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. With Financial Group and tab. 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 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 EUR10.4 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 remind you here that fixed income markets were down 6.9% in the quarter, whereas equities suffered 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 3.5% 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 AuA and EUR 8 billion in the billing and execution AuA. We already have explained in the past that the services of dealing and execution 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 all fans. 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 on board 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 4 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 set 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. Such an 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 Main Street partners to occur in 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 on 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 the [indiscernible] Just a bit of color on this 8 million migration to [indiscernible]. 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 sort of 0.2 basis points for the rest of that [indiscernible] portfolio. And third, does the remainder of that EUR 40 billion H2 migration target include any more migrations to be an execution? And then just a second question in, maybe a question in the second area. We're obviously not the way through the second half. Can you give any indication of how revenue margins are pending within the 3.2 to 3.5 basis points range? Thanks very much.

I mean, Alex, thank you very much for your question. Unfortunately, there's a lot of noise and it was tough to get all the metrics on the [indiscernible] but well, let's see I got -- I don't know why…

Yes, the line is breaking. Alex, you let us know. I think that the first section was on migration of the deal and execution piece. What are the prospects to upgrade that client to the full platform studies?

The other one was regarding margin and -- Yes, EUR 40 billion, okay, revenue -- Well, regarding [indiscernible] Now it looks like the line is okay.

Okay. Great. So the first question was just around the EUR 8 billion migration to dealing and 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 and execution? And then 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.

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 solution and business model. However, it's true that we are also keen to make exceptions in the case that we realized 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, it's always good. Second, because it reinforces our -- well, our market share dominant market share in one 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 to upsell the level of service that you provide to this distributor, but not just necessarily trying to move that client from dealing and execution to service platform that, of course, is one of our main priorities, but also to sell to this client digital services, which is our kind of core 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 will be disclosing the margin with a specific client, something that I cannot do. But I can tell you that it's significantly higher than the average margin that we have in dealing and execution, okay? Third question regarding migrations. Are we expecting new migrations in dealing and 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 and 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 [indiscernible]

So we maintain the same guidance that we gave you since the beginning of the year. Remember, we mentioned we expected the proper 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 per market -- fair 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.

Sorry, somewhat sort of questions following on the lines of the previous ones. But maybe just thinking ahead into '23 in terms of what visibility you have on pipeline to new clients, I mean, should we be thinking sort of -- is there 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 a 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 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 3.33 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. So regarding -- well, next year, no migrations and 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, one thing is the pipeline that not necessarily has to be inside one specific year because it can happen that migrations fall into the following year, okay? So pipeline is this one, which, yes, I think is extraordinary strong pipeline. A specific number for next year. I mean you gave a number, which is -- well, it's not far away from what I'm expecting. That's all I can really say. And regarding revenue margin, I think Alvaro you can jump in with this question. And probably I can answer or I probably can start answering this comment that you made regarding what happens if the market rebounds? Well, definitely, there is a clear effect in our margin -- overall margin with product mix, okay, which means that the better the product mix of our portfolio -- of our -- 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, you can take the question regarding again margin.

Hi, 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 -- were on the fixed income space, we've seen a different trend in Q3, as we had earlier. So we've seen equities also flowing out of the platform to some extent. That has, of course, impacted our margin. Having said so, 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 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, a significant amount of potential D&E migrations in the pipeline. So as of that, if not all of what will be coming next year, likely on the partner service side.