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Good afternoon, ladies and gentlemen, and welcome to the Deutsche Börse AG Analyst and Investor conference call regarding the Q2 2022 results. At this time, all participants have been placed on a listen-only mode, and the floor will be open for your questions following the presentation.
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 2022 results. With me are Theodor Weimer, CEO; and Gregor Pottmeyer, CFO. Theodor and Gregor will take you through the presentation today, and afterwards, we will be happy to take your questions. The presentation material for this call has been sent out via e-mail and can also be downloaded from the Investor Relations section of our website. As usual, the conference call will be recorded and is available for replay afterwards.
With this, let me now hand over to you, Theodor.
Thank you, Jan. Welcome, ladies and gentlemen. Since we gave you a comprehensive update on our strategy and outlook at the recent Investor Day just less than 4 weeks ago, let me focus mainly on our results today. And by the way, the numbers speak anyways for themselves, if I may say so. Overall, the development in the first half of 2022 significantly exceeded our initial expectations, while the development in the first quarter was mainly driven by the outbreak of the terrible war in Ukraine. The second quarter was increasingly influenced by the beginning cycle of rising interest rates. This is the new area I was referring to at our Investor Day, which adds additional cyclical opportunities to our consistent delivery of strong secular growth.
In the first half of this year, the secular and cyclical growth contribution was almost equally strong, and we saw some additional growth from M&A. In total, net revenues increased by 20% and amounted to more than €2 billion, the EBITDA increased by 22% to around €1.3 billion. Secular net revenue growth at 8% was again slightly above our guidance. This was particularly driven by financial derivatives with product innovation and stronger double-digit growth in OTC clearing, and growing demand for ESG-related products in Data & Analytics, and the further increase of market share in commodities.
Cyclical net revenue growth also amounted to around 8% was mainly driven by higher volatility in almost all asset classes. Accordingly, our clients hedging needs increased significantly. Financial derivatives with strong growth in index [ph] and fixed income products were the biggest contributor to cyclical growth, followed by Security Services with a jump in net interest income. In addition, the situation in European gas markets fueled the activity in commodities.
M&A contributed another 3% to our net revenue growth. This was mainly driven by the contribution of the remaining 2 months of ISS, which we started to consolidate in March last year. As we explained at Investor Day on June 29, we are generally expecting our organic operating costs to increase to support our secular growth vision. But continuous improvement is also a key measure for us to capture efficiencies, and thus offset normal levels of inflation. But from a cost development point of view last year and the current year are definitely not normal periods. Last year, you manage the organic operating cost growth to zero, because cyclical headwinds. This year we have significant cyclical tailwinds and loss, a little bit more flexibility to invest.
Furthermore, we have faced with an unprecedented environment resulting in slightly elevated levels of inflation, adjusted for M&A and FX effects. Our operating cost in the first half increased by 6% which we think is a fair outcome. The overall development in the first half, but far exceeded our initial expectations for 2022. And therefore, we are meanwhile expecting to significantly exceed our initial guidance for the full year.
With that, let me now hand over to you, Gregor, to present the financial results in greater detail.
Thank you, Theodor. On Page 2, we saw the results for the first 6 months in detail. All segments have contributed double-digit growth rates to the overall net revenue development. The Data & Analytics and Trading & Clearing segments even achieved organic net revenue growth rates of around 20%. As part of the net revenue, the net interest income across the group has roughly doubled compared to the previous year. On the one hand, this was driven by higher collateral levels in financial derivatives and commodities. On the other hand, the NII of security services has started to meaningfully benefit from higher U.S. interest rates.
I will explain the 6% constant currency organic operating costs increase in more detail in a moment. But overall, the cost development is broadly in line with our expectation. This has also helped us to achieve solid operating leverage. And, as expected, the operating leverage was slightly stronger on an organic basis.
In terms of the operating costs in the first half of 2022 on Page 3, we saw several different drivers. First, M&A effects, which amounted to 6%, they were still mainly driven by the IFS acquisition. Second, the stronger U.S. dollar was added in a 2% operating cost increase, but was obviously also beneficial to the net revenue development. This brings us to the more meaningful constant currency organic operating costs.
On the one hand, it was driven by slightly higher inflationary effects from building operations, general purchasing, and higher staff costs. On the other hand, we had to increase the provisions for variable and share-based compensation in light of the favorable financial development, and relative share price performance.
This brings me to the details of the second quarter results on Page 4 of the presentation. We saw continued strong net revenue costs, mainly driven by secular and cyclical developments. Last year numbers include the €40 million euro gain on the full purchase of Fund Centre. Without that, the net revenue growth would have been north of 20% and the cyclical costs would have been double-digit. The M&A effect has been minor in the second quarter, since they were only driven by some of the smaller, more recent acquisitions.
The explanations I just provided on the half year one operating costs development can also be applied to the second quarter. The constant currency organic operating costs increased by 6%, this was mainly driven by some inflationary pressures, and higher variable and share-based compensation. Then besides from financial investments includes a partial reversal of the gains we booked in the first quarter on the FairX disposal by Nodal in the U.S.
We received Coinbase shares as a compensation that’s a 6-month lockup period. But for the first half of 2022, a solid gain remains in our books. The financial result includes 2 one-off effects. First, the interest expenses on our bonds are slightly higher, because we refinanced the corporate bond maturing in October already in March. Second, it includes around €6 million of interest on additional tax provisions we made in the second quarter.
I’m now turning to the quarterly results of the segments, starting with Data & Analytics on Page 5. We saw a solid double-digit organic net revenue growth across all business lines. This was driven by as a continuing trend towards ESG, a good new client pipeline and higher market activity for the index licensing business. The other line, which is mainly the ISS Market Intelligence business, included some inorganic costs from the acquisition of Discovery Data. The EBITDA in the previous year’s quarter included a gain of around €10 million from the revaluation of the stake in Clarity AI. Adjusted for the Clarity AI effect, the EBITDA increased 27%.
Let me turn to Slide 6 in the Trading & Clearing segment. The Trading & Clearing segment continues to benefit from higher volatility and increased client hedging needs. The financial derivatives business of Eurex was driven by a higher double-digit cost in index derivatives, interest rate derivatives, the OTC clearing, and in particular, higher margin fees, amounted to €27 million in the second quarter, also slightly down compared to the very strong first quarter.
Commodities continued their strong year-over-year cost due to volatile gas prices and higher margin fees. The cash equities business includes a gain of €13 million relating to the deconsolidation of Tradegate Exchange. Due to a capital restructuring, our stakes declined to 43%. Although, the previous year’s net revenue in the cash equities business included a positive effect of around €7 million, relating to the sale of the Regulatory Reporting Hub. As a result of higher volatility, demand for foreign exchange product was significantly higher compared to previous quarters, and net revenue increased by 27%.
In the Fund Services segment, which you’ll find on Page 7, the previous year quarter included the book gain from the full purchase of Fund Centre. On an adjusted basis, our net revenue increased by 14%. This includes continued organic growth, despite a clearly more challenging environment from a market performance point of view. This was possible, because of onboarding of new clients and portfolios. In addition, the acquisition of Kneip added around €6 million of net revenue in the other line item of the segment. It is also encouraging to see that the momentum of new partnerships continued. We’ve recently entered into an agreement with Italian online program Directa to provide Italian retail investors access to our global funds portfolio.
Our Securities Services segment on Slide 8, delivered a very good performance in the second quarter. Headwinds from equity market performance and lower retail participation, they are overcompensated by solid leverage of fixed income issuance activity and some FX effect on assets under custody denominated in U.S. dollar. In addition, we are now starting to see a more meaningful impact from the recent rate hikes in the net interest income.
Besides higher rates, also the cash balances are still significantly exceeding last year’s level. With the current trajectory of interest rates in the U.S. and now also in Europe, we would expect even higher close rate for the third quarter. The other line item declined slightly because of the REGIS-TR disposal in the first quarter.
The last page of today’s presentation shows our guidance for 2022. As Theodor mentioned, the development in the first half by far exceeded our initial expectation for 2022. There is a performance so far, we are trading around €150 million above our initial net revenue expectation. Therefore, meanwhile, we expect to significantly exceed our guidance for the full year. You are probably wondering why we are not narrowing down our expectation a little bit more. But there are still 6 months left to the year, though there could be both cyclical headwinds as well as further tailwinds affecting the growth we are currently expecting.
This concludes our presentation. We are now looking forward to your questions.
Thank you very much. [Operator Instructions] And the first question comes from Haley Tam from Credit Suisse. Over to you.
Good afternoon. Thank you very much for taking my question and congratulations on a good set of results. Since I’m restricted to one question, can I actually ask about the Data & Analytics segment, I think the resilience of the index revenue, there was a lot better than I was expecting given the market trends we’ve seen during the first half. So I wondered if you could help me understand, what it is that drove I suppose first of all the stability in the AUM and exchange traded index funds during the period, and whether you expect that to continue.
But secondly, I’m not sure I’m familiar with why your stock exchange licenses business would have gone up with increased market volatility, and whether that is a subscription business. So we can expect that to continue? Or that there’s any sort of cyclical nature to that, that’d be great to help me understand? Thank you very much.
Yeah, thanks, Haley, for the question. In both questions, I can give you one answer. So our index business what we show here, where we continue to get basically a license for providing for the stock in the tax business. So that’s really very closely related to each other. So the more U.S. derivatives contracts are traded, the higher license fee income is on continuous side. And therefore, yes, there is some cyclical component included here.
Super. Thank you.
So we’re coming to the next question, and it comes from Michael Werner from UBS.
Thank you for the presentation. My question is on the FX tailwinds to the revenue side, you highlighted the underlying organic growth on costs. I was just wondering if you could provide what the year-on-year revenue growth would have been in the constant currency world. And particularly, whether the – what the 8% secular revenue growth in Q2 would have been in a constant currency world? Thank you.
All right. So with regard to the FX tailwind on revenues, so overall, we have a positive EBITDA impact, if we say on the cost side, it’s a roughly a 2% impact on the revenue, it’s roughly a 1% to 2% and FX on the cost side is more 2% to 3%. So overall, it’s positive if the U.S. dollar is stronger compared to the euro.
The second question, the 8% secular growth on a constant portfolio basis, I think, it is a constant portfolio basis, because we say overall, the 20% cost in the first half year, we said its 8% secular, 8% cyclical, and roughly 3% is M&A. So we already exclude the impact here. If your question goes into direction, whether it’s also an FX impact onto secular growth, then it could be this number I’ve done in my mind, but it could be maybe 1% lower.
Pretty much, Gregor.
The next question comes from Bruce Hamilton from Morgan Stanley.
Hi. Thank you for taking my questions and congratulations on the results. I guess just looking at the outlook. And just this also sort of goes back to the cost question. I’m trying to figure out how much of the revenue beat is going to drop through to EBITDA. So I guess, at the moment consensus is just shy of €4 billion of revenues, and €2.35 billion of EBITDA, so close to a sort of one-for-one drop through. But given your comments around some of the inflationary and FX pressures, I guess it feels like some of those cost pressures endure into the second half. And so there would be some offset. Is there a good way for us to think about that sort of that drop through from there?
Yeah. Thanks, Bruce. Obviously, for the expected question around our operating leverage even if you don’t take this word. I think we are fully able to show operating leverage for our existing core business, right? So if you would just take the Eurex core numbers, where you have clearly a big increase in the EBITDA margin. And if I would just do that for the Eurex core business. And you see it and it’s documented in our Clearstream Security Services business where we have basically doubled an increase in EBITDA compared to the revenue, so here you’ll see that we are fully able to deliver the operating leverage.
Why you don’t see the significant impact here on group level, so there are basically three elements to explain. So on EBITDA margin level, so the first impact is out of the impact in our equity results, right? So in the first half year is even on a constant basis, or I think it’s two times €32 million. But last year, we made for the full year some €85 million. And currently, I do not expect another €50 million for that. So that’s number one. So let’s impact here out of tailwinds in the equity result.
Secondly, our M&A is dilutive for our overall business, right? So we acquire business. So let’s take the biggest one, the ISS, there’s a margin of today roughly 30%. And that’s obviously below the 60% or 50% plus you have in our existing businesses. So these are basically the reasons by on group level and we already anticipated that, when we gave our guidance in Compass 2019, where we say, look, we want to grow on our top line is 10%. And it’s basically the same on our bottom line. So basically, the cost increase is compatible with that, so that we have a constant EBITDA margin. And again, the main impact M&A slightly diluted, and secondly, the onetimers we have in our equity results.
Got it. Ando so just a follow-up, though, in the second half, do you expect that the FX headwinds on costs and the inflationary pressures those will persist? So we’ll be running a bit higher than the 5% organic, that’s probably here to stay for the second half? Or would there be any change?
Yeah. So from a cost development perspective, I think the M&A contribution will obviously go down, so on a constant portfolio basis. Secondly, the FX impact will increase assuming that we will continue to see that kind of that strong U.S. dollar compared to the euro. So my expectation is that this will increase and basically the organic portfolio constant FX will be the same like in the first half year.
Got it. Thank you.
And the next question comes from Philip Middleton from the Bank of America.
Yeah. Thanks very much. And as always, we’re all asking the same thing. So if we could just return to the costs for a minute? I think you just said that you expect that the 3% and the 3% effectively representing the inflationary impact for this year, and the share payments to roll through into the next half, just to check that’s correct. And secondly, if it is, when you’re talking about the first component of that, there was some – there was a bit at – the end you tacked on and general inflation. How important is general inflation in that figure compared to the investing to build new services, which is obviously something you’ve always said you’ll do when you’ve got the headroom to do it?
Yeah, so thanks for this question. So, obviously, the general inflation is higher than in previous years, there’s no doubt. There’s pressure – more inflationary pressure on the salary side, even if you hire new people. The inflationary pressure, obviously, in our energy costs, if you all know that, but it’s across all cost segments. And so you can see usually our inflation was in the range of 2% to 3%, now it’s roughly 1 percentage point higher it’s 3% to 4%. And therefore, we are even lower than, let’s say, it’s 8% what you see in the markets general. So, yes, the general inflation is higher than originally expected.
With regard to your first question, so what we show is organic cost on a constant portfolio and constant FX basis, so it’s a 6% roughly in the first half year. Yes, I said, I expect basically is the same for the – roughly the same for the – increase for the second half year, because owners we basically built provision on the current level and we would have to do basically the same now, and from a share price development also higher than compare to the first half year. So this would be most probably a comparable number [for the main tool] [ph] for the product general inflation.
Okay. Thank you.
The next question comes from Johannes Thormann, HSBC.
Good afternoon, everybody. First of all, a question on Clearstream, you elaborated the strengths of customer revenues also did you in a fix effect? Can you quantify this effect? And also looking at the decline of settlement fees over the last quarter. This has been the weakest level since many quarters. Is this the bottom? Or do you feel it could continue to decline? And just on your next Fund Services customer migration, can you elaborate a bit more how you’re progressing with that? Thank you.
Yeah, obviously, for the – starting with the second question on the Front Services migration. So we are proceeding as planned? So we told you that both parts of the Clearstream business, so the Fund Service business and Security Services business, we will show it more on an autonomous more and more independent basis, so that you have higher strategic flexibility here, for instance, going into partnerships. And so we are proceeding as expected and hope that the majority of the work we will have done at the end of the year, or beginning of next year.
Your first question around the customer revenues here. Yes, there’s obviously in the FX impact you asked, yes, there is a positive FX impact for our dollar-denominated custody. I don’t have the exact number, Jan.
Around 15% of the assets under custody, and the ICD, which are denominated in U.S. dollar.
Okay. Jan has a precise number, right? And with regard to the decline in the settlement process, so as in the first quarter, where we see some decrease in the retail segment, and that’s the main driver for the reduction in the settlement area.
Okay. Thank you.
The next question comes from Benjamin Goy, Deutsche Bank. Over to you.
Yes. Hi, good afternoon. Just staying with Fund Services and to better understand, because your assets under custody are down roughly 7% since the peak, which, if you look at many asset managers is actually quite good. So could you quantify the inflows from new business you have whether it’s new clients, whether they bring on more business, rather than just a simple mark-to-market? Thank you.
Yeah. Thanks, Benjamin, first of all, the question on the Fund Service topic. And it’s worth to elaborate a little bit. So currently, you show a 14% growth number. But there are also positive elements out of our Kneip acquisition. So on organic basis, it’s 6% basically. And now you could argue, oh, why is it just a single-digit number? I thought it’s a double-digit number. And therefore, there are two or three elements to explain it. So the first is, what we elaborated in our speaking notes is that market performance on the equity level specifically are obviously lower. And currently, that’s roughly a headwind of 4 to 5 percentage points here. So that’s the first way we have some cyclical headwinds.
Secondly, we currently see some reluctance from – as you already mentioned, some reluctance from investors and asset managers to really invest in the fund space, due to the uncertainty of the markets. But we expect that at a certain point of time, and this will also disappear. And firstly, our customer onboarding process, so still it’s a great pipeline and it’s continued to be very successful. But to show, on a constant basis, continued success here in onboarding on a quarterly basis, I think it’s a little bit challenging. And therefore, we can promise you, we are likely on there, and it’s a strong customer pipeline.
And overall, from a secular perspective, we are convinced that we are able to deliver double-digit growth also for the next quarters and years.
Understood. Thank you.
All right. There are no further questions in the pipeline. So we would like to conclude the call today. There’s anything else then please feel free to reach out to us directly anytime. Thank you.
The conference is no longer being recorded