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Good afternoon, ladies and gentlemen, and welcome to Deutsche Börse AG Analyst and Investor Conference Call regarding the Q2 2019 Results. [Operator Instructions] Let me now hand the floor over to Mr. Jan Strecker.
Welcome, ladies and gentlemen, and thank you for joining us today to go through our second quarter 2019 results. With me are Theodor Weimer, CEO; and Gregor Pottmeyer, CFO. Theodor and Gregor will take you through the presentation today. And after the presentation, we will the happy to take your questions. The presentation materials for this call has been sent out via e-mail and can also be downloaded from the IR section of our website. As usual, this conference call will be recorded and is available for replay. Let me now hand over to you, Theodor.
Thank you, Jan. Welcome, ladies and gentlemen. Let me start with a short summary, as always, about the highlights of the reporting period Q2 afterwards Gregor then will present the results in greater detail. The favorable development of Deutsche Börse in line with our strategic plan also continued in the second quarter. We achieved a 6% increase of net revenue, which was primarily driven by our secular growth initiatives. Of particular note, we increased net revenues from EurexOTC Clearing business as well as product innovation in the Eurex segment. In addition, our commodities business, EEX, continued to develop extremely well. Market shares, both in Europe and in the United States, are meanwhile on record levels. Meanwhile, the cyclical development remained moderate across the group. While the higher U.S. interest rate level has supported a net interest income from banking business at the Clearstream. We saw some headwinds from lower market volatility compared to a strong development in 2018. Our adjusted operating cost increased on a non-GAAP basis by 4%, this is fully in line with our expectation and reflects, on the one hand, organic growth investments, new technology trends such as blockchain in the public cloud as well as regulatory initiatives. On the other hand, it results from our efficient management of operating cost and our endeavors to further leverage the scalability of our business model. As a result, our adjusted net profit increased by 10%. The results for the first half of 2019 confirm the sustained growth trajectory of Deutsche Börse. Therefore, we are confident to reach our targets of at least 5% secular growth of net revenues and around 10% growth of the adjusted net profit for the full year 2019. Apart from these more than satisfying financial results, is I think we made further progress in implementing our strategic plan in the second quarter. Our efforts aimed at closing the Axioma transaction have made excellent progress. We now have all the necessary approvals from the relevant authorities. Closing of the transaction is expected towards the end of the third quarter. As you're well aware, by mid of April, we disclosed that we are in negotiations with Refinitiv concerning the potential purchase of certain FX businesses. The negotiations and the assessments of the potential transactions are still ongoing and we need to be diligent. Please bear with me that we cannot comment upon this process any further, especially not on the potential time line. If I take a step back and look at the first half of our midterm planning period from 2018 to 2020, I think it is fair to say that we have made very good progress in implementing our strategy and are fully in line with our financial targets for the year 2020. We exceeded our midterm organic growth targets in 2018 through a combination of a strong secular growth and cyclical tailwind. In 2019, we have been well on track to deliver upon our guidance despite some cyclical headwinds. After we completed attractive smaller bolt-on acquisitions in 2018, our M&A focus in 2019 is on larger transactions to gain further scale. The Axioma acquisition is one example, but others will hopefully follow. Our main focus in technology is currently on distributed ledger technology and the adoption of public cloud services for our regulated businesses. In both areas, we've made good progress since last year. The Structural Performance Improvement Programme, SPIP, we initiated last year with the objective of increasing our cost flexibility, has largely been implemented. The ramp-up of the savings is faster than expected and the total savings are somewhat above our originally estimated EUR 100 million. With this, we're confident that we can continue to deliver on our promises. Let me now hand over to Gregor to present financials in more detail.
Thank you, Theodor. Let me start with the group financials on Page 2. In the second quarter, Deutsche Börse achieved net revenue and earnings growth rates slightly above the first quarter, even though, the environment continues to be not particularly easy. Net revenue increased by 6%, EUR 725 million, to which net interest income contributed EUR 67 million. As we mentioned in the first quarter call, the implementation of IFRS 16 presided in some shifts from operating expenses to depreciation. We adjusted the previous year's numbers in the presentation to ensure a like-for-like comparability. Operating expenses amounted to EUR 260 million in the second quarter. They were adjusted for around EUR 32 million in terms of exceptional items relating to restructuring initiatives and M&A expenses. This also includes some cost for legal advice in relation to the Axioma transaction, which has not been considered in our guidance so far. To fully reflect the Axioma transaction, we increased our guidance for exceptional cost for the full year by EUR 20 million to EUR 120 million. The EBITDA increased in line with net revenue and operating expense development by 6%. The financial result includes a positive one-off effect from a partial reversal of interest rate provisions for potential tax payments of around EUR 5 million. In combination with the lower tax rate of 26%, the adjusted net profit increased by 10% and reached EUR 288 million. Let us now turn to the quarterly results of the segments, beginning with Eurex on Page 3. The development of Eurex in the second quarter was driven by secular growth in net revenue, from OTC clearing as well as new products. This overcompensated the cyclical headwind that remains, for example, in interest rate derivatives, especially against the strong 2018. This leads to 1% net revenue growth and 3% growth in adjusted EBITDA. Page 4 shows the outstanding development of our commodity business EEX, which achieved an increase of net revenue by 17%. Net revenue growth was mainly driven by power derivatives, which were significantly above the previous year, mainly due to the good performance of the Phelix DE futures and as a consequence a considerable gain in market share within Europe. Moreover, the U.S. power derivatives business at Nodal Exchange continued to grow significantly. Higher volumes made an important contribution to net revenue growth. They were mainly driven by higher market share but also by increased overall market volumes. At the end of June, Nodal achieved a spectacular 39% market share in power derivatives open interest in the U.S. As a result, the adjusted EBITDA of EEX improved by 24% and reached EUR 35 million. Let me turn to Page 5 and the FX business. 360T net revenue saw an increase by 18% to EUR 22 million. This was mainly driven by consolidation effects of GTX ECN. Adjusted by this effect, 360T still grew by 4%. It's worth mentioning that June has been a record month for 360T. We achieved the highest average daily volumes ever seen at 360T. Adjusted EBITDA increased 12% and amounted to EUR 10 million. [ Xetra's ] development was mainly driven by lower equity market volatility and muted trading activities. So much for the bad news. But there are good news as well. Xetra was able to further expand its market position for equity trading in DAX [ stocks ] and reached 70% market share amongst regulated markets. This proves that we have not only successfully defended our function as a key market for German stocks, but have even considerably enhanced it. All in all, Xetra net revenue stood at EUR 55 million and adjusted EBITDA at EUR 33 million. Our post-trading segment, Clearstream, was mainly driven by growth of the net interest income. Higher U.S. interest rates and increased U.S. dollar balances resulted in a net interest income of EUR 51 million. The favorable development of Clearstream's core business, including settlement and custody, was partially offset by a declining net revenue from third-party services, as we decided to discontinue this non-core business. In total, net revenue in the Clearstream segment was up by 8% and reached a EUR 196 million. Adjusted EBITDA stood at EUR 131 million, which corresponds to an increase of 15%. The Investment Funds Services segments, which you find on Page 8, shows a sound increase of net revenue by 16% and achieved EUR 44 million. This was mainly driven by the consolidation of the Swisscanto Funds Centre in the fourth quarter last year. The business has now been fully integrated into Clearstream and operates under the brand Clearstream Fund Desk. But even though equity trading activity was weaker in the second quarter, both settlement transactions and assets under custody in investment funds increased against the previous year. Adjusted EBITDA grew by 21% and reached EUR 21 million. While market conditions in the Global Securities Financing business remained challenging because of lower interest rates, volumes and net revenue from collateral management services improved slightly in the second quarter. This was offset by a decline in securities lending business, which reflects a lower market demand for such services. As a consequence, adjusted EBITDA declined to EUR 10 million. The weaker equity market environment and outflows out of European equities also adversely affected our index business stocks. While new contracts in the other licenses line item helped to overcompensate this effect, our net revenue remained more or less stable with an increase of 2%. Year-over-year the adjusted EBITDA stood at EUR 23 million. The data segment profited from slight growth in every line item amongst others because of new product such as regulatory reporting services and pricing measures. The number of subscriptions, unfortunately is not the best business indicator anymore. As we are seeing a trend towards higher price, non-display data subscriptions used by automated trading systems. Net revenue in data grew by 7% and achieved EUR 41 million, while EBITDA stood at EUR 27 million. On Page 12, I would like to put the Q2 results into the context of the first half year of 2019. The slightly better net revenue growth rate in the second quarter has helped to achieve net revenue growth of 5% during the first 6 months of the year, which is essentially all driven by secular growth. Adjusted operating cost increased by 3% and reached EUR 509 million as a consequence of higher investments. However, these were partially offset by cost savings, resulting from our Structural Performance Improvement Programme. In total, adjusted net profit increased by 9% to EUR 580 million. This is very much in line with our forecast for the full year. On Slide 13, we provide you with an overview of the 3 components of net revenue growth for the first 6 months of 2019. Compared to the previous year, secular growth being the key component of our strategy to increase net revenue has developed very well. The increase of 5%, respectively, EUR 65 million, was mainly driven by Eurex and EEX, but 360T, STOXX and IFS contributed as well. As expected at the beginning of the year, the market environment developed in a slightly more muted rate compared to 2018. This was mainly due to lower market volatility. Contribution from higher U.S. interest rates only partially compensated this effect. Consolidation effects resulted in further net revenue growth by altogether EUR 13 million. But the discontinuation of the third-party services at Clearstream had a negative effect on net revenue, which amounted to roughly EUR 6 million. Adjusted operating cost, shown on Page 14, increased in the first half of 2019 as planned, by around 3% and reached EUR 509 million. This includes inflationary pressure in staff and other operating expenses. However, this was largely offset by lower provisions for variable and share-based compensation. Savings from the Structural Performance Improvement Programme made an important contribution to fund investments in growth initiatives, new technology and regulations. Net investments grew by EUR 8 million. Furthermore, consolidation effects from M&A activities resulted in an increase of operating cost by EUR 5 million. This concludes our presentation. Thank you for your attention. We are now looking forward to your questions.
[Operator Instructions] And the first question comes from Chris Turner, Berenberg.
It's Chris Turner from Berenberg. Just a short question from me. Given that you can raise debt at less than 2%, your shares have an earning of less than 5%, are you tempted to lower that 10% return on invested capital target for M&A?
No. We have clearly stated our financial targets for M&A transaction and we clearly said we want to be that in the first year to be cash earnings accretive and latest after 3 years. And with regard to the return on invested capital number, our targeted number is unchanged, 10%.
And that's 10% within 5 years?
Yes. And that's a range over the next 5 years, right.
The next question comes from Mike Werner, UBS.
Just a couple of questions on my behalf. We saw a pretty healthy uptick or a sizable uptick in equity index pricing on the Futures, especially given the relatively good volumes that we saw in the quarter. I was just wondering what drove that. Was that a mix effect? And then 2 quick questions here. On Clearstream, we saw other revenues grow by about 20%, about EUR 4 million year-on-year. I was just wondering what's in that other revenue bucket and was any of that related to consolidation? And then finally, with regards to the third-party services in Clearstream, and as you expect to kind of relinquish that business, should we expect those revenues to trend to 0? And are there any expense off-sets on that?
Yes. Okay. So starting with the 3 questions. So the equity index pricing, yes, there's, on the one hand side, a product mix, as for instance, so dividend derivatives is a positive so it was a higher margin end product, so we saw some positive development here. So it's a kind of product mix. But we have also seen some pricing impact out of measures we already did in 2018, where you see now also a positive catch-up effect here. Second question, with regard to Clearstream other revenues, this increase. Yes, our basic strategy and idea is that we bring additional services to our customers like reporting services, tech services, also connectivity elements are included here. So that's the kind of what we -- from a strategic perspective we would expect that this approach will continue. Third. Third-party services, yes, we made the decision to discontinue that kind of business. And that will keep on for the next 18 months, so it will go down to 0.
And then any guidance on the potential expense offset as you discontinue that business, or if there is any?
Yes. There is also some cost reduction element in it and it will take over time. So there are immediately some cost savings, but there are some [ remnant ] costs that we have to work on, on that topic. So overall, I would expect that we can more than 50% cover off the cost what we had before.
The next question comes from Gurjit Kambo with JPMorgan.
Just one question on the interest rate environment. So clearly, it feels like it's more of a risk that rates may move down, maybe in the second half of the year. Just -- can you help us understand the sort of effect of the declining interest rates. It feels like there's a lag effect in both rising and declining interest rates. So just how to think about that, if let's say there was a rate cut at the end of this quarter?
Yes. So I would assume that you would refer to the Fed, or let's start with the Fed and then I can answer [ EFPP ]. With regard to the Fed U.S. rate, yes there's an expectation of the market that the Fed will do a rate decrease maybe one step or potentially a second step until year-end. So with regard to our NII, so net interest income on Clearstream, so you could calculate from a -- with some 25 basis points translate into some EUR 15 million less net interest income. So 25 basis points x EUR 6 billion cash dollar balances. So that's roughly the impact here. On the Euro side, another rate decrease would not impact our NII as it's already a negative number and we just charge the additional cost to the customer. So there wouldn't be any negative impact. With regard to our fixed income product, obviously, that could potentially help for these products if there is more volatility in that area and some speculation has it now 1 or 2 cards or whatever happens here. So potentially, there should be some positive element for us, and if I look on our development in July, so the fixed-income products, so they are currently 25% above previous year. So not sure whether that -- this will continue but here you see there's a higher volatility at least in July.
Just quick follow-up. So on the EUR 7.9 billion of cash balances in dollars, in terms of how quickly does the effect come through? Is there a -- it feels like it was a lag effect on the way up. Is there a similar impact on the way down?
No. It will happen very, very fast.
The next question comes from Johannes Thormann, HSBC.
Three questions from my side, please. First of all, just to follow-up on the impact of Brexit. When you said last Investor Day 2018 that you expect a positive impact on Clearstream, we still don't see anything. Any guidance or ideas when this might come or is this anyway a gone and a missed opportunity? And secondly, just looking at your big rise in cash balances versus -- probably normally this goes in line with the -- more with the balance sheet size and now we have a slightly different move. What is driving this significant rise in cash balances? And last but not least it would be great if you could remind us for the P&L impact for -- of the Axioma deal and the Ausmaq deal, what is coming in this year?
Okay. So let's start with the Brexit topic. So positive impact on Clearstream, I didn't think that it had that. So Brexit is more a topic with regard to our euro clearing initiatives so -- where some uncertainty in the market, so what could happen here. And therefore, we think there could be potentially positive impact on our euro clearing initiatives. With regard to Brexit, what we communicated was that Brexit has, for our customers, for paying a higher priority to be prepared and therefore that was one of the reasons why we had some negative impacts in -- at Clearstream with regard to our target to securities implementation. And therefore, that was one of the reasons why we set this target to securities secular growth opportunity, there's some delay to Brexit. So that's our view on Brexit. With regard to the cash balances, unchanged. The main driver are the settlement activity. And when you see an increase in settlement activities and proportionally, you should see a cash balance increase. And indeed the settlement activities increased and as a consequence, cash balances also increased. Third, P&L impact Axioma and Ausmaq. So Ausmaq is not really a material impact here. It's a small transaction with a low double-digit investment we did. With regard to Axioma, so here we expect closing in Q3 this year. But I would not expect big impact out of that acquisition as it would just be a few months until now, on the revenue impact, for instance. So we gave some guidance that the annual contracted volume is around EUR 100 million -- or USD 100 million and -- but this won't be shown fully in the P&L as you have to do some adjustments here. So there are some positive impact on top line, obviously. But on bottom line, I wouldn't see a big material impact here.
The next question comes from [indiscernible].
I've got a question on OpEx and a follow-up on third-party services. Firstly on OpEx, so if I include back depreciation and amortization, it looks like you've grown costs including G&A by 2.5% in H1. At the time of Investor Day, you were saying that you would be happy to sacrifice some EBITDA margin to try and get some growth. So I'm wondering how we should be thinking about costs, including G&A going in H2? Are you growing at a 3% rate from here? And how should we think about cost looking forward because from your investments in technology, it sounds like this is going to go on for a bit. So if you can just clear up a bit on the cost guidance, that would be helpful. And secondly, on third-party services, so from the presentation and Mike's question, it sounded like that business line is still profitable today. So could you indicate what's happening? Why it's being shut down?
Okay. Starting with third question, third-party services. So we made the decision last year to close it because: first, what kind of business are we talking about. So it was some very specific outsourcing business in the Luxembourg market where we did some outsourcing, IT outsourcing element to banks in Luxembourg. And when we looked at it we said, it's not a strategic element for us or best for us. And secondly, the margin we get out of that business was not as we had expected. So from a strategic financial perspective those were 2 reasons. With regard to your first question, OpEx. So we do not give precise OpEx guidance. So we say, overall, we give a clear guidance with regard to our revenues and specifically with regard to our secular growth, where we say we want to increase our net revenues by secular growth element by at least 5%. So we are right on track here. In addition, we say we want to achieve net earnings growth of 10%. So therefore, the cross -- in between, here you see that we make sure that the scalability works. So our intention is unchanged, that the cost increase should be lower than the net revenue increase, obviously, and we are able to deliver on that side. But our focus is, again, net earnings. So really bottom line impact where we again say it's roughly 10% and net revenue growth and in between are other cost elements.
The next question comes from Ian White, Equity Research.
Just one for me on OTC clearing, please. I think you previously guided to expect EUR 50 million of revenues from OTC clearing during FY '19. You've done sort of the best EUR 19 million in the first half. So just wondered what gave you conviction, do you still hit the EUR 50 million target this year and indeed continue to drive growth in that revenue line in future years, please?
Yes. As you rightly mentioned, we had roughly EUR 19 million net revenues in the first half year and that's 65% more compared to the comparable half year 1 in 2018. So we see a strong growth rate here. We have roughly a market share of 15% with EUR 14 trillion notional outstanding volume. I think that clearly shows that the right -- that we are on the right growth trajectory here. In addition in the first half year, we continue to constantly connect new clients, specifically from the buy side. And we expect additional revenues already in the second half year of 2019 out of that the pipe will become -- will come in 2020. But we expect that we really we get now more revenue from that buy side. And you know that is also more the long-dated interest rate swap and the much more profitable business. So assuming that we get more of that kind of business, our assumption is that the second half year will higher from a net revenue perspective than the first half year, whether we finally make the EUR 50 million. We will see, our target is to come as close as possible to that kind of number.
And the next question is coming from Kyle Voigt, KBW.
Maybe just try one on the negotiations with Refinitiv, just wondering if you could give us some more color as to what's holding up the deal. Is it price or just difficulty carving out the entity or something else? And also wondering if you think you're still first in line, so to speak, or if you have any type of exclusivity agreement with Refinitiv's [ net ] asset?
Kyle, it's Ted speaking. From my side, many thanks for the question. Please bear in mind I cannot disclose more than what we've said here, but I can ensure you we're in in-depth discussions with Refinitiv here and the negotiations and the assessments are ongoing on both sides. The kind of deal we're envisaging here is a carve-out deal and carve-out requires from both sides a very thorough due diligence, right? And that is the reasoning why it takes longer, predominantly.
And then just one follow-up if I could on the Clearstream cash balances. I believe there was a pretty significant increase in the U.S. dollar balances in June up to EUR 8.7 billion. Just wondering if you could give some color as to what drove that increase in June?
Yes. Again, in principle, as I said, and so the settlement activities are the main driver for that. And so far it's under customer's decision what kind of collateral they provide us. And in principle we see that's obviously a very good message that U.S. cash balances even increased, even the Fed did some [ 8%, 9% ] rate increases. So there was some fear that, that could be reduced, but the opposite is the case. And so this showed that really the settlement activities are the main driver and as these increase so also the cash balances increased in Q2.
We don't have any further questions in the pipeline. So we would like to conclude today's call. Thank you very much for your participation, and have a good day.