Allfunds Group plc (ALLFG) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to Allfunds First Quarter 2023 Trading Update Conference Call. Joining us in today's conference call are Allfunds' CEO, Juan Alcaraz; the CFO, Alvaro Perera; and the Global Head of Investor Relations, Silvia Rios. Mr. Alcaraz will make a brief introduction, and there will be a question-and-answer session that will follow. This conference call is being recorded, and an audio replay will be at allfunds.com.com during the day. At this time, I would like to hand the call over to Mr. Juan Alcaraz. Sir, you may begin.

Thank you very much. Good morning to everyone, and thank you for joining us today in this Q1 2023 trading update. I'm very happy to take you through the highlights for this quarter. Assets under administration for Allfunds Group increased by 3% or EUR 40 billion as a result of the positive evolution of both portfolios of assets: Platform service, which increased by 3.2% since December and Dealing & Execution assets that grew by 2.6% since last quarter. For the first time since December 2021, our assets have grown which makes this Q1 of 2023, the strongest quarter in a year. The increasing Platform service assets, which reached EUR 937 billion came as a result of the positive evolution of global markets in this quarter involve equities and also fixed income, but also due to positive net flows. We saw a market performance contribution of EUR 24 billion despite the volatility seen during the last part of the quarter. Net flows amounted to EUR 5.2 billion as a result of continued strong new client migrations onboarded into the platform, which compensated outflows due to market volatility in the last 2 weeks of the quarter. Let me remind you that this is the second consecutive quarter of positive flows. We're moving into more detail. We have experienced organic outflow from existing plants by EUR 2.5 billion, as a result of some identified situations in a limited number of clients. However, this represents the lowest level of outflows in the last year. In terms of migrations, you will see that, as expected, we have managed to onboard almost [ EUR 1 billion ] of assets all in the Platform service business. As regards to the portfolio of assets in Dealing & Execution, there has also been an increase of EUR 10 billion in this start of the year. Again, mostly driven by positive market performance. Finally, year-on-year, assets and the administration have decreased by almost 5%. And this converts with a decrease of 6.3% for the European mutual fund industry according to Morningstar. So we continue to consistently outgrow the market. As you might have seen in the statement today, we continue to attract new clients to our WealthTech platform. We are very excited with the progress of our strategy around the subscription-based business, hence, the recent acquisitions that we made last year, we have won top new clients. Most clear example has been the partnership between new credit with Allfunds Tech Solutions that we announced months ago. A landmark deal, which proves our capacity to attract pan-European leading institutions and becoming a strong partner for these investments where it has not been an isolated case. And year-on-year, we have managed to add 29 more clients in OpenStack solutions. Our Allfunds Data Analytics, there has been also an uptick in client wins with a 36% increase year-on-year. And our professional monthly users have reached 9,680 professional users in our Connect platform. As closing remarks, I would also like to reiterate today again that we remain highly confident in our business model and the growth levers at our disposal. Prospects for this year remain positive. We have continued to strong new client activity demonstrating our ability to continue to win market share and deliver excellent client outcomes. Overall, our secular growth drivers, outsourcing the [indiscernible] architecture and digitalization, they all remaining intact. So thank you very much, and let's now open for Q&A. Thank you.

[Operator Instructions] Our first question comes from Philip Middleton from Bank of America.

I wonder though, could you say a little bit more about the Credit Suisse asset? In particular, what revenues roughly you're earning from those? And also, what do you think the medium-term trajectory of those assets will be given presumably they won't be booking new clients into Credit Suisse post the merger? I just wondered if you could give the market a bit more clarity on that issue, please.

Philip, thank you for your kind words. Look, unfortunately, as I'm sure you imagine, we cannot disclose the revenue we make with our clients, whether it's CS or any of the other clients. But if helpful, I would remind you what we disclosed at the time of the IPO in the prospectus. We disclosed around [ 125 billion ] assets and at a margin that was below the average. Those assets, as you -- well, look, might have imagined has sunk since then. And with regards to the future of CS. We also don't have a position the company. We -- as you can see on our Q1 results, we remain very solid in terms of flows from all our clients and we don't want to single anyone out, of course.

The next question comes from Ian White from Autonomous Research.

I had a few questions, please. First of all, I appreciate you obviously issued your FY '23 guidance recently but has anything really changed over the course of the first quarter that would lead you to be more or less optimistic regarding the FY '23 outlook? I'm particularly thinking about the profitability margin expectations given things like the asset mix will have changed during the first quarter. That's question one. Secondly, just around the net treasury income assumptions. I think I'm right in saying that your guidance for 2023 included maybe some conservatism around pass-through of interest income to depositors. I just wondered how that played out in the first quarter where you were now sharing any rate benefit or whether you would retain that benefit in full so far? And then finally, just wondered if I could ask for maybe a bit of detail around developments in your sub-advisory business? That's obviously an area you've discussed for a number of years as a growth opportunity. And just wondered if you could give us an update on progress there, please?

Ian, let me take the first 2 questions, and I'm going to bundle the answer and probably Juan to cover the last one. So long -- in a nutshell, we haven't seen anything that would make us update our outlook for the year. In terms of margin, we have seen -- we have not seen any changes in the underlying book. We are not seeing the shift to a more conservative but also not to more aggressive share classes yet. So stable margin on that front. It is true that we've seen a weak quarter in terms of transaction revenue. But on the other hand, we have offset that weaker transaction income revenue with a more positive-than-expected net treasury income. And yes, we -- as said, we remain confident that based on what we know today and the expectations that we included into our guidance for the year that we will remain on those -- on that post code. Juan?

Thank you, Alvaro. Yes. Regarding sub-advisory, well, as you know, we launched our ManCo in Luxembourg last year. And I think the good news is that this ManCo now is ready to bring many different type of solutions not to our clients, not just mandates through sub-advisory if there is appetite for our clients to buy or to enter into an open architecture through mandates instead of buying [indiscernible] and -- but also the diversification of business lines now provide us the possibility of becoming and building the infrastructure for both, not fund houses and distributors, infrastructure of the range broad in Luxembourg. So we can work on all this time hosting a business, helping them to create their own [indiscernible] in Lux. So as an example. So that's why I think that today, we have a much more diversified business that can -- well, again, help both fund houses that want to launch products in Europe or distributors that want to export their products from Italy or Spain or any country to Luxembourg and make it pan-European or global. Now they can also count Allfunds. So that's why I believe that on the long term, with this ManCo, we are definitely reinforcing our value proposition.

The next question comes from Gregory Simpson from BNP.

First of all would be, can you provide any update on the pipeline you're seeing or interest in outsourcing? I think the number was EUR 50 billion in terms of pipeline in December, you were expecting EUR 40 billion to EUR 60 billion to be migration this year. Is that still kind of on track? Is there anything in terms of the new parts that are coming in at the moment, is there any kind of particular geography or trend in to roll out? That would be the first question and I have one.

Yes. I mean -- no changes at all not to the guidance that we gave with a pipeline. I think that probably the only difference with previous years is that it's true that there are some big whales in the pipeline of clients with assets above EUR 15 billion that -- well, that we are -- as you can imagine, we are doing all our best. Not just to incorporate because, I mean, our clients that have signed already with Allfunds, so it's not a matter of convincing them to sign with us. It's a matter of the timing of the migration. But that's the only, let's say, kind of difference that I'm seeing compared to other years. So 2, 3 big whales that I hope you know that they will enter into 2023 natural here, let's say. But apart from that, yes, we are committed not to be above EUR 40 billion, between EUR 40 billion and EUR 60 billion, as I said at the beginning of the year, absolutely.

Got it. And then maybe a follow-up is on I think you announced the launch of a Allfunds Alternative Solutions in March. I guess I think before there was maybe some partnership with [indiscernible] capital. So could you maybe explain a bit the top line or the full process around alternatives and the opportunities that you see?

Yes. Our partnership with high capital remains intact. It's a company that, of course, would trust then, and we are really happy in incorporating with them. However, we have identified from both sides, okay, from managers and from distributors, the appetite and the need for something else or something more. And that's why we have decided not to internally to launch this new platform that is almost already live in Spain. But of course, this has to be a global platform. So the idea is that we will announce, I hope, in April, if not in May, these strategic agreements with the top fund houses in this type of asset class. And the good news is that the distributors are, let's say, waiting for this platform to be ready in order to start investing. So yes, we are really excited with this opportunity because again, it's cycle funds 23 years ago. We're going to do our best to try to facilitate distributors to enter in an efficient way into these asset class as we know, is a little bit more complex, especially when we talk about the operational setup.

And maybe just one final question would be on the transactional income. What is the driver in terms of the best because on -- is it you expect to do -- is it transactional income tends to be better when there's a lot of inflows from existing kind of clients? Or because on -- in fact, it was going to be -- it felt like quite a volatile quarter. So you maybe you would've expect a bit more kind of fund switching. What are the kind of market conditions that cause transactional income to be stronger and weaker? And why was is it a bit softer this quarter? Just I think getting the medium term?

Yes. Greg. No, I think you nailed it. It has actually to do with the amount of both inflows and outflows. And while it is true that Q1 was a volatile quarter in terms of markets, when it comes to the actual inflows and outflows, it has been very, very quiet, right? So we have recorded lower than the usual transaction levels, but it is also true that going forward, we might see some, let's say, potential for recovering those weaker levels if we start seeing those portfolio balances taking place, be it in Q2, Q3 or even Q4. So it's nothing I would say, out of the ordinary, nothing to be worried about. Just simply, it has been a weak quarter. And as I said earlier to Philip or to Ian, we've been able to offset that we took quarter by reporting better than expected net treasury income.

The next question comes from Reg Watson from ING.

Juan, I'll just want to ask your opinion of how you think legislation is going or the proposed legislation on rebates? And whether or not asking to affect your back book, please can you confirm if my recollection is correct that not on your front book has any rebate business involved?

Well, I mean this [indiscernible] going to give you my personal opinion because I don't know more than you. Until it looks like until end of May, we are not going to see the paper and the commission is preparing. So nobody will knows what is going to happen. But there is a lot of noise -- so it looks -- and we have -- and it's true that we have also seen the reaction and the push back of some European countries, more recently, Italy and previous to Italy was for Germany for instance. Let's say that, again, the feedback that I get -- that it's an official feedback. As you can imagine, is that it looks like that in the first craft -- draft well, the word [indiscernible] inducement, it's not going to be there. It's not going to appear, but it's adding. But this is something that we don't know and we are going to have to wait until end of May. And regarding Allfunds, yes, of course, a part of our income, part of our revenues come from [indiscernible] It is pretty concentrated in some geographies in some countries. And again, we don't know if it is going to happen. It looks like no. But if it happens, it's not going to be in the next 12 or 24 months. So it would take years to be this regulation implemented and with time, I think that Allfunds should be able to put in practice in some mitigation measures in order to reduce any impact on the revenue side. But I think that, as I mentioned, some months ago, there are also countries and geographies in where were rebate is not exactly -- how can we say it? I mean it's not definitely a positive factor for all of us to win [ plans ] because in countries were we are small, our prices not necessarily are extraordinary competitive and I always tell my team that we need to win clients based on our value proposition and not based on prices that we have so -- when I say prices, I mean better prices with -- or the best prices with the fund houses or the [indiscernible] is not in the end. So -- so in the long term, we are not really concerned. I believe that where we need to focus this in world, I always tell my team that is in having the very best value proposition for our plans, both houses and distributors. And if [indiscernible] remain, well, we will have that the extra income. If they don't remain, we will attract and we plans much faster in the long term. So again, it's not something that's really worries me.

The last question comes from Alexander Medhurst from Barclays.

Most might be answers just a couple of clarifications, if that's okay. Firstly, on the sort of couple of clients that you've mentioned will bring very significant levels of assets, double-digit billions of assets this year. Can I confirm, is that included within the EUR 40 billion to EUR 60 billion pipeline and therefore, should we expect the quarterly profile of migrations to be quite lumpy this year? Or is that additive to the EUR 40 billion to EUR 60 billion? And then secondly, just on sort of revenue margins. Can you what sort of revenue margin ex NII we should be expecting for the first half this year?

Yes. is included when we talk about the pipeline, However, we really need those big whales, those big assets to reach, let's say, the EUR 40 billion, which is kind of our [ floor ]. I mean the problem more with migrations is that I understand that we need to work on natural years of migrations in 2022. No migrations in 2023. It's not the way I follow migrations really because for me, look, if EUR 20 million migration doesn't entering to the platform in November or December of this year, but the -- those assets here in the platform in January of the following year, I'm fine with that. But I know that, of course, the numbers of the migration number of that year doesn't have those assets and it could be like a kind of needed. It's not for the market, but -- but what is what it is. The floor should be those EUR 40 billion. We felt this big ways, if they come, it should not, of course. And regarding the revenue margin, Alvaro want to jump in with this one.

Sure. Alex. Look, we're not disclosing every component of the platform margin at this stage, but let me try to help you here. So remember, back in Feb, when we did the full year presentation, we mentioned a margin for the year '23 of around 3.4 to 3.5 basis points, including net treasury income and here, we were assuming at least EUR 25 million in revenues for the full year '23. As you had picked up from my comment earlier, we are already seeing some let's say, positive signs in this regard. So '25 hopefully, will be an absolute floor. So we're being more positive on this front. But let's say, we're not changing, as I said, our views around the 3.4 to 3.5 margin for the full year.

There are no further questions at this time. I will now hand back to Mr. Juan Alcaraz, Allfunds CEO, Mr. Alcaraz, your line is open.

Well, nothing else. Again, thanks for your time today, for your interest as always in Allfunds and hope to talk to you soon. Okay. Thank you very much again. Thank you.