Azimut Holding SpA

MIL:AZM

Earnings Call Transcript 2019-Q1

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Azimut Holding's First Quarter 2019 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Gabriele Blei, CEO of Azimut Holding. Please go ahead, sir.

[Gabriele Blei, executive]

Thank you very much, and welcome to everyone for this first quarter results presentation. We will quickly go through the presentation slides and then leave as much time as possible for Q&A.

So let's turn to Slide #4, where we give you a quick snapshot of our results. As you can see, we have seen very strong revenues in the first quarter, actually, the record quarter since Azimut is listed, with EUR 247 million of total revenues. Thanks to both combination of strong recurring fees as well as a good level of performance fees that were generated during the quarter. Net profit up 244% year-on-year, with EUR 91 million recorded in the first quarter. We're speaking about almost 90 basis point on managed assets in terms of profitability. And then last, but not least, net inflows. We gathered EUR 1.8 billion up to April this year, which is up 83% year-on-year -- sorry, since the beginning of the year. And this is a mix of very strong flows from the international operation as well as strong improvement in the capability of our Italian method to raise assets domestically and compared to EUR 1 billion we recorded last year.

If we turn to Slide #5, you see the evolution of the assets under management. The record that we have seen in terms of revenues in the previous slide is also at an asset under management level with EUR 55.4 billion in terms of assets under management, which is the highest level we have reached so far. International business is roughly 28% of the total assets, and the net performance to client, which has contributed to the record on assets, has been positive by 6.3% year-to-date to clients. This is, I remind to all of you, always net of fees and it's what clients -- our record in terms of performance. We will see more detail later. The mix of the asset you can see that 75% is made up of mutual funds and insurance products, which is consistent with previous quarters.

Slide #6, the impact of the new fee structure. Lots of things have been discussed in the past, many people have argued things. Now we're presenting to you some numbers, which we can discuss later, but these are numbers and facts that we are actually delivering. Recurring earnings, net profit and ex the variable fees, are to the tune of EUR 34 million in the first quarter, which is doubling the earnings compared to the average of the past 4 quarters. While this is only a partial adoption, when we will be moving to a full impact of the new fees structure, we will be looking at EUR 50 million of recurring earnings on a quarterly basis. Obviously, this is assuming current mix and current assets under management level. As you can imagine, the switching of the new fee structure is something that will lead us in the future to be more skewed towards growth and asset growth, rather than the volatility of the performance of the markets and the capability to generate performance fees.

Some have argued that we would have an impact on the flows given the fee structure that we were implementing. But actually if you look on the right-hand side of the slide, this is not actually happening, at least for Azimut, because we have gathered EUR 1.3 billion in the quarter or if you prefer EUR 1.8 billion up to April this year. The Italian industry cannot say the same, unfortunately, there are some pressure on flows and we're seeing a drop of 5% year-on-year. We do confirm so far that we will be looking at least to reach the same level of flows we have gathered in 2018, so roughly EUR 4.4 billion of net new money over 2019.

Moving to Slide #7, which is a continuation of what we have seen in the previous slide. We believe that we are extremely well positioned in terms of this new fee structure for 3 main reasons. The first one is the performance to the clients. Net of fees continues to be above the industry average where we are delivering 120 basis point on top of what the industry is actually capable of delivering. And this is what our clients are looking at. So they're giving us the money because we're good money managers, and we are able to deliver superior performance.

Number two, the fee structure. Even after the repricing, you see how, if we take few competitors that have shown these numbers in some of their presentation in the past, the total expense ratio excluding performance fees obviously for both us and the competitors is in the region of 2.3%, and we are currently at 2.15%. So nothing major there. So we don't think that the new fee structure is going to have an impact on our capability to deliver performance on the one side and on flows on the other side.

Third very important aspect is our decision to go international, which dates 2008 -- back to 2008, and we see that we have a strong diversification that actually nobody else could say. And it is indeed helping us in having access to new distribution channels as well as implementing a global team that is capable of managing money across the globe, 7 days a week, 24/7 actually.

Moving to Slide #8. New management team is actually fully operational now following the AGM on the 24th of April. Some interesting articles have called us Hydra with 5 heads. We're actually very proud of being 5 heads because these 5 heads can deliver all the necessary competencies to the group, which is broad, diversified and needs actually all these 5 people. So we believe this is not a negative but a plus that will help us in achieving our results and delivering our long-term strategy.

Moving to Slide 10. You see how the performance in the first 4 months of this year has developed. We have been able to build up this -- the spread vis-à-vis the industry since actually the very beginning of the year and maintain this capability -- overperformance, actually, throughout the 4 months. We're at 6.3% net to clients and it translates to 120 basis point of delta vis-à-vis our competitors.

Page 11, the usual funds breakdown, where you actually see that our AUM by category is looking at 60% of the assets into flexible and equity strategies, bond is at 18% and balanced funds at 13%. We do have high stands in terms of cash and money market, but this is something we have seen for many, many quarters by now. The equity exposure stands at 40%. I would just simply comment here that this 40% is a static picture, it's not the average of the exposure we had throughout the quarter and this has been managed, I would say, in a very dynamic way both in order to take advantage of the uplift in the market as well as since, I would say, mid-March to be able to protect this overperformance we have been able to achieve.

Slide 12, the usual split about the equities and fixed income component. I wouldn't comment this, but I would be happy to answer any question you may have on this specific slide.

Distribution, turning to Page 14. We do have a superior capability to generate flows vis-à-vis the industry. The average stands at around 12%. And we see, again, some good momentum in terms of the flows we can generate in Italy as well as the growth we are achieving across the different geographies we are present in.

Slide 15, a small focus on the Italian network development. We have recorded a very strong 2018 with almost 200 new FAs attraction. And the first quarter of 2019 continues with this capability to attract very strong financial consultants as well as private bankers, with 52 net new -- sorry, 52 gross additions in the first 3 months of the year.

Financials, Ale, our CFO.

[Alessandro Zambotti, executive]

Thank you, Gabriele. So as usual, let me go through the consolidated income statement. Let me touch on the consolidated net profit EUR 91 million, second best as already said by Gabriele. We are really satisfied about this result. We are not surprised because we know what we are doing. And we know exactly, which is our target of EUR 300 million that we know, that is there, and we are sure that we're going to reach by the end of the year.

Let me say to the main line of the statement. So we have a strong increase of the recurring fees and the insurance fees, in total EUR 27 million compared to EUR 169 million of the previous period, so compared with the first quarter 2018, and with an increase of EUR 20 million. Total variable fees, we have a significant increase, more than EUR 48 million compared to the previous quarter. In total, -- so the total revenue, as we said at the beginning, best result ever with an increase compared to the first quarter 2018 of EUR 65 million.

So about the operating cost, we are almost in line. We increased a bit of EUR 2.7 million. This is mainly explained by a decrease of the distribution cost, as it is directly correlated to the increase of the asset under management and our activity in hiring new financial advisers that characterize those this first quarter.

And then below at the level of the interest income, as we were expecting, we recovered part of the negative impact that we booked at the end of the year. So we recover, thanks to the performance of our fund, our position in -- of our liquidity that is invest in our fund, so we almost recovered with a EUR 7 million of profit. No particular variation on the nonoperating cost, and actually the level of the interest expense, we can see trending at a slight increase, as you know, the new line that we collected at the end of February obviously impact the increase of the interest expense.

Following that, going to the next slide, the net financial position. As you can see, the net financial position is back to a positive value compared to the 31st of December 2018, that was negative of EUR 31 million. So we increased about EUR 99 million. That is mainly explained by the good result of the quarter that recovered and compensate the negative situation of last year.

As you can see in specific, the total debt increase, as I mentioned, the new credit facility impacted the total debt, but at the same time as we have not used yet, this amount is booked at the level of cash and cash equivalents. So at the same time, cash and cash equivalents increased by EUR 293 million compared to the end of December. I'm going to give back to Gabriele.

[Gabriele Blei, executive]

Thank you, Alessandro. So moving to Slide 19. We wanted to show you the capability we have in terms -- as a company to actually manage our balance sheet in the most appropriate way, and this is since the IPO. So there is quite a long history here of deleveraging and releveraging the balance sheet, which is a mix of willingness of managing the capital in the most active way on the one side and capability of the group to remain lean in terms of structure and deliver profit to shareholders, which helps obviously to improve the net financial position.

One thing to remind is the approval by the AGM of the dividend of EUR 1.5 per share. We are expecting to pay almost 80% as cash, while the remaining portion will be paid in treasury shares.

Turning to the outlook. There are a number of key things we want to highlight to you. First, we already mentioned it, but it's nice to reconfirm this. The new management team is fully operational since the AGM. We are working actually days and nights in order to revamp the group results and the activities we are doing all over the world.

New pricing scheme. Let me put it this way. The new pricing scheme has had no impact on the flows and no impact on clients. We are having ongoing discussions with the Luxembourg regulator. They are very constructive and the new scheme in terms of performance fee will be coming into play soon. The reality is, however, that we have a net profit of EUR 90 million in the first quarter, we do have collected EUR 20 million in April. And as we have seen and showed to you, we expect recurring earnings of EUR 50 million per quarter. So if you add things up, you reach probably EUR 260 million already as we are speaking today.

So somehow we are still seeing skepticism around our target, which is the last target of the 5-year business plan of EUR 300 million. But probably, I don't know, you are better than us doing numbers, but we see our confidence given and proven by the numbers that we're showing to you.

Flows, recovering in Italy and ongoing abroad. This is the second nicest positive aspects we're experiencing since the beginning of the year and since a very strong delivery in terms of our performance to our clients. And then last, but not least, capital management. We're very active. We've taken out a credit line of EUR 200 million in February in order to be ready and prepared to grasp any opportunities in the future.

2019, we are expecting to improve our domestic business and increase profitability abroad. We have been telling you this for quite some time. We are expecting to present to you more insight on this during the Investor Day, which will be held in London on the 4th of June. And I'm sure, we will be able to at least explain what we have been doing in our international business as well as in our Italian business for quite some time now.

Going forward, the focus actually is and remains as always on growing our earnings, which are going to be more and more linked to assets given the new fee structure. The diversification in terms of geographical presence is one of our differentiating factor, and we think we will push this further going forward.

In terms of cost reduction, which we have said here that it's an exercise. It's actually more than an exercise, it's a commitment we have taken with ourselves internally as well as with you in order to make sure that we have and maintain a very efficient and lean structure both in terms of personnel and in terms of SG&A. As we are -- we have been used to, we don't speak about these things until and unless we have numbers to show, and we want to demonstrate to you that we will be capable of managing our cost base in the most appropriate way, although maintaining the focus on growth and maintaining the focus on the strategy that we have to deliver.

Private market. This is something that we are pushing very much with our investment as well as with regulators with whom we have dialogue at least here in Italy for the approval of a number of products that will be transforming to some extent the business, similarly to how we transformed the business when it was just domestic, and then now it comes around 30% of its assets outside of Italy.

We remain selective in terms of M&A. We think we see and we have opportunities around the world, probably less in Italy, but more skewed towards some emerging markets. And this is going to help us in consolidating our presence in some of the countries in which we operate. That's it from us, and just the very last bit.

Again, a reminder on our business plan, which ends in 2019. EUR 300 million is the last target, as we have said and mentioned and we can dig into the detail. We believe this is achievable and very feasible, and we are working to actually overcome this level.

Thank you very much.

[Operator]

[Operator Instructions] The first question is from Alberto Villa with Intermonte.

[Alberto Villa, analyst]

I have few questions from my side. The first one is on recruitment. You have shown still a strong contribution in terms of number of new additions. I'm wondering if you are willing to replicate the same figure over last year and what -- which are the general conditions in terms of recruitment right now on the Italian market? And now, how much, if possible, the recruitment component of new inflows on the Italian side has contributed to the EUR 1.8 billion of net inflows you had in the first 4 months of this year?

The second question is on the performance fees changes in Luxembourg. Can you be a little bit more specific about when you're expecting these changes to take place? There's still some, I think, uncertainty about the timing of the change. And if the Luxembourg authority is asking or challenging the proposal you made to them in terms of changing the way you're -- you will calculate the performance fees going forward.

My last question is on the SG&A that were below the level of last year and below the level of the last -- the other quarters of 2018. So I was wondering, if this is a sort of run rate or if there are any specific elements we should bear in mind when we model for the coming quarters in terms of operating cost?

[Gabriele Blei, executive]

Okay. Thanks, Alberto. Going in order. Recruitment replicates 2018 or not? The question is not very much whether we can or we cannot replicate the numbers of 2018, is the quality of the people that we can find at the threshold or in terms of a discipline we have set to ourselves since ever in terms of cost for recruiting advisers. We do see opportunities in the market, also thanks to some organizations that we are seeing when we look at some competitors or people that are moving out of their historical company after a long career.

We aim really to remain focused on the quality. So the net number or the gross figure is a bit less relevant for us, but these are people that have to start contributing to our profitability in the very short period of time and we have to pay the right cost for these people. When it comes to...

[Alberto Villa, analyst]

Which is?

[Gabriele Blei, executive]

Which is always in the region of 2.5%. We're not pushing these barriers to much higher than that because it doesn't make sense, at least for us, especially the way in which our company operates. When it comes to the impact of the recruitment, in terms of flows, clearly, this is something we've always stated when things are positive in the markets, the contribution of flows come -- comes mainly from the recruitment. While when markets are a bit more rough, things are a bit easier for our existing advisers because obviously new advisers don't tend to move clients because they have to visit them with a negative performance and it's a bit more challenging. Having said that, the contribution is in the region of 50% to the flows -- to the domestic flows coming from recruitment. The rest being the existing network.

Second question was on performance fee. This is -- when you submit something to the regulators, you know you have submitted it and then it takes their time and their agenda when -- to come back to us. We are having a very constructive dialogue with them. As we have -- in the chance of discussing together, you know very well that this is something that has already been approved by another regulator. So it's nothing new and they have the benefit of having the Bank of Italy approving the same fee structure that we are proposing to them.

It can only add a positive aspect in terms of having these approved and done for us. We do expect to continue to have this dialogue throughout the next quarters, and we will definitely update you when we will have more knowledge on when they will approve it and from when actually the new fee structure will be fully operational.

SG&A, yes, we have had a decent quarter. There is also an impact of a change in the IFRS standard, which I would leave Ale to give you the detail.

[Alessandro Zambotti, executive]

Yes -- I mean -- as you can see, we are in line with the 2018, and we are lower compared to the end of December, as you mentioned before and as was said by Gabriele. The fact is that, we should consider the new IFRS 16, that as you may know is reclassifying the leasing cost and leasing cost and we are referring also to rent, et cetera. Therefore, EUR 2 million for this quarter are booked not anymore on the administrative cost, but you will see -- you can see this reclass in the depreciation cost. Therefore, if you compare -- actually in this EUR 2 million, so EUR 50 million should be the right number if you want to compare the 2019 with 2018. So during the year, we will see [ EUR 30 million ] reclassified at the level of the depreciation cost.

Nevertheless, about the future, I mean, we don't really want to take position today on that as the new management team, as also said before by Gabriele, is focusing the attention on cost and the reduction of this cost starting from this new mandate for the future. Therefore, we can expect to be in line a bit, maybe increase the value, but in general, we will work harder to maintain a good level of cost.

[Gabriele Blei, executive]

Just one thing to add to that. Bear in mind that given our active M&A approach, the indication Alessandro has given to you is based on a constant perimeter. So the acquisition can have an impact on SG&A, but obviously they have also contribution in terms of revenues. I would say that, as always, looking at the first quarter as the good proxy and indication for the full year is never the right approach, but I'll leave it to you.

[Operator]

Your next question is from Jonathan Richards with KBW.

[Jonathan Richards, analyst]

Couple of questions from me. Firstly, on your -- thank you for the guidance regarding your net inflow target for 2019. Of the EUR 4.4 billion that you're looking for in this current year, what percentage of that would you think would be into the managed assets versus the custodian assets? It looks like your custodian assets have grown about twice as fast as the managed assets since the beginning of December. And I'm just wondering, if you think that's -- that that will -- that the differential in growth will sort of equalize towards the end of the year.

Secondly, on performance fees. Again, thank you for the guidance regarding the April performance fees. I just wondered if you guys had run any internal or have -- could disclose what your internal model for performance fees this year would have been had they been under the new performance fee calculation, just to give us an idea of what the variance would be there?

And then lastly, on the G&A costs or maybe on your cost-reduction program more broadly. Could you -- would you be willing to quantify at all what you're looking to target in terms of either an absolute number of cost takeout, a percentage? It looks like G&A costs fell about 9%, but maybe when you adjust for that move in the IFRS 19 that we spoke about at the beginning of the call, that could be around 5%, 5-ish percent. Just to give us an idea of what you're targeting for cost reduction.

[Gabriele Blei, executive]

Got you. Thank you very much. So just taking this one as the easiest one to answer because you will have to bear with us less than a month simply because we are doing the exercise now and actually running the numbers on how we -- and from where we could actually have this improvement in cost, and we will be able to give you a bit more detail and insight during the Investor Day.

On the performance fee model. As you know, the new methodology would imply a time frame of a year over a [ harder ] rate. So it would actually be quite difficult for us to quantify the impact under the new methodology given the fact that we're only at the first -- or 4 months into the year. So it doesn't really -- cannot be run such an exercise.

On the inflows, the EUR 4.4 billion guidance and the mix of managed versus custody, as you can see the recruitment process that we have seen in Italy tells us that when advisers move their portfolios sometimes, if not most of the times, it goes into a mix that comes to us, which is made into something that then is worked and transformed into something else, so into using also Azimut fund.

As you know, we do have a closed architecture, when we say -- when we look at our funds because -- no, but only our advisers have access to distribution of our funds in Italy. So when we hire a person by definition, he does not have the mix that is the desired mix. We do have some component of the custody assets, which is -- which has grown because of some of our international presence that ends up into custody assets. But honestly, even the improvement in the fees we're seeing tells us that the percentage of flows into managed assets is in the right direction and we're actually looking to maintain that level.

Any other question?

[Operator]

Your next question is from Hubert Lam with Bank of America.

[Hubert Lam, analyst]

I've got 3 questions. Firstly, on organic flows. Can you -- and managed inflows, can you just tell us how much of that came from Italy so far year-to-date? I think you mentioned that mostly it's international. But I was wondering if you can quantify the percentage from Italy and also what the time line is for that percentage to get higher.

Second question is on possible strategic partnerships and M&A. As I recall, there was an article in April interviewing your Chairman, saying that he was interested in mergers or partnerships with institutions in Asia, Japan, Lat Am, et cetera. I was wondering what he means by this. And if there is anything in the pipeline that we should be aware of?

And lastly, I was wondering if you can just give us an update on performance fees in April. And just what number should we expect for April performance fees?

[Gabriele Blei, executive]

Okay. Just starting from the last one. As we said, it's EUR 20 million, the level of fees -- of performance fees we generated in April, which adds to the first quarter numbers of EUR 57 million, if I'm not mistaken. In terms of flows, Italy versus rest of the world, in the first quarter of 2019, so looking at EUR 1.3 billion of assets under management, you should look at something in the region or slightly more than EUR 600 million in terms of Italy and the rest coming from our international operation.

M&A in Asia or anywhere else. When Pietro discussed with the journalist, what I believe was the underlying message of the article is, what our group needs is more distribution capacity. And the reason of our international expansion is also mainly driven by having access to a larger distribution as well as also finding production, so fund managers around the world that can actually help us in innovate our product range on the one side and be able to have access to markets, which are typically far away from our European markets.

The idea is to continue scouting opportunities around Asia, but not just Asia to find partners that can be interested in our production capabilities and product innovation competencies, which can also benefit their client base. I guess Asia was mentioned, but we can refer to virtually any other region in the world. The idea is very simple. We are very creative also in terms of how we can finance or we can structure such a deal also using our status of listed company. But it's again an ongoing process that we do scout every day. And when we have something to announce, I'm sure you will be the very first to know.

[Operator]

Your next question is from Federico Braga with UBS.

[Federico Braga, analyst]

I have 3 questions, please. The first one is on the churn rate of financial advisers. For 52 new hirings, you lost 26 financial advisers equaling an annualized churn rate of roughly 6%. So I was wondering if you can give us a little bit more detail on what was the reason of these losses. If there is anything going on there, to what extent you're, let's say, forced to recruit financial advisers to partially offset these FAs that are leaving your network and if we could expect any negative impact on your flows, AUMs from these FAs leaving your network?

The second question is on the insurance revenues, which in Q1 of 2019 saw a pretty decent uptick. You registered EUR 17 million revenues, which was the highest level in your history, if I'm not wrong, despite life insurance, AUM remaining flat and not posting strong inflow. So I was wondering if you can give us a little bit more color on what drove the increase in the insurance revenues.

And the last question, just a follow-up on the April flows. If you can quantify the mix between Italian and international operation? And when do you expect to consolidate the USD 500 million assets that you acquired in Egypt in the beginning of the year?

[Gabriele Blei, executive]

Okay. Churn rate, first, we're not forced to recruit to grow. We recruit because we see opportunities of improving our distribution capabilities. We do not recruit because we are losing people or because we are losing assets. You should actually look at something different because this should -- I mean, if we follow your reasoning, there shouldn't be the numbers that we are showing in terms of flows and in terms of revenues. The churn rate is made up of a number of different aspects, including, and this is especially true for this quarter, people retiring or people with very low portfolios, average portfolios that we have dealt with. So there is -- there isn't any major FA leaving because running to competition, and we're forced to actually cover for this loss.

As far as the insurance revenues are concerned. There is a bit of repricing element there as well as the performance fee generation of our assets. So it's in the historic -- the highest level of EUR 17 million per quarter is made up of this 2 component.

And your last question was in relation to flows, if I'm not mistaken.

[Federico Braga, analyst]

Yes. On April flows.

[Gabriele Blei, executive]

Okay. April flows, we gathered 2/3 from our international businesses and 1/3 from our Italian operations.

[Operator]

[Operator Instructions] Mr. Blei, there are no more questions registered at this time.

[Gabriele Blei, executive]

Okay. Thank you very much. And myself and my colleagues are available for any follow-up questions. Have a very nice day. Bye-bye.