Allfunds Group plc (ALLFG) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to Allfunds Third Quarter 2023 Trading Update Conference Call. Joining us today 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 available at allfunds.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 in this third quarter 2023 trading update. Looking at the evolution of global markets, even though activity was down during the quarter for both equities and fixed income, I think we have achieved a good performance for Allfunds over the period. We are happy to see an improvement in the outflows that we experienced in the last quarter Q2, experiencing a reduction of almost 2%, so around EUR 7 billion less, okay, so in the flows from existing clients. Allfunds assets growth on a year-on-year and year-to-date basis remains healthy at 2.5% and 2%, respectively, demonstrating greater resilience as a result of new client migrations onboarding to our platform. This compares to an increase in the industry of 2.3% of the European, okay, cross-border mutual fund industry according to Morningstar. So we continue to outgrow the market even in such a difficult times as this. As I said many times before, one of the key competitive advantages and one of the most difficult ones to replicate for our competitors is our flywheel effect. This quarter, too, it remains as strong as ever, allowing us to diversify our client base, especially in expansion markets. Let me note some interesting things, not during the quarter. We had negative outflows in this period, but that's not surprising given the very difficult circumstances that we are operating under. Higher volatility bear market as well as rising interest rates. These negative outflows are concentrated in Southern Europe and in Switzerland. However, we are seeing positive inflows in France, Benelux and Northern Europe and also in Asia and Brazil, where we continue to see that the vast majority of existing clients account for resilient flows. By asset class, the main contributor in terms of inflows had the money market funds as well as alternative non-UCITS. We have managed to increase in 54% in our capital commitments in this asset class since the beginning of the year. But let me take you through some details. Our platform service assets decreased in the quarter by 1.6% to EUR 930 billion, given the high volatility experienced in global markets, especially in August and September. The decrease was mainly due to the risk of sentiment environment across equities and fixed income asset classes. The effects of challenging market performance were also conservative when compared with the global benchmarks against which Allfunds aligns its own performance. This includes the stock [ AuA ] 600, with a 2.5% decrease, the MCSI World Index with almost a 4% decrease in this period or the Bloomberg Global Aggregate Index that was down 3.6% in this period. So as you have seen, we have experienced organic outflows from existing clients, slightly above Q1, but significantly lower than Q2 that we have largely offset with the new client migration during the quarter. This resulted in modest net outflows of about minus 0.6% during the quarter. The existing client outflows were concentrated on the months of August and September, as I said before, especially the last half of September. So as you perfectly know, I mean, July was a good month. But unfortunately, you know August and September were pretty negative. As opposed to what happened in Q1 and Q2, we have seen in this third quarter [ an stabilization ] in the outflows in the fixed income asset class. In terms of migrations, you will see that we have managed to onboard EUR 9 billion in the platform. We have continued to see strong new client activity with 41 new clients onboarded and 60 new fund houses this year-to-date, okay, demonstrating our ability to continue to win market share and deliver excellent client outcomes. The majority of the clients onboarded this quarter come from America and Asia to a lesser extent, Central Europe and Middle East. As an interesting note, we have onboarded larger clients over the period with 20% of the clients having an average size higher than EUR 10 billion and 35% of our clients, total clients onboarded year-to-date have an average size higher than EUR 5 billion. Our new client pipeline remains very strong and while it might be more weighted to the last quarter of the year, we remain confident in achieving the level of migrations that we always established as our goal of between EUR 40 billion up to EUR 60 billion on a yearly basis. We are very excited with the good progress with our strategy around subscription-based business. We continue seeing banks and financial institutions wanting to upgrade their tech offering, and we are becoming a strong partner for these investments. There is good traction on the upselling and cross-selling efforts from the different areas. We have seen an acceleration in the pipeline, which is now well diversified, by product, by region, and it has doubled since the beginning of the year. The prospects for the end of the year remember are positive. Finally, I would like to spend the last minute of the call on our alternative solution platform. Remember, the new platform that we launched before summer. As I said back in July, this is one of the most relevant projects we have currently, and we continue devoting time and efforts to bring it up to speed. Just this quarter, we have made significant progress in the automatization of the dealing and execution of this type of assets. In parallel, we have almost completed the Allfunds private partner program, which fits perfectly with our strategy in this asset class. Next week, we will publish the name of the new partner, number 7. With these 7 partners, we will close the program for 2023, okay? So we are not expecting new partners until next year. But as you know, our goal is to have a program with less than 10 strategic partners, okay? So we are about to finish with next year contribution of around 2 more partners. As a final update, I would like to remind you that we are just waiting for the closing of the Iccrea deal to occur in the coming weeks that will also reinforce our core platform business. This addition will certainly provide further collaboration areas with the new business lines created. We also remain very active in the M&A space, looking at several opportunities, both platform and subscription-based well, definitely to help us to accelerate our strategy, our growth strategy. We entered the final quarter of the year with good momentum and in a strong position to continue delivering against our strategy. So thank you very much for being with us today, and let's now open for Q&A. Thank you.

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

Three quick ones from me, if that's okay. Firstly, I wondered if you could comment on any changes in the balance of outflows between the Swiss clients who we were flagging in the first half of the year and the other large Southern European institutions that are also impacting H1? Secondly, just wondered if we get an update on the revenue margin outlook, ex net treasury income. I guess that's in the context of trading volumes remaining low across the market, flows you called out being into low-margin money market funds. But also, there's a favorable mix shift going on here over the last year or so, but towards platform service AuA a way for dealing and execution. And lastly, can you comment any change in sort of cash balances on which you earned net treasury income since the end of H1?

Okay. I mean well, regarding the Swiss Southern European or the rest of our clients, as I stated now during the call, well, in these regions, let's say, Southern Europe, basically Spain, Italy, also in Switzerland, we are still seeing negative outflows nothing really more to comment about this. I mean, we are not, in this moment, giving any more specific, let's say, disclosed per client, things like that. So what -- is what it is in this moment. And regarding the asset classes, you mentioned money market funds, but for me, it's a positive for price now that we are seeing a big number of clients of the platform using all funds also to invest in money market funds, okay? Probably not in countries like Spain and Italy, because they use their proprietary funds, but in other regions. So -- and what's very good news regarding the growth in alternatives products. This is more -- well, this is like 50% of the questions that you made. I'm going to ask Alvaro, our CFO, to take the other questions regarding revenue margin and the other topics that you want to discuss. Alvaro, please.

Sure. Thank you, Juan. So on revenue margin outlook, what we expect is a slight decrease of the platform margins in the second half as a result of a weaker AuA mix, as you mentioned, which is driven by a more challenging market backdrop, especially in the light of the recent events in the Middle East. However, we consider this effect to be temporary. And in any case, we do reiterate our guidance of EUR 3.4 billion to EUR 3.6 billion for the full year, including the treasury. And I hate unbundling the treasury from the overall margin because it works as a natural hedge against this environment of raising rates. But with regards to the, let's say, ex treasury margin, as I was saying at the beginning of my response, we do expect some slight decrease versus the first half of 2023. And with regards to cash balances, we have not seen a significant change in average balances so far versus the first half of 2023. And I'm mentioning the average of the year and not the end of H1 because what you might have seen in June's balance sheet is that the cash position was I would say, abnormally high, driven by a few portfolio rebalancing movements towards the end of the quarter that normalized a few weeks afterwards. But overall and looking at the NTI that the treasury revenue for the full year, I have to say that I'm highly satisfied with the progress of this revenue line and confident that we will deliver a number which will be hopefully at the high end of the guidance that we shared back in July. So towards EUR 60 million for the full year.

Next question comes from Bruce Hamilton from Morgan Stanley.

Just a quick couple of questions on the kind of situation with Intesa and Santander. So I think we're getting close to the point where you will kind of like to extend those contracts for 2 years. So should we still be thinking base case, you pay EUR 30 million to each and then we extend to November 2025? And then secondly, will we get any clarity on the state of affairs beyond 2025 at the same time? Or is that a negotiation that you are yet to sort of go through? And if those relationships move from exclusive to nonexclusive beyond '25, I guess the consequence would be you get a slightly lower share of flows and perhaps there's a fee margin consequence as well. Just if you could help us understand what it would mean if those are exclusive or no longer exclusive beyond 2025.

Thank you, Bruce. Well, very quick answer. So the first thing is, yes, we are going to pay that money in order to extend the exclusivity basically because this was something negotiated back in 2017 as part of the deal between Santander, Intesa and H&F and GIC. Regarding if there are negotiations to extend -- to further extend, I mean we always talk with these 2 institutions, of course, that is something that, as of today, there's nothing close because, as I said, today, we are focusing on 2024 and 2025. Do we expect -- if we do not -- I mean, we do not extend not exclusivity, do we expect to see an impact in our business with them? I don't think so. I mean bear in mind that with Banco Santander, we have been working without exclusivity from year 2000 up to 2017, okay? So the exclusivity just came because H&F and GIC paid a big check to Santander for the business and they wanted to in some way or to protect that investment. But we don't like to work with exclusivity with our clients. The clients have to be happy with the level of service that we provide. And that's the way we like to operate. So we are not obsessed with extending exclusivities or things like that. I don't know others but definitely not in the case of Allfunds. So no, I mean, if we do not extend exclusivity further than November, December of 2025. We will keep on working as again as we have been working with them for 17 or 18 years. In the case of indexes, a little bit less, but I think we started to work with them in 2003. So I don't know, 20 years. So I don't know. They are really important clients, extraordinary loyal clients. They operate with Allfunds in every single jurisdiction in where they have operations. It's not just in Spain or Italy, it is all around the world. It's not just about dealing and execution. It's about digital. It's about ESG, it's about blockchain. So I mean we have so many initiatives in place with these 2 strategic clients and banks that well that's how I see, okay. So.

The next question comes from Antonin Baudry from HSBC.

Two questions. The first one is on the acquisition pipeline. You quickly spoke about opportunities in both segments. Would it possible to be more specific in terms of target, in terms of size and in terms of geographies on the potential acquisition that we could see in the future? And is it near future or more long term? The second question is about details on the evolution of the group in Asia or in the U.S., what should we expect in coming quarters in this particular region? Asia was supposed to be a driver of growth for the company. And so where are we today?

Okay, Anton. So I mean, what I can say is that the short-term target is much more focused today in Europe rather than in any other geography on the M&A space, okay? But unfortunately, I cannot be more specific, okay, and tell you which are the key countries in world today, we are analyzing M&A opportunities, but let's say that it's all about Europe. Regarding Asia, well, I think we have -- and the markets that we want to have in Singapore, in Hong Kong, we are -- keep on growing our market share. We have the Mainland China opportunity where last year, we opened our Shanghai office. Unfortunately, you know that the open architecture for international funds is extraordinary limited by this QDII quotas very limited, but we are there, waiting for the opportunity. And whenever this market opens, we are doing these closing the agreements with all the Chinese local institutions. I mean, first, to work with their offshore unit, so basically, Hong Kong and Singapore. But again, in the moment that market opens, we want to become, and I think that we will become the bridge for international funds in Mainland China, okay? And there are other regions or countries like Korea, South Korea, potentially Japan that we are starting now to explore, okay? In Southeast Asia, we have clients in the Philippines, in Malaysia, in Thailand, and we keep on gaining market share. And I mean, the truth is that the size of that business in Southeast Asia is really small, limited, and the company just wants to work with the top 2, top 3 financial institutions in this country. So I mean, I don't expect that we are going to bring 50 or 60 banks in Thailand because we just want the very, very, very best ones. And regarding the U.S., we have an office in Miami that is performing extraordinary well, but it's true that it's all about offshore business or non-U.S. domicile funds. So it's basically private banks established in Florida, that channel, the investments of high net worth individuals now in Latin America. For U.S. onshore, well, I think that there are just 2 ways for us to become a significant player in the U.S., and one is with a strategic alliance. And the other one is with a significant inorganic movement. So there are no more options for us. I mean I think that to think that we can start from scratch and to try to replicate what we have done ex U.S. in the U.S. is not realistic. It could take us decades. So strategic alliances and inorganic growth, but not in the very short term, really, Antonin. We are much more focused today on reinforcing our position in Europe to tell you a truth in the very short term again.

The next question comes from Gregory Simpson from BNP.

Two questions on my side. So despite the market backdrop, the industry data shows Europe still having pretty strong inflows into passive funds this year. Can you remind us in broad terms how this passive trend impacts all funds? Is it still the case that only a small proportion of AuA is passive on the platform? Would a distributor use all funds if they want to use passive products as part of their asset allocation, for instance. So that's the first question. And then the second one, can I just check on the recent acquisitions, the release has some quite positive wording around pipelines. I think the former Web Financial business, you talked about doubling the MainStreet business. I think you said the pipeline growing fourfold. So should we expect these businesses to grow at a faster pace than what they were doing organically as you upsell to the broader client base that you have -- is that going to be -- just wanted to chat with him what the outlook is around this kind of -- what seems like a pretty good [best] about the pipeline.

We will come back to you with the specific growth of passive products. I mean the quick answer is that definitely, yes. I mean we have all type of passive funds in the platform. I need to check exactly which has been the growth, okay, in this asset class, we will definitely tell you. I just mentioned the 2 asset classes, which I mentioned, and they were not passive funds, were money market funds and liquids and semi liquids. But yes, but we will come back to you and tell you all funds growth in this passive asset class, okay? And regarding the pipeline that we have in subscription fee -- well, I mean, we have internal discussions regarding what is the pipeline. So it's clients that we have already started to negotiate, clients where we already have an NDA signed. And what I can tell you is that we have been very conservative with this figure that we have given to the market of the fact that we have doubled the pipeline, okay? In some specific business lines, the pipeline is 4 to 5x bigger than 6 or 9 months before, okay? So regarding the traction that this added value services, the traction that these services are getting is impressive. However, something that at the beginning in 2022, 2021, when we started to build this new value proposition, we thought that the time, okay, that takes to close the deal was going to be smaller, let's say. So what we are seeing is that we start discussions with the client, with the prospect and it can take us 6 months, okay, to close the deal. So is it bad? Good? Well, I don't know. It depends on the size of the deal. If it takes 6 months to sell a 10,000 license, of course, it's not a very good KPI. But if it takes 6 months to be able to win a big, big contract to develop, I don't know, the digital value proposition of a big commercial bank, probably then is a reasonable timeframe. So again, very, very strong pipeline, but it's true that with the big companies and with big deals, it's not 1, 2 or 3 months of timeframe. It can take 6 to 9 months. And this in some way, it can be reflected in the revenues in the in-year revenues not that we made no.

Great. Alvaro here. Just a quick comment on the ETFs and passives, just to let you know that you might remember towards -- as of December last year, they represented roughly 7.3% of our book. Increased to, I think, around 8.5% in June. As of September, it has increased a bit more. We are around 9%, but not more.

The next question comes from Andrew Lowe from Citi.

Just couple of clarifications. I see consensus sits below 12% in terms of subscription revenues as a share of total 2023. Are you sort of reconfirming the expectation for that to be above 12%? And do we sort of have an idea of where that may land in 2024? And then the second question. I just wondered if you could add any comments about recent press reports about a strategic review. And maybe related to that, what are your thoughts on when you may be able to present a Capital Markets Day to us maybe next year.

Alvaro, do you want to take this one?

Sure. Andrew, So on relative weight of subscription revenue, as you've heard from Juan, we're witnessing good progress but we will most likely be south of that 12% guidance that we provided for the full year 2023. Having said so, in the second half, we are already seeing that percentage closer to or above that 12%. So hopefully, if we continue at this path, the speed next year, we should see an increase in that relative weight of the subscription business. And...

Sorry, yes, it's just to point out that in the case of all, remember, not the MainStreet acquisition, it was supposed not to be integrated in the company last year 2022, and we had some delays. So finally, MainStreet became part of the -- of our ecosystem in February and March. Okay. So yes -- so H1, as Alvaro was saying, okay, we have been probably below expectations, but it's also true that we didn't have the product because the company was not Allfunds yet. And also bear in mind that the other companies that were acquired took place in summer of 2022, okay? So it took us also 6 months to integrate them. So I think what is important is what Alvaro was saying to point out second half, H2 of 2023 in where all the acquisitions that we have made are all ready to deliver, basically. Sorry -- or just to point out the timing because I think it's important. I mean, the company's form part of Allfunds Group, one of them like 6 months ago and the other ones 12, 13, 14 months ago.

Yes. Thank you, Juan. So on -- if you want, I'll comment on -- on the question around capital markets, but I don't know, Juan, if you want to make any comments on the strategic review [ RIS ]. On Capital Markets Day, Andrew, definitely something that we are discussing and considering internally, we haven't agreed on a date yet, but we see that definitely as something that will be positive for the company and for the investor community as a whole.

Yes, I think -- I don't know if there is -- yes.

So no comments from -- regarding the retail investment strategy further than what we already said now in July.

Yes. There are no news regarding -- specific news regarding this topic that I'm aware of.

The next question comes from Ian White from Autonomous.

Just a few follow-ups from my side, please. First of all, just a clarification, actually, on a previous question. Am I right to understand that a decision is still to be made on the question of exclusivity payments to Santander and Intesa? That's what I took from your answer, I think, but just to be clear on that, please. And secondly, I think earlier in the year, you commented on some sort of lumpy migration opportunities in the pipeline, some potentially bigger deals, I think, EUR 15 billion AuA. That sort of ballpark might have been a number that was sort of floated. I'm assuming those haven't gone through in 9 months '23. Just what's the latest on those, please? Are those conversions that are in progress, or we might see now in 2024? That's question two. And just finally, obviously, you've had another period of relatively high inflation again in 2023. Just wondered how you were thinking about that with respect to pricing particularly on the subscription-based services looking ahead into 2024. I'm assuming there's sort of nothing no major change likely on the sort of platform service, given I think you did an exercise a couple of years ago there. But basically, is there some scope to raise prices a little bit faster than trend given the inflationary backdrop.

Well, regarding the payment in order to extend 2 more years, I mean, yes, very clear. Yes, yes, we are paying in November, okay, for these 2 years because that was negotiated, as I said, in 2017. So yes, okay. What else? Regarding...

Migrations one, the...