Earnings Call: Q3 2021

Oct 20, 2021

Earnings release

Thank you very much. Good morning to everyone, and thank you for joining us in this trading update for Q3. As you may have seen in the statement, we have published this early morning today. We also announced the successful integration of the two companies that we acquired in H1, Financial Group and Insty Hub. I'm very excited about the creation of Ofan's tech solutions, a new dedicated company that will benefit from the integration of Ofan's digital and Web Financial Group. In addition, Insty Hub will be rebranded into the new Ofans Data and Analytics, becoming our business line focusing on data and analytics solutions. Both are going to be instrumental in our strategic goal of further providing digital solutions to our clients and increasing subscription revenues. Let's start with Q3 results and numbers, okay? So as you have seen this morning in our press release, assets under administration were stable since June 2022 for All France Group, decreasing only 0.8% or $10,400,000,000 This resilience in assets was driven by the best quarter in migrations year to date with $17,200,000,000 despite the negative market performance and the outflows from existing clients. And this makes this quarter the strongest quarter of the year. As refers to platform service assets in the current quarter, given the high quality the high volatility experienced in global markets in August and September, we saw assets decreasing by 2% to eight ninety five billion, demonstrating greater resilience as a result of new client migrations onboarding to our platform. The decrease was mainly due to the risk of sentiment environment across equities and fixed income asset classes as you can imagine. In terms of market appreciation, the negative performance across asset classes contributed to virtually most of the decline. I remind you here that fixed income markets were down 6.9% in the quarter, whereas equities suffer a range of 5% to 6.6% drop in that same period, depending on which equity market index you choose. As you have seen, we have experienced organic outflows from existing clients slightly above Q1 and Q2 that we have largely offset with new clients migrations during the quarter. This resulted in modest net outflows of about minus 0.5 during the quarter. The existing client outflows were concentrated on the month of August and September, especially the last half September. As opposed to what happened in Q1 and Q2, we have seen in this Q3 a stabilization in the outflows in the fixed income asset class. Regarding migrations, you will see that we have managed to onboard almost EUR 10,000,000,000 in the platform service AUAs and EUR 8,000,000,000 in the billing and execution AUS. We already have explained in the past that the services of dealing and execution, D and E, are not our core business. It's true. But we will be willing to grow as a way to gain clients for the platform service. The capture of this new specific client was a strategic for all fans. It was a very important win and highlights our ability to win businesses from large distributors with flexible servicing needs. Regarding our subscription based business, we are very excited with the progress. We continue seeing banks and financial institutions wanting to upgrade their tech offering and we are becoming a strong partner for this investment. There is good traction on the upselling and cross selling efforts from the recent acquisitions and the prospects for the end of year remain very positive. I would also like to reiterate today again that we remain highly confident in our business model and the growth levers at our disposal. We have continued to see strong client activity with 51 new distributors on boarded year to date, a figure that we usually onboard on average for the full year and more than 100 new farmhouses, demonstrating our ability to continue to win market share and deliver excellent client outcomes. So our famous flywheel effect. During the quarter, we onboarded about $17,000,000,000 of assets onto the Allfans platform. Our new client pipeline remains very strong. And while it is this year more weighted to the last quarter of the year, we remain confident in achieving the level of secure migrations of $40,000,000,000 for second half of twenty twenty two. That is what I commented to you last July when we talked about H1 results. Overall, our secular growth drivers remain absolutely intact, outsourcing, the shift to open architecture and digitalization. Finally, I would like to spend the last minute of the call on the integration of the two companies we have acquired, Web Financial Group and Instyca. I'm happy to share with you that these integrations have been completed without any setback and in less than four months. Both the creation of Ofan's tech solutions and Ofan's data analytics are a direct effort to align and harmonize teams across the business. Such an integration will leverage the mutual benefits of these organizations to help create an even more robust offering to clients. This step will also reinforce our strategy to diversify our revenues and be less impacted by market volatility. As a final update, I would like to remind you that we are just waiting for the closing of Main Street Partners to occur in the coming months to also reinforce our ESG offering. This addition will certainly provide further collaboration areas with the new business lines created. And that's it. So thank you very much again for joining us today in this call. And let's now open for Q and A. Thank you. Thank you. The first question today comes from Alex Medhurst from Barclays. Please go ahead. Yes, good morning and thanks for taking my questions off the presentation. A couple of sort of areas I wanted to touch on. Firstly, just a bit of color on this, hopefully, in migration to bidding and execution. Firstly, what are the prospects of upgrading this to the core platform offering? Second, can you comment a little bit on the initial revenue margin? Will this be the same as sort of 0.2 basis points for the rest of that Union and Execution portfolio? And third, does the remainder of that GBP 40,000,000,000 H2 migration target include any more migrations to bidding and execution? Thank you. And then just the second area of questioning well, maybe just one question in the second area. We're obviously much the way through the second half. Can you give any indication of how revenue margins are trending within the 3.3 to 3.5 basis point range? Yes. Alex, thank you very much for your questions. Unfortunately, there's a lot of noise and it was tough to to get, you know, all the all the all the messages, you know, and the questions that you paid. But what let let's let's see, Alex. I got I don't know why Yeah. The line is breaking. Yeah. Alex, you let us know. I think that the first question was on migrating this on the delay and execution piece. What are the prospects to upgrade that client to the full platform service? The other one was regarding margin and yes, 40,000,000,000, okay, revenue. Well, regarding migration would it be useful for me to repeat that? Might have a clearer line. Now it looks like the line is better, yes. Okay, great. So the first question was just around the $8,000,000,000 migration to dealing and execution. What are the prospects of upgrading this to the core platform? Can you comment on the revenue margin initially on this $8,000,000,000 Is it the same as the sort of 0.2 basis points for the rest of the portfolio? And also, does the H2 $40,000,000,000 target include any more migrations to dealing and execution? Super. And then the second sort of question was just can you give any indication on how revenue margins are trending for the second half within the 3.3 to 3.5 basis point range? Super. Thank you, Alex. Much better. Okay. So regarding the €8,000,000,000 and the possibility to upgrade, well, I mean, we are consistent with the strategy. We do all our best to capture clients for our platform service, which means the one stop solution, old fashioned traditional business model. However, it's true that we are also keen to make exceptions in the case that we realized that we are talking about a very, very strategic client in a very specific core country, which is the case, okay? So then we do it. Why we do it? Because in this case, this money comes from a competitor, so it's always good. Second, because it reinforces our market share dominant market share in one specific core country. Second, okay. And third, because as you said, yes, once you start dealing with a client, working with a new client, you always have the possibility to upsell the level of service that you provide to this distributor, but not just necessarily trying to move that client from dealing and execution to service platform. That of course is one of our main priorities, but also to sell to this client digital services, which is our kind of core focus. We are really keen to do it, as you can imagine. So that's regarding this EUR 8,000,000,000. Also regarding to migrations, in this case, these EUR 8,000,000,000, I cannot disclose the margin, the specific margin because I would be disclosing the margin with a specific client, something that I cannot do. But I can tell you that it's significantly, okay, higher than the average margin that we have in dealing and execution, okay? Third question regarding migrations. Are we expecting new migrations in dealing and execution in Q4? And the answer is yes. Okay? The answer is yes. How much of the $40,000,000,000 We don't know yet. Okay? We don't know yet. But yes, we are expecting some more assets coming in Q4 in dealing and execution. So this is regarding migrations. I don't know if I have answer to your questions. And the last question probably, Alvaro, in your case, revenue margin for the Yes, exactly, on revenue margin. Yes. Hi, Alex. We maintain the same guidance that we gave you since the beginning of the year. Remember, we mentioned we expected the profit margin to be around 3.3 to 3.5 basis points, assuming a stable to flat market scenario. Given the current situation to be more on a peer market scenario, sorry, the margin might be at the lower end of the range. Again, it's difficult to predict what the market is going to do. But based on what we know today, I think looking at the low end of the range seems more reasonable. Great. Thank you very much and apologies for the poor line. No problem. Thank you, Alex. Thank you very much. Our next question comes from Bruce Hamilton at Morgan Stanley. Hi, there. Thanks. And sorry, somewhat sort of questions following on the lines of the previous ones. But maybe just thinking ahead into 2023 in terms of what visibility you have on pipelines and new clients. I mean, should we be thinking as sort of is that kind of GBP 60,000,000,000 plus of potential new wins? I think when you came into this year, was about GBP 100,000,000,000. Is it similar order of magnitude? And when we think about new client business then, I mean, what sort of proportion or how should we think about what proportion comes to platform versus dealing and execution? Because obviously, if it's to the latter, it's much less impactful to revenues, at least initially, which is something we need to sort of bear in mind. And then secondly, just on the revenue margin point. So if I've understood what you're saying is from the 3.5 bps you did in the first half, we should imagine that's trending towards 3.3% in the second half? Or are you saying for the full year, it's near 3.3%, so you dip below the 3.3% in the second half? And then what would how should we think going forward, if equity markets start to recover, should that recover back up to 3.4%, three point five %? Or how do we think about that sort of dynamic? Thank you. Thank you, Bruce. So regarding next year, no migrations and pipeline, I mean, are not we are working as we speak in next year budget and we still don't have that figure. What I think that I mentioned in July, overall pipeline of around $130,000,000,000 okay? But again, as you know, one thing is the pipeline that not necessarily has to be inside one specific year because it can happen that migrations fall into the following year, okay? So pipeline is this one, which yes, I think it's extraordinary strong pipeline. Specific number for next year, I mean, gave a number, which is well, it's not far away from what I'm expecting. That's all I can really say. And regarding revenue margin, I think Alvaro probably you can jump in with this question. And probably I can answer or I probably can start answering to this comment that you made regarding what happens if the market rebounds. Definitely, there is a clear effect in our margin overall margin with product mix, okay, which means that the better the product mix of our portfolio of our of the assets that we have in the platform, the better for our margin. It's clear that we make more money if we have more equity, okay, in the platform. Yes, we are all expecting that sooner or later, markets will rebound and definitely we should see an impact, very positive impact in our product mix, therefore, a very positive impact in our overall margin. But having said this, Alvaro, probably you can take the question regarding, again, no margin. Hi, Bruce. So of course, we won't be disclosing the forecast for the second half. But I think the way to look at this is, look, we as you correctly pointed out, we disclosed the 3.5 basis points for the first half. Most of the outflows that we saw during that period of time was on the aware on the fixed income space. We've seen a different trend in Q3, as you've heard earlier. So we've seen equities also flowing out of the platform to some extent. That has, of course, impacted our margin. Having said so, I would reiterate the 3,300,000,000.0 to 3,500,000,000.0 range for the full year. I think we will be probably closer to the 3.3% to 3.4%. I would be surprised to see margin going for the second half below the 3.3%. But as we mentioned earlier in the call, there's a lot of uncertainty. Volatility can also play in our favor, as you know, on the transaction income. So I would reiterate that range that I provided. And as Juan was saying, of course, rebound in equities might have a very positive impact on the margin. So we see this more as a temporary, let me say, setback or impact. And let me also take the opportunity, I think you asked about the D and E migration for next year. I think the Juan answered earlier to Alex, we this migration that you saw in Q3 and what is remaining is more opportunistic. And we don't really have a, I would say, significant amount of potential new DME migrations into the pipeline. So most of what, if not all of what will be coming next year, likely on the platform service side. Got it. That's very helpful. Thank you. You're welcome. Thank you, Gurik. The next question comes from Philip Middleton from Bank of America. Please go ahead. Yes, good morning. I wonder if you could talk a little bit about what you've been seeing from the BNP portfolio, where you were looking to move more assets from the dealing and execution to the full service one. And also, I wonder if you could say a bit about it seems like the characteristics of new business this quarter have changed a bit with more emphasis on people choosing to outsource for the first time. Is that do you think that's the lasting trend or just a bit random because of a small sample size? Okay. Yes. Thank you. Thank you very much. I mean regarding the first question, client conversion BNP or FDS client conversion is on track. Nothing really to point out. I will disclose the numbers in February, okay, whenever we have the 2022 results presentation. So but I mean everything is in track. And regarding the question of the type of taxonomy of clients, new clients, as you said, mean, it's a very small, let's say, period, you know, to take any conclusion really. I think the beauty of our business model is that, as you know, we have 16 offices around the world operating locally. We have clients in more than 60 countries. I think now it's around 65 countries. We target always we try to target the best clients in each of these countries. As you can imagine, diversification is our main goal. And I don't know, some quarters we are pretty successful, I don't know, The Middle East. And suddenly, the following quarter, we see clients coming, I don't know, in Latin America, clients coming in The Nordics. Also it's I don't think we can take at this point any conclusion about client taxonomy in this moment, okay? Probably, again, in February, probably we can look back and see if there is any pattern in twenty twenty two types of clients, something has really changed. My opinion today is that, no, nothing has really changed. Okay. Thanks very much. Thank you. Our next question is from Tom Mills at Jefferies. Please go ahead. Hi, good morning guys. Sorry, just to ask another question on the migration side of things, but and I appreciate you said you can't be sure on the D and E migrations in 4Q. I think you previously suggested that there's a certain amount of signed and dated new business into 2H. Is it possible to give us an idea what proportion of the kind of remaining visible migrations this year would relate to the core platform service? And then just secondly, on the EBITDA margin kind of target and sensitivity analysis you helpfully provided at 1H, is it fair to say that you're still feeling pretty good about the 70% plus target for this year? That's great. Thank you, Tom. Okay. Let me take the migrations question, and I will ask Alar, before she jump in regarding the EBITDA margin. So really, I mean, unfortunately, I cannot really add anything else really, Tom, not regarding what I have already said. I mean, because I mean we're talking about a Q4 and which means that it's next three months and it can happen that some of these dealing and execution migrations that we're expecting to have potentially they could fall into next year. But on average, I think that as I have already disclosed that I'm expecting to see further migrations in dealing and execution in Q4, okay, apart from the $8,000,000,000 I don't know. Let's say that we could expect overall to see that out of the overall migrations that we are expecting to close this year, which is going to be around 55,000,000,000 and $60,000,000,000 I'm talking about 2022, I don't know, probably 15%, twenty % of that overall migration 2022 could fall or could come from billing and execution. Yes, probably. But bear in mind that, as I said, okay, the margin is not the current margin, okay. So it's a better margin, okay, in any case. And as I said before, it's an exceptional client, a strategic client for the company. So I'm super, super excited and happy to bring this type of exceptions to the platform. This is regarding migrations. And Alvaro, probably regarding the Tom, look, it's difficult to predict where market is going end now and how are they going to evolve. So given this business is all about scale, it adds another layer of complexity to really talk about that EBITDA margin. Having said so, we continue with the cost discipline that we've had throughout the year. We have, as we said, internalized some third party services that were outsourced. We're streamlining the third party providers. We're renegotiating terms and so on, and we're very strict in our highest policy. And going back to the guidance that the scenarios that we provided back in H1, we still think that, 70% plus EBITDA margin for the full year 2022 is achievable. It's going to be and it's being challenging, as you can imagine, but we will definitely work towards that target. And of course, we are very conscious of the very difficult environment in which we operate. And so we will make sure that the costs remain under control if the outlook does not improve, as you can imagine. The next question comes from Greg Simpson of BNP Paribas. Please go ahead. Good morning, guys. So just to go back on the migrations point. In the future, and so thinking next year and beyond, should we expect new clients to remain spread across both the platforms that the full platform service and the giving the execution service? Or is the higher share of this in kind of H2 of giving execution more kind of a one off? Second question would be for the distributors and in house issue onboarding this year. What kind of proportion are taking the most premium versions of Connect in terms of monetization? I think it used to be about half of onboarding where we're paying for Connect Premium, but how is that trending? And then just thirdly, with the existing client outflows in the period, are there any particular trends by country you'd flag? Or is the weakness quite broad based across all your end markets? Thank you. Thank you very much. Very good questions. Well, next year and beyond migrations, no, look, I think we're saying that we have been able to onboard about around 50 clients already this year, out of which 49 are platform service, so traditional clients. And just one is dealing and execution. The only thing is the dealing and execution. In this case, the client is pretty significant, as I said, and so it's something exceptional. So I mean, what you should expect next year and beyond is that we will keep on promoting and selling our traditional one stop and I think unique business model that has been so successful in the last two decades. So however, again, as I said, if we find in a specific country in where we have significant interest, find the opportunity to migrate a big book of assets starting with gas dealing and execution. Well, we will sit down, discuss it internally and take a decision. But yes, it's I think you mentioned the word one off. If you want to see it like a one off, you can also see it like a one off, yes. Okay. So this is regarding migrations. I think the other one is regarding a fan houses. So if we are able well, I tell you, yes, I mean, now, fan houses that are on boarding, I mean, we have seen it's 1,400 asset management companies with global distribution agreements, which means that it's very difficult now that we find like a new asset a big global asset management company that doesn't work today with old funds, which means that all these new fund houses or the majority of these new fund houses are predominantly U. S. Boutiques or specific local asset management companies when we open a business in a new country. And therefore, yes, they are they definitely need our services, especially data and analytics services in order to again, not to waste their time visiting the 800 clients that we have around the world, but to make their how can we say it? Mean, they're to target Allfans clients and Allfans distributors in a much more intelligent way, which is to and that's the way we sell these, for instance, these data and analytic tools, helping these asset management companies to target the clients that really that they really have appetite for the assets in what they have good products, let's say. So yes, I'm expecting to see definitely an increase in the number of fan houses paying new fan houses paying for our digital capabilities. Apart from that, today, have announced, as you know, the launch of these two companies, Allfan's Tech Solutions and Allfan's Data and Analytics, in where we are reinforcing the teams, the features, the tools, the services, the products in order to be, again, even more I mean, to enhance our value proposition for these fan houses and also for distributors, of course. So you can definitely expect all funds being able to grow to significantly grow in what we internally call non asset driven revenues that are mainly subscription fees. I think Alvaro, I think there was a question regarding yes, so Sure. Hi, Greg. So your question around the trends in outflows and organic outflows. We have seen a stabilization of the outflows or redemptions coming from the over the course of Q3. Remember that in both Q1 and Q2, they redeemed heavily fixed income products. That has continued in Q3, but it has stabilized and softened. And as of today, I think that trend has, I mean, normalized a lot. What we've seen in Q3, different to previous quarters, is something which, of course, we knew could happen, which is outflows on the equity space and in particular, on the private bank side. It's not so much linked to the country or not so country specific, but more linked to the typology of the distributors or the clients that sell those funds. And as I was saying, following the market turmoil or market underperformance, we've seen some outflows on the equity space, which again also explain some of the, let's say, margin compression that I mentioned earlier in my previous response. Welcome. We have no further questions. So I will now hand the floor back to the All Funds team for closing remarks. Thank you very much. Well, again, thanks a lot for your time, for your interest in our company. And we look forward to keep on talking to you and discussing with you all plans present and future. Thank you very much.