AZIMUT HOLDING S.P.A

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Transcript : Azimut Holding S.p.A., Nine Months 2022 Earnings Call, Nov 10, 2022

10/11/2022 | 15:00

Presentation Operator Message
Operator (Operator)

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Azimut Holding 9 Months 2022 Results Conference Call. [Operator Instructions]

At this time, I would like to turn the conference over to Mr. Gabriele Blei, CEO of Azimut Holdings. Please go ahead, sir.

Presenter Speech
Gabriele Blei (Executives)

Thank you very much, and welcome to everyone. We'll go through the presentation, as always, quite rapidly and then leave as much time as possible for Q&A. So if we turn to Slide #4, we have some key highlights on the 9 months results.

Stressing the fact that the platform is diversified and global is -- can deliver results in an adverse market environment such as the one we have lived, especially during Q3, but I would say also the entirety of 2022.

So assets stands at EUR 83.7 billion, of which 46% are coming from our international business by now. Year-to-date, net inflows EUR 6 billion, of which EUR 1.5 billion are coming from private markets. Because of that, we have, once again, reconfirmed the guidance we've given at the beginning of the year of EUR 6 billion to EUR 8 billion of net new money in the full year.

As far as our P&L is concerned, 9 months total revenue stands at EUR 969 million, plus 12% vis-a-vis the same period last year. This is mainly driven by recurring fees that today constitute 85% of our total revenues. And this is, as far as the total revenues are concerned, despite a lower performance fees vis-a-vis the same period last year because we are short of EUR 30 million of performance fee when comparing the period of 2022 with 2021.

Q3 operating profit of EUR 415 million, a 17% increase year-on-year. This is the result of the growth in revenues as well as disciplined cost control. Despite the inflationary environment in which we are living, excluding Sanctuary, we will see this in a minute, the growth is mid-single digit, which is something that should be taken into account.

Finally, net profit guidance, as always, we set our targets, we don't change it, although the environment is everything but normal, which was the basic assumption at the beginning of this year when we set the target. We are spending at EUR 302 million in terms of net profit for the 9 months. Clearly, we are looking to some sort of support from the market in the last quarter of the year. But once again, EUR 400 million is what we are working for.

Turning to the following slide, total assets evolution. You see that total assets at the end of September has grown 6% year-over-year. This is thanks to a continued positive net new money environment as far as we are concerned and despite clearly the negative market effect, which we'll see in a minute.

Average assets, which is even more relevant, are up 16% year-over-year, with 7% of managed assets. Net new money, you see a quick snapshot of the last couple of years in terms of quarterly evolution. We have, in Q3, recovered to the level seen in 2021, thanks to the contribution coming from all geographies. And, today, net new money stands at 8% of initial AUM of 2022.

Moving on to Slide #6. As I was just mentioning, all the regions have contributed to our net new money collection. Starting from the left-hand side, Italy: we have been recovering partly the outflows that we have seen at the beginning of the year in terms of the institutional mandate, and we have kept on collecting money from our network of financial advisers. Clearly, the focus here, especially when the network is concerned, is on private market/managed product, which we are quite keen to continue. Clearly, the industry or, if you want, the financial industry at large is clearly attracting considerable flows into current account and deposit, given the higher interest rate in which we are today working.

Turning to EMEA. We have kind of a smaller number, but it is -- it can be explained by the following. When we look at our Turkish presence, flows have been positive by EUR 160 million, partly, if not all entirely offset by outflows coming from Egypt due to the decision of an investor, a sovereign wealth fund, to completely divest out of the country and region. So nothing that relates to our capabilities to perform and even outperform very well vis-a-vis the local industry.

Lastly, worth mentioning, Dubai is positive by EUR 60 million, while Switzerland is also positive by EUR 40 million of net new money.

APAC, the main contribution here comes from Australia and Singapore. Respectively, almost EUR 300 million and EUR 140 million.

And then last, but not least, the Americas, where we have Brazil that has come back quite strongly as we have commented over the last quarters, with more than EUR 700 million of net new money, and also Mexico with almost EUR 300 million of net new money. The rest coming from the U.S., of which almost EUR 400 million coming from our private market presence and the rest, EUR 2.7 billion from Sanctuary.

The EUR 550 million almost M&A contribution is entirely explained by the contribution from RoundShield, which is the latest acquisition we have done in our private market venture of a 20% stake. So this leads us to the EUR 6 billion of net new money in 9 months 2022.

Moving to Slide #7. Our asset evolution shows a cumulative annual growth of 14%, with assets standing at EUR 85.7 billion at the end of October, and mainly the driver here is an international business that keeps growing with 47% exposure -- sorry, 47% contribution to the total assets, whereas Italy stands at EUR 45.3 billion. The delta vis-a-vis 2021 of EUR 4.5 billion is effectively the negative market effect that we have been witnessing so far year-to-date.

Private markets, so moving to the right-hand side of the page, stands at 12%, and it is approaching our 15% target by 2024. And we will continue to pursue new product launches and penetration within the network.

Moving on to Slide #8. We just want to give you a quick reminder of what is the deconsolidation and the impact of the deconsolidation of Sanctuary as far as the accounting is concerned. So total assets as of June 30 have not been adjusted, will be adjusted by year-end. First half net -- first half 2022 net inflows will not be retrospectively adjusted, whereas net inflows from the 1st of July, as far as Sanctuary is concerned, have been taken into account just for the economic rights we now have, which is currently 53.4%.

When we look at the impact on the P&L, and we will have the next couple of slides to dig into the details, P&L, until the first half, has not been retrospectively adjusted. It's like net new money up to that moment, whereas the financial from the 1st of July, i.e., the Q3 results, have been adjusted according to the economic rights we have in Sanctuary and are recorded in the finance income line, so below the operating profit line.

Moving to Slide #9, digging into the revenue breakdown. I would highlight a couple of things, starting from the 9 months results. We have EUR 969 million, up 12% vis-a-vis the same period, with an increase of EUR 120 million on the recurrent fee level. So moving from EUR 706 million to EUR 825 million.

How this is broken up? It is explained by an increase of contribution from revenues from our foreign operations by EUR 25 million, excluding Sanctuary, of course. An increase by almost EUR 20 million coming from our private market initiatives that are starting to contribute to the revenues that we generate, and the remaining bulk coming from the new distribution, which accounts for EUR 70 million in the 9 months.

I remind you, we had the new distribution fee just in Q2 and Q3 and not starting from Q1.

When it comes to the variable revenues, we are somehow lower than the 9 months 2021, and this is due to the fact that we have introduced the fulcrum mechanism. So we have crystallized EUR 34 million up to the end of March. The foreign operation has contributed EUR 6 million in the 9 months, whereas the fulcrum has subtracted almost EUR 6 million during Q3.

Moving to the insurance fees. We have EUR 71 million in the 9 months, of which EUR 19 million increase (sic) [ decrease ] vis-a-vis the same period last year. How is this broken up? EUR 24 million less performance fees in the insurance revenue and EUR 5 million more instead of recurring fees in the 9 months.

Last, but not least, the Others income line is basically positive year-over-year by EUR 8 million, and this is mainly linked to the fact that our private market presence in Italy as well as the neoLending project and M&A activity that we are starting to perform are contributing by EUR 8 million to the growth in this line.

If we move back to the quarter results of Q3, and we focused on the same period, we can see that fees -- the recurrent fees are flat year-over-year because if you exclude Sanctuary, 2Q 2022 is EUR 273 million. And we have basically had an impact in the Q3 -- positive -- by more than EUR 3.5 million linked to our foreign business as well as the private market initiative that have offset the reduction in the fees due to the market in our liquid instruments, which has been negative by EUR 2 million.

As far as performance -- sorry, insurance revenue is concerned, there is a slight increase in the quarter thanks to the fact that we have had some performance fees by EUR 1.2 million and then a positive development of the recurring component by almost EUR 1 million.

Lastly, other fees are going from EUR 14 million to EUR 9 million on a quarter per quarter basis, and this is basically explained by the deconsolidation of Sanctuary because, if you remember, there was a contribution from brokerage commissions that were impacting the other income line.

Moving to the following slides, we wanted to represent you a management fees snapshot of the last couple of years, where you can see the growth, and we have tried to show you the impact of the Sanctuary consolidation and then deconsolidation. So basically, the 14% increase is from Q1 2020 to 3Q 2022. But if we try to exclude whatever is the impact from Sanctuary, so the growth from, say, the EUR 200 million in Q4 2020 up to EUR 274 million, is explained by the new distribution fee, the growth of our foreign business in terms of contribution to management fees, the growth in the asset base that clearly has had a positive impact, and last, but not least, the private market exposure that, as I have explained to you before, is starting to contribute in terms of management fees generation.

Moving to Slide 11, costs. Here, we have tried to show you a similar picture to the revenue on a longer period of time. If we focus our attention on Q3 2022, we have EUR 163 million of total cost, which compares to EUR 198 million in Q2. There is a decrease of EUR 35 million, of which the bulk is linked to the deconsolidation of Sanctuary. But if you -- if we go to the distribution cost line, they have gone down to EUR 90 million, and this is mainly explained by the fact that we're not including Sanctuary anymore. And the rebate to the network has basically remained flat Q-on-Q, with an increase coming from higher revenues on private market, offset by the fact that, as I have explained before, liquid products management fees have decreased slightly quarter-over-quarter.

As far as SG&A line is concerned, net of Sanctuary, basically, we are working with flat evolution on a quarterly basis despite the environment, which is everything, but friendly as far as the cost inflation is concerned. And then, on the overhead, it's good to mention the fact that we have recorded lower overhead, and we have had a positive impact on higher yield curve on the future severance payment to FAs that is the consequence of the higher interest rate environment in which we are living in.

Lastly, operating margin is up to 46% in the quarter, which is a level pre-Sanctuary consolidation that is back.

Moving to Slide 13, just a quick update on our funds breakdown. Despite a very tough market environment, the advisory work that has been carried out by our financial adviser with our clients has recorded a positive evolution in terms of clients remained invested in our funds, although the change in the mix has been subdued, and this is shown in the maintenance of the margin level that Alessandro will show you in a minute, which stands at 178 basis points. Clearly, all of this is even more true when we come to the observation that private market exposure has gone up quarter-after-quarter, which is going to help us in managing client expectation as far as performance is concerned and the short-term volatility is somehow subdued.

As far as the underlying asset is concerned, just worth mentioning that the equity exposure is managed very actively these days. It stands at 46% at the end of September 2022, but changes daily. And as far as the fixed income component, we have not been, let me say, hammered by the overall industry poor results in 2022, thanks to our strong diversification across regions and categories, and decision to take a very low duration.

If we turn to Slide 14, not much to discuss. A quick snapshot of our equities diversification. This rests on the fact that, more than ever today, we work with our global team across all the countries in which we operate. And as far as the bond component, it follows clearly the evolution of our asset management capabilities.

Worth mentioning that we have decided strategically from a management perspective of our portfolio managers to not to have exposure to Italian BTPs [indiscernible] as that clearly benefited the performance of our bond portfolios.

So this translates, on Page 15, of an outperformance of more than 300 basis points year-to-date as far as the industry is concerned. We're down 9%, the industry is down more than 12%, and over medium term, clients are still enjoying a positive net weighted average performance of 6.5%.

Moving on, Slide 16, Private Markets, EUR 6.4 billion of total AUM, 10x the level we have seen when we started this venture in 2020. We now have 52 products and initiatives launched or in the fundraising phase and 18% of our clients are invested in our private market product. So we still have a significant potential penetration within our Italian client base.

Worth mentioning, on the right-hand side, the diversification by category, where you can see how private debt is still quite significant, although private equity and real assets, especially are covering the rest -- the remaining part of the pie chart.

By region, Italy 53%, U.S. 38%, and U.K. and Europe, 9%, thanks to the acquisition of RoundShield.

On Page 17, we have decided for this quarter to provide you a quick snapshot of the product suite that we have. I think that probably nobody can claim, at least in Italy, to have such a well diversified offering in the private market across geographies and asset classes. And clearly, this includes a number of very specific products such as a fund that provides exposure to the staking and seeding business of emerging U.S. managers that is wrapped up in a fund that we're offering to our client base, as well as some smart initiative called private escalator, which provides for a gradual buildup of the exposure to private market across different asset classes within this private market investment.

We have had also the pleasure to launch a couple of club deals lately: One dedicated to an initiative that is linked to the mining of crypto currencies, but linked to the clean energy approach that these guys are trying to evolve, given that we all know how energy intensive this business can be.

Lastly, let me mention the initiative within the venture capital fund. P101 is an alternative asset manager investing in the VC world in Italy in the tech environment. We are now at the third products launched by these guys, and we recently decided and agreed to buy a 30% stake of the management company.

Last, but not least, we have had the pleasure to invest in Elekta Ventures. We control full ownership of the company, and we are developing a number of initiatives thanks to their deep know-how of the Italian SMEs environment. They are active in the prebooking SPAC award as well as they leverage on their extensive network of relationship within the private equity environment in Europe.

Moving on to Slide 18. I don't want to bother you too much, but we wanted to show you that despite raising assets, we're also trying to invest this and invest it in a wise and profitable manner. Today, we have capability of investment, both in Italy as well as internationally. The first 2 transactions are related to our neoLending projects, so the Synthetic Bank, if you want. The venture capital investment, worth mentioning that we have invested in more than 110 companies across 4 funds for more than EUR 100 million.

In the infrastructure fund, we have deployed -- we have committed investment for an enterprise value of close to EUR 800 million into what is an Article 8 compliant ESG fund that we are still fundraising. We have also been able to propose to our clients a couple of club deals, one in the vertical farming environment and the other one in the clean and safe nuclear technology that are going to be building the fourth generation reactors.

Moving to Slide 20. I leave the floor to Alessandro for the financials.

Presenter Speech
Alessandro Zambotti (Executives)

Thank you, Gabriele. We can now move to Slide 20. As we always do, we will go through the P&L. Starting from the operating profit, we see that it's an increase of EUR 62 million. This is thanks to an increase in total revenue of EUR 102 million, and a slight increase of cost of only EUR 40 million. Therefore, we have this positive effect on the operating profit.

So back to the revenue, the main variation is coming from the recurring fees that increased by EUR 125 million. The key elements, the key aspects of this increase has been already explained before by Gabriele so nothing specific to add.

In terms of variable fees, we have a lower impact comparing to the 9 months 2021 because, as you can see, we have EUR 34 million that as we already explained, is driven by the capitalization of the performance fees under the old method. So EUR 34 million is coming from the first quarter, EUR 6 million are coming from the international business already booked in the first half -- in the first half of the year, and then the negative effect of the fulcrum.

The other income increased by EUR 9 million. This is mainly driven by the business of Azimut Direct and [ Azimut Capital ], therefore, there has to be [ already sales ] coming -- it is coming from the what we call Synthetic Bank.

And then the insurance revenues decreased by EUR 20 million, but again, here, also following the note #3, insurance revenue -- impacted by a less -- a minor effect of the performance fees with a difference of EUR 24 million that we netted by the increase of the recurring fees of EUR 4.5 million.

At the level of the cost, distribution cost increased by EUR 22 million, mainly driven by the evolution of the recurring fees. And then personnel and G&A increased by EUR 18 million, in line again with the growth of the business. And more specifically, we have EUR 2.3 million coming from the deconsolidation of Sanctuary; EUR 2 million is linked to the new Italian perimeter; and then additional EUR 10 million from mainly Australia. Again, as you remember, cost of the financial adviser outside Italy are booked at such at the level of this line of cost. And then EUR 3 million more in terms of IT costs due to the transition to the new front end.

On Q-on-Q variation, again, I would say that there are no specific elements to highlight if we compare the two quarters, '22 and '21.

We can now move to Slide 21, where we have additional, let's say, elements to share with you in terms of finance income. For example, EUR 5 million positive. If we cross to the note, this is mainly driven by dividends from GPs at around EUR 8.5 million. We have the impact of Sanctuary due to the deconsolidation. So now we know that the effect of Sanctuary is booked here. So we have a negative effect of EUR 2.6 million. A fair value option effect that is positive by EUR 13 million and then a mix of unrealized and realized gains and losses on our current investments that, all together, make a difference, negative, of EUR 30 million.

Nonoperating costs instead of having a negative effect, we are still positive. As you remember, already in the first half we shared, let's say, the effect of the deconsolidation of Sanctuary of EUR 5.7 million. So this effect has been, let's say, netted by the one-off costs. So we reduced this positive effect, but we still have a positive contribution to the net cost.

And then finance expenses, again, this is simple to explain. As you know, we reimbursed our bond of EUR 350 million in March, therefore, we have lower interest rate booked during the 9 months 2022. Income tax, the evolution, let's say, is in line on what we already shared and discussed in the last few quarters. Therefore, nothing to add specifically.

And then it probably makes sense to share with you a quick focus on the minorities. We have 2x effect if we compare to the 9 months 2021. This is due to better results on [ foreign operation ] business and some also Italian subsidiaries and also one-off dividend to our management team in some foreign countries.

So in general, just to conclude the level of net profit, EUR 303 million. Comparing to the 9 months 2021, we see a negative difference. But if we take out the effect of the goodwill, the Sanctuary alignment that then will reverse at the end of 2021, instead of having a negative difference, we have a positive variation of EUR 12 million despite the [ higher ] tax rate and overall less performance fees of about EUR 30 million compared to last year.

Now we can move to Slide 22. We represent the net financial position. Overall, we have a positive level of EUR 364 million -- EUR 44 million, if we compare, less , if we compare to 2021, December 2021. And [ it's, anyway, ] positive, so we increased the net financial position of EUR 76 million if we compare it to the end of June 2022.

We increased our treasury shares that stand now at 2.9%. And if we want to perform an overall reconciliation of the EUR 44 million variation on -- comparing to the 2021, we have a net profit before tax -- we should consider a net profit before tax of EUR 440 million, then we take out the dividend paid of EUR 261 million. We have advanced tax payment of EUR 77 million. M&A activities in Italy and international, so it's outside Italy, of more or less EUR 124 million. Therefore, we should be there and reconciled EUR 44 million, negative variation.

I'll leave back to Gabriele for the final part.

Presenter Speech
Gabriele Blei (Executives)

Thank you, Alessandro. And now moving to Slide 24, just a focus on the business development. As far as Italy is concerned, we continue to work on growing the underlying business. Clearly, market is not supportive as we had in the last couple of years, but we continue to invest and train our financial advisers in order for the company to grow its potential. We are expanding and will continue to do so the product offering, leveraging on our proprietary distribution channels simply because there is nobody else that can claim these such capabilities, know-how and competence across so many regions offered to our Italian client base.

Private markets and fintech, these are the latest initiatives and projects. We believe we still have untapped potential in both areas, and we will be trying to develop this organically and inorganically whether with third-party agreements or additional acquisitions.

As far as the international business is concerned, we think and see a continued improved momentum across markets and products, and this is exactly what I have been referring in the last couple of calls as a platform that is much more resilient to external shocks because of its diversification and that of solutions and presence in several markets.

We will be expanding some strategic partnership in some key markets. As always, we are quite active and we assess ongoing potential increase of our capabilities, whether in the asset management or distribution in mainly, I would say, regions in which we are already present. We don't see ourselves as easily engaging in new markets in the coming future.

All in all, this will translate in an improving profitability. As you all know, we have set our 2024 target of EUR 150 million of net profit contribution from our international business, and this stands as one of the key targets we reach -- we want to reach by 2024.

Private market, EUR 6.4 billion as of October. We will be growing in this area. We are thinking to launch significant new products as well as complete the fundraising of those products that have been launched up to September and even beyond. 37,000 clients are already invested, and this number has just to increase even further in the coming years.

Lastly, capital management. We have a dividend policy that has been set almost a year ago at 50% to 70% of recurring earnings. That is reconfirmed. Buyback has been initiated, as you have heard from Alessandro. We continue to monitor and exploit potential opportunities given the ridiculous valuation at which our stock is trading at.

We are continuing also to deleverage our balance sheet. And the last milestone that we have is at the end of 2024 to repay the EUR 500 million bond, thanks to the continued strong cash flow generation on a quarter-per-quarter basis.

Moving to the very last slide, 25 -- 25th, sorry, as you see, there has been gradual development of the net profit towards the EUR 400 million target, which we can only just reconfirm, given that we are 3 months from the target. And then the net inflows stands at EUR 6.8 billion, well in the middle range for the full year of EUR 6 billion to EUR 8 billion, which we, again, reconfirm, and we will give you more updates in the coming months.

So thank you very much, and we are clearly available for any Q&A.

Question and Answer Operator Message
Operator (Operator)

[Operator Instructions] The first question is from Hubert Lam of Bank of America.

Question
Hubert Lam (Analysts)

I've got 3 questions. Firstly, on your distribution costs in Q4, at EUR 90 million, it was a bit better than I expected. And I think, in your presentation, you talked about being helped by lower overheads and deposit impact from the yield curve. Just wondering how much of this is recurring? And how should we think about the run rate going forward on this number? And whether or not that's -- the low 90s is sustainable or not. That's the first question.

Second question is on development of your private markets business, both, I guess, in terms of product pipeline and client appetite. So you've raised EUR 1.5 billion of new assets from private assets this year, which is good. Can you repeat this next year? Or do you expect a slowdown as the client base could possibly be topped out on these type of products already?

And I guess, last question, it could be a bit early, but what's your outlook into 2023 compared to what you've done in 2022? I know, on Slide 24, you talked about business development and brand focus areas. Just wondering how you think about any specific type of products or regions where you think could maybe take off in the next year? Just probably how do you think about budgeting into next year or guidance into next year?

Answer
Gabriele Blei (Executives)

Thank you, Hubert. Well, as far as distribution costs are better than what you were expecting. I mean, the evolution of the yield curve, and therefore, the impact coming from what is mentioned as a severance payment, it's hard to predict. Although, given the direction of interest rates, we might have some positive effect at least in Q4. But I would not go beyond because I wouldn't speculate too much on where we think interest rates are going to land.

As far as the overheads are concerned, they have been softer than in the previous quarter. We do expect to have, from now on, even more tighter control on this kind of expenses just because -- and I'm going to partly answer to your last question, 2023 is probably going to be quite of a challenging year for everyone. So we are already thinking of actions to put in place to control cost, if not reduce them. But I think it's a bit too early to start discussing how and where we think we can manage the cost base.

But we will certainly give you more updates on this and details on how we will be doing in the next couple of quarters. As far as the run rate is concerned, I would assume that, as you know, there is a bit of seasonality effect always in Q4. We expect this to be somehow less than Q4 2022 vis-a-vis 2021 simply because the year has not been as extraordinary as last year. But I would expect somehow slightly higher number in Q4 than what we have seen in Q3.

Moving to the private markets. "Can you repeat it?" That's an excellent question. We always want to repeat good numbers. But there is no alternative to what we have done this year, and we have to continue to do in 2023 and onwards, simply because volatility will still be present, and we need to diversify the performance driver for our clients, which is something that, at the end of the day, is the only number that matters when we try to deliver to them some positive news.

So we will be testing our network capabilities in the coming months vis-a-vis the products that we have in the pipeline, and we are in the process of building up a product suite that will be delivered and presented at the beginning of January on our usual convention that we lay the path towards a number of -- an expectation in terms of asset gathering capability within the private market space, which cannot be very much dissimilar to what has been achieved in 2022.

Outlook 2023. Tough question, probably hard to give you an answer. But the way we are thinking from a rational standpoint is probably market will still be somehow complicated, at least in the first part of the year. And then it's a guess estimate that we can all make. So in order to produce potentially net profit growth, which is the basic assumption on which we are working because we need to make sure that the company evolves and different areas of the business increased their contribution to the profit, we need to manage the cost base quite carefully if there is going to be some sort of shortfall in the revenue evolution due to market effects. So I'm not going to speculate on any number, but I hope this gives you a picture of how we are kind of figuring out the numbers for 2023.

Question and Answer Operator Message
Operator (Operator)

The next question is from Domenico Santoro of HSBC.

Question
Domenico Santoro (Analysts)

A few questions from my side. First of all, the delta of management fees that you had in the quarter. You said EUR 3 million more from foreign business, if I remember correctly. So I wonder whether this is M&A. And EUR 2 million less from liquids -- illiquid assets, sorry. So I mean, I struggle to understand a little bit why you got less money on these products given that there is no mark-to-market? So I'm just wondering what's the driver.

Is it lower sales? Because if I look at the volumes, they went up quarter-on-quarter. And on this matter, it's a little bit difficult to look at the underlying business in this quarter because there were all these changes in perimeter.

What happened to margins on your business? Because, if I'm correct, there was a little bit of deterioration in margins. And the -- what will happen in Q4 as well because there is still September market performance to account for. So that could be useful given that we don't see any indication of margin in the presentation.

The other question is on performance fees because, I mean, all the data points that you show in the presentation are also the numbers -- the numbers that the Chairman shows in the press release. They would probably pointed out to positive performance fees instead. I know that is -- it might be the net of plus or minus, but why performance fees were negative in the quarter when you outperformed basically the market?

And then, just a clarification on the other revenues. Because if I look at the presentation of H1, the other revenues were at least average. For Sanctuary, they were EUR 26 million more or less per quarter. So I'm just wondering whether the delta between revenues is in the other that you indeed lose in the quarter? Sorry for the very big questions.

Answer
Gabriele Blei (Executives)

Thank you, Domenico. So let me try to answer some of your questions. And then if Alessandro wants to jump in and add and clarify, he will elaborate further.

What I said, and I refer to Slide 9, Q-on-Q, the evolution of the management fee we have, I said, EUR 3.5 million positive evolution Q-on-Q from our foreign business and our private market business. Specifically EUR 2.5 million from our foreign business and EUR 1 million or slightly more from our private market Q-on-Q. The -- if you check, we did not do any specific M&A transaction on our foreign business. So it's quite organic growth that we have witnessed, and this is not linked to market performance because it's truly management fees.

When I refer to the liquid instruments, so the negative contribution of EUR 2 million, I refer to the fact that we are not immune to market movements in our liquid product. So our EUR 25 billion, EUR 27 billion, sorry, usage funds that we have out of Luxembourg. And we cannot simply exclude the fact that, either because of the market or because of the mix, we have some kind of erosion on a quarter-per-quarter basis given the overall environment we have lived in.

When it comes to margins, I would point you to Slide 20, where you see -- you can see the recurring margin on the bottom of the page, probably with -- sorry, I apologize, not highlighting this clearly before. But if you check the evolution on the 9 months, there is a slight movement downwards of 2 basis points. If you check it on a quarter -- on an annual basis, Q3 2022 versus Q3 2021, which was a completely different environment, we had 181 basis points versus 178 basis points. So an erosion of 3 basis points on a quarterly basis.

As I referred on a number of occasions, I tend not to see this evolution of a couple of basis points up and down as significant and material simply because the market can have an impact on the mix that we currently have in any specific point.

The third question was on the fulcrum, right?

Question
Domenico Santoro (Analysts)

Yes, yes. Well, on Q4 instead, what's your expectation about margin? Because I'm mistaken, you're correct. I mean you showed in the Q2, so margins then went down in the quarter. Yes. And what about in the Q4, what would you expect?

Answer
Gabriele Blei (Executives)

Listen, again, if we assume that Q4 has been a positive evolution so far in terms of market performance, probably we can see a margin that is stable or slightly recovering the 1, 2 basis points that we have lost in the -- that I have just commented. But let's see how the year finishes because we all remember what happened in November, December -- sorry, November last year, which we have seen quite a big drop that has been partly, if not all, recovered in December. So a bit too early to say. But again, I'm not expecting huge swings because of these market movements. And this is, let me say, an occasion to congratulate with our portfolio managers wherever they're based because of the excellent work they have done so far.

And probably to clarify on Pietro's comments in the press release, the outperformance of 300 basis points is vis-a-vis the industry -- so the benchmark that is commonly used in Italy is the Fideuram index. And although we are as -- unfortunately, most of the industry participants showing negative performance to our clients, the fact that we are 300 basis points ahead of competition, and even significantly better than many competitors that we see when we receive clients from financial advisers moving from other companies to Azimut these days, the results that we are showing are significantly better than what clients are having in other asset management companies.

So I think we are in a good position today to have a quite constructive dialogue with our clients when it comes to eventually changing the asset allocation, which is something we have been talking about for the last, I would say, 3-plus years because, eventually, market would have moved in a downward trend, although we did not try to speculate, but we were kind of anticipating what we are living today.

Question
Domenico Santoro (Analysts)

And can I ask, sorry, the -- as of now, the performance of which these funds have generated negative fulcrum? In the Q4 -- I mean, in the portion of Q4, has it improved, so we will see this number to reverse into positive? Or you still expect some negative?

Answer
Gabriele Blei (Executives)

Domenico, I would tend to be consistent with what I've said so far, commenting performance fees. We don't want to anticipate any comment when the quarter is still running just because it would provide the wrong message. Having said that, I think you have seen the recovery in the weighted average performance. And clearly, this is somehow the contribution of funds performing in line or better than our benchmark. But I would not be expecting, as of today, material performance fee contribution just because there hasn't been any spectacular positive/negative outlier, I would put it this way. So far.

Question and Answer Operator Message
Operator (Operator)

The next question is from Elena Perini of Intesa Sanpaolo.

Question
Elena Perini (Analysts)

I would ask some clarification on your outlook for next year and, in general, on potential guidance about a recurring net profit. Actually, you were able to deliver this, which was quite difficult or at least in such a challenging year, around EUR 100 million per quarter. So I was wondering if this could be considered as a recurring net profit on a quarterly basis going forward, plus or less market movements?

And then just to clarify, well, on the on the performance fees, I didn't understand your answer to the previous question, which was that -- the element determining the negative contribution, if you had some outperformance. I couldn't get your answer actually.

Answer
Gabriele Blei (Executives)

Thank you, Elena. Well, actually, thank you for the first question because it gives us the opportunity to stress and underline something that probably we have mentioned in the past several times, but I would like to start from here. I think as we have all witnessed over the last years, the expansion, the diversification of the company as far as our geographies is concerned, investment into the products that we have delivered, the entry into the private market space, the fact that we are developing new initiatives in the fintech/M&A activities, all are pointing to years ahead of us that are going to diversify even more our revenue generation and net profit contribution. We are not here for building businesses that are making loss. We're here to produce results, possibly results that grow year after year independently from the market performance.

Obviously, as you all know, we are, however, dependent on external factors that we cannot control: among all, the markets and eventual regulatory changes that may happen in the future. So we work for growing the recurring component. Following the change in the fee structure, we have stressed several times how we were moving into the direction of a P&L that would have been, for the bulk and the vast majority of the earnings, being built up for recurring revenues and profit. This is taking effect this year, and you see this in the numbers.

And again, probably taking just a single quarter is not a good indication of what we will be doing in the future. But it's 3 quarters now that we have been stressing these aspects that I have just recalled in my comments. So I think the business, the company, the people that work within this organization are worth some sort of credibility when they say and set targets. So we typically set targets at the beginning of every year, in the last 3 years, we've done so. We have been able to achieve all these targets beyond the 5-year business plan targets that were delivered in the past.

So we will most likely do the same and set a target at the beginning of 2023 that is going to be challenging, that will deliver growth. And despite the market, we will try, as always, to try to meet, and if we are lucky, to overcome. So I hope I did provide you some color, but I will not be providing you specific numbers and actions that will be taken before the year 2022 is completed.

As far as performance fee is concerned, what I said before is, we don't want to enter into a discussion of whether we are or not generating performance fee in a quarter that is still running. To that extent, we will not provide numbers for Q4 at the current stage. But what I can say from the numbers we're seeing is, we do not see any significant positive, negative impact from the fulcrum mechanism, which I remind you is capped and floored at plus/minus 20%. So indeed, we are benefiting from the uplift in the market that has taken place so far in Q4, but we are not betting on any super material performance fee contribution so far.

Question
Elena Perini (Analysts)

Okay. And if I may, I will add another question. Given the current interest rate environment, do you think that there could be some lower interest for your private market business because clients were interested also in higher yields given the very low yield environment when you launched this kind of business? Or on the other hand, do you perceive that there is a higher sensitivity to the funding of the [ real ] economy also by your clients?

Answer
Gabriele Blei (Executives)

Thank you, Elena, also for this one because, again, it gives us the opportunity to try to reinstate some of the reasons for us entering this private market space. We have seen, especially over the last year, that if you were building a balanced portfolio, so a 50-50 equity bond product, you would have probably be down 25-plus percent year-to-date. So we are working in an environment in which the old-fashioned way of building a portfolio for a retail client, 50-50 equity and bond, is no longer the solution -- or at least this is what we think.

So the idea we have had back in 2019, when markets were positive, was to try to introduce an element of innovation in the driver of performance for the medium to long term. Therefore, we are not changing today our idea because interest rates are going up. Clearly, this is going to help us in delivering performance from, say, the liquid instruments at some point when the mark-to-market on the bond side will stop having a negative sign.

But on the other hand, what we need to do and to justify vis-a-vis our client is to try to bring some other pocket of performance and investment opportunities. So we are not changing our long-term vision of becoming or transforming this business from a traditional asset management company into a well-diversified platform of products and services across any geography. Because today, we're speaking about private markets in Italy mainly as well as in the U.S., where we did our staking business investment. But believe me that we are starting to enter the private market space in emerging markets or developed markets in which we operate because clients have the same needs because clients do understand that markets are changing and they need to change accordingly the way they were building their asset allocation.

So no, we're not changing our long-term strategy. Certainly, higher interest rates are appealing, but they serve as a performance driver for a number of other liquid strategies.

Question and Answer Operator Message
Operator (Operator)

The next question is from Filippo Prini of Kepler.

Question
Filippo Prini (Analysts)

Few clarification on the private market business. The first one is just on accounting. The commission on private market that go in the line of recurring fee are only those on the assets in Italy. So we're talking about EUR 3.4 billion.

And second, do you give -- do you disclose to your client the sort of mark-to-market also these assets, I don't know, twice a year or on a different time horizon?

And finally, we see that you put a slide with some of the investments you've done into this business, private market, lending and other investments. But could you share a rough idea of how much, for instance, of the assets in private market in Italy, EUR 3.4 billion, are not only committed capital, but already invested?

Answer
Gabriele Blei (Executives)

Thank you very much. So as far as the booking of the private market line, but -- Alessandro will certainly be able to elaborate further. The contribution coming from our staking business in the U.S. is not booked under the management fee line, but is consolidated below the operating profit line as he was commenting before.

So within the private market contribution to the management fee, you will have only whatever is done out of the, let's say, EUR 3.4 billion linked to the distribution of private market products from our Italian network, okay? Ale, you're good?

Answer
Alessandro Zambotti (Executives)

Yes.

Answer
Gabriele Blei (Executives)

Mark-to-market on the private market, it depends very much on the type of product. It can be once a year NAV or twice a year NAV but it very much depends on what we have written in the prospectus of each single product. And then I -- sorry, I missed the last question, if you can repeat it?

Question
Filippo Prini (Analysts)

Yes, of course, how much of the committed capital you talk about, the private market in Italy, is already invested?

Answer
Gabriele Blei (Executives)

Listen, I don't have specifically the Italian, but from the...

Question
Filippo Prini (Analysts)

Generally, or more generally, or even generally figures.

Answer
Gabriele Blei (Executives)

From the latest statistics that we have seen, we have deployed around 50% of what we have raised so far. It clearly varies from fund to fund, but the bulk average is that.

Question and Answer Operator Message
Operator (Operator)

The next question is from Alberto Villa of Intermonte SIM.

Question
Alberto Villa (Analysts)

A couple of questions. One is on net inflows, outlook for the future. You provided a split by geographical regions of the inflows so far. I was wondering if you expect in the future to have a revamp of some regions or a different mix? I'm referring especially to Italy, where maybe there are room -- there is room for more managed inflows in the future -- managed assets inflows in the future. And what is your expectations in terms of contribution coming from recruitment on that point?

And the second one is on cost inflation. You said stable or even down cost. It seems to be a challenging exercise in an inflationary environment. So I was wondering if you have a specific already actions in mind to reach this target? And if you can give us an idea what is the split of the cost on your P&L related to the Italian business overall and the business outside of Italy?

Answer
Gabriele Blei (Executives)

Sorry, we were just speaking, but the mic was off. Well, thanks for the questions. Net inflows expectations, as far as geographies, is always hard to predict with a good degree of precision. But what we are seeing is countries that have lagged, such as Brazil, has come back quite well. There has been some sort of one-off effect, mainly linked to institutional mandate decision in some regions that have turned into negative territory. And let me say that, eventually, what is the missing bit is probably inflows from China that has been going through a prolonged period of lockdown that has effectively limited the capability of our colleagues that have been locked up in their houses to meet with clients.

As far as Italy is concerned, there's always room to do better. There is always room to increase, but we have been working with our network specifically on trying to change the allocation and increase the penetration of private markets. This takes away a good degree of time when it comes to them visiting clients and trying to elaborate some investment decision proposals to put forward.

Certainly, when it comes to the environment and therefore, the recruitment activity, whenever market turned negative and we're down 15%, and have been down even more than that, the activity of the recruitment is slower simply because it is harder to move from one company to the other and show to your existing client base the fact that you are generating negative returns. So we have done 89 additions in terms of recruitment year-to-date. It's not a big number. It's not a small one, but certainly, this has had an impact on the flow environment.

As a guideline in good years, meaning good market environment, more than 50% of the flow historically has come from the recruitment activity in bad years, the proportion are the opposite when it comes to the existing advisers.

Cost, yes, we have ideas. Yes, we are starting and digging into the details and making sure that we will be ready from 1st of January to try to implement actions that will gradually manage the cost base and to try to limit what you have mentioned correctly as being the pressure coming from inflation on our P&L. So whatever we save is not just going to be a pure saving, but it can be either offsetting the inflationary pressure or being used to invest in the business in areas in which we feel comfortable to deploy some investment to have a better machine in the future or expect higher revenue generation.

When it comes to the split, Ale?

Answer
Alessandro Zambotti (Executives)

Well, if we look to the personnel and SG&A, so the EUR 200 million, I would say it's almost 50-50. To be precise, EUR 110 million at the level of the Italian business and EUR 90 million for the foreign business. The level of the distribution cost, let's say, the contribution from the foreign business was just coming from Sanctuary. So we have the 6 months of 2022. It's around EUR 65 million. So the rest is the Italian business.

Question and Answer Operator Message
Operator (Operator)

Gentlemen, there are no more questions registered at this time.

Answer
Gabriele Blei (Executives)

Well, thank you very much for your time and attention. And my colleagues and myself are always available for further follow-up. Have a good day. Bye-bye.

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