Allfunds Group plc (ALLFG) Earnings Call Transcript & Summary

Thank you very much. Good morning to everyone, and thank you for joining us in this trading update for Q3. As you may have seen in the statement, we have published this early morning today. We also announced the successful integration of the 2 companies that we acquired in H1, Web Financial Group and instiHub. I'm very excited about the creation of Allfunds Tech Solutions, a new dedicated company that will benefit from the integration of Allfunds Digital and Web Financial Group. In addition, instiHub will be rebranded into the new Allfunds Data and Analytics, becoming our business line, focusing on data and analytics solutions. Both are going to be instrumental in our strategic goal of further providing digital solutions to our clients and increasing our subscription revenues. Let's start with Q3 results and numbers, okay? So as you have seen this morning in our press release, assets under administration were stable since June 2022 for Allfunds Group, decreasing only 0.8% or EUR 10.4 billion. This resilience in assets was driven by the best quarter in migrations year-to-date with EUR 17.2 billion despite the negative market performance and the outflows from existing clients. And this makes this quarter the strongest quarter of the year. As refers to platform service assets in the current quarter given the high quality, the high volatility experienced in global markets in August and September, we saw assets decreasing by 2% to EUR 895 billion, demonstrating greater resilience as a result of new client migrations onboarding to our platform. The decrease was mainly due to the risk of sentiment environment across equities and fixed income asset classes, as you can imagine. In terms of market appreciation, the negative performance across asset classes contributed to virtually most of the decline. I'll remind you here that fixed income markets were down 6.9% in the quarter whereas equities suffer a range of 5% to 6.6% drop in that same period, depending on which equity market index you choose. As you have seen, we have experienced organic outflows from existing clients, slightly above Q1 and Q2 that we have largely offset with new client migrations during the quarter. This resulted in modest net outflows of about minus 0.5% during the quarter. The existing client outflows were concentrated on the months of August and September, especially the last half of September. As opposed to what happened in Q1 and Q2, we have seen in this Q3, a stabilization in the outflows in the fixed income asset class. Regarding migrations, you will see that we have managed to onboard almost EUR 10 billion in the platform service AuAs, and EUR 8 billion in the Dealing & Execution AuAs. We already have explained in the past that the services of Dealing & Execution, D&E, are not our core business is true, but we will be willing to grow as a way to gain clients for the platform service. The capture of this new specific client was strategic for Allfunds. It was a very important win and highlights our ability to win businesses from large distributors with flexible servicing needs. Regarding our subscription-based business, we are very excited with the progress. We continue seeing banks and financial institutions wanting to upgrade their tech offering, and we are becoming a strong partner for this investment. There is a good traction on the upselling and cross-selling efforts from the recent acquisitions and the prospects for the end of year remain very positive. I would also like to reiterate today again that we remain highly confident in our business model and the growth levers at our disposal. We have continued to see strong client activity with 51 new distributors onboarded year-to-date, a figure that we usually onboard on average for the full year and more than 100 new fund houses, demonstrating our ability to continue to win market share and deliver excellent client outcomes. So our famous Flywheel effect now. During the quarter, we onboarded about EUR 17 billion of assets onto the Allfunds platform. Our new client pipeline remains very strong. And while it is this year more weighted to the last quarter of the year, we remain confident in achieving the level of secured migrations of EUR 40 billion for second half of 2022. That is what I commented to you last July when we talked about H1 results. Overall, our secular growth drivers remain absolutely intact, outsourcing, the fit to open architecture and digitalization. Finally, I would like to spend the last minute of the call on the integration of the 2 companies we have acquired, Web Financial Group and instiHub. I'm happy to share with you that these integrations have been completed without any setback and in less than 4 months. Both the creation of Allfunds Tech Solutions and Allfunds Data Analytics are a direct effort to align and harmonize teams across the business. Certain integration will leverage the mutual benefits of these organizations to help create an even more robust offering to clients. This step will also reinforce our strategy to diversify our revenues and be less impacted by market volatility. As a final update, I would like to remind you that we are just waiting for the closing of MainStreet Partners during the coming months to also reinforce our ESG offering. This addition will certainly provide further collaboration areas with the new business lines created. And that's it. So thank you very much, again, for joining us today in this call. And let's now open for Q&A. Thank you.

[Operator Instructions] The first question today comes from Alex Medhurst from Barclays.

A couple of sort of areas on [indiscernible] a bit of color on this EUR 8 billion migration to Dealing & Execution. Firstly, what are the prospects of upgrading this to the core platform offering? Second, can you comment a little bit on the initial revenue margin. Will this be the same as sort of 0.2 basis points for the rest of that Dealing & Execution portfolio. And third, does the remainder of that EUR 40 billion H2 migration target include any more migrations to Dealing & Execution. And then just a second area of questioning, maybe just 1 question in the second area. We also marched our way through the second half. Can you give any indication of how revenue margins are trending within the 3.2 to 3.5 basis points range?

Yes. Alex -- I mean, Alex, thank you very much for your questions. Unfortunately, there's a lot of noise, and it was tough to get all the messages understood very well. Let's see now I got -- I don't know why.

Yes, the line is breaking. Alex, you let us know. I think that the first reason was on migration of the Dealing & Execution piece. What are the prospects to upgrade that client to the full platform studies?

The other one was regarding margin and -- and yes, EUR 40 billion, okay, revenue. Well, regarding migration.

Migration. Would it be [indiscernible] I might have a clear line.

Now, it looks like the line is better, yes.

Okay. Great. So the first question was just around the EUR 8 billion migration to Dealing & Execution. What are the prospects of upgrading this to the core platform. Can you comment on the revenue margin initially on this EUR 8 billion? Is it the same as the sort of 0.2 basis points for the rest of the portfolio? And also does the H2 EUR 40 billion target include any more migrations to Dealing & Execution? And the second sort of question was just can you give any indication on how revenue margins are trending for the second half within the 3.3 to 3.5 basis point range?

So clear. Thank you, Alex. Okay. So regarding the EUR 8 billion and the possibility to upgrade. Well, I mean, we are consistent with the strategy. And we do all our best to capture clients for our platform service, which means the one-stop solution, the Allfunds traditional business model. However, it's true that we are also keen to make exceptions in the case, you know that we realize that we are talking about a very, very strategic client in a very specific core country, which is the case, okay? So then we do it. Why we do it? Because in this case, this money comes from a competitor. So it's always good. Second, because it reinforces our, well, our market share -- dominant market share in 1 specific core country, second, okay? And third, because as you said, yes, once you start dealing with a client, working with a new client, you always have the possibility not to upsell the level of service that you provide to this distributor, but not just necessarily trying to move that client from Dealing & Execution to service platform that, of course, is 1 of our main priorities, but also to sell to this client digital services, which is our kind of our focus. And we are really keen to do it, as you can imagine. So that's regarding this EUR 8 billion. Also regarding to migrations. In this case, these EUR 8 billion, I cannot disclose the margin, the specific margin because I would be disclosing the margin with a specific client, something that I cannot do. But I can tell you that it's significantly, okay, higher than the average margin that we have in Dealing & Execution. Third question regarding migrations. Are we expecting new migrations in Dealing & Execution in Q4? And the answer is yes, okay? The answer is yes. How much of the EUR 40 billion? We don't know yet, okay? We don't know yet. But yes, we are expecting some more assets coming in Q4 in Dealing & Execution. So this is regarding migrations. I don't know if I have answered to your questions.

The last question, probably, Alvaro, in your case revenue margin for the second half.

So we maintain the same guidance that we gave you since the beginning of the year. Remember, we mentioned we expected the profit margin to be around 3.3 to 3.5 basis points, assuming a stable to flat market scenario. Given the current situation to be more on a bear market -- bear market scenario, sorry, the margin might be at the lower end of the range. Again, it's difficult to predict what the market is going to do, but based on what we know today, I think looking at the low end of the range seems more reasonable.

Our next question comes from Bruce Hamilton at Morgan Stanley.

And sorry, somewhat questions following on the lines of the previous ones. But maybe just thinking ahead into '23 in terms of what visibility you have on pipelines or new clients, I mean should we be thinking sort of -- is that kind of EUR 60 billion plus of potential new wins. I think when you came into this year, it was about EUR 100 billion. Is it similar order of magnitude? And when we think about new client business then. I mean, what sort of proportion -- how should we think about what proportion comes to platform versus dealing and execution? Because obviously, if it's to the latter, it's much less impactful to revenues, at least initially, which is something we need to sort of bear in mind? And then secondly, just on the revenue margin point. So if I've understood what you're saying is from the 3.5 bps you did in the first half, we should imagine that that's trending towards 3.3 in the second half? Or are you saying for the full year, it's 3.3 dip below the 3.3 in the second half? And then what would -- how should we think going forward, if equity markets start to recover, should that recover back up to 3.4, 3.5? Or how do we think about that sort of dynamic.

Okay. Bruce. So regarding -- well, next year, migrations pipeline. I mean we are not -- we are working, as we speak, in next year's budget, and we still don't have that figure. Well, I think that I mentioned in July, this overall pipeline of around EUR 130 billion, okay? But again, as you know, 1 thing is the pipeline that not necessarily has to be in inside 1 specific deal because it can happen that migrations fall into the following year, okay? So pipeline is this one, which, yes, I think it's extraordinary strong pipeline. A specific number for next year. I mean you gave a number, which is -- well, is not far away from what I'm expecting. That's all I can really say. And regarding revenue margin, I think Alvaro, probably you can jump in with this question, and probably I can answer or I probably can start answering to this comment that you made regarding what happens if the market rebounds. Definitely, there is a clear effect in our margin -- overall margin with product mix, which means that the better the product mix of our portfolio -- of the assets that we have in the platform, the better for our margin. It's clear that we make more money if we have more equity, okay, in the platform. So yes, we are all expecting that sooner or later, markets will rebound and definitely we should see an impact -- very positive impact in our product mix, therefore, a very positive impact in our overall margin. But having said this, Alvaro, probably you can take the question regarding again margin?

Yes. Bruce. So of course, we won't be disclosing the forecast for the second half. But I think the way to look at this is, look, we -- as you correctly pointed out, we disclosed the 3.5 basis points for the first half. Most of the outflows that we saw during that period of time was on the fixed income space. We've seen a different trend in Q3, as you've heard earlier. So we've seen equities also flowing out of the platform to some extent. That has, of course, impacted our margin. Having said though, I would reiterate the 3.3 to 3.5 range for the full year. I think we will be probably closer to the 3.3 to 3.4. I would be surprised to see margin going for the second half below the 3.3. But as we mentioned earlier in the call, there's a lot of uncertainty. Volatility can also play in our favor, as you know, on the transaction income. So I would reiterate that range that I provided. And as Juan was saying, of course, rebound in equities might have a very positive impact on the margin. So we see that more as a temporary let me say, setback or impact. And let me also take the opportunity. I think you asked about the D&E migration for next year. I think as Juan answered earlier to Alex, we -- this migration that you saw in Q3 and what is remaining is more opportunistic. And we don't really have, I would say, significant amount of potential D&E migrations in the pipeline. So most of what, if not all of what, will be coming next year, likely on the platform service side.

The next question comes from Philip Middleton from Bank of America.

I wonder if you could talk a little bit about what you've been seeing from the BNP portfolio, where you were looking to move more assets from the Dealing & Execution to the full service one. And also I wonder if you could say a bit about it seems like the characteristics of new business this quarter have changed a bit with more emphasis on people choosing to outsource for the first time. Is that -- do you think that's the lasting trend or just a bit random because of a small sample size?

Okay. Yes. I mean, regarding the first question of client conversion, BNP or FDS client conversion is on track, nothing really to point out. I will disclose the numbers in February, okay. Whenever we have the 2022 results presentation. But I mean everything is on track. And regarding the question of -- well, the type of -- taxonomy of clients, new clients. As you said, I mean, it's a very small, let's say, period to take any conclusion really. I think the beauty of our business model is that, as you know, we have 16 offices around the world, operating locally. We have clients in more than 60 countries. I think now it's around 65 countries, and we target -- always we try to target the best clients in each of these countries. But as you can remind, diversification is our main goal. And I don't know, some quarters, we are pretty successful in, I don't know, in the Middle East. And suddenly, the following quarter, we see clients coming, I don't know, Latin America or clients coming in the Nordics. So it's -- I don't think we can take at this point any conclusion about the client taxonomy in this moment, okay? Probably, again, in February, probably we can look back and see if there is any pattern in 2022 types of clients if something has really changed. My opinion today is that, no, nothing has really changed.

Our next question is from Tom Mills at Jefferies.

Sorry, just to ask another question on the migration side of things. And I appreciate you said you can't be sure on the D&E migrations in 4Q. I think you previously suggested that there's a certain amount of signed and dated new business into 2H. Is it possible to give us an idea what proportion of the kind of remaining visible migrations this year would relate to the core platform service? And then just secondly, on the EBITDA margin kind of target and sensitivity analysis you helpfully provided at 1H. Is it fair to say that you're still feeling pretty good about the 70% plus target for this year. That's great.

Okay. Let me take the migrations question, and I will ask Alvaro to jump in regarding the EBITDA margin. So really -- I mean, unfortunately, I cannot really add anything else really Tom, regarding what I have already said. I mean -- because, I mean, we're talking about a Q4, which means that is next 3 months and it can happen that some of these Dealing & Execution migrations that we are expecting to have, potentially, they could fall into next year. But on average, I think that as I have already disclosed that I'm expecting to see further migrations in Dealing & Execution in Q4, okay, apart from the EUR 8 billion, I don't know. Let's say that we could expect overall to see that out of the overall migrations that we are expecting to close this year, which is going to be around EUR 55 billion and EUR 60 billion. I'm talking about 2022, I don't know, probably 15%, 20% of that overall migration in 2022 could fall or could come from Dealing & Execution. Yes, probably. But bear in mind that, as I said, okay, the margin is not the current margin, okay? So it's a better margin, okay, in any case. And as I said before, it is an exceptional client -- a strategic plan for the company. So I'm super excited and happy to bring this type of exceptions to the platform. This is regarding migrations. And Alvaro probably regarding EBITDA margin.

Sure. Tom, look, it's difficult to predict where market is going to end or how it can evolve. So given this business is all about scale, it adds another layer of complexity to really talk about that EBITDA margin. Having said so, we continue with the cost discipline that we've had throughout the year with, as we said, internalized some third-party services that were outsourced. We're streamlining the third-party providers, we're renegotiating terms and so on, and we're very strict in our highest policy. And going back to the guidance that -- the scenarios that we provided back in H1, we still think that, that 70% plus EBITDA margin for the full year '22 is achievable. It's going to be -- and it's been challenging, as you can imagine, but we will definitely work towards that target. And of course, we are very conscious of the very difficult environment in which we operate. And so we will make sure that the costs remain under control if the outlook does not improve, as you can imagine.

Thanks very much, Juan and Alvaro. That's really helpful color. I appreciate all the uncertainties. That's great.

The next question comes from Greg Simpson of BNP Paribas.

Sorry, just to going back on the migrations point. In the future, and so I think in next year and beyond, should we expect new clients to remain spread across both the platforms or the whole platform service on the Dealing & Execution service or the higher share of this in H2 in Dealing & Execution is more kind of a one-off? Second question, for the distributors and in-house issue onboarding this year. What kind of proportion are taking the most premium versions of Connect in terms of monetization. I think it used to be about half of onboarding what we're paying for Connect premium, but how is that trending? And then thirdly, would the existing client outflows in the period? Are there any particular trends by country you flag? Or is the weakness quite broad-based across all your end markets?

Very good questions. Well, regarding next year and migrations. No, look, I think saying that we have been able to onboard about around 50 clients already this year, out of which 49 are platform service, so traditional clients. And just 1 is Dealing & Execution. The only thing is that Dealing & Execution in this case, the client is really significant, as I said, and so it's something exceptional. So I mean, what you should expect next year and beyond is that we will keep on promoting and selling our traditional one-stop and unique business model that has been so successful in the last 2 decades. So, however, again, as I said, if we find in a specific country in where we have significant interest, we find the opportunity to migrate a big book of assets, starting with just Dealing & Execution, we will sit down discuss it internally and take a decision. Okay. But yes, it's -- I think you mentioned the word one-off, if you want to see it like a one-off, you can also see it like a one-off, yes. Okay. So this is regarding migrations. I think the other 1 is regarding a fund houses. So if we are able -- well, I tell you, yes. I mean, now fund houses that are onboarding -- I mean we have -- I think it's 1,400 asset management companies with global distribution agreements, which means that it's very difficult now that we find like a new asset manage -- a big global asset management company that doesn't work today with Allfunds, which means that all these new fund houses or the majority of these new fund houses are predominantly use boutiques or specific local asset management companies when we open a business in a new country. And therefore, yes, they are -- they definitely need our services, especially data and analytics services in order to, again, not to waste their time visiting the 800 clients that we have around the world but to make you know their -- I mean their target Allfunds clients and Allfunds distributors in a much more intelligent way, which is to -- and that's the way we sell these, for instance, these data and analytic tools helping these asset management companies to target the clients, that they really have appetite for the assets where they have good progress, let's say. So yes, I'm expecting to see definitely an increase in the number of houses paying new fund houses paying for our digital capabilities. Apart from that, today, we have announced, as you know, the launch of these 2 companies, Allfunds Tech Solutions, and Allfunds Data & Analytics where we are reinforcing the teams, the features, the tools, the services, the products in order to be, again, even more -- I mean, to enhance our value proposition for these fund houses and also for distributors, of course. So you can definitely expect Allfunds being able to grow -- to significantly grow in what we internally call non-asset driven revenues that are mainly subscription fees. And I think, Alvaro, I think there was a question regarding -- yes. So yes, yes.

Greg. So your question around the trends in outflows -- in organic outflows. We have seen a stabilization of the outflows, redemptions coming from the managers over the course of Q3. Remember that in both Q1 and Q2, they redeemed heavily fixed income products. That has continued in Q3, but it has stabilized and softened. And as of today, I think that trend has normalized a lot. What we've seen in Q3 different to previous quarters is something which, of course, we knew could happen, which is outflows on the equity space, and in particular, on the private bank side. It's not so much linked to the country or not so country specific, but more linked to the typology of the distributors or the clients that sell those funds. And as I was saying, following the market turmoil or market underperformance, we've seen some outflows on the equity space, which, again, also explain some of the, let's say, margin compression that I mentioned earlier in my previous response.

We have no further questions. I will now hand the floor back to the Allfunds team for closing remarks.

Thank you very much. Well, again, thanks a lot for your time, for your interest in our company and we look forward to keep on talking to you and discussing with you Allfunds' present and future. Thank you very much.