Allfunds Group plc (ALLFG) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Allfunds 3Q 2024 Update Conference Call. Joining us in today's conference call are Allfunds CEO, Juan Alcaraz; CFO, Alvaro Perera; and Global Head of Investor Relations, Silvia Rios. Mr. Alcaraz will make a brief introduction. [Operator Instructions] This conference call is being recorded; an audio replay will be available at allfunds.com during the day. At this time, I'd like to hand over the call 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 Q3 2024 trading update. As we generally do, let me start by giving you some general brief remarks on the highlights for this quarter, and then we will open for Q&A. First of all, we are delighted to announce that Allfunds has achieved a new record milestone of EUR 1.5 trillion in assets under administration. We have never reached this level of AuA, although we ended very close the year of our IPO back in 2021. In this third quarter, it is worth highlighting not only our strong AuA growth, but also our strong revenues in the quarter, increasing 60% year-on-year and only 1.7% below the record revenues achieved last quarter, now in Q2. Due to the seasonality of this period, our assets continue to increase at double-digit growth year-to-date and year-on-year, and this is very important for several reasons. First, it confirms the long-waited acceleration trend on our platform business. Second, it means that we are growing faster than the cross-border industry, so we continue to increase our market share. And finally, this also confirms that our 3 engines are performing positively and are contributing to our overall growth. This is the most exciting aspect, which shows the good business momentum we are experiencing. For almost a year now, since last February, we have seen the 3 engines of our AuA growth, contributing positively every single month, positive market performance, positive flows from existing clients, and a strong migrations. All of this has translated into a 10% growth of our total AuA year-to-date. This compares to only an 8% for the European cross-border industry. This growth is supported by a positive market performance. As you may have seen, market performance contribution has amounted to EUR 21 billion, building on the robust performance in both equities and fixed income markets. Additionally, this significant growth is mainly driven by positive net flows, the sum of migrations and flows from existing clients for the second consecutive quarter, underscoring the strength and consistency of our performance. Inflows from existing clients, rose by EUR 4.7 billion, thanks to the positive flows in fixed income, money market and alternative funds. In terms of migrations, you will see that we have managed to onboard EUR 18 billion in Q3 and EUR 30 billion, year-to-date. Expectations for new client migrations are on track to meet 2024 guidance. Our flywheel effect has remained strong, 63 new distributors gained year-to-date and 21 just in Q3. The majority of the clients onboarded this quarter come from the Nordics, Asia, Middle East and Americas. And we keep on increasing our market share. Around 51% of the new clients have been captured from other platforms. And we keep on increasing our market share, okay? As I have just said, thanks to our value proposition, which keep -- so we'll keep on enhancing it. On the revenue side, once again, a strong performance in this quarter, with growth across all revenue lines. Platform revenues were up 16% year-on-year. As typically absorbed during this time of year, transaction revenue had a slowdown since previous quarter, amounting to EUR 23 billion (sic) [ million] versus EUR 28 million in the second quarter of the year. However, these revenues represent an increase of 29% from Q3 of 2023. So 1 year ago, which reflects -- the higher level of normalized level of transactional activity compared to last year. NTI amounted also to EUR 23 million, an increase of 11% year-on-year. Subscription revenues grew more than 18% year-on-year and showed a consistent quarterly contribution of EUR 16 million so far in this year. I would also like to give you a brief update on our growth initiatives. As you might have seen in the statement today, we continue to attract new clients to our WealthTech platform, and we are very excited with the progress of our strategy around the subscription-based business. The pipeline remains well diversified, and we are further penetrating our customer base, enhancing the cross-selling of products. On our alternative Solution Platform, we made progress in our private markets' platform, and we delivered outstanding growth of 38% year-to-date. As we once again demonstrate the critical role, we play in helping clients to distribute these new products in the European private wealth segment. This is by far the fastest-growing segment of our business. We have launched this initiative globally. And as a result, we are capable of offering the widest range of alternative funds, providing access to the entire network of distributors across all strategies, and types of liquidity and under any regulatory framework of the product. We are extremely proud to be the platform of choice for both the vast majority of distributors and fund houses in the European market for accessing private market funds according to a recent specialized survey. This recognition demonstrates that we are uniquely positioned to capture the potential growth of this new asset class in the private wealth market. We continue working towards the launch of our new ETP platform, expanding the possibilities of distribution of our clients in the ETP space. As you might have seen, we have announced key hires to lead this effort to establish ourselves as the premier platform for ETP distribution outside the United States. We aim to be global leaders in our multi-platform proposition. First, we want to maintain our leadership in the long-only platform space; second, achieve that leadership in alternatives as the platform of choice outside the U.S.; and third, become leaders in the distribution of ETPs, provided -- providing an open architecture model for exchange-traded products in Europe, Asia and Latin America. As closing remarks, I would like you to retain this key messages from today's update. We are entering a new phase for Allfunds that will accelerate growth with our core platform business poised to benefit from an improving macroeconomic environment. We continue to observe a strong new client activity, showcasing our ability to gain market share and deliver outstanding client outcomes. We are making significant progress in our growth initiatives, building a high-quality subscription-based business, enhancing our alternative platforms and expanding our offering into the ETP space. Overall, we continue to be very optimistic about this year 2024 and remain confident in achieving the guidance provided last February. Thank you very much, and let's now open for Q&A.

[Operator Instructions] Our first question comes from Haley Tam from UBS.

Can you hear me, okay.

Very well. How are you?

Lovely. Could I ask two, please? Firstly, just on the ETP platform, which is due to launch in Q1 next year, could you give us any more color on the economics? Is this going to be a sort of transaction fee-driven platform? Or is this basis points of AuA? And maybe some color on your expectations there would be appreciated. And then the second question, if I can, on the flows from new clients. I think at the end of H1, you had highlighted you had signed more than EUR 40 billion of new client agreements. And clearly, some of that's come through in Q3. So I just wondered if you could confirm for us what the pipeline looks like today?

Very good. Well, regarding the economics of the new platform that we are launching next year, it's going to be a combination, okay, of transaction and a combination of platform fee, so our traditional, let's say, business. So both. So that's why it will be an accretive -- margin accretive new business line for Allfunds. Regarding the pipeline, yes. So today, we have EUR 30 billion year-to-date, and we are definitely expecting to reach at least the EUR 50 billion mark this year. So yes, I mean, a strong pipeline for Q4. And very, very -- well, this is something that we will talk in February, when we talk about 2025. But it's -- we are building a very, very strong pipeline for next year, as we have seen some significant delays in some big deals that we were expecting to migrate this year and will come in Q1 or Q2. So very positive on the migration outlook.

That's very clear. If I could just follow-up on the ETP platform. Is there any guidance you can give us on the speed or scale of revenue impact there?

Fortunately, we have not yet done any volume, okay, estimation for next year. We are working on that, okay. But as I said, I mean, we want to position our funds as the #1 in distributing, okay? So under distribution agreement of this new type of ETFs, active thematics that are becoming so popular, and we are detecting a significant demand. So again, margin accretive compared to our long-only platform. Not compared to our alternative platform, which is more profitable. But we still need to put the volume, not the assets, and this is too early in this moment to make an estimation for next year. Today, we are working on creating that infrastructure that will provide these 3-in-1 multi-platform that is our main objective for next year.

Our next question comes from Carlos Peixoto of CaixaBank.

Carlos Peixoto from CaixaBank here. Just a couple of questions as well on my side. I would actually be focusing slightly on the Credit Suisse deal and basically the indications -- or the breakup, sorry, I mean in the indications you could provide on that one. I was actually wondering -- well, you already mentioned that in the 9 -- in the first half, the weight that Credit Suisse had on your revenues was around 3%. I was wondering if that weight remains the same now in the third quarter. And also on top of that, I was wondering whether there are variable costs associated to this distribution agreement, which could -- so basically, what type of impact in costs could the breakup have in terms of reducing costs, I mean? And then on the other -- still on this, if you could remind us how much intangibles exist related to this partnership and whether you expect it -- you expect to have to write them down at year-end given the breakup?

Alvaro, yes, you can take these 3 questions.

Sure, Carlos. So with regards to the first question, yes, it is still around 3% of revenue on a run rate basis. And cost-wise, unfortunately, we were able to onboard this business at a very high margin. The platform is already operated at very high margins, as you know, but the inclusion of CS was done at an even higher profitability level. So some cost adjustments will be done, but not meaningfully. With regards to your second question, yes, the plan, and that's something that we are discussing with our auditors, as you can imagine, as we speak, is to write off the cash generating unit associated with InvestLab. As of the end of last year, these intangibles stood at around EUR 183 million, but you can see the full detail in last year's annual report, and we will, of course, update you regarding the final numbers.

Our next question comes from Antonin Baudry from HSBC.

I have two questions. The first one is about the existing client in flow. We saw slightly below Q2. So it was just to understand what are the current trend and momentum on client inflow, especially in the frame of your growth initiative for next year, which kind of profile of recovery should we expect in Q4, 2025? And my second question is about the evolution of the competitive landscape. 51% of the migration is coming from a competitive platform. How do you see this competitive landscape going forward?

Okay. So let me start with the last question on the competitive landscape. And probably you know Alvaro, you can cover the organic growth because that's all about, yes. Yes. Okay. So well, of course, competitors, I'm sure you know that they are doing a great job. They're reinforcing in some cases, replicating or trying to replicate our one-stop solution, no concept model that we created 25 years ago. But well, as of today, the good news for Allfunds is that we keep on onboarding almost half of the clients that we onboard come from other platforms. I mean, this is -- this is what is happening today. But of course, we expect a stronger competition in the future without any doubt. But well, that's a challenge. I think competitors will become better, but Allfunds will become better. And that's why we are so keen to launch new initiatives to reinforce and enhance our value proposition, not just with long-only. So you saw how last year we were the first one also knowing in anticipating this appetite for alternatives in Europe, we created the platform. Today, we are already recognized as #1. Now that it looks like the market is also asking for accessing these new ETP products in Europe, we are also the first one launching the platform. So well, we need to run very, very fast because everyone is running fast. And this is part of our DNA and what we have been doing for decades. And regarding organic growth, probably, Alvaro, you can give us some insight, yes.

Sure. Antonin, just to clarify, when we look at organic flows for the third quarter and compare it to the previous one, if we exclude the Central European client, the growth has actually accelerated. So for Q3, we have recorded almost EUR 10 billion of positive flows versus the EUR 6.2 billion that we recorded in Q2. So there is an acceleration of inflows taking place, which we are also seeing throughout this month. And we are confident now and very comfortable now that, that positive trend will continue in the future.

Yes. If that -- Alvaro, absolutely. Yes, a very brief comment. I mean, probably the potential [ extrap ] side has to come from equities, okay? Because the truth is that we are seeing clients investing again. They didn't invest as -- during 2022 or 2023, but now they invest, but they're still investing in pretty conservative products, okay? So we have not yet seen big wave of investments in equity. And I think we are all expecting to see that. And what -- so well, so we remain pretty positive because, again, we are still missing that very important wave of investments.

[Operator Instructions] Our next question comes from Javier Beldarrain of Bestinver.

So my first question on the flows from existing client charts on the press release. We see outflows in Central Europe and outflows in equities. Are these correlated in some way? Or would you say there is a significant percentage of the equities outflows that comes from Central Europe region? I believe you just mentioned that you're not yet seeing this big wave of investments, but just trying to understand if the average trend in most countries or if it's just driven by the Central Europe situation. And then the second question and perhaps related to the previous question. On the news earlier this month, there was some mention that you might be preparing an arbitration claim against UBS and seek compensation for making the exclusivity agreement. I assume you cannot say much, but just conceptually speaking, would the claim be more or less in line with the expected revenues from these AuAs until [indiscernible]?

Okay. Thank you very much. Let me take the first question. Yes. And Alvaro, probably you can take the second.

Yes.

Yes, the second one. So it's a very, very quick answer. No, there's no correlation at all between Central Europe and the -- not yet flows in equity, not at all. I mean we see this lack of appetite for equities. All across the different geographies in where we operate. Of course, there are some exceptions, as you can imagine, some specific private banks in where we are starting to see that they are back to investing equities. But the majority of our clients are investing in fixed income and not yet in equities. And again, nothing to do with the Swiss client. No. And Alvaro, regarding the -- yes, the other point?

Sure. So as you can imagine, we have been in -- we are in regular touch with people at UBS. And what I can tell you at this point is that Allfunds is taking all the necessary steps with our legal advisers to preserve our legal rights and remedies in connection with this cooperation agreement in order to claim for relevant damages. Nothing else I can disclose at this point in time.

Our next question comes from Gregory Simpson of BNP Paribas.

First question on my end is it looks like the commission revenue and the margin linked to it is higher quarter-on-quarter and year-on-year. Is there anything to kind of call out around the improvements here and outlook? Secondly, on the subscription business, I know there's some lumpiness, and it looks like there was a big jump in Q4 last year. And should we expect the same this year? And do you see the kind of mid-teens like-for-like growth that you called out in the release is kind of the outlook for subscription revenues kind of still going forward on the longer-term view? And then just lastly, quickly on alternatives. Just curious to hear, which regions and client types are having the best traction in terms of interest in private markets?

Let me start with the last question, okay, with alternatives and just let -- I mean, there are mainly 3 countries in where we are seeing a lot of appetite and the flows are pretty concentrated in these 3 countries, which are Switzerland, Italy and, let's say, Asia, mainly Singapore, okay. On the subscription business, okay, a subscription-based business, are we expecting an acceleration in Q4? We still need to see -- I mean it's getting traction. I think we are pretty happy with what we are seeing, but I cannot really confirm how we are going to finish the year. I mean it's not as easy, let's say, as -- or predictable as migrations because migrations we already have like the migration date confirmed by the distributors. So for us, it's kind of easier to predict. In the case of subscription revenues, there is much more volatility in whether we are able to close the deal in year -- this year or because it could move to -- probably it could move to next quarter. So let's say that well, we should achieve the numbers that we guided last February, this high teens and overall for the full year. And Alvaro, well, if you want to cover the first question?

Sure. So as Juan said, subscription, we remain in the range that was provided at the beginning of the year and then reiterated towards the end of July. And with regards to the first question, Greg, on margins, yes. I mean what we're seeing is higher transactional activity versus the previous year, which is something that we also anticipated, which also affects the NTI. So we're seeing incremental cash balances that more than compensate that lower interest rate. And with regards to the commission revenue, what we see is stability. And we -- yes, we expect margin to continue this trend going forward. And hopefully, thanks to the positive impact and contribution from new projects launched like the alternative platform that Juan mentioned earlier, to contribute positively.

[Operator Instructions] Our next question comes from Julian Dobrovolschi of ABN AMRO and ODDO BHF.

I have two. Maybe the first one as a follow-up on the ETP platform. If you can please talk a bit about the CapEx, but also OpEx that you had in mind for building the platform itself. Just curious to know how they think about that. It looks like you already hired on top industry talent in Q3 for this new initiative. So maybe if you can also say something about to which extent do you think this will impact the EBITDA margins in the second half of 2024? And the second, really quick, I think, Juan said at the beginning that new migration, the pipeline for the 2025 seems to be very strong, the way you look at it, and you see it at this point in time. given that, do you think there is scope to perhaps lead to the guidance from the current levels of EUR 40 billion to EUR 60 billion?