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Edited Transcript of AZM.MI earnings conference call or presentation 8-Nov-18 2:00pm GMT

Q3 2018 Azimut Holding SpA Earnings Call

Milan Nov 19, 2018 (Thomson StreetEvents) -- Edited Transcript of Azimut Holding SpA earnings conference call or presentation Thursday, November 8, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alessandro Zambotti

Azimut Holding S.p.A. - CFO & Director

* Sergio Albarelli

Azimut Holding S.p.A. - CEO & Director

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Conference Call Participants

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* Alberto Villa

Intermonte SIM S.p.A., Research Division - Head of Analysts Team

* Elena Perini

Banca IMI SpA, Research Division - Research Analyst

* Federico Braga

UBS Investment Bank, Research Division - Associate Analyst

* Filippo Prini

Kepler Cheuvreux, Research Division - Equity Research Analyst

* Gian Luca Ferrari

Mediobanca - Banca di credito finanziario S.p.A., Research Division - Security Analyst

* Hubert Lam

BofA Merrill Lynch, Research Division - VP

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Presentation

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Operator [1]

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Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Azimut Holding Third Quarter 2018 Results Conference Call. (Operator Instructions) At this time, I would like to turn the conference over to Mr. Sergio Albarelli, Managing Director and Chief Executive Officer of Azimut Holdings. Please go ahead, sir.

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Sergio Albarelli, Azimut Holding S.p.A. - CEO & Director [2]

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Thank you so much, and welcome, everybody. We going to present today our quarterly results ending September 2018. So let me start straight to the point with '18 priorities. As you can see, we're presenting you some ideas about 5 relevant topics, which are seemingly changing the way we doing business and impacting our profitability going forward.

The first area I would like to address is private markets; the second one is evolution of our advisory business; the third one is the FA network and the evolution in hiring; number four, international; and number five, fintech, which is a pretty general type, but it's still about the operating system, which we run our business nowadays.

Speaking to the first one, as you know, we launched a few years ago Azimut Libera Impresa, which is aid in supporting more medium-size companies. As of today, we have roughly EUR 0.5 billion in various products, either private equity or venture capital. We have a very aggressive target of EUR 4 billion AUM, with 18 new products to be launched in the pipeline over the next 10 years. This is the consequence of the revolution in the company. We hired a new CEO, we are reorganizing company itself. And the business spend is nearly simply approved, and that's reason why we are presenting this today.

Number 2 is advisory. Lots of question we've seen in the last few months about the implementation, how things are evolving. What about you, blah, blah, blah. We're very simply -- we're not starting today because we launched advisory services back in 2014. And as of today, we at EUR 1.3 billion in assets regarding the various subitems of the advisory channel. It's tailor-made solution for clients, and I mean it, it's really delivered, it's not standardized and not [realistic] generalized but really tailored. No need to say it's all about recurring fees for Azimut but very importantly, it is the return of clients. Going forward, the evolution of MiFID II, the evolution in the market, we do believe we have a say in this field, and the numbers are there, and I will be more verbal in a few minutes.

Number 3, the evolution of our financial agent network. We are 144 new hires, as much as Italy is concerned, in 2018, that's the record, as much as our activity. I would say, our performance is much better than industry here today, we have the opportunity to attract competitor and attract talent, and I will drill down this 144 within the various activities of wealth managers, international agents and so on.

Number 4, international. The underlying P&L is showing improving trend, significantly improving trend. I'm going to present you today some data regarding those trend in Brazil. Australia is our second largest market with EUR 4.6 billion and generating profit. Brazil stands at EUR 3.7 billion, despite all what's going on over there, you may like it or not and also the net profit situation.

Number 5, fintech. Obviously, Azimut, as a company, which is centered around financial agents and wealth managers. So the transformation of our IT model means, number one, that we already make significant investments in the last few months dating back 2016. We are actually running over 60 different projects on top of the one we already terminated in both 2016 and 2018. And it's all about focus on volatility, digital-enabling scalability and automation. There will be benefits for both people working in the organization, for the organization itself because it's going to be streamlined and for clients as well.

Let me stick to point number one, our private market. Alternatives are implementing our strategy, and we planning a significant expansion into broader markets, the reason is benefiting all stakeholders, i.e. not just Azimut but clients, our distributors, i.e. our agents, and our shareholders as well. The reason, very simply, stable recurring healthy fees, long-term commitments. It's a new tool, you may probably question about the definition of tool, but as a matter of fact, these are tools in the end of the raise, the very important assets in wealth managers we have today in order to see prospect and existing client and revising portfolio allocation. The way we moving is to make sure that, otherwise, our retail access to those products will be impossible. Azimut is growing in a quickly new direction. Most of our products will be retail-ish or very retail. Not aiming just to be top client and top institution but really go down to retail investor. And this is something -- some people call it, as you can see, democratization of the products. But in that sense means better and larger access to investment opportunities for a wide range of clients. No need to say positive contribution to performance in the client's portfolio. Diversification, a lot of commitment and not to forget, talking about venture capital, private equity, private debt and the social impact. Basically, we are committing and investing in the real economy while banks are under pressure. This is having a bigger impact, though. The mitigated platform we're talking about, if we go clockwise, we're talking about corporate finance, supporting investment strategies, debt advisory, finding a renegotiation of any form of debt, and when I say any form of debt, I really mean it. Treasury solution through Azimut Asset Management and partnership with banking institution and Club Deal or Venture Capital. As you probably remember, we launched a month ago a vertical called IP Club, and we initiated or replicate situation like this one.

The purpose: promote the introduction of liquidity into the real economy and offer opportunity for expected enhanced performance and value creation. Then, how to make it to the product range, we go from impact funds, funds of funds, private debt, corporate cash to permanent capital, IPO/pre-booking, private equity and venture capital. As you can see, this is pretty vast and large and deep product range. No need to say there will be investment in these area. We are already planning hiring analyst and portfolio managers. The operational support in Azimut Libera Impresa will be strengthened through agreements with the parent company -- sorry, with the sister company, Azimut Capital Management, about operating processes, compliance, anti-money laundering and so on.

Speaking now to item #2. Azimut Advisory business. As you can see from the histogram chart, growth has been pretty good and fees as well have been pretty good. The numbers are not yet exciting, but they are very good in terms of growth, in term of penetration within our product range, in terms of understanding of our financial agents and wealth managers about what advisory can do. How did we structure, we have an advisory committee, we have an advisory team, and then we go down to the wealth managers. Going to greater diversification for fully customized solution, privileged access, maximum control, exclusive relationship.

Let me stress one point, which is pretty important here. MiFID II is starting to be effective next year, but if you plan it properly, you started thinking about it years and years ago. And if you think about launching a service like this one back in 2014, presenting it to our network and gradually growing to more than EUR 1 billion in order to be ready for the revolution means proper planning have been made. It's very difficult environment, no need to say. Market, as all you know, are in a totally different situation than a few years ago, so the quality of advice will be key, it will be determinant. I would say, it will be the adamant part of any strategy for the financially group in the next few years. We should do it well, and we should have proper infrastructure, that means IT, operations, portfolio managers and agents to make it successful.

In order to be successful as well, you need to expand your network of financial agents and as you can see in item #3, we have a record 144 new agents entering into our network. The breakdown is pretty interesting. 33% of these new agents are coming from banks, you probably remember we launched a significant project called banking revolution, aiming exactly at hiring people coming from banks. Still, a healthy 50% is coming from competitors, FA networks; 13% is coming from what we talking about millennials, a very young professional with growth opportunities in front of them where we are planning to invest in training and support; 4% is made by others, i.e. insurance agents as an example. This is an answer to some of the, I wouldn't say criticism, but my comments we receive about what's going on in hiring in Azimut. Very simply, all the good planning and all the good activity already done in 2017 and 2018 early. 2018 is generating now the numbers.

Hiring people is not like, as you know, posting something on the internet, it takes time. You need to analyze, you need to go deeper into the ability of each financial agent you are talking to in order to understand if they're good or not. You need to understand how flexible are clients for the financial agents in order to relocate. And it is not a question about performance or not performance on the existing portfolio, it's a question about the credibility of the financial agent and the ability of this person to generate performance for the end client. So the process may be longer, but if you do it well, these are the numbers we're talking about.

International business. Pretty healthy. Pretty good. EUR 2 billion net new money in 9 months, entirely organic. So once again, criticism about why are you growing the growth and what's the reason why, well, the numbers are here to demonstrate that if you do it properly, you can do pretty good things. 31% of our business, as much as assets, is based in Europe and Middle East and North Africa; 31% in Brazil, Mexico, Chile and the United States; 38% is Asia Pacific with, obviously, Australia having the lion's share; plus 8% year-to-date, 100% organic. Please consider also the negative impact coming from the evolution in the markets with the number that could have been much better, but you know, that's the market, nothing we can do about that.

Case study. We presenting you some pretty interesting items about Australia and Brazil. Australia means AUD 7.4 billion in 4 years of operation. Very strong local talent and good market opportunity. Strong talent means local people, hiring and getting into Azimut, the best professionals in the market. If you see -- on the right-hand side of the chart, you can see the geographical breakdown of our presence, and it's very interesting to note that we're not talking about only the main areas in Sydney and Melbourne, where we talking about geographical dispersion in the ability of our business model to be presentable to a wide range of clients. The thing is made by 3 different operations: Azimut NGA, the leading platform in order to calibrate financial planning, accounting firms in Australia, AZ Sestante, [which of] the financial service licensed entity, with 6 multi-manager funds and 12 managed accounts for the Australian market; and Sigma Funds Management, it's a values-style Australian equities boutique, was established back in 2009 by some ex-Credit Suisse Asset Management team.

Left-hand side, bottom side of the chart, the growth, pretty impressive. Not too much to say. The annual growth rate, 117%. But more importantly, the strategic priorities. First of all, the next generation technology. You cannot be successful in a market like Australia if you are not part of the leading back as much as technology.

Leadership and governance. In the federated model, you need strong governance in order to make sure that everything is run properly. Common backbone, the infrastructure, which is supporting all these various entities becoming part of The Azimut Group is based on the backbone, which is made common to each and every one of them.

Succession, because we're thinking about how to make sure that entrepreneurs will be able, in this business, to pass over, [being us]going forward, profitable growth in organic and sustainable acquisitions.

If we stick to these priorities, and we keep performing as we are in order to make sure that they are consistently on our radar screen, I think that, going forward, this business will be probably generating even much better numbers than we talking today. No need to say, the Australian market is pretty different from the rest of the markets we're talking about. It's in a fee-based advisory business driven. There is obviously some institutional opportunities over there. The annual contribution to Australian to financial outlets is very important. So comparing this business with the rest of the organization in Azimut, you need some caveats, and I'm quite sure that all you know perfectly what the caveats are.

Talking about Brazil, which is our third largest market. Let me start with the left-hand side bottom of the chart -- of the slide. You can see the chart, an impressive growth. It's not like Australia, only because it is slightly longer than we're talking about. It's 42% on CAGR, but nonetheless, with EUR 3.7 billion in Brazil, we are a significant player over there. Most of our clients are AZ Quest, which is one of the 2 entities we're talking about, are best-in-class. We're talking about equities, we're talking about long/short, we'll talk about macro and fixed income. We're talking about some very sophisticated type of product like arbitrage and impact. In a word, it's an almost win-win situation. A large number of our portfolio manager, a large number of our funds have been awarded as best fund in Australia -- sorry, in Brazil. Best portfolio manager in Brazil going forward.

As you think about it, it's Azimut. The success of this company has always been top performance, top people, in distribution and in portfolio management. Azimut Brazil wealth management is distribution focused on wealth management. We have a proprietary sales force, very similar to what we have today. The breakdown of our presence in Brazil is on the right-hand side of the slide, where we have local offices in Belo Horizonte, Salvador, Recife, and so on. Pretty important to say, while obviously, São Paulo, Brazil is the largest financial center and most of the richness and roughness of the company -- of the countries over there, we recently opened up office in Rio de Janeiro with the local partnership, they are now part of our organization. And we do believe that, going forward, this will be as successful as São Paulo has been.

Last comment, you can see on the right-hand side of the chart, bottom part of it. Services and offering. Here is what are we doing over there. Segmentation is the name of the game in Brazil, like in most of our markets. And aiming in order to offer FX solution, retirement planning, standard asset allocation goes to more sophisticated situation-like portfolio consolidation services, custom investment solution and financial planning. In this case, all this is possible because operations and technology in our Brazilian operation is state-of-the-art.

Last point, point number 5, fintech, evolution of our system. We started back in 2017 a process in order to transform the IT model that was supporting our distribution since longer. The idea that guided us was very simple. If you talk about digitalization just as a way of automatization of existing process, you may gain some productivity, but this is nothing new and nothing exciting. Digitalization means you took the opportunity to revise the operational model, you reanalyze processes and procedures, you eliminate bottlenecks in order to transform them into digital services, you really achieve productivity. So the principles, the guiding principle of our model evolution has been modularity, digital enabling, scalability and automation. The 3 targets and I mentioned right at the beginning of our conversation, improve financial customer's experience, simplify life and work of our networks and financial agents and obviously, reduce the operational load throughout the supply chain.

In 2018, we already introduced, for example, simplification of our digital signature and activation of digital services compliance. New full digital on-boarding process for prospective client. In 2019, we're ready to launch digitalization on communication and official report for clients. And we operate new open distribution platform and redesign our processes in a front-to-back logic. For those of you who are in love with technology, this means that a brand-new company, a brand-new backbone of our operational system, all this has been designed internally and has been

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internally. Obviously, we're using suppliers for software and contrology, but it is important to say that we're revising internally the way we are operating, and we do believe that the day we will be launching officially, the system will be above competition significantly.

Now sticking to the numbers. The first 9 months of 2018 have been, considering what's going on in the markets, pretty good. Our total assets are EUR 52.4 billion, up 8% versus the same period of the last year; Italy, EUR 38.9 billion; international, EUR 13.5 billion; net interest, EUR 3.6 billion versus EUR 3.9 billion. And strong organic contribution, as I mentioned, will be for -- from our overseas business. More to come from international in the next few years.

Financial result. Our total revenues are up 8% versus the same period last year, up to EUR 189.9 million. Our net profits EUR 39.3 million, up 12% versus EUR 35 million in the third quarter 2017.

In the 9 months, we had total revenues above the EUR 565 million versus EUR 591 million, same period last year. Recurring revenues is just as important, EUR 521 million up 5% versus 2017. Despite the disappearing of a significant portion of performance fees, our recurring revenues are up, which is a confirmation of the sustainability of the business model, the sustainability of our product range and the way we operate. We're talking also about net profits, almost EUR 112 million versus EUR 156 million in the same period in 2017. Most of the difference is due to lower variable fees.

On corporate development, as I mentioned before, the kickoff the private project -- sorry, the private market project through Azimut Libera Impresa. A new CEO, we recently announced yesterday. If I remember well in the press release, EUR 4 billion AuM and 18 new products to be launched.

On financial, we completed further EUR 10 million buyback tranche, a total of EUR 110 million since January 2017. And we do believe, with the continued expansion we experience in Australia, up to EUR 7.4 billion, we continue going forward.

Evolution of our assets in -- of our assets under management, nothing I can add to what I said before, but please consider the following. This picture is a picture which is supposed to stay, i.e. the validity of our presence in mutual funds, in discretionary portfolio management, in insurance product and so on and so on. It is not just based on what we're doing here locally in the current market, but we see a significant contribution going forward from international assets.

Now we're talking about 26% of informational versus the total. Sticking to performance, the numbers are still in our favor. Our net WAP is above the market average. As you can see from the chart, it has been consistently superior for a long period of time.

Funds breakdown. A good increase in Equity, going from 10% to 10.6%. This, at the expenses of Flexible, going down almost 1%. We had more or less stable Balanced, and we had a slight increase in Bond but very slight, we're talking about 0.4%. Cash is pretty stable. If you go to the underlying assets, total equity is stable, 44%. Obviously, this is due to market condition, evolution to client's module, evolution to redemption and subscription going forward. Also on the Bond side, we're talking about 33.2%, very much in line with the previous figure. Italian equity, 6%. Even if you down -- a 10% decrease is negligible as much as percentage terms.

If we go to diversification, geographical diversification, Europe, 39%; North America, pretty good, from 20.8% to 23.3%. Emerging markets slight increase, Others more or less in line. The only thing we can advise for you is a slight decrease, 1%, in Asia Pacific.

On the fixed income side, we're talking about an investment-grade model that's in line with our yield. We're talking about hybrid going down, with clients favoring different investments and our portfolio managers as well. And we have an increase in for -- in sovereigns accounts both to view to some investment almost on a tactical basis on the Italian government.

Please remember that few years ago, for those of you who were already part of the business, we had very nice campaign talking about the opportunity in investing in some decline risky assets. And as of today, our portfolio managers who are pretty brave and active are taking actions in the same direction.

Talking about net inflows. Azimut is above the average Italian industry. We're talking about 11.9%, industry average is minus 1.3%.

More interesting for you is, we believe, is the breakdown of the hiring process in this first 9 months of 2018, 144 is the total. Pretty interesting to see, wealth managers, 19; average age 55, average asset is EUR 41 million. We've managed funds in the region of 78% of the portfolio.

On the Banking Revolution side, even if the numbers are smaller, i.e. talking about 16 individuals, average age is pretty younger, 41; average assets, lower; but very importantly, managed funds, 85%. So we have plenty of growth in front of Azimut there. The millennials, extremely interesting, very young, very small portfolio, very well managed, talking about 77% are managed. Financial advisers, bread and butter of our business, and slightly a higher age than Banking Revolution. We're talking about 52 but very much in line with the average age we have in our network. Average portfolio is EUR 15 million, lower than the one we have today on average but opportunities in front of us because they will be running their business in a completely new more professional and effective way. 82% of portfolio already invested in managed assets.

No big changes regarding geographical distribution. We highlighting for you something probably you might already be aware of, but I think it's pretty interesting. We had a truly unique positioning in the High-Wealth-Density market. First of all, if we compare Italy versus the rest of the world, we're talking about 8% versus a similar 8% in the United States on compound growth. If we talk about the numbers of millionaires, despite all the taxes that the Italians are forced to pay, we're talking about an increase in a significant number. Talking about 17.3%. The evolution of this situation, as a consequence on Azimut, as you can see from the chart, compound growth, 13.2% versus 4.1%. And let me say, all these numbers, which are obviously in view in order to analyze it in deeper terms, are talking about the way we are in this business. It's always to be on the front line of the opportunity on the ability to generate significant returns.

Our position has always been very strong in this field. The numbers are growing significantly in the market despite what's going on, on financial situation and the economy, and our positioning is there. We are wealthier than the average client base, our average portfolio size for financial agent constantly increase, 13%, as I mentioned here before. And something that I will never be tired to underlying and to trust, we are totally focused on portfolio management. We do only portfolio management. Talking about nothing at all on conflict of interest, we're not talking about the processes, we're not talking about the student, we are not talking about like this. So we are focused on the best part of the economy, we are talking on the best part of the financial markets. We are talking about our ability to stay front running on this.

On financials, let me, as usual, pass the opportunity down to Alessandro Zambotti, our CFO, to highlight for you some details of our other profit and loss. Alessandro?

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Alessandro Zambotti, Azimut Holding S.p.A. - CFO & Director [3]

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Thank you, Sergio. So let's start from the bottom line of the interest statement. Therefore, the consolidated net profit is today, the end of September '18, about EUR 112 million compared to EUR 156 million of the 9 months of 2017. As you can see, we have a decrease by EUR 44 million. This was already said by Sergio at the beginning of the presentation, the result is mainly explained by the negative variation of the variable fees.

But let's go to the, let's say, the main element of the P&L. So total revenue, we have a decrease of EUR 26 million. So from EUR 592 million of 2017 to EUR 565 million of 2018. But as you can see, again, here we have EUR 49 million of variation, negative variation of the variable fees, but at the same time, we reduced this negative impact, thanks to the recurring fees where we are really stronger with about positive variation of EUR 25 million. It is, again, thanks to our stronger evolution of the asset under management. It's an evolution of our whole business in Italy and abroad.

Going to the operating cost. Here we have an increase of EUR 19 million. At the level of the distribution cost. We have EUR 2 million less compared to last year, 2017, 30 September. But again, here, it's a combination of the evolution of the group in terms of assets under management, attracting new financial adviser, which has already described, but at the same time, we have the benefit of the new principles IFRS 15 already described in the previous closing.

At the level of the personnel and SG&A cost. We have the significant variation of EUR 20 million, but again, here, it's a link to what has been already said before by Sergio. So the investment, the evolution of the group and what we are doing for the evolution of the business.

At the level of the interest income, maybe is the main element that can be, let's say, shared with you, we can see that we have a negative variation of EUR 7 million, therefore -- I mean, positive for us. Because if you remember in 2017, we had the one-off impact of the buyback of the convertible bond, therefore now, we have less cost. That's it, I would say so also focusing on quarter-on-quarter, we can see that the result increased by EUR 4 million. Again, here the main element, I think, is the recurring fees that is facing very, very good. On the level of the net financial position. The total debt decreased by EUR 10 million. This is due to the reimbursement of the -- back cash of the senior loan. At the level of the cash and cash equivalent, we have a decrease of EUR 189 million compared to the end of December. So if we compare the net financial position, we moved from a positive value of EUR 135 million compared to today, that is negative of EUR 42 million and if you remember in June, we were negative by EUR 57 million.

So as usual, if we try to reconcile the evolution of how our net financial position so starting from end of December, that it was EUR 135 million, as already said, we include the result, therefore we should reach EUR 247 million. But then this amount has -- which has to be reduced by the significant and important dividend that we paid in May so EUR 131 million. EUR 82 million of stamp duty and policyholder tax advance, EUR 40 million of buyback, EUR 23 million of acquisition. Sergio.

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Sergio Albarelli, Azimut Holding S.p.A. - CEO & Director [4]

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Thank you, Alessandro. Moving to our summary and outlook. Obviously, at least from our side, our business model is strong. We have resilient net inflows, sound financial result despite volatile market. Our correct demonstration of it. So even if we're talking about a significant absence of performance fees, which has always been an element of criticism versus Azimut, our numbers can demonstrate that the machine is up and running, the business model is going fine. And going forward, we might expect to an even better situation. Our global expansion is showing significantly material results. The EUR 2 billion in the net generated by international operation are a solid demonstration of it, and they are totally accepting in the very tough domestic market.

Let me touch one point -- topic once again. Talking about P&L for International. It doesn't mean the international strategy may be judged on the quarterly basis. It's a long-term process. In the International group going outside the main market, it took years and years in order to generate first numbers bottom line. So what we're talking about here is demonstration of long-term planning. We always been talking about long-term planning, we always been talking about being a presence in our markets. And the numbers we're talking about today, for Australia and for Brazil, are a demonstration that we can build, step-by-step, significant market presence over there, creating a business model which has no peers in the market.

The Italian business is bouncing back with some strong recruitment across the various channels as demonstrated here before. Despite what's going on in politics and economy, the private wealth in Italy still remains today one of the most attractive in Europe. Maybe there would be less new money available in the market, maybe it will be a question of cannibalization between competitors, nonetheless, the numbers demonstrate that there are 3 great opportunities in our domestic market, and all our investments of our hiring new people, launching new products, reviving an operation are going into that direction, i.e. exploiting the maximum we can at very strong and solid market.

We're focusing on improving profitability. We increasing the net interest of financial agents for the next 2 quarters. Obviously, as I've mentioned here to some of you and even a couple of calls in the past, a very strong effort has been put in place, and we put in place going forward about making sure that our financial agents will be even more productive and profitable than today. We're going to support them, and the ones who are not, unfortunately, at par will not be part anymore of the Azimut family.

Independence from any banking group is proving to be a strong attention from talent acquisition. Lots of the people we hire from banks see in the independence they have within Azimut and in independence in Azimut itself as a strong argument to go and look for prospect and to make sure that the clients understand that independence means no conflict of interest, lower fees for them, better opportunities going forward.

Tough performance year-to-date, despite being much better than the Italian industry. Performance is a key element. We're talking about a performance business. We're not talking about just servicing some clients with ideas, we're talking about making sure they will be wealthier going forward.

We are significantly considering how to strengthen our operation in portfolio management. We're talking about, as you remember regarding our product range, we will be key to make sure that we're going to stay above our competitors. The performance will be looked very carefully in order to assess not what's the best product going forward but what's the best combination of products. And that's the aim of the product range evolution.

Areas with focus going forward. Private markets, that's number one, absolute terms, we are investing money. We're hiring people because we do believe that lots of products with different market valuation with different condition will be enhancing profitability of our clients.

Backbone of the company, second key element. Digitalization, optimization, revision of our processes, it is not just an element of making sure that there will be better productivity but also the running the business will be more effective, and there will be less cost involved.

Obviously maintaining focus on growth as well as bottom line results overseas. And color, as promised, will be given in 2019, starting from today with some flushes in the business we are in Australia and Brazil.

Last point, once again, we are always open for opportunistic M&A in those areas where we do not have strong competencies, it may be portfolio management, it may be some other areas.

Last comments. Very quick update on our business plan. Not too much to say. Total asset's pretty fine. Net interest, pretty fine. Dividend policy, let me remember -- let me remind you, we paid EUR 131 million cash and EUR 135 million in shares this year for a total of EUR 262 million, which is a pretty impressive number. The only area where we still have to run a bit, we're talking about the annual -- we're talking about the net profit. As you can see, we have an indication of an annualized net profit, but the numbers today are talking we are at EUR 112 million. I thank you very much. I would love to pass over and open up for questions whoever might pose some bright new ideas for the company to be discussed.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Mr. Hubert Lam from Bank of America.

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Hubert Lam, BofA Merrill Lynch, Research Division - VP [2]

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I've got 3 questions. Firstly, on your plan to grow your private market assets by EUR 4 billion. Just wondering if you can give a sense in terms of the timing of that. I know it's a 10-year plan, but when should we start to expect to see the flows coming from this? And assume also that you would have to spend to hire new personnel before the platform, et cetera. So when should we -- how much costs do you think are associated with this? And when should we start to anticipate the cost coming -- needed for this investment? That's the first question.

The second question is on your flows. It seems like so much of your managed flows are still coming from your international business rather than domestic. Just wanted to give a sense on the domestic flows. Is it mainly due to the uncertain macro situation, which is suppressing the flows? Or is there anything specific? Because if you look at the hires you've done this year, it seems to be quite -- adviser hires this year, seemed to be quite a bit, I'm just a little bit surprised it hasn't led to stronger domestic flows coming from the new hires.

And lastly, on international business. I know you're -- at this point, you're still quite shy in terms of saying how profitable international businesses. But just -- I know by then just looking at your -- the growth and success of Brazil and Australia, which you mentioned today, just wondering if you can give us a sense to the profitability or the contribution of those 2 regions on your earnings.

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Sergio Albarelli, Azimut Holding S.p.A. - CEO & Director [3]

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Thank you, Hubert. Let me start with the first one of your question about the private market business we are strengthening right now. It's not by chance that I say strengthen because this brand is based on an existing backbone, i.e. Azimut Libera Impresa. Azimut Libera Impresa was launched on a vision, on intuition 6 years ago. It's been built up gradually. We have gradually educated our financial agents and wealth managers in talking about something they were not used to, i.e. talking about investments, which are not the standard long funds. As you can imagine, this has a cost on the one side but has a great opportunity because today if you go and look to some of our competitors, which have been pretty verbal and loud about what they doing and -- what they are doing, in reality, they are doing nothing. There's been a statement, nothing more, nothing less. I would say, today, it's very simple, we hired a new Chief Executive Officer, a very experienced guy in the business. The guy has been crafting with the top management of the organization a business plan, a very aggressive business plan, for the next 10 years because if you launch a project with 7-year maturity, obviously, the business plan has to be very long in front of you. So we're talking about something that is supposed to build up 18, 1-8 different funds ranging from the equity to the depth, the combination of the products and so on and so on. No need to say, and I think you will be, not apologizing, but understanding me, it is not the case to disclose openly which are the products we're going to launch, how many fund managers and analysts we're going to hire, how much money we'll be investing here today. Because basically, it means putting all our cards on the table and showing our competitors what we're doing. What we can do is to tell you that the plan is serious. It will be financed internally. The plan, it's a combination of our existing expertise plus new expertise we are bringing in from outside. And it will take a while before our competitors will be able -- just even to think about what we're doing today. 18 funds may sound something like aggressive or probably a bit too loud to some people. In reality, it's not. Because in front of 10 years of opportunities, talking about 18 funds in order to assess today are supposed to meet the investment needs of our clients means we are pretty rational. Think about for a second one of our brand-new product: the private debt fund. A product like this one, you are supposed to stay in for a few years, 5, 7, makes sense. It will give you the opportunity to diversify, it will give you the opportunity to look for a different profitability of our -- of your portfolio. It is based, on the one hand side, on existing reserves, on the other hand side, it is based on new resources we hired and a new combination of our performance expertise with external profit management expertise. In that sense, what I'm telling you is this is an area, and lots of people were reluctant to consider as a key element of our strategy. And today, on the values of EUR 0.5 billion of assets already existing, we are saying we are serious, we are investing even more over there. Obviously, it will be made on a gradual basis. We're not going to hire 15 people tomorrow. We're going to start hiring a few people, launching a few product, making sure that our agents and fund managers will understand them. In order to push our portfolios -- sorry, those fund into managed portfolios and advised portfolios. In that sense, what you're going to see in this area is to be one of the best contributors to our profitability going forward. This is, I know, a strong statement but otherwise, we would not have said we're going to raise, in 10 years' time, EUR 4 billion. If you compare the EUR 4 billion with the existing business in the Italian market, it's a significant number.

If I can stick to your question #2 about the net interest in the domestic markets. And what has been the impact of financial agents, let me start with the latter. Hiring an agent is a very long process as I mentioned here before. It doesn't mean that an agent hired in February with the portfolio of EUR 25 millions day 1, immediately to EUR 25 millions into Azimut. It takes a while. That's why I was referring to the ability of these people bringing in business gradually, making sure that the clients are happy and so on and so on. So even if you hired 144 people in 2018, 9 months, the numbers are supposed to get in on a gradual basis. And we're going to see the benefit of this expansion going forward. The last quarter and the next 2 quarters: quarter 1 and quarter 2 in 2019. The net inflows, well, everybody knows what's going on in financial markets. Everybody knows about the, let me say, nervousness of some market participants on what's going on in Italy. Some clients, obviously, are worried about they're not just clients of ours, they are clients in the market, i.e. clients of Banca Generali, Fineco, Allianz and so on and so on. It's a slowdown in the business, and we are not the worst one to see this type of situation. It's a slowdown, who are supposed to be -- sorry, which is supposed to be longer than expected. I cannot tell you nowadays. We need to see some reaction to A, general market conditions; B, what's going on in the U.S. financial markets; and C, obviously, no need to say, and it's not just impacting Italy, it's impacting Europe, what is supposed to be the outcome of the European elections going forward in the spring of 2019.

International business, you're right. We are on the way to provide color about P&L. And today, we gave you a demonstration of what's behind it. We didn't disclose yet the total P&L of neither Australia nor Brazil because you would have been displacing the attention to the key elements here, which is the growth in the business. Azimut is a growth company. We've grown assets, our ability in gathering assets worldwide is unparalleled. It's above the competition. So we stick to the facts that we are still the company which has been able to do this in the past and can do this in the future. It's important to first give you a picture of all of our ability in doing this. And then, as promised in 2019, we will be providing you an idea on how all these assets are going to generate margins and bottom line profits. But I am glad to say, or I would like to say, if you honestly should comment the histogram charts about Australia and Brazil, probably we will not have too many examples to compare with our ability in generating those numbers worldwide. Not too many companies can show that type of growth in the Australian market of above 100% or 40% in Brazil like we did.

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Operator [4]

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The next question is from Mr. Alberto Villa of Intermonte.

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Alberto Villa, Intermonte SIM S.p.A., Research Division - Head of Analysts Team [5]

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A few questions from my side as well, and thank you for the, let's say, presentation of the different initiatives that you are exploring to boost your business. Just to come back to Libera Impresa and advisory. I just wonder if you can give us an idea of what is the, let's say, if a new customer comes in and wants to subscribe a Libera Impresa product, fund, et cetera, how does it compare with the traditional offering of your products in terms of pricing? Is that a big difference in terms of recurring fees? I guess it does not contribute to the performance fees? So I wonder if you can give us an idea of what is the pricing there? And also for the advisory service.

The second question is on the Slide 12 on fintech, you're presenting a set of initiatives, you are planning to deploy in the coming months and quarters. I was wondering if -- we know that you had already step up in the IT cost in 2017. If we have to plan for more costs or investments, how should we look at it in terms of, let's say, the impact on the P&L in terms of potential increase in costs? And so if you can give us an idea of a run rate for quarterly SG&A in 2019.

And my third question is on the net financial position. You have now a net debt of around EUR 40 million. I was wondering if you can give us a bridge of what's happened in the last quarter in terms of how much you invested in buybacks and how much, eventually, cost for new acquisitions? And if the net debt position you have right now is creating any burden if we look forward to, let's say, future buybacks and dividend -- cash dividend payments in the future?

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Sergio Albarelli, Azimut Holding S.p.A. - CEO & Director [6]

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Thank you, Alberto. Let me start with your first question about pricing and how our agents will be able to offer their client's products like this one. Obviously, no need to say products like this tends to be slightly to a bit more expensive than the standard long-only type of equity or fixed income products. No need to say because the complexity of the underlying management strategy, the complexity of the instruments we're talking about on securities, the complexity, no need to say, about the operation behind it. So even if we're not talking about something which is going to be extremely more expensive, no need to say, $1 in the traditional Azimut funds will be generating a bit less than a new dollar into the new Azimut Libera Impresa products. Is this sustainable going forward? My answer is yes because these products are aiming to a much better and different performance behavior. They will be offering the opportunity to our clients to invest in those asset classes in the areas which has been almost forbidden to them in the last few years. Diversification on traditional asset classes proved to be good for a long amount of time, but nowadays we're all financial classes, international assets are moving into the same direction, beyond the opportunity we offering to clients today is to give them earning to something brand new, which doesn't mean riskier or more complicated. It means new in terms of products, in terms of performance behavior, in terms of long-term commitment of the investment to both the portfolio ability and the Azimut ability to generate long-term incomes. The true cost we're talking about here is not just about hiring portfolio managers or making sure the infrastructure in Azimut Libera Impresa is up to par, is a very important task. The true cost here is to ensure that all our 1,700 agents Italy-wide will be feeling comfortable in offering these products to the end clients. They might perceive the opportunity, they might see something in front of their clients, say, well, this is not enough. We need to help them in order to assess clients' needs to relocate portion of the money through these products because they will be generating better performance going forward to the end client. No need to say I'm talking about training, I'm talking about what we are going to offer to our agents in order to be effective in building our portfolio very significant contribution in the performance generation will come from something nontraditional.

But that said, and [you will] apologize if I am getting into politics, is this something new versus offering in the past alternatives? I mean, a few years ago, everybody was talking about hedge funds to be offered to the private clients and so on and so on. And all the questions were all about the pricing and the training and so on and so. Well, let me touch you with the following. The market went through this type of situation already in the past. Some mistakes were committed, no need to say. We are in a much better situation because we started offering these types of products a long time ago. And most of our agents are already aware on how those products are supposed to be managed and how they are supposed to be offered to the end client. Now the question is to help financial agents to assess exactly what is supposed to be the portion -- the proportion of alternatives into clients' portfolio. And it's not a question about pricing at all. Even if with the two, we start hitting in January 1st next year, it's a question about really helping the clients' understanding about the best asset allocation on the long term. And that's why we're talking to our people, stressing 2 points: point number one, don't stay in product like this one for 1 or 2 years, you need to stay for longer; point number two, you need to be above the sort of market cycles in order to see effectiveness from these products. No need to say, it's an educational process to both agents and clients. It's a long-term process but if we are successful over there, and the reason why competitors are copying us isn't because we are -- have already been successful, it is because we are serious about it. We're not just launching 1 or 2 products and say we can have some alternatives to offer to our clients, not at all. We had a totally separated and exclusively dedicated division called Azimut Libera Impresa in order to make sure that it will be benefit for all stakeholders into this business.

Sticking to your question number two, fintech. Yes, we started long time ago in making investment and let me say, our evolution of our IT and operational system. I can provide you some -- Alessandro, correct me if I'm wrong, talking about from 2016, '17. 2016, something like EUR 20 million that we already invested into our evolution. Obviously, this is about investments, i.e. adding infrastructure, software licenses, full-time equivalent employees dedicated to this project, et cetera, et cetera. The aim is to be effective, the aim is to be productive, the aim is to make sure that the system will be fully digital, enabling our clients and agents to be online and execute all those in trades real-time without any paper evolution. On PSM and our financial position. Alessandro, would you like to speak in?

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Alessandro Zambotti, Azimut Holding S.p.A. - CFO & Director [7]

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Yes. Following your question, [answer the best we can] share in terms of reconciliation in EUR 10 million of buyback, almost EUR 6 million of acquisition, EUR 2 million more on [the dividend]. And we pay back also the EUR 2.4 million to dividend to our foundation. That should be the reconciliation that you need.

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Alberto Villa, Intermonte SIM S.p.A., Research Division - Head of Analysts Team [8]

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Just a follow up if I -- couple of follow-ups if I may. One quickly on the fintech, is there any -- really any cost that we can assume associated with this, let's say, IT investments in the SG&A going forward? And second one, it's a question related to the 144 people you are -- you have recruited so far this year. If I look at the Slide 21, this makes up for EUR 2.5 billion more or less of assets associated. I was wondering if these assets have already been transferred. So are already in the number of the inflows we have seen at the end of October? Or if these are expected to, let's say, represent the tailwind for the '19 in terms of the following months?

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Sergio Albarelli, Azimut Holding S.p.A. - CEO & Director [9]

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Thank you for that. We're leaving to Alessandro, but here, we're talking about now, I would say, a discussion about how investments and costs should be treated in P&L and statement of accounts.

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Alessandro Zambotti, Azimut Holding S.p.A. - CFO & Director [10]

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Yes. I mean -- yes, we are talking about investments, for sure we are going to see an increase on the amortization cost. So looking back to the P&L as you want to, let's say, have a look, and you want to look forward, for sure, we're going to have an increase in the amortization and as well on personnel SG&A, which is, [let me say], going over. But it's a combination of new investments that we come in and at the same time, setting cost from the actual one that we are putting in place.

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Sergio Albarelli, Azimut Holding S.p.A. - CEO & Director [11]

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And Alberto, apologies, your second question was about?

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Alberto Villa, Intermonte SIM S.p.A., Research Division - Head of Analysts Team [12]

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It was about the 144 recruitment that you had this year. If I look at Slide 21, you detailed also the average asset for the different clusters, and it adds up to around EUR 2.5 billion of assets associated with this new advisers. I was wondering if this amount have already been included in, let say, transferred to Azimut? And so part of the net interest figures we have seen so far this year? Or if part of this amount, significant one, is yet to be included in the net inflows figures?

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Sergio Albarelli, Azimut Holding S.p.A. - CEO & Director [13]

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Well, as you can imagine from what I've told you at the very beginning, a portion of it because this is a picture that we took above the FA in the moment they were hired by Azimut. As you remember, it's a question about timing to bring in the business, for sure. You can allocate into the net flows that you see in 2018 nowadays. The asset that we gain from the acquisition of Sofia. And we're talking about here roughly around 40 different professionals we brought in. So in the numbers, you have, for sure, the assets have immediately came in to Azimut thanks to the acquisition of Sofia SGR.

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Alberto Villa, Intermonte SIM S.p.A., Research Division - Head of Analysts Team [14]

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So we have a few more, I mean, to come in the coming months so this should increase the visibility on net inflows?

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Sergio Albarelli, Azimut Holding S.p.A. - CEO & Director [15]

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If our financial agents will be able to transfer the large majority of their portfolio and obviously, market condition will not deteriorate. Well, obviously, this is a target we are in front of us. Everything is depending, on the one hand side, about the ability in convincing clients. And on the other hand side, the markets will not guide away from where they are today.

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Operator [16]

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The next question is from Elena Perini of Banca IMI.

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Elena Perini, Banca IMI SpA, Research Division - Research Analyst [17]

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I have 3 quick questions. The first one is on your position in Turkey, there has been quite a turmoil in the country. So are you expecting some write-downs? Or some hurt to your business? What are you currently seeing in the country?

Then, I would like to ask you if you can provide us with the performance fees that you recorded on the Italian funds in the fourth quarter last year? And what kind of level would you expect for this year?

And then coming back on the IT investments, I was wondering if you can, at least, provide us with the range of potential expenses in this. You already indicated that we will see an increase in both D&A and G&A, but I would like to ask you if you can provide us at least with a range of the amount of money that we are talking about.

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Sergio Albarelli, Azimut Holding S.p.A. - CEO & Director [18]

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Thank you, Elena. Well, I don't like, but apologies, I need to contradict you because we didn't talk about increasing G&A going forward. We talked about we incurred some expenses and some investments regarding our operations and technology. And that there would be some expenses as well in 2019 in order to materialize and finalize what we're talking about. But not specific -- but not especially business, an increase in G&A, not at all. So let me touch this point. And in quarter 1 and quarter 2, when we're going to have better numbers regarding the overall investment that we came from, but please remember, what Alessandro said before about costs, expenses on the one side and investments on the other hand side because we need to step in with the depreciation and amortization as well. We can be more effective in providing you some information. On the performance fee, let me understand properly your question. It's about the Italian fund?

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Elena Perini, Banca IMI SpA, Research Division - Research Analyst [19]

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Yes. Yes, the Italian funds.

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Sergio Albarelli, Azimut Holding S.p.A. - CEO & Director [20]

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So we're talking about, roughly speaking, EUR 10 million?

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Elena Perini, Banca IMI SpA, Research Division - Research Analyst [21]

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Okay.

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Sergio Albarelli, Azimut Holding S.p.A. - CEO & Director [22]

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Last year. And your first question, apologies ago, vice versa. 3, 2, 1. Turkey. Honestly, despite all what's going on Turkey, i.e. the revolution, the difficulties in the international markets, economic condition, the tariffs and so on and so on, let me use a proxy to describe what's going on over there. If you look at interest rates on deposits, they had a peak during the summer and then gradually, they ran down. All the comments regarding the ability or inability about the new Finance Minister in order to manage what's going on over there was totally dissipated by his speech in Bali, Indonesia a few weeks ago. The guy stood up and made clear what was going on over there, there was no plan about capital control, there was no plan about nationalization or whatever. That said, situation, I didn't say, came back to normality because still lots of eyes are on Turkey, but at least on our side, despite what happened in 2018, our business is fine. Our business is fine. Our assets are off the beginning of the year. Our team over there is stable. We made some selection in order to get rid of non-performing agents inside the organization. Our portfolio manager are confident that things are getting better. And we are there to stay, very simply. I have not the opportunity yet to meet the Finance Minister, there was a meeting planned a few weeks ago, but unfortunately, it was canceled due to a sudden complication on their side in order to prepare the meeting in Bali. But I'm quite confident that they will see the government in Turkey, they will be reconfirming their intention to be a pretty open financial market with no capital control, we've not [feeling] anything about making sure that our operation there is on their sides. So I'm pretty confident over there. And for your information, I traveled to Turkey 3 times in the last few months in order to make sure that everything is up and running totally.

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Operator [23]

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The next question is from Filippo Prini of Kepler.

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Filippo Prini, Kepler Cheuvreux, Research Division - Equity Research Analyst [24]

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I've got 2 questions. The first one is on the financial net worth. I'm seeing that you have recorded more financial advisers [day one, yes,] before even Sofia. So I was wondering if you can guide us to the trend of net payout, the network for the next year, if should assume is just staying stable, 4% to 5% or to be a bit higher.

And the second point is on the -- basically the asset allocation of the client, remember that during previous conference call, you mentioned that you would adjust supply maybe to increase on the longer-term exposure to equity. Given what you present today in a slide, basically in the first slide of private markets on, should the new initiative be regard as to consider a different allocation, so maybe no more increases for equity buyer toward basically these alternative market?

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Sergio Albarelli, Azimut Holding S.p.A. - CEO & Director [25]

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Thank you, Filippo. Well, obviously, longer term, we're talking about more allocation to our product if that's a matter of fact. But it is not supposed to come at the expenses of equity. And even if 10.6% versus previous 10% may sound not, let's say, overly exciting, no need to say, and when I say no need to say, I'm serious about it. If you consider what's going on the market in the last few weeks, months, this level of equity investment prove there are clients out there that are just going to be totally understood and a fully allocation is supposed to be healthier going forward. As much as your question about the payout, no, I don't see, and we are not planning anything different going forward. And even if we have brand-new clients -- sorry, brand-new colleagues fortunately coming from Sofia, they will be adapting to our standard practice. And as of today, our payout is not supposed to come -- sorry, is not supposed to change going forward.

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Filippo Prini, Kepler Cheuvreux, Research Division - Equity Research Analyst [26]

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Very briefly, to be sure to understand, so basically what you're seeing in terms of keeping out the last 2 quarters also with new regulation, should we consider it as sort of figure eight also for...

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Sergio Albarelli, Azimut Holding S.p.A. - CEO & Director [27]

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Absolutely. Absolutely.

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Operator [28]

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The next question is from Federico Braga of UBS.

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Federico Braga, UBS Investment Bank, Research Division - Associate Analyst [29]

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Actually, just one follow-up question for me. Again on Slide 12, please. When you mentioned the new open distribution platform for 2019, can you give us a little bit more color on what you mean by new open distribution platform, it means that you will push more also on your -- you will have your financial advisers also selling third-party distribution funds? And if yes, this will be mainly for those clients on an advisory contracts or in general. If you can give us more color on this aspect as well.

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Sergio Albarelli, Azimut Holding S.p.A. - CEO & Director [30]

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Thank you, Federico. No. No, open distribution platform means the platform itself, it's open, i.e. it's not rigid, and we can plug in any type of supplier or software or operational items that we'd like to. Because for a long time, platforms, especially managing companies like us, has been -- have been pretty rigid. They've been pretty close to the evolution in the market. And that's one of the difficulties when you grow from non-automatized to digitalization. We took intentionally the decision to have an open platform, which means it is based on a technology which is in evolution made by players in the market. And it is not rigid. I'll give you an example. Under the new platform, we can plug in various type of banking providers as an example. Or we can choose one supplier for CRM and 2 months later, change it and then attach a brand new one. We can attach the -- sorry, we can attach facilities in order to, for example, have live chats between clients and agents or between agents providing alert for market situation condition, et cetera, et cetera. So we're not talking about commercial strategies here, we're just talking about the technicalities of the platform. Open distribution platform doesn't mean more third-party funds, it means the opportunity of the platform to bring in different suppliers.

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Operator [31]

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The next question is from Gian Luca Ferrari of Mediobanca.

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Gian Luca Ferrari, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Security Analyst [32]

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Three questions from my side. The first one is on Azimut MAX, which is a solution you had seen since 2014. If I read correctly Page 7, on average, on Azimut MAX, you gained 120 basis points, more or less. Now the question is, are you going to offer Azimut MAX even to clients, I guess, below the EUR 1 million threshold? And this could have a dilutive effect on the overall profitability? Or it will remain at a service or product dedicated to the really high net worth individuals with a negligible dilution to your margins? The second question is if you can give us the net leverage performance of your clients at the end of October.

And the third, I admit I'm a bit confused about your dividend policy now. So we saw last year the EUR 2 dividend, the official guidance is 65%, 75% on the earnings pre-participation capital. So I know we're still in Q3, but in 3 months, we will have the full year '18 rate dividend. What should we expect? We expect the dividend calculated in the 75%, 85% of the earnings per participation capital? Or there is a new guidance?

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Sergio Albarelli, Azimut Holding S.p.A. - CEO & Director [33]

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Thank you, Gian Luca, let me start with your first question about the advisory service, and I think it is a good proposal going down from the EUR 1 million. It makes a lot of sense. Yes, it's a plan that we have in our mind. No need to say, it's the evolution of net worth too and evolution in the market. So even if today, most of the clients, as you can see, not in Azimut but in the market itself are very healthy clients looking to be fee-based type of services. Going forward, this threshold will be lower and lower. Don't get me wrong, it doesn't mean we're going to be like U.K. in a few months, but probably, we're going to see even smaller clients accepting the idea that as well as they pay a doctor to make a visit, they need to pay financial adviser to make some consultancy. Performance of clients, while this is a metric that we do not disclose, it is something that I don't see very frequently in the market. So you will apologize if I'm not alluding to it. And as much as the dividend, I can tell you we see it as republic because what is supposed to be the next dividend for Azimut after a very healthy 2 years. But to be very transparent, I think we going to communicate this going forward with a very nice press statement.

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Operator [34]

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(Operator Instructions) Sergio Albarelli, there are no further questions registered at this time, sir.

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Sergio Albarelli, Azimut Holding S.p.A. - CEO & Director [35]

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Thank you. Thank you very much to not just our friends and colleagues who posed us questions but everybody attending the conference call. Obviously, Victoria and I are more than happy to take more questions and to provide more color, but the numbers, I do believe that today, despite market conditions, the numbers are very good and very strong. And we are well positioned going forward. Thank you very much and a very good evening to everybody. Thank you.

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Operator [36]

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Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.