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Edited Transcript of AZM.MI earnings conference call or presentation 7-Mar-19 10:59am GMT

Full Year 2018 Azimut Holding SpA Earnings Call

Milan Mar 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Azimut Holding SpA earnings conference call or presentation Thursday, March 7, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Alessandro Zambotti

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

* Pietro Giuliani

Azimut Holding S.p.A. - Chairman

* Vittorio Pracca

Azimut Holding S.p.A. - Head of IR

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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

* Giuseppe Mapelli

Equita SIM S.p.A., Research Division - Analyst

* Hubert Lam

BofA Merrill Lynch, Research Division - VP

* Mauro Baragiola

Citigroup Inc, Research Division - MD and Country Analyst

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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 Full Year 2018 Results Conference call. (Operator Instructions)

At this time, I would like to turn the conference over to Mr. Pietro Giuliani, Chairman of Azimut Holding, for some opening remarks. Please go ahead, sir.

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Pietro Giuliani, Azimut Holding S.p.A. - Chairman [2]

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Thank you. Good afternoon to everybody. Thanks for being here. I'd like to provide 4 key remarks today. Before I leave the floor to my colleagues for the formal presentation and Q&A session, I will not participate, well, the 4 key remarks. Number one, dividend. The board decided to propose a DPS of EUR 1.50, about under 40% payout and about 12% as yield.

For the second consecutive year, highest dividend yield amongst FTSE MIB members. Technically, the dividend is based on the previous year's earnings, however, this amount is based on Azimut generating EUR 300 million of net profit in full year 2019, the last of our 5-year business plan, and the only one still not to be achieved by the group.

A DPS of EUR 1.50 over a EUR 300 million profit is perfectly in line with our business plan guidelines. In terms of payout, it's between 60% and 75%. At last, this can provide you the amount of confidence that we all have to achieve EUR 300 million in 2019.

Second key remark, MiFID II still not a major problem in our view, performance would with the key differentiator. Our performance remains well above industry. Almost 5% net of fees to the customer, more than 1.5% above our competitors.

Over the next quarters, you will realize that this will have a limited impact on our results. Even with the latest pricing change, our total expense ratio remains below other key competitors with a significantly higher net performance to clients.

Key remark number three, financial adviser. I'm not seeing at all an issue with certain key financial advisers leaving the company. At the contrary, I see a tangible action of more than 1,200 colleagues buying EUR 100 million worth of Azimut's share in the leverage buyout showing strong sense of commitment, alignment and competitiveness. Anyway, you'll also hear results will be visible over the next quarters.

Last key remarks, number four, replacement of CEO over the next few weeks. Timone Fiduciaria will propose to the AGM a new slate of board members of Azimut Holding, including a new management team. The idea is not to have a traditional single CEO, but more like a team of senior leaders with specific and distinct mandates.

Well, I give the floor to my colleagues for the formal presentation and Q&A session. Vittorio Pracca, our IR, I give the floor to him. So Vittorio, please.

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Vittorio Pracca, Azimut Holding S.p.A. - Head of IR [3]

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Perfect, thank you, Pietro, and good afternoon, everybody. So let me jump in straight in the presentation. As you can see, 2018 results are no big surprise. The results have been widely expected, the financial figures are clearly impacted by what has been a very tough year, but at the same time, there is a few key initiatives that we have already started and already working on in 2019, which we think are meaningful for the equity story of the stock.

So if we look at the financials, and then Alessandro will go through them later with a little bit more detail, in 2018, we closed the year with almost EUR 750 million of revenues, slightly below the previous years.

At EBIT level, the numbers are on EUR 193 million, again, little bit lower than last year, and of course, net profit normalized through following certain IFRS accounting standards, that's, again, we'll go through later, was a little bit lower than 2017, almost entirely due to a significant reduction in variable fees, obviously, related to the market.

Fourth quarter, again, the bottom line was around EUR 22.5 million. This is a normalized number through the IFRS. The revenues were clearly below last year as well and EBIT's around EUR 40 million compared to $79 million of the previous year. Again, this is pretty much entirely due to markets and how the movements went over the last year.

If you look at the inflows and performance. Inflows last year were EUR 4.4 billion, the number is slightly below the previous years, but if you look at it from a net new money growth perspective, we're close to 10%, which is in line with our historic average and in anyways, is a good number considering last year. January and February started off well. We closed around EUR 800 million of net inflows, which we think is good, with a pretty solid contribution that has been consistent in the last year or years actually from our international business.

Looking at performance. Last year was in line with the industry. So nothing great. But in 2019, it is worth highlighting that the performance we are delivering to clients is very positive, where close to 5% net of fees compared to an average Italian industry of about 3.5%. So this has an impact not only on the weighted average performance but also on the performance fees that we're going to go through later on in the presentation.

Looking at the key initiatives we went through at the beginning of this year, I think there is a couple to highlight here at the beginning of the presentation. The first one is on the fee structure. As you remember, in early January, we released a press release, where we are aligning our performance fee methodology in line with the IOSCO principles. This is something that has been an issue and a concern around the company for a long time. We think this is an important move that not only will take away this uncertainty but will also significantly transform our P&L into something that is much more recurring and much more linked to assets and assets growth, rather than market and its volatility.

We have aligned our fixed commission with an additional roughly 50 basis points. This is nothing extraordinary. This is perfectly in line with the Italian market. The total expense ratio remains virtually unchanged and is pretty much in line, if not slightly below, a few of our competitors.

In terms of dividend, as Pietro said at the beginning, we are proposing -- the board is proposing a total dividend of EUR 1.50 per share. This is a significant number compared to the income that we made last year, but considering we are confident in achieving EUR 300 million this year, it's a number that already reflects a company that is running at EUR 300 million net profit per year.

We gave a floor in terms of the cash portion, which is at least 3 quarters, which is going to depend on the treasury shares we have at the moment of the delivery of the dividend, any potential further buybacks as well as how the stock will perform.

This translates into a yield of roughly 12%. It's for the second consecutive year, the highest yield in the FTSE MIB market and the payout that is above 140%. So it's a very generous dividend approach and policy towards shareholders, it's consistent versus the previous years, and we think this is a strong message, again, to the shareholders.

On the following page, you can go through a little bit the achievements and the projects that we've worked on last year. Last year was a particular year, but this didn't mean that the company was not focused on a lot of key initiatives that were completed, both from a corporate point of view and from a business point of view. We started off the year with announcing the big management buyout. A few months later, we completed it in June 2018. During that time, we made a small acquisition in Italy of Sofia SGR, and right after the summer, we kicked off the Azimut Libera Impresa or the private markets and alternatives business, which has already been in place, but we revamped it with a new leadership team and with a new business plan that will be delivered in the next few years.

We launched another private debt fund, which is in line with what we had said before, and there will be new launches already starting from this year.

Later on, we've continued our expansion in Australia. We've increased our presence in the alternatives and innovative strategies in Italy with the acquisition of P&G. And at the beginning of this year, as I said, there was the proposed change to the fee methodology as well as another M&A opportunity in Egypt and the most recent EUR 200 million financing that we closed to have greater flexibility and in order to grasp a good market opportunity in terms of pricing.

On the following page, you can see, I think, what is really the bulk of this presentation and going forward. So what's going to happen in the future. The key priorities are summarized in this slide. So first of all, growth and profits. We're confirming the EUR 300 million net profit for 2019. This looks ambitious, but we are confident that we're working on a lot of practices that will enable us to achieve this challenging but doable goal.

At the same time, in terms of growth, clearly, the international business has been driving a lot of the growth in the past and we believe it's going to continue driving the growth in future.

Just to give you an example, in the past couple of years, the AUM doubled to almost EUR 15 billion, which is equivalent to 28% of our total AUM and it's set to continue growing at a strong pace. Sustainability. Sustainability, for us, is important, because, as I said before, we have changed the fee structure going into something that we think is more sustainable in the future. It's going to be in line -- the methodology will be in line with the IOSCO principles, and this will have an impact in terms of the P&L that we are able to achieve today and the P&L that we can deliver in the future, given it will be much less reliant on the volatility and more on our assets.

Diversification. As we said earlier, the private markets, for us, is an important listing of growth. The EUR 4 billion target is just the beginning. We are working to deliver new funds and new ideas that we can use both for our financial advisers and for our clients, and this is going to be something where we'll give you more color in the future.

And last, but not least, compactness. Because the transaction that was made last year, in a year that was very full of news from a political and macro point of view, is something that is worth highlighting. EUR 100 million worth of shares bought by managers, PMs and advisers, this really shows the compactness and the unity of the group and our colleagues working altogether.

On the following page, a quick view of our evolution of AUM. As you can see, 2018 was essentially flat year-on-year, we delivered a good net new money of EUR 4.4 billion, a lot of it was balanced by performance. But what is important is that 2019 already started off well with a good rebound, both thanks to net inflows as well as market performance.

Last year, the contribution of our international business was virtually all organic, which is, again, another important point. And the weight, as I said before, is close to 30% of our total AUM.

On the asset management section, you can see on page 9, what I briefly discussed before, so the weighted average performance. We are essentially at 5% net of all fees. This is about 150 basis points above the industry. Let's see how it evolves during the year, but it's definitely a good start, and it's a promising start considering how the market ended last year.

On the following couple of pages, the usual breakdowns of AUM. You'll probably see that in the category section, there is no major change compared to the previous quarter. The total equity, clearly, was reduced at the end of December because of the market correction, but I would say, it's understandable and is normal.

In the following page, in terms of equities and fixed income, again, you can see a pretty good diversification across geographies and types of fixed income. North America keeps having a big weight as well as Europe, and the fixed income is also pretty diversified and not too different compared to the previous quarters.

If we pass now on the distribution side. This is, again, our usual slide comparing the Azimut numbers versus the Italian industry. We remained well above the industry in terms of net new money. 2018, of course, there has been a correction for everyone. But again, 2019, if we look at the early numbers we've delivered, we are back up to a significant amount. And I'd like to highlight the average of the past over 10 years, 12% net new money over a period of longer than 10 years is a very significant amount. I don't think, there's a lot of companies in this sector that can continue performing at such a high pace.

On the following page, you can see an idea of the breakdown of our net inflows. We are now a much more global company. So as you can see, the Italian business, of course, remains an important component of the net inflows, and we are looking for this to continue delivering in terms of net inflows going forward. But what is important to highlight is that the 3 main regions were able to deliver a strong amount, strong amount that is almost entirely organic with Americas and within it -- Brazil, that has contributed significantly. Asia-Pacific and within the region, Australia is the largest market, which is also contributing. And EMEA, ex-Italy, which also contributed positively considering that we have both mature markets like Switzerland and Monaco and very emerging markets like in the Middle East and Turkey. But this is definitely a good number that we are proud to show in the presentation.

In the -- in page 15, you can see a quick snapshot on the Italian business. On the Italian business, the result has been very good because we've hired record financial advisers, almost 200 people in total. You can see also an interesting breakdown on the left-hand side that we have continue to hire the traditional financial advisers, the wealth managers with slightly higher portfolio, but we have also expanded into new distribution pots, if I may, which are both banking revolution, so people working in a bank branch as well as millennials, which are going to be important, especially in the future. We have already started this, we're starting to recruit people and this will be important to continue managing the relationship with the clients even in the next generation.

On the financials, I'll pass the word to Alessandro.

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Alessandro Zambotti, Azimut Holding S.p.A. - CFO & Director [4]

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Yes, thank you, Vittorio. Let me start from the bottom line of the income statement.

The consolidated net profit, in my opinion, is EUR 145 million, and excluding the one-off, as mentioned at the beginning of the call, this I would say is the real result of the group today for the full year 2018, because, as you know, starting from beginning of this year, it has been introduced a new accounting principle, the IFRS 9. And as you know, this is the main changes that it's going to have from this new accounting principle, is linked to the fact that the fair value valuation of the investment in funds is booked directly on the P&L side, so not anymore it's in equity. And this is going to directly impact, therefore, our P&L even if the impact is just a note to realize loss.

To me, therefore, we are considering something that today considering the performance of the 2019 and our funds is absolutely totally recovered. So I mean from the 2019, we will have some positive impact from this new accounting principle.

And on the other side, the other element that has been taken into consideration, it's a put option that, again, here the underlying asset is linked let me say, to the market, therefore, with a market that is performing negative in 2018, it has an impact of other EUR 15 million therefore in total EUR 23 million. So going back to the main line of the P&L, the valuation that we have seen in the net profit is EUR 75 million and considering the -- between the adjustment one. So I mean, and following this it's completely explained by the valuation of the valuable fees that compared to last year is EUR 30 million less. Therefore, this is the main reason why we had this 2018 result.

On recurring fees, we are solid. We increased by EUR 22.5 million, this is thanks to the increase of our assets under management within Italy and outside Italy. So at the level of the distribution cost, we are almost in line. We don't see any particular element. This is the result on one side of the new IFRS 15 that give us the possibility to reduce the cost in terms of its amortization. But at the same time, as you know, we are still investing it in recruiting new financial adviser. Therefore, this has been balanced during the year compared to last year.

So at the level of the personnel, general, administrative cost, we have an increase of EUR 25 million, taking here a link to our growth in Italy, to outside Italy and our investment that we are still continuing at the level of the operation.

Following the -- sorry, moving to next page, so the level of the net financial position. So at the end of the year, we are negative by EUR 31 million compared to EUR 135 million of 2017. We have more or less the valuation of EUR 160 million. This is mainly explained and we can reconcile, I would say, the result of this net financial position starting from the cash and cash equivalent that we had at the end of the year 2017. So more or less we have EUR 500 million. Then we increased by the results so, therefore, it's going to consider EUR 145 million because then consistent on what I said before that as the result is not impacted, but it's just an -- a normalized loss and considering that there is no cash flow, of course, so the total cash-in should be EUR 645 million. Now from this amount I should take out the dividend, EUR 131 million, more than EUR 100 million linked to stamp duty and policyholder tax advance, EUR 40 million of buyback and EUR 38 million of M&A. And this is going to give you the results of EUR 323 million of cash and cash equivalent.

I'm going to leave back to Vittorio for the rest of presentation.

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Vittorio Pracca, Azimut Holding S.p.A. - Head of IR [5]

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Okay. Thank you, Alessandro. So on the following page, capital management and returns. On this slide, I think you can see really the consistent growth that the company was able to deliver to shareholders in terms of dividend per share and payout. So especially in the past few years, the company generated a lot of cash, a lot of profit and the good part of it was return to shareholders with another good part of it that was used for investments.

The number that we're proposing this year is, as I said, EUR 1.5 per share. It's a pretty significant amount. As we said, this is based essentially on the company generating EUR 300 million of net profit, which remains our target for this year and remains a target that we are confident that we can achieve.

The cash and shares proportion will be decided in -- before the payment of the dividend, while 3 quarters of it is a floor and at least 3 quarters of it will be paid in cash.

The dividend policy and capital management policy at the moment remain as we have done in the past. So a flexible use of cash in terms of dividend, in terms of buybacks, opportunistically, and of course, maintaining an attractive share return to our shareholders.

On the summary and outlook. We've said it now numerous times in the presentation, so I think it's really clear to you that we're all focused on delivering on this last item of our business plan, which is the net profit.

Year-to-date, we have already cashed in about EUR 20 million of performance fees, which is a good amount considering how the previous quarters have behaved. We'll see how March ends, but we're confident that this can help us in achieving the EUR 300 million net profit target. As we said, the 2019 dividend is already reflecting the EUR 300 million net profit that we are all working on to achieve.

MiFID II, again, as Pietro said at the beginning, there's been a lot of talk about it. The bottom line in our view is that what will be a key differentiator is going to be performance. Performance, where Azimut has historically and even recently delivered significantly higher performance than our competitors.

Year-to-date, we are 150 basis points above the industry. So we are confident that once there will be a level playing field, this will be the key differentiator and this will be really what is going to matter for clients rather than focus on the pure costs, which alone does not mean much.

The new fee structure, this is the other relevant news, as we said at the beginning, we're changing -- we have proposed to the Luxembourg authorities a change in the methodology that will be in line with the IOSCO principles. We are just waiting on the details in order to finalize the exact formula, but the methodology will be in line with the IOSCO and we hope we can hear back soon.

At the same time, the fixed commissions have an average increase of 50 basis points, which, as I said at the beginning, is not a big deal because this brings us perfectly in line with Italian market in terms of pricing, it leaves us virtually unchanged in terms of total expense ratio, and again, considering that we are today delivering almost 5% net of fees, if we're able to continue this way, this will not be an issue in our view.

The conclusion of all of this is that the P&L of the company will now be much more recurring, which will be much more predictable and much less reliant on the volatility of the markets. So this is really a deep change that is going to happen in the numbers of Azimut. But it is important that now the growth of the business is really going to be connected with the assets that we are able to bring in and we are able to continue growing as we have done in the past.

Last points, the key growth areas will remain mostly the international business as well as our expansion into the private markets. These are the 2 components where we think can bring a big contribution to the growth of the group as well as, of course, the Italian business that's continuing to deliver and to consolidate a leading position and our more traditional products that we are working on to continue to deliver.

The new management team, as Pietro said at the beginning, will be proposed shortly to the AGM and you will have more details about that as soon as this has been proposed and announced.

And last but not least, we're working to set an Investor Day in the second half of the year, where we can provide you access to the new management team and a bit more color on what we have been doing with our international business, with our alternatives business and where we see the upcoming future of the company, including the target of EUR 300 million that we are confirming for 2019.

Last page is the usual update on the business plan. There's really not much left, as we said at the beginning, the total assets has been reached, the annual net inflows has been well above the target. The dividend payout is significantly over 60%, 75% range that we had delivered. What is missing is the net profit. We're closing the year with EUR 145 million. It seems big bridge to get to the EUR 300 million, but if you consider the new pricing scheme that we have announced in January, if you consider even, let's say, moderate contribution of performance fee in 2019, if you consider the growth of the international business that is going to provide more and more impact even on a net profit level, and of course, an AUM growth that is reasonable, we are confident that the EUR 300 million can be achieved.

That's it for now. Thank you, and we'll open to Q&A.

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Questions and Answers

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Operator [1]

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

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

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I have got three questions. Firstly, on your EUR 300 million profit target for this year, if you currently look at consensus, it's actually around 25%, 30% below what your target is for this year. Just wondering what you think is the delta between the consensus and -- or what the market thinks and what the EUR 300 million implies? Is it because of higher -- your assumptions for higher performance fees, higher flows, better markets or costs? That's my first question. The second question is on your financial position. You already have a slightly negative financial position at the end of 2018, however, with your higher dividend that you plan on paying out, this will put you further in a negative financial position. How low a financial -- how negative a financial position are you willing to tolerate, just given your guidance for dividend this for year? And the last question is on the commission expense. Your commission expense ratio went up to about 56% on my calculations for the last quarter for -- EUR 87 million for Q4. How should we think about this run rate out of the ratio or the absolute amount going forward? Should it be at about this type of level, just given your outlook on hiring or how should we think about this?

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Vittorio Pracca, Azimut Holding S.p.A. - Head of IR [3]

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Okay, so on the EUR 300 million, I think it's briefly what I was touching on in the last slide. So the recurring component will be meaningful. And probably this is what is still, let's say, estimated in a conservative way, which is fine. But we think that component will be quite meaningful in reaching the EUR 300 million. We're also assuming performance fees that are not exaggeratedly huge. So it's not going to be the differentiating factor. We've got the overseas business that, as we said, we have not provided a lot of details at the moment for the reasons that all of you know very well. But it is also contributing to net profit in 2019. And in general, if you assume a moderate growth in terms of AUM with the new recurring fee scheme and the other things that we touched upon, we're confident that the EUR 300 million can be reached.

On the second one of net financial position, it's -- so the dividend is a big amount, but in reality, as you can see on the net financial position slide, we have more than EUR 300 million cash. We have already closed the new financing of EUR 200 million. So clearly, if you see the payment that will be in the second quarter as of today, it will have a certain impact on your cash flow and on the net financial position. If you see the impact over the year, in 2019, where we are going to generate cash flow in Q1, in Q2, this will help to rebalance the net financial position. So we don't see any particular issue in terms of leverage of the company. We have done in the past that the company was much more leveraged than what it is today. And we have seen that the company has recovered very quickly without any major issue.

On the third question, the distribution cost, so distribution costs were up, but of course, as you have seen, we've hired lots of financial advisers. So this is, let's say, one of the points that should be kept in mind when looking at this number. The year has started off well in terms of recruitment, so we keep on hiring people at a pretty good pace. There's a lot of interest now in joining the company. So we can expect going forward, a distribution cost that is similar to the one that we've seen in Q4 depending on, of course, the opportunity. So if there's opportunities, we'll go for it, and while maintaining a strict recruitment cost that, as you know, is not above the 2%, 2.5%.

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Operator [4]

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The next question is from 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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I've a few questions. The first one is on net inflows after the EUR 800 million you gathered in the first 2 months of the year. I was wondering if you can share with us a target for 2019 in terms on net inflows. And going back to last year net inflows that you show in Slide #14, I was wondering if there is a significant component of institutional money or it's mostly retail, especially for the foreign operations. The second question is on the, let's say, profitability of the assets abroad, now they are almost 30% of your total AUM, it's quite surprising that you have a resilient level of management fee on assets, despite the different composition in terms of geography. So I was wondering if there is really a certain similar level of management fee in any jurisdiction or if there are major differences in profitability in different countries. The second question is on the -- it's more like on the performance fees. Basically two questions. One, if you can tell us how much you cashed in, in the first 2 months of the year, and if you can assume that March could be crucial one for performance fees if markets remain at this level? And the second one, is when there would be the switchover, if you confirm, it will be in June as probably was mentioned in -- when you changed the fee structure? And the last one is, I guess, for Pietro, you announced the intention to propose a different management team, I was wondering if you can share with us what would be your role in this management team in the future if you are going to have specific, let's say, tasks and powers?

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Vittorio Pracca, Azimut Holding S.p.A. - Head of IR [6]

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Okay, thank you, Alberto. So in terms of net inflows, I think the target that we have in mind for this year, it's of course very early to say, but we're aiming to achieve at least the same number that we have achieved last year. So north of EUR 4.4 billion. In terms of the second question on the foreign contribution of inflows, the answer is, no, in the sense that there's not a lot of contribution from institutional. We have institutional clients, but it remains a minority of the business and this was also reflected in the inflows numbers in Italy and outside of Italy.

In terms of the profitability and management fees, so I understand the questions, but it's difficult to give an answer because we're present in many markets with different clients and with different type of presence. In some markets, we have distribution, in others, asset management and several clients within each of these markets. So in general, if you take similar products so mutual funds with retail clients as we have in Italy, there can be a similar marginality also abroad. Of course, different products and different clients will have a slightly different management fee and margin. But overall, as you said, I think what is important is that even in Q4, the management fee and margin remained in line and this is what we are working on, of course, even in the future.

Performance fees, January and February was about EUR 20 million. And yes, if March remains at these levels, it can be a significant amount. So this would be, of course, quite important as well as going forward in the next few months. The new performance fee methodology, we have submitted it to the Luxembourg authorities, so we are waiting to hear back. We don't -- they haven't told us a specific deadline as by when they will get back to us, but it can probably be over the next few months. We are waiting to hear from them.

On the last question of Pietro, Pietro is non-Executive Chairman, and our understanding is that he will remain as non-Executive Chairman going forward even in the new management team.

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Operator [7]

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The next question is from Giuseppe Mapelli of Equita.

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Giuseppe Mapelli, Equita SIM S.p.A., Research Division - Analyst [8]

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I have some questions. The first one is on management fees. The new pricing, is it right to say that the new pricing will start from March full steam? That's the first question. The second question is on performance fees. You gave us some color on the new methodology, I would like to understand if you backtest the new methodology on previous years and you can share with us what these results and the percentage of performance fees that you would have cashed in, for example, in '17 and '18, assuming the new scheme of performance? And my last question, I understood that IFRS 9 is impacting you at P&L level, are you projecting a change in the treatment of this balance in order to avoid this impact at P&L.? And if these, when these could be applied?

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Vittorio Pracca, Azimut Holding S.p.A. - Head of IR [9]

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Okay, thank you. So in terms of management fees, actually, the change was from mid-February. So it will impact essentially half of the first quarter and almost the entire 2019. In terms of performance fee, so it's a little bit difficult for us to provide you a formal guidance on this. It's a little bit early, and especially we are waiting to define the actual formula with the Luxembourg authorities. So based on that, once we have the formal and complete answer, we can provide you with some guidance. But clearly, it will be an amount that will be significantly less than what we have done in the past with the current mechanism.

In terms of the last question, maybe Alessandro...

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

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Yes, regarding the new accounting principle, I mean, to be honest, I would say that there is already a rumor on the market that something could change again in this principle, by the way, we will not do, let me say, the EUR 300 million considering the effect of -- so on the P&L side of this valuation. So basically -- so I think that it's better to focus on the recurring fees, the growth that we are putting on the markets, which, I mean, for sure, which will be positive for the 2019 without considering the effect of the IFRS.

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Giuseppe Mapelli, Equita SIM S.p.A., Research Division - Analyst [11]

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Okay. And just a follow-up, is it right to assume that up until there would be the reply from authorities in Luxembourg, you're going to apply the previous valuable management fees calculation scheme?

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Vittorio Pracca, Azimut Holding S.p.A. - Head of IR [12]

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Yes, that's correct.

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Operator [13]

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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 [14]

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I've got four questions. The first one is a follow-up on your target for 2019 in terms on net inflows. As you mentioned, the EUR 4.4 billion, but the EUR 4.4 billion of 2018 also included the acquisition of Sofia SGR. So I would like to know if we can think about EUR 3.5 billion, which was the normalized level more or less for the last year? Then the second question is on the new financing from Banco BPM. You mentioned that you signed it to have greater flexibility, so I would like you if it's possible to add some more color? Do you want to go on, on the expansion abroad, and then in which countries? And then about the international business, when you mentioned that you will give us more color on your business abroad in the Investor Day, shall we be able to have also P&L for regions? And are you really working on it? And then finally, I was wondering if you can provide us with the amount of performance fees that you recorded in 2018 on Italian funds and on the international business?

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Vittorio Pracca, Azimut Holding S.p.A. - Head of IR [15]

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Okay. So on the first question of the inflows, I mean, Sofia was an acquisition but it was less than EUR 1 billion. But in any case, the target of at least EUR 4.4 billion remains. So it's not EUR 3.5 billion, but it's EUR 4.4 billion and north of that amount for 2019.

For what regard to the financing, I mean, in general, as we said in the press release, it's general purposes, more flexibility, this can mean potential investments, potential M&A opportunities, buybacks, dividends, any type of use of cash. We wanted to have a broad flexibility and get this done in a favorable market condition. So there isn't a specific aim for it, but it's in general to have greater flexibilities on all of these items.

For what regards to the Investor Day, you're going to get a bit of a clearer idea later on, but in general, I think the point shouldn't be on separate P&L of specific countries or areas, I think what will be important to show you is what we have tried to achieve, what we have done at the beginning, what has been done in these years and where we are now, where we would like to go, so we'll try to provide you a broader view of where we see the business is going and what we have done in order to achieve this. But again, we'll put together a schedule, which we're sure that will make it very interesting from your point of view, both on the international and the private markets, and in general, on the new management team that will step in going forward.

The last question, I think, was some performance fee in Italy. In Italian funds, it was virtually 0. Clearly, December was heavy, very negative, and as you know, it's one time per year at the end of December. So it was essentially 0 -- and 0. That's it I think, right?

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Elena Perini, Banca IMI SpA, Research Division - Research Analyst [16]

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Yes, well, on the international business, because you had, for example, a significant amount of performance fees from Brazil in the second quarter. So I was wondering if you can provide us with the total amount of performance fees coming from the foreign business in 2018.

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Vittorio Pracca, Azimut Holding S.p.A. - Head of IR [17]

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Well, look, so if you look at the performance fee overall, we're talking about something around 14 basis points. Of that, there was a contribution from the foreign operations. It wasn't the majority, but it was a contribution. But we have not yet provided the detailed breakdown.

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Operator [18]

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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 [19]

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I have four questions as well, if you don't mind. The first one is on recruiting, excluding the 40 financial advisers of Sofia, you're recruiting 160 new financial advisers last year, I was wondering if you could tell us what was the contribution of these recruited financial advisers to your AUM last year, and more importantly, what do you expect to be the contribution of these hirings in 2019? The second question again on financial advisers, excluding the 40 financial advisers acquired with Sofia, we are talking about 160, but your net number of financial advisers increased by only 70 people, and in Q4, the churn rate of your financial advisers increased quite significantly to about 8% on an annual basis. So I was wondering to what extent these financial advisers were asked to leave or if there was any specific reason why the number of financial advisers leaving Azimut increased? And more importantly, also, how much -- how many assets these financial advisers that left in 2018 had? The third question is on February flows, if you can give us please a mix between Italy and international contribution, if possible? And the last question is that if you already know if you can already share with us how much of your 2018 profit will be paid as a profit participating instrument if we can expect a percentage in line with last year's around 14% or 15%.

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Vittorio Pracca, Azimut Holding S.p.A. - Head of IR [20]

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Okay. So on the first question of recruiting. So you are correct, if you take away the 40, it's around 160. The contribution was fairly limited, it was about EUR 0.5 billion from the new recruits and the rest being organic.

On the second question, in terms of...

(technical difficulty)

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Vittorio Pracca, Azimut Holding S.p.A. - Head of IR [21]

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Okay, perfect, we had a small technical problem. So did you hear the first answer?

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Federico Braga, UBS Investment Bank, Research Division - Associate Analyst [22]

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Just, I mean, you said EUR 0.5 billion contribution from 2018 and then I don't know if you wanted to say anything also on 2019, maybe the contribution that you expect for this year?

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Vittorio Pracca, Azimut Holding S.p.A. - Head of IR [23]

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No. On 2019, we have not broken down the amount coming from recruitment and from organic. It will be, of course, an important contribution because of the hiring, but at the same time, the existing advisers are also raising new assets. So it's a bit early to say, but it will be a contribution from both. In terms of churn and the net number, so what I was saying before is that it's quite normal in the business that you have a certain level of churn rate, especially for advisers that reach a certain age. So what has been traditionally the case for Azimut is that and you can see it also in the numbers is that the bulk of the people leaving are the ones retiring. And we have been trying to work on this by recruiting the millennials that can gradually work together with more senior financial advisers and take over the portfolio. In fact, we've not seen any meaningful outflows related to people leaving the company. And so this is quite an important figure that we have traditionally never had. As you know, all financial advisers are shareholders in the company, even when they leave, they remain a shareholder. So traditionally, there has not been a direct correlation between people leaving and outflows. So this has been the case and in it's no major impact on the actual AUM.

In terms of February flows, it's been slightly skewed towards our international business, so a ballpark figure can be around 2/3 international, 1/3 Italy. And the last question was on -- I'm sorry, the preferred dividend. The preferred dividends will be in the region of EUR 17 million, EUR 18 million.

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Alessandro Zambotti, Azimut Holding S.p.A. - CFO & Director [24]

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The same percentage as last year.

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Operator [25]

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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 [26]

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I have got 3 questions. The first one is on the G&A cost, if you can give us an indication for 2019 on this metric that exceeded EUR 200 million last year? The second one is, it's possible the clarification of new performance fee, I assume that, that would be a result of 1 year, 1-year length, could you give us now that your proposal implied at the starting point calculated 1 year will be in July, basically when the new performance will be active and not will be the beginning of the year. And last question on the new pricing of recurring fee on the Luxembourg fund. If you can share with us the feedback of the client that been notified this new pricing and so basically there have been some particular feedback from the client?

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Vittorio Pracca, Azimut Holding S.p.A. - Head of IR [27]

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Okay, thank you, Filippo. So on the SG&A question, yes, last year was around EUR 50 million per quarter. What we are doing today is we are working on a number of efforts and initiatives to, let me say, limit in some ways, reduce the SG&A cost going forward. But these initiatives are medium, long term. So there won't be any significant impact in the short term, although, the company is working on a number of efforts that should be able to keep a reasonable amount in this cost item. And probably, we can give you more color in future on this, but at the moment, this is what we are working on. In the short term, it's difficult to say. So as you know, we are a very active company in terms of investments, in terms of growth opportunity. So if you see the business as it is today, there shouldn't be any reason why the SG&A cost would jump at a significantly higher number versus what we are today. Of course, if there's any opportunities to invest that can be -- that has a broader meaning both in terms of acquisitions, in terms of new initiatives, in terms of IT, this can have an impact. But it will be opportunistic and selective. The last question on the clients. No, there has not been any particular feedback. The client mood year-to-date is pretty positive, they're enjoying very strong rebound of basically 5% net of all fees. So the cost has not been an issue and has not been a part of the discussions, we are doing through our financial advisers.

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Operator [28]

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The next question is from Mauro Baragiola of Citigroup.

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Mauro Baragiola, Citigroup Inc, Research Division - MD and Country Analyst [29]

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A very few questions just to verify that I understood correctly. Talking about the inflow, in Italy, last year, it was EUR 1.9 billion. If you take out Sofia, which is EUR 950 million, more or less is EUR 1 billion. Of this, EUR 1 billion, roughly if I understood correctly, EUR 500 million comes from new recruitment. So it's fair to say that the EUR 1,600 million the 38 financial advisers of December '17 raised EUR 500 million altogether in Italy in a year time. That's the first question. The second question, the inflows abroad remained pretty strong, but still are organically below those of 2017. Can you tell us where are you much happier on the results? And also, on South America, can you provide an idea of what was the net service performance for the clients there? The last question, if I may, we clearly, everybody in this call hopes that the markets are going to be strong in 2019 so that we can all benefit from that. But assuming markets turn negative ahead in the year, given the commitment that you have on the dividend, would you consider to sell the cash if you need to liquidate the cash and equivalents? Or would you consider to go to a higher gearing than the current one?

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Vittorio Pracca, Azimut Holding S.p.A. - Head of IR [30]

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Okay, thank you, Mauro. So on the first question, I mean, if you take the analysis that you made, of course, from a number of point of view, there is nothing much to add, but I think it's important to consider the context in which the year was completed. So the entire industry suffers significantly and big outflows, the performance of the industry was more than minus 6% net. So it was a challenging year for the entire industry and for us as well being part of the industry. Our advisers still were able to make positive net inflows, and you also should consider that Azimut products are not similar to what can be the ones of our competitors that offer may be banking-like and deposit-like solutions for clients that maybe show a big number in terms of inflows, but then if you look at it from a profitability point of view and transformation point of view and to manage the assets, it's very, very different. So Azimut is an asset management company, we are focused on a certain amount of solutions for clients, and it reflects the year and the industry that we have lived last year. On the third question on Brazil. Do you mind, sorry, repeating it?

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Mauro Baragiola, Citigroup Inc, Research Division - MD and Country Analyst [31]

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Yes, no, Brazil last year was -- Americas was EUR 1.7 billion organic inflows, this year it's EUR 1.6 billion. Nonetheless, it's 36% of the inflows in -- the organic inflows of international operation this year. So I wonder, if we can have more granularity over these South American now, Americas now? And in particular, on Brazil, if it's possible to have the net average performance for clients as a [manual] deal in Brazil? As you shared on Page 9 for Italy for the first 2 months of this year, it will be great, honestly, if you could add the same slide also for 2017 for -- sorry, for 2018 for the markets where you compete to understand why, given that you say that it's all about alpha to understand how you generate alpha last year over the globe.

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Vittorio Pracca, Azimut Holding S.p.A. - Head of IR [32]

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Okay. Thank you, Mauro. So Brazil is for sure a success story for us because the market has increased significantly, especially in the last couple of years. To give you an idea, the Brazilian business today has about EUR 4.5 billion of AUM, and so it's really the second, actually, probably market outside of Italy.

In terms of performance, so the granularity and further details, maybe we can provide at a later stage in the Investor Day, but the Brazilian portfolio management team is really excellent in the sense that all of the funds that they manage down there are first or maximum second quartile. They are 5 star, Morningstar, so the both the equity and fixed income team have been doing really a great job and they are very well reputed locally from the local community. And the funds there are sold both through an in-house distribution network as well as through third parties. So we have different channels where we are selling the funds. And in some situations, we also had to close certain funds because of the sales and the strong increase there was from certain investors locally.

Just as a color, the amount that was sold through third-party channels was over EUR 1 billion. So it's a pretty meaningful amount.

Yes, the last question, so in terms of the dividend and the flexibility in case markets turn, I think, so we are ready even in case of the market turn because we have provided a floor in terms of the dividend for 2019, the treasury component will be based on a number of factors including markets and volatility. But in any case, we have quite a lot of cash and cash equivalents today. We've raised the new financing that does not have any, let's say, is not already invested into certain securities or certain other commitments that we have. So we do have flexibility even in case of a market downturn.

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Mauro Baragiola, Citigroup Inc, Research Division - MD and Country Analyst [33]

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Can we have more granularity on what is -- because if I read your financial accounts, there is only very generic information on the funds in which Azimut has invested? Can we have an idea if there are -- what kind of funds or whatever are these equivalents?

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Vittorio Pracca, Azimut Holding S.p.A. - Head of IR [34]

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But you can consider that around EUR 170 million roughly is invested in our own funds.

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Mauro Baragiola, Citigroup Inc, Research Division - MD and Country Analyst [35]

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I'm sorry, what kind of profile, it's equity, it's fixed income, it's monetary funds?

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Vittorio Pracca, Azimut Holding S.p.A. - Head of IR [36]

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It's a mix. Of course, it's propriety cash so it's a diversified mix in order to have a proper exposure.

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Mauro Baragiola, Citigroup Inc, Research Division - MD and Country Analyst [37]

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And the EUR 23 million net financial income or the income statement I should suppose, mostly it's related to losses in the funds, I'm correct?

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Vittorio Pracca, Azimut Holding S.p.A. - Head of IR [38]

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A part of it, for sure.

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Mauro Baragiola, Citigroup Inc, Research Division - MD and Country Analyst [39]

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Okay, how big is possible to know? Because last year was EUR 40 million, right?

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Vittorio Pracca, Azimut Holding S.p.A. - Head of IR [40]

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Yes, like Alessandro said earlier, it's around EUR 8 million.

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Mauro Baragiola, Citigroup Inc, Research Division - MD and Country Analyst [41]

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Up EUR 8 million of EUR 23 million and the remaining EUR 23 million, if I may, sorry, I know that it's not a question for the Q&A, so if we can speak if you want but it will be grateful if you can provide the detail apart.

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Vittorio Pracca, Azimut Holding S.p.A. - Head of IR [42]

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Okay, Mauro, if you want, we can touch base later on this. But it was the -- of non-realized, so if you consider the same exercise done today, the effect would be essentially 0.

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Operator [43]

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

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Vittorio Pracca, Azimut Holding S.p.A. - Head of IR [44]

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Perfect. Thank you very much to everyone, and of course, we're available if you have any follow-ups later on. Thank you.