport in the next couple of years.

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We do because we meet market, in general, which was 2019, healthy. The different segments of Hypoport often are related to the housing market in Germany. We still see a strong net migration to Germany. We see an expanding of life expectation in Germany and the number of single-person households increasing. This all leads to 1 million to 2 million missing apartments, especially in metropolitan areas. So we have an exceeding demand in this markets, which leads to increasing rents and prices.

If not the regulation would slow down the construction side, we would see a construction boom in Germany. But because of a highly volatile building market, we have a slow building sector with roughly only 300,000 units delivered every year, something which increased over the last decade, but it's still far below this what we saw 20 years ago here in Germany. So we are still ramping up our construction side.

As a result, the property prices increased last year, depending on -- if you take an average for Germany or just look on the metropolitan areas, somewhere between 5% and 10%. So stock price increase, which leads to an increased mortgage volume because the number of transaction, more or less, stay the stable.

First, short excerpts to the current situation. For 2020, we expect still in that migration, still in exceeding demand and because of the extremely low interest environment, increasing prices for property. So if not -- if you are looking for a new home, a new apartment for your family with an interest rate, 10 years fixed, far below 1%, it's the best time to buy right now. Even when there are some uncertainties in the environment and the -- especially the, let's say, corona-related industries. We expect for 2020 no slowdown in the number of transactions and because of the price increase, a small increase in mortgage volume...

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Okay. So back to 2019, and how the different segments managed to grow in a market environment. We start as always with the Credit Platform. And then we said that the EUROPACE system, high focus on mortgages. But as I mentioned earlier, with the acquisition of REM CAPITAL, we are hitting here in the direction of corporate loans as well.

The transaction volume of EUROPACE increased in 2019 by 18% to EUR 68 billion, new record. As you see, we saw a increase in pace in growth rate. If you compare it with the long time effort of 16%. This is a result of investments within the last 5 years in key account resources plus a positive support by the market last year, as mentioned earlier. Especially the housing-related product segment of EUROPACE mortgages and building finances expanded by 80%, 90%. This is the major part of the marketplace, and this growth rate is by far exceeding the market growth of roughly 9%. So EUROPACE, overall, was gaining market share.

In personal loans, we had a strong year in 2018, a slow start in 2019. Over the quarters, we ramped up the pace. And with this minus 2%, we finished more or less on a quarterly basis equal to the last year; and before 2020, we expect a growth from this product segment as well.

When you look on the different segments of the market, where advisers are using EUROPACE, we have a strong position from 18 years of history now in the broker segment where every second transaction is part of the EUROPACE. Mortgage brokers in Germany are still gaining market share, and they're growing in 2019 again. While the largest German mortgage brokers was only growing with the speed of the overall market, something 8%, 9%, the advisers and mortgage brokers using EUROPACE were growing faster. You will see this later as well with DR. KLEIN, the private finance segment. So EUROPACE is outperforming as well in the largest mortgage brokers here. And let's say, we understand this as a result of the huge support EUROPACE is giving the brokers for their business.

The brokers are gaining market share from bank branches, especially the large private banks reduced the presence in the field. They shut down branches and supporting this way as well the gain in market share and volume of the brokers. So this is a quite stable environment for us with some medium-sized private banks migrating their branches to Europe.

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The core development for year in 2019, where the huge speed, the regional banks kept migrating to EUROPACE. While the savings banks continued long-time migration path with a gain of 42% to EUROPACE, the corporate banks with GENOPACE speeded up last year. You can see this pretty well in a direct comparison, while the savings banks were growing on a steady pace, in the last 4 years, the corporate banks were slow in 2017 and '18 still. But together with -- or let's say, supported by a joint venture, we founded in the middle of 2018, together the largest Bausparkasse in this sector. We were able to gain traction and increase the migration path of EUROPACE in the sector dramatically. 162% plus in transaction volume to EUR 4.3 billion is a huge gain and a nice speed for quite big organizations is central to migrate on the technical system.

For 2020, we expect both sectors to continue this path with a double-digit growth rate somewhere in the middle of 40% to 60% on FINMAS side and maybe a little bit faster even on the GENOPACE seeing from which speed we are coming here right now. So all in all, this is going to lead to a huge gain and market share in the overall German mortgage market. With a volume somewhere around EUR 270 billion in 2020, we see us well positioned in all 4 sectors for market share gains and saw a double-digit growth of EUROPACE with extra volume, overall.

Go back to 2019. We finished with a record year and a plus of 22% in revenue, EUR 141 million and quite an equal gain and profitability even when we expanded our investments in key account resources and engineering resources here excessively. Major change in 2020, beside this growth of EUROPACE will be the launch of the corporate finance platform fundingport. We expect to pilot it this year with support in the transaction volume in the year 2021 and following.

So after the first major segment of our group, we are coming to the second traditional important segment, the private client business. Here, we operate a franchise system with 200 branches in Germany. It's a business where we generate leads for consumers online, bring them in contact with our local franchisees, and local franchisees are using EUROPACE who advise and hopefully transact the best mortgage available for the consumer. This business was growing as well in 2019. The growth in transaction volume by 40% and to EUR 7.5 billion was faster than the leader of the industry, which were going only by 8% to 9%. So we are seeing here that we, let's say, keep the pace and follow the leader. And if DR. KLEIN is looking to a smaller brokers, they grow as well, but they are far behind DR. KLEIN. So there are only 2 major brands here in Germany, recognizable by the public when it comes to independent mortgages.

This growth was based by 2018 growth of 9% in numbers of advisers. This year, we were able to achieve double-digit growth in advisers. Again, 13%, this is the base for even half the growth in 2020 when it comes to actions advised by DR. KLEIN in the franchise brand.

So when we look on the overall numbers as well as segment, it's a record year. We closed above EUR 100 million in revenue here, plus 21%. EBIT record year as well with EUR 11 million, just 3% above 2018. The reasons that we had some significant investments in ramping up 500 regional banks, which we are very successful in digitalizing their business on EUROPACE and wanted to close new mortgage contracts as well with DR. KLEIN. DR. KLEIN had to, let's say, invest in closing the necessary general contracts with them, plus digitalization of the lead generation, so that we are up-to-date with the way how consumers are informing themselves and getting in touch with us, plus on investing as well and the scaling this franchising their model. For the near-term future, expect that we continue the growth on top line and in line with this on bottom line across this investments in -- especially the key account resources for banks here. They are well done in 2019 and will not need to continue in 2020.

Okay. So now we come to our growth segments. First of this, the Real Estate Platform, where we group multiple platforms around housing. On one side, for the housing industry here in Germany, with DR. KLEIN, our portfolio property financing platform, and this FIO, the property management platform as a software-as-a-service solution and for the housing-related services of the credit industry, our offerings of valuation under the brand, Value AG, and the property sales platform, the agent solution for retail banks is firing again. So there are 4 segments or there's 4 platforms performed different in 2019. Because of the surrounding environment, we started the financing platform under the brand, DR. KLEIN. The housing associations are a key to the, let's say, demand for social housing. They are serving lower third of the market. Then we talk about 1 million to 2 million units missing in the metropolitan areas. It's especially the role of this housing associations to deliver this needed living space. Besides this, that it's needed and that it has to be built, the regulation is keeping -- holding them back. Intense talks, political talks, in Germany about rent control slowed down the development project of this industry. And even when we see an historical low interest environment, this industry is hesitating to invest right now because of the political agenda, especially in the metropolitan areas. So this slowdown in this industry, DR. KLEIN felt pretty well. Because if they slow down, they are financing less mortgages in their portfolios. And so we saw a slowdown by 12% to EUR 1.7 billion last year. And this is in great interest environment for this industry because housing is delivering very stable cash flow from rents, and the interest rate for this kind of housing associations is somewhere far below 1% for even the 15 years fixed interest rate mortgage. And so it's, from an economic environment, the best time to act; but from a political environment, it's distracting.

So next, our special service offerings for housing associations and retail banks. Here, we saw a sharp increase in revenue last year. Thanks to the gain of market share in the savings and corporate banking sector and some projects in the housing industry. In general, you could say we are here successful with the integration of these offerings in our network. On the other side, we still need to transform this business from a license fee and project fee-based business to a marketplace business, where we participate in the transaction volume and are aligned with the interest of our partners and clients. So while in license, our product business here, let's say, hit a cost factor for our partners. In the marketplace business, you are a partner because both sides gain revenue and profit when markets goes up or participants are successful. And this transformation still needs to be done, let's say. We are -- we started the transformation, but it's still a long way to go to transform this business model with additional services and changing in the contractual structure and pricing structure, and let's say, keeping all clients, all partners on board. This is something where we will see significant investments in 2020 after already some investments in 2019.

So when you talk about investments and growth, last segment here, property valuation. Value AG is very successful in signing up EUROPACE partners on the banking side for their services. And signing up means banks are using first services of Value AG in their new mortgage process, some valuations of smaller properties, some inspection of smaller properties or the more complex property part. Value AG was extremely successful in this, let's say, first phase of acquisition in 2019 and signed up roughly half of the EUROPACE partners for their services. And you can see in the strong growth of 60% in the revenue that they were very successful in delivering services to them, but it was a struggle to meet the demand. So in some parts of the year, you can say Value AG was over or under client demand, and it was even a challenge to keep pace by expanding their workforce and partly introducing -- or developing and introducing software support for the business.

So this is an investment case here right now. In 2019, we invested heavily, and for 2020, we expect as well to invest heavily to support strong growth coming from the demand from the EUROPACE platform and as well using automation to increase profitability of this product supply here.

We are here on the way to be the major German player or a dominant player in the valuation market when it comes to evaluating properties for banks. So as a total, the segment was growing by close to 50% to EUR 50 million last year, fast speed. The investments in property valuation business and the SaaS business decreased the probability of this segment, but we see a huge, huge future here and lots of potential to be a major part of the housing industry in Germany and deliver a housing platform for all participants in this market.

Using our strong position mortgages, we have a leverage here, plus our competencies to build technical solutions for B2B players enabled us here a huge growth potential for the next decade.

Okay. And our fourth segment and as well a growth segment, insurance market and Smart InterTech. Here, we tried to do what we did to the mortgage market, to the insurance market, to integrate all participants from the consumer via the adviser to the insurance company, one integrated solution where information seamlessly flow between the 3 parties. And thanks to the complexity of the insurance market in the perspective of product variety and process complexity. This is -- this was not done in Germany, and it is not done. We are the leader when you see the technical functions that we provide, the market accept us as an independent source such a platform because we proved to, let's say, be a neutral independent player in the credit business. And let's say, we are growing this position with our partners here. We developed parts of the platform by ourselves and added an programmatic acquisition strategy where we acquired smaller software companies, which fitted to this platform or were already integrated to the platform to expand our client base and our control about the engineering skills in the direction of the future of the development.

All in all, we acquired 8 companies in this segment and integrated them in the last years, you can say. In 2019, the segment achieved a growth rate of 38%, organic and inorganic. This is in line with our expectation. What we feel is that on the health side, the advisers are keen on getting technical solutions. They agree that EUROPACE -- sorry, the Smart InsurTech is the right player to do so. They are in talks with us, but still we celebrate every signature, every project that we close, still, let's say, the pace of this industry is below our expectation. It's a complex environment. We understand this, and it's -- this is a major decision to migrate your infrastructure to the cloud, to Smart InsurTech. But let's say, if we would be in the need of automation, like this industry is, we would act faster. So as a result, we were able to reduce our loss in this segment to EUR 1.4 million in 2019. For 2020, we expect a neutral profit contribution from the segment and the continued growth with our focus to stitching more and more clients and demand to a transaction-based flow model. The pace of the revenue growth will be in 2020 still low because it takes a lot of time to convince the client, get the signature, do the project, and finally, get the revenue out of a transaction model.

So there is more detailed view of the 4 segments. Let's come to the summary again. Hypoport was growing last year to EUR 337 million, strong growth, expect this to continue and adding growth in all KPIs as well. This is in line with our long-term development. 20 years of growth, 6 years now of scaling and expansion in our business models in these 3 sectors, a record year on the revenue and profit side and saw another great year of Hypoport. It's a very special company here in the German market.

So what you can expect from us long term, the same what we did in the last 20 years. We are a growth company. We are focused on double-digit growth in revenue and profitability. In average, we were growing, in the last 5 years, 25% on the top line, 33% even on the EBIT line. This is outstanding for a German company. And so it's -- you can say, German middle stand meets digitalization, and it's a great joy to be here in charge for so long. We are able to handle this organic growth and combining this with inorganic growth, our programmatic acquisition strategy helped our 2 growth segments to grow. In the last 5 years, more than a dozen of acquisitions in this 2 was successfully integrated now. Our debt ratio is healthy, still. So we have firepower to keep even growing organically -- inorganically besides this organic growth. Last acquisitions we announced last week. The pension model for corporate pension support platform, which is a great addition to our Smart InterTech model, where we acquired a 49% share with a divide to take over the company in the next 3 years fully and integrate fully. Okay. So after all this information about last year, expect that we continue our gross profits in 2020 as well. We expect a revenue between EUR 400 million and EUR 440 million and an increase in our profitability to something between EUR 35 million to EUR 40 million. This is in line with what we did to lastly years. Recognize please that industry EBIT, we expect even a higher investment in future growth activities to keep the pace of growing our services industry. So much from my side. I hand back to our moderator for handling the Q&A session.

Question and Answer

Operator

[Operator Instructions] Well, it seems that we have no question for a moment. So dear speakers, back to you.

Ronald Slabke

Yes, thank you. Okay. No questions for them. No problem. We will meet here again in 2 months when we present our first quarter results. We expect a record quarter again. And I hope you stay healthy until then. So see you soon in the beginning of May. Bye-bye.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect.