Allfunds Group plc (ALLFG) Earnings Call Transcript & Summary

Good morning, and welcome to Allfunds' financial results presentation for the first half of 2024. Thank you for joining us today. I'm here with Juan Alcaraz, Allfunds' Chief Executive Officer; and Alvaro Perera, Chief Financial Officer. Juan and Alvaro will take you through the presentation for an overview on our performance and outlook. After our prepared remarks, we will be happy to take your questions. This call is being broadcast live, and a replay will also be available on our website during the day.

Thank you very much, Silvia, and good morning to everyone. I'll give you a brief summary of our key highlights and share with you the significant strategic progress that we are making. Then I will hand over to Alvaro to go through the financials in more detail. Today, I'm excited to share with you our first half performance with 2 main messages: growth acceleration and record financial performance. We have delivered another half of record financial performance as we continue to accelerate assets, revenue and profitability growth. We have a strong business outlook. First, as we see flows from existing clients finally recovering with a sustained positive momentum, our engines are back on track to contribute positively to assets growth. Migrations are also expected to accelerate in the second part of the year. Our subscription-based business grew by 18% in this semester as the investments we have been making in order to enhance our value proposition are now really starting to bear fruit. We made progress in our product markets platform, and we delivered outstanding growth of 27% year-to-date, as we once again demonstrate the critical role we play in helping clients distribute these new products in the European private wealth segment. On top of this outstanding performance, I'm glad to announce our new key strategic priority for 2025, our new ETP platform. We will be rolling out the first features of this new platform in the first quarter of 2025. We had a strong and consistent delivery on our strategic growth pillars, a strong accelerating core business geared to an improving macroeconomic cycle. We are building a high-quality growth accretive subscription business. And finally, our private markets platform positioned for growth. Let's first discuss our core business growth, starting with a glimpse on what we are seeing in the market context in slide #6. Active funds, have now experienced a first quarter of inflows in a sign of rebound for the product. This implies that the usage industry is already only 2% away from recovering the USD 12 trillion highs seen before the start of the war in Ukraine, similar to what's happening in Allfunds. Fixed income has dominated the active fund inflows. We have achieved consistent market share gains throughout the last 11 years and again, this year was no exception. Following the temporary reduction in the penetration of open architecture that we saw since mid-2022 until June 2023, we are seeing open architecture recovery markets serve, given that long-term structural trends are intact and the need for more diversified investment products increases. Let me give you an update as we did back in February on the captive flow opportunity of Allfunds in 2 of our core markets like Spain and Italy. If you remember year 2023 last year, we saw a significant growth in captive flows due to a strong commercial push by large distributors for mutual funds with fixed term duration, [ famous guarantee function ]. As you can see on slide 8, Allfunds is already enjoying net flows, while the organic flow opportunity within short-term maturity products continues to increase. In Spain, Allfunds' organic flows show a strong recovery in contrast to a significant decline of net flows into conservative products. In Italy, net flows in these conservative products have slowed down, helped by the lower success of the BTP Valore placement in second quarter versus the first quarter. As a result of this improved market context, we have achieved AUAs of EUR 1.47 trillion, 6% above December 2023 and a strong growth of 9% year-on-year. Thanks to the turnaround of flows from existing clients, we have achieved a strong positive net flows of EUR 14.3 billion. Together with market performance, our 3 engines of growth are contributing positively to the growth of our business. Moving into more details of these positive net flows, the next slide -- in Slide 10, you see that Allfunds has experienced inflows from existing clients during Q2 of 2024, the first time since 2021. In line with what we have been witnessing since Q4 of 2023, we have been experiencing a continuous improvement in monthly trends. If you see at the bottom chart of the page, Allfunds has experienced flows from existing clients every single year since inception until 2022. This growth has been supported by structural trends towards [ best-of-breed ] and open architecture. And our flywheel network effect with flows directed to Allfunds as the leading European platform, exceptional macro environment in 2022 and 2023 with rapid rate increases led to exceptional years of outflows, which seem now behind. As a result, Allfunds is poised for inflows from existing customers again in the near term with expected rate cuts from ECB and Fed. Moving now to our next engine of growth, Migrations. Migrations from new clients have continued to contribute positively, which underpins the strength of our franchise. We onboarded 42 new clients in this first semester, a 35% growth year-on-year, and we brought EUR 2 billion of new assets into the platform. We win clients from all around the world. As you see, more than 50% of our new clients are coming from Asia, Central Europe and also in Northern Europe. We keep our focus on the sweet spot of midsized clients from EUR 100 million up to EUR 5 billion, which are more attractive to us from a business perspective. In this first half, we have attracted this type of clients while capturing significant share from competitors, helping us to diversify our distributors base. But more importantly, we have a strong new distributor pipeline activities supported by the EUR 40 billion of secure migrations for second half. This is not the first time that we share with you this metric. Given that we do not fully control the process of migrations, we wanted to reassure you about the strong new business activity and momentum that we are seeing. Just want to remind you that when we talk about secure migrations, this means that we have an agreement closed with the distributor, and we have an estimation of the date of when those assets are going to be migrated to [ others ]. Our flywheel effect remains as strong as ever. We keep on winning new distributors and onboard new fund houses, which in turn make our asset base grow and turn them into even stickier customers as driven by our extraordinary retention rates. Since IPO, Allfunds has continued expanding its platform business. But all of this would be incomplete if we didn't make our propositions to our clients more compelling. And since we are talking about a stronger proposition, let's have a quick look at our high-quality, growth accretive, subscription-based business. The subscription business is instrumental for our enhanced value proposition. To ensure we accelerate the penetration and share of wallet of our client base, we will keep on investing while we reinforce our existing capabilities, both organically and inorganically. We have delivered high teens growth and keep on improving our commercial metrics. As you can see in the bottom right-hand side chart, we are growing faster than the last 2 years, proving that our acquired businesses are delivering on the strategy. As we reflect on the first half of 2024, I'm thrilled to share the remarkable progress we have made on our product road map. We have achieved not 1, but 2 successful product launches. These new offerings have already begun to make a significant impact, and we are just getting started. In the spirit of continuous innovation and in collaboration with Google's team, I'm excited to announce that we have an AI-powered feature in the pipeline. These features set to launch in Q3 promises to revolutionize how our users gain insights and interact with our platform. It will be the backbone of future products and services at Allfunds. We are also leveraging AI technology also for internal use to use and to power efficiency internally. We have launched a document processing platform that represents the first use case with AI. It will help us to reduce costs by processing a significant amount of documents. I would like now to spend some time in our successful alternatives platform. European private wealth remains a top segment to capitalize on the alternative strength. Most of the key players have already highlighted the special momentum and activity they have experienced. And wealth managers are allocating more client capital to private assets. In that line, we expect private markets to witness a significant increase in demand over the coming years. As a result, our Allfunds alternatives platform is building a strong momentum. This is a high growth and margin accretion potential opportunity for us and it perfectly fits with Allfunds' strategy to be a one-stop shop for distributors and fund houses. We have seen a solid growth of 27% year-to-date of the AUA we distribute with a strong demand from Asian and Swiss clients. We remain very optimistic about the prospects of this segment of the business, given that the funds were launched 12 to 18 months ago, will become more attractive as they grow in AUM and track record. Therefore, the flows into these funds will increase. Lastly, I'm particularly enthusiastic about an initiative that has been in development for several months. I'm talking about the launch and the success of [ long-only fund ] distribution platform launched in 2000 and following the introduction of our fully operational private market platforms, we are excited to announce the creation of our new ETP platform. This solution will provide an open architecture model for exchange-traded products, further enhancing our proposition by integrated 3 platforms into 1. We are working on expanding the possibilities of distribution for our clients in the ETP space. This means expanding Allfunds' one-stop shop solution and penetrating the open architecture of ETPs. As a result, our existing distributor channels will grow its share of wallet by increasing the usage of ETP. There is significant runaway based on a large addressable market that we estimate to be around EUR 2 trillion today and that grows at more than 20% rate. Our goal is to offer access to a wide variety of ETPs, improve the liquidity delivery of these products and optimize the distribution for both new and existing fund houses. We're in an exciting phase and keenly anticipating the development and progress of this initiative. Allfunds' leading full-service offering on its traditional and alternatives platform can be extended at the scale across the ETP platform. As a result, our proposition will be stronger than ever, a comprehensive integrated suite of best-in-class solutions. With that, let me now turn the call over to Alvaro, who will take you through our financial results.

Thank you, Juan, and good morning, everyone. I will now run you through the key financial figures and explain the main underlying drivers of this outstanding performance. Let me start with a few key performance indicators on Slide 24. As you can see, we have delivered strong financial performance in H1 '24 combining growth, high profitability and cash generation, 3 pillars of our financial profile. The company delivered record half year revenues of EUR 310 million, a 16.4% growth versus first half of '23, and adjusted EBITDA of EUR 210 million, implying a margin of 68%, a 20% growth in adjusted earnings per share; and finally, a 19% free cash flow growth in line with our historical pretax cash conversion rates. Let's pause on Slide 25 to take a quick look at our revenues. The company has been able to grow across both platform and subscription services at high teens. In H1 '24, net platform revenues increased by 16% compared to H1 '23, benefiting from the sustainable contribution of net [ treasury ] income, thanks to higher average balances as well as to the higher transaction revenues following a recovery to normalized levels of activity. At the same time, subscription revenues increased year-on-year by 18% to EUR 31 million, driven by an improved level of commercial activity and successful integration of recent acquisitions with like-for-like growth in the mid-teens versus H1 2013, in line with our '24 guidance. Shifting our attention to margins, I would like to highlight that our business has demonstrated margin resilience, increasing our total net platform revenue margin from 3.7 basis points to 3.9 basis points. Platform service margin increased 0.3 basis points from 5.1% in the second half of '23 to 5.4 basis points while dealing and execution margin remained stable. As you've noticed in previous slides, revenue growth materially outpaced costs, generating positive jaws, demonstrating our operating leverage. Costs were driven by higher inflation, mainly fixed cost, currency impact and increased investments in line with our strategic ambition to develop our digital capabilities and IT infrastructure. We also managed to offset some of these key hires in strategic initiatives and new senior appointments in the operations team with efficiency programs launched last year. With regards to SG&A expenses, the incremental transactional activity and growth in our subscription business resulted in a slight variable cost increase. So as a result, adjusted personnel expenses and SG&A expenses stood at EUR 62 million and EUR 43 million, respectively. Thanks to our operating leverage, we were able to deliver record adjusted EBITDA of EUR 210 million in the first half of '24, representing a 22% growth versus the first half of '23. Furthermore, adjusted EBITDA margin stood at 68%, slightly ahead of our guidance of mid-60s, as you might recall. So as stated earlier this year, we expect adjusted EBITDA margin to remain stable in 2024 and progressively improve over time. Allfunds has a strong cash flow and capital generation capacity. We have consistently delivered on our capital allocation, and we are committed to continue doing so through funding our innovation investments and reinvesting in the platform, value-accretive M&A and finally, shareholder remuneration. Before we turn to Q&A, we wanted to share our views on the potential outlook for the remaining of 2024. Today, we confirm the guidance we provided in February for the full year and our higher conviction to reach the upper end of the range on the basis of our year-to-date performance. For the rest of the year, we keep the same assumption of flat market performance from current levels. In terms of migrations, we maintain the range of EUR 40 billion to EUR 60 billion given the high visibility on secured migrations. Regarding flows from existing clients, we have experienced a gradual recovery, as Juan mentioned, ahead of what we were anticipating in February, and we continue to see upside potential based on year-to-date dynamics. So as a result, we anticipate to end 2024 slightly above the EUR 1.5 trillion mark of AUA and net revenue growth in the upper end of the range provided in February, i.e., low double-digit growth. Finally, the adjusted EBITDA margin for 2024 is expected to remain stable and turning towards [ 70% ] in the midterm. Thank you all very much for your attention, and let's now open the Q&A.

Let's move on to questions next. As is customary, during the Q&A, please limit yourself to one question plus one follow-up. You may get back in the queue if you have additional questions. And for any questions that may remain un answered, the IR team will be at your disposal after the event. Operator, can you please proceed with the first question including the name and company of the caller?

[Operator Instructions] Our first question today comes from the line of Arnaud Giblat from BNP Paribas.

I've got a question on your alternative platform. I was just wondering, given the ELTIF 2.0 regulation update, should we expect an acceleration in flows to alternatives? Is that something you're seeing? And also, if you could give us a bit of an update as to whether -- how the flows are shaping up? Is it concentrated to a given number of players? Or are there more big scale, big names, big brands to come still on the platform to underpin that growth? And my follow-up question is on the ETP. I was just wondering if with the launch of this platform, there's a plan to address the B2B2C market?

Regarding the first question about the -- yes, I think regulation is also going to help the growth of the alternative products across Europe. So yes, definitely, the quick answer is we are expecting, and we expect an acceleration of alternatives investment in Europe without any doubt. So we are expecting to see more products and more appetite for this type of products across all our distribution network. And I think the second question was regarding migrations and [indiscernible].

No, on [ precise ] alternatives, if it's concentrated in a number of players or it's not.

Well, I think that we are seeing appetite especially from the private banks. So, we have a really important market share in private banks and wealth managers in Europe. And these are the first ones, note, that are showing significant appetite for this asset class. So remember that until now the appetite for this asset class was mainly coming from institutional investors. Now we are seeing this new segment, wealth managers entering into this space. So -- and we have -- I think, the beauty of Allfunds' platform is that we have this type of clients, wealth managers, private banks, all around Europe or around the world. So we are seeing big distributors with appetite for these products, but also midsized and small distributors, again, private banks wanting to access to this asset class

And finally, on ETP, are we going to address the B2C channel?

Well, I think it's a very good point. I think we have always remained for the last 24 years or since inception as a B2B platform. And with ETP, we are not planning to change anything. I think the only opportunity or option for Allfunds to enter into or to be closer to the end customer is going to be or it could be, not so much regarding products but regarding countries. So of course, there are some countries where we are not so strong in B2B or in where we could decide to become a B2B2C. But again, not -- our ETP value proposition is definitely going to be 100% focused on B2B. So the same as what we have done with [ long-only ] and the same what we did last year when we launched our alternative platform.

The next question today comes from the line of Haley Tam from UBS.

If I could ask one about migrations, please? The EUR 12 billion of migration you saw in H1 was obviously a big improvement, and you did highlight the 42 new distributors; I think it was up 35% year-on-year. I think H1 last year, you actually had a much higher migration figure in H1 of EUR 20 billion. So, I just wondered, is there any comment on the average value you're getting from each new distributor, if there's a trend that we should be identifying? And then the follow-up question, please. You talked about 36% of those migrations coming from other platforms. Could you remind us, please, is that other large platforms or smaller ones? And should we think about this as a pricing-led success or something specific about your service proposition that is particularly successful right now, and also, I didn't see the retention rate mentioned in the slides today. Is that still 99.9% of the distributors?

I mean I don't see any trend on the migrations. I think the beauty of Allfunds is that we are in the countries and regions in where we want to be. So we don't have to do any homework in necessarily open new countries, new regions, I mean we have been open in regions and countries for the last 25 years. And the beauty is that now we already have the teams, the platforms. The local platform is now supported by our global team. So migrations come and new clients come from every single and every single country in the world. So that's the first thing. The fact that we grew -- I mean, that migrations last year were a little bit higher or 20% versus 12%, to me, it's not really important because this can change in a week. We are currently -- we have big migrations already signed for second half of the year of -- some clients are above EUR 15 billion, for instance, so you migrate those EUR 15 billion next week and suddenly, the migrations of that quarter looks super good, not compared to last year. But again, I think what for us is important is that we're capable to keep on gaining market share, to keep on gaining clients from everywhere, as I said, and that in an ongoing basis, we had this EUR 50 billion mark every year of new assets coming to Allfunds. To me, that is the most important, let's say, take away. I think the other question was regarding that if we are gaining -- I mean, what type of platforms are we gaining clients from? There are not so many small platforms or competitors in Europe. I think that today, the platform market is very concentrated, really. So when we say that we are gaining market share and we are gaining clients from other platforms, it's mainly from the top 3, 4 platforms that operate today in the world. And you mentioned, if it is a price issue? Well, since I launched the company more than 2 decades ago, I always told my people, my team that we should never try to win clients based on price. We always try to focus our value proposition and the way we sell Allfunds as a solution and therefore, not really focusing on price. So I really hope that the new clients that join Allfunds are not because we are able to pay them more or less, but because of the one-stop concept. So this added value and enhanced value proposition of Allfunds compared to other players.

And Haley, on your comment with regards to retention rate, yes, it is above 99%. We've not included it in the presentation. I think we're getting used to it.

The next question today comes from the line of Andrew Lowe from Citi.

First one is on Page 14. You mentioned the retention rate being above 90% for your subscription business. I'm just curious how that compares to your prior expectations, given that subscription revenues disappointed consensus over recent results? And then if you've got an idea of how that compares to peers? What are the expectations for that retention rate going forward should that increase meaningfully as product improves? And then a quick follow-up on the ETP platform. Could you just clarify what the margins are versus the mutual fund margins?

Well, it's difficult to talk about our peers in this, let's say, business line because here, you compete with so many companies, wealthtechs, fintechs, not with the traditional fund platform. So, we are boosting our sales activity regarding subscription revenues. We have made some changes. So now we have all the sales force of the company now promoting these services and not just the sales people from the subsidiaries. So I think that we should expect a significant acceleration and growth of this type of revenues. But at the same time, we are competing against very, very strong fintechs and wealthtechs coming from all around the world. And therefore, we will see how the above 90% retention rate evolves. To me, it's definitely a much more, let's say, difficult environment than the fund platform that, as we said before, we have been selling our value proposition for decades. This is pretty new for us. We are expecting to win many, many clients. But of course, as I said, many players are also competing. Sometimes the product or the solution, the tool that we are selling is at EUR 20,000, a tool. So it's not so difficult that suddenly you lose that contract with that distributor because they prefer another tool or another product. So I'm not so, let's say, obsessed with the retention rate in subscription. I'm much more focused on the retention rate on the, let's say, platform business. What else?

The margin expected on the ETP platform.

Well, the margin -- the only thing that I can disclose at this point because this is a new initiative, and we want to keep it as confidential as possible until it's already live. The only thing that I can tell you is that is without any doubt is going to be accretive. So we are expecting to make more money in this platform than the money that we are currently making -- the margin, I'm talking about the margin, that the margin that we currently make with the [ long-only platform ] with [indiscernible]. That's what I can disclose at this point.

The next question today comes from the line of Julian Dobrovolschi from ABN Amro.

I have also a follow-up on the ETP business. Can you please remind us what proportion of your AUA is now ETP/ETF driven? And kind of also an expansion on this question, I'm just wondering how is the new platform, which obviously you're trying to isolate as a kind of separate brand now, is different than the current way of you distributing ETPs? And then another one is on the capital allocation. You're generating solid free cash flow. Margins are quite solid and probably this will stay at this level. Can you please update us on your capital allocation policy, i.e., maybe some more buybacks coming up in the horizon?

I mean the first one is the proportion. I mean for us, it's a new business, so we know that we have around 9% of the current assets in our platform -- around 9% are index and/or passive, but that's the only, let's say, number that I can give you because, I mean, this is a new platform. We currently have a very, very small amount of ETFs traded through Allfunds, so insignificant amount. So all you can expect is new money and new business, really. I'm not thinking about converting part of the passive or index products that we have into this platform. I'm expecting to see the growth coming from scratch, really. This is regarding ETPs. Separate brand, no, I don't think so that we are going to -- I mean there is just one Allfunds. The only thing is that it's true that I think that for our clients and distributors and fund houses, I think it's easier for them to see in Allfunds these 3 platforms in one rather than saying that we do everything. So probably at the beginning, we will keep on in all our communication strategy, we will keep on talking about these 3 platforms, but everything is going to be integrated. It is true that, of course, we have specialized teams in each of the platforms because in the case of EPS, the team, the operational team and also on the IT side, we are hiring new people, new experts, but Allfunds is just one company and everything has to be definitely integrated.

And with regards to capital allocation policy, no changes versus what you have been seeing since we IPO-ed. So all the cash that we continue generating on a yearly basis, it goes to reinvesting in the business, funding our initiatives, doing accretive M&A and of course, giving it back, remunerating shareholders, whether it's through ordinary dividends or buybacks as we've done recently; that's still part of the policy. So answering your question, should we expect more buybacks in the future? I think that's definitely why not? That's part of the part of the policy.

The next question today comes from the line of Ian White from Autonomous Research.

Firstly, I'm just looking at the year-over-year progression in the asset-based revenue margin in the platform service specifically. On my math, the margin there has declined maybe 8%, 9% year-over-year in the second quarter. And I wondered if you could just help me understand what's happening there and whether we should expect to see continued pressure in that [Audio Gap] platform? And secondly, I wonder if you could just comment a little bit on the recent senior appointments that you've announced, the Group COO and Chief Data Officer. What prompted those hires during the second quarter? And is there an eye on the potential for further efficiency savings or a view that the commercialization of the data upfront could be improved or something along those lines, please?

So on margin, I think you're looking at first half of '23 and comparing it to the first half of '24. And you're right, there is an attrition there in the, I'd call it, pure asset-based revenue, which I think we addressed in February now during our full year presentation. So actually, when you compare the second half of '23 with the first half of '24, which is what we're doing now today, you see that there is a stable margin on the asset-based revenue front. When we compare it to last year, you have the, let's say, the impact of the [Audio Gap], which has progressively gone down over time, and we've openly said that we expect that to continue progressively reducing over time. We've also seen the impact of a weaker asset class mix, in particular in the first half or the second half of last year. But we are now seeing those flows normalizing and actually improving now into more riskier assets. So we feel, I'd say, very, very comfortable now with the margin stability that we are describing today.

Yes. And just a comment on what you have just said now, the truth is that the first inflows is now coming into equity products, and therefore, this improvement in product mix started 1 month ago. So we are seeing appetite for riskier assets, but the truth is that we are talking about still fixed income. So this improvement of product mix has not yet happened, which is, I think, in some ways, good news because, well, whenever that happens and that appetite towards equity really become significant, I believe you know that we will also see a positive impact in the margin. And regarding the senior appointments, yes, I think that -- well already last year we appointed a new Head of IT, so a new responsible for our IT platform. That happened in 2023, and it came with also a big transformation of the IT team. And this year, what we have done at the beginning of the year, we hired Chief Operating Officer; Antonio Varela to take care of the IT platform plus all the operational teams of the company. So putting together for the first time in many years, IT and operations and having just one single voice when we talk about Allfunds, a technological platform. And Antonio is bringing and transforming the team. So bringing new people with a lot of experience, basically with international background. So yes, a lot of focus on the platform itself, apart from bringing other products, other solutions, other services, that is very good. But now we need to really pay attention to the platform because it's absolutely critical that remains being a solid and resilient platform.