Hello everyone, and welcome to Flow Traders' second quarter 2024 results conference call. Please note that this call is being recorded. I'd now like to hand over to Eric Pan. Eric, you may now go ahead, please.
Thank you very much. Good morning, and thank you for joining Flow Traders' second quarter and first half 2024 results call. As you all have no doubt already seen, we released our results first thing this morning. I am joined here on the call by Flow Traders' CEO, Mike Kuehnel, as well as Global Co-Head of Trading, Coen van Sevenhoven, who will run through this results presentation. Afterwards, we will be happy to take any questions you may have. Before we begin, let me draw your attention to the disclaimer on page 2. Please be advised that if you continue to listen to this presentation, you are bound by this disclaimer. Also, please note that the results we will discuss in this presentation are unaudited. Formalities out of the way, I would now like to hand over to Mike for his opening remarks.
Thank you so much, Eric, and good morning to everyone. The second quarter of 2024 saw a mixed markets trading environment, as total market ETP value traded was up 12% when compared to the same period a year ago, but declined by 9% quarter-over-quarter. Volatility remained subdued and was down 15% when compared to the same period last year, and relatively flat quarter-over-quarter. Our own ETP value traded, tracked relatively in line with the market, as it increased by 4% in the quarter compared to the same period last year, but decreased by 15% when compared to the last quarter.
Value traded across each of our three asset class pillars in the quarter saw corresponding movements that were largely in line with the market, with crypto seeing the largest increase year-on-year, but decreased compared to the last quarter, given the slowing of funds flows into spot Bitcoin ETFs in the U.S. in the second quarter. Total income came in at EUR 76.2 million for the second quarter, a 48% increase compared to the same period a year ago. Net trading income came in at EUR 79.5 million, plus other losses of EUR 3.3 million, other income, excuse me. As a reminder, the other income line item reflects the unrealized gains and losses of our strategic investments portfolio.
Despite subdued volatility levels that declined a further 15% when compared to the same period a year ago, we were able to generate EUR 21.1 million in EBITDA, which is more than a six-fold increase compared to the second quarter of last year. Net profit for the period amounted to EUR 12.8 million in the period, with a basic EPS of 0.3 euro cents. The solid results this quarter serves as further validation of our growth and diversification strategy, as we continued to focus on implementing our strategic growth agenda over the last twelve months amidst the subdued trading environment across most asset classes. I will now hand it over to Coen, our Global Co-Head of Trading, to review recent ETP market dynamics on the next slide.
Thanks, Mike, and good morning, everyone. As shown at the top left-hand side of this slide, ETP market value traded increased by 12% in the second quarter compared to the same period a year ago, but decreased by 9.9% compared to the first quarter. Implied volatility in the quarter, as represented by the VIX, decreased by 15% when compared to the same period a year ago and was roughly flat compared to the last quarter. Total ETP assets under management increased by 13% in the first half of 2024 to over $12 trillion, given the strength of the overall market and continued net inflows in ETPs. ETP velocity declined broadly across all regions in the quarter, compared to both last quarter and the same period a year ago.
In summary, despite the currently muted market activity, the secular industry trend across the ETP universe continues to be strong. I will now move on into the dynamics within the fixed income and crypto markets. As shown on the top left of the slide, trading volumes in the investment grade and high yield bond markets increased when compared to the same period of a year ago, but decreased when compared to the first quarter. Volatility levels were down both on a year-over-year and quarter-on-quarter basis, while credit spreads narrowed by almost 20% when compared to the same period a year ago. Trading volume and volatility in digital assets was up significantly compared to the same period a year ago, but declined by double digits in the quarter compared to the first quarter.
Global crypto ETP market value traded elevated when compared to the same period a year ago, but declined by about 30% quarter-over-quarter, given the slowing of fund flows into the U.S. spot Bitcoin ETFs in the quarter. On slide 6, we present an overview of some of the key performance indicators for the second quarter, as well as for the first half of 2024 on a regional basis. As Mike mentioned earlier, market ETP value traded improved in the second quarter compared to the same period a year ago. However, value traded figures were down quarter-on-quarter, given the seasonality in our business. In Europe, we maintained our position as a leading liquidity provider in ETPs in the first half of 2024, amidst a muted market environment, which saw volatility decline by double digits compared to a year ago.
Our investment in the digital asset space over the past seven years, along with our ability to rapidly shift capital to segments of the market, allowed us to capture opportunities in the asset class during this period. Moving to the Americas, we assisted our partners in the U.S. with Spot Bitcoin ETF launch in the half as a lead market maker, reflecting our long-term commitment to supporting the continued evaluation of crypto and digital assets. The improved regulatory sentiment and increased institutional adoption of digital assets in the U.S. confirms our long-term investment strategy in the asset class. Lastly, with respect to Asia, we continue to see growing contribution year-over-year from our China operations, following the approval of our QFII license and opening of our Shanghai office back in November 2022. We also received market access in the quarter to begin trading commodity futures in China.
I will now hand it back to Mike for the next slide.
Thank you, Coen. After a few years of rapid expansion, we continue to focus on cost and operational efficiencies while implementing our growth strategy at the same time. As this slide shows, fixed operating expenses in the first half of this year declined slightly, while our NTI increased by 29% year- over- year. We achieved strong margins in the first half of the year, as an upturn in revenues delivered a 40% EBITDA margin, compared to 27% in the same period a year ago. We ended the quarter with 635 FTEs, down from the 646 FTEs at the end of the fourth quarter, which is in line with our guidance of flat to down for the year, given expected efficiency gains, while we continue to bring on board additional talent in growth business areas.
Our guidance on fixed operating expenses remains unchanged, as the firm remains fully focused on operating and cost efficiencies across the business, while implementing our growth and diversification strategies. Coming to the next slide. Over the past 18 months as CEO, the company has made a concerted push into new markets, asset classes, and geographies with considerable success. Following the arrival of the newly constituted boards, we have conducted a broad-ranging strategic review and concluded that we have a significant opportunity to capitalize on this period of development and move the company into its next phase of growth. A critical element of this development will be the expansion of our trading capital base, especially given the significant returns we have generated on trading capital historically. Following a review of the various options to achieve this, we are implementing a wide-ranging trading capital expansion plan.
As the first element of this, we recently secured a EUR 25 million bank term loan, and we are looking at several other ways to increase external financing. We have also concluded that a central pillar of the plan and the most cost-effective way of increasing our trading capital, is to increase the level of retained earnings in the business. Accordingly, we are suspending regular dividend payments until further notice, a move that will accelerate the expansion of the trading capital base, and that the board is confident will generate long-term value for the shareholders.
We do believe that the firm's new trading capital expansion plan, the continued expansion of our diversified set of existing and newly emerging trading strategies, will deliver significant return and further strengthen our company's role as a leading global trading firm, providing liquidity and efficiency across a wide range of financial markets. Moving to the next slide, I will discuss market trends and our strategy. On the next slide, you can see that the supportive megatrends, which underline the firm's strategy, remains very much intact. These four key megatrends continue to shape our market environment, acting as tailwinds to our business and offer increased opportunities. Crucially, these trends all feed into and reinforce each other, as highlighted before. Especially relevant to our core business, is the ever-increasing acceptance of ETPs and growth in passive investing.
Total industry ETP AUM is projected to double from today's $12 trillion to $25 trillion by 2030, and underscores the strength and importance of the ecosystem we are a key part of. Electronification of trading is critical for all of our activities, but in particular, it is within the fixed income asset class, where this is the key structural trend in corporate credit and emerging market sovereign bonds. Increasing adoption of electronic trading ties into our core technology-enabled competency set. As highlighted in the fixed income white paper we published last year, credit algos, for instance, have comprised almost 50% of executed volumes in Euro credit in the last 2-3 years, particularly in the sub-EUR 1 million ticket sizes. Fixed income ETF AUM is projected to triple from $2 trillion today to $6 trillion by 2030.
With the recent regulatory developments regarding digital assets, there's growing institutional interest in this asset class, and total assets invested in cryptocurrencies more than doubled from the second quarter of 2023 to around $2.5 trillion today. With the regulatory approval of the first spot Bitcoin ETFs in the US in January of this year, and the approval of spot Ether ETFs, we anticipate growing investor demand for digital assets. This class remains a long-term growth opportunity, with the underlying technology expected to drive significant transformation across global financial markets in the coming years. Lastly, regulation continues to support our business in terms of creating a level playing field from the aspect of execution transparency. We continue to work with the regulators around the world to drive the increase in transparency and improve liquidity across all markets and asset classes. Now, moving to the last slide.
On this slide, I outline the firm's four key strategic pillars to grow, strengthen, and accelerate our business. The first is to optimize our costs and grow our trading capital. This means building an increasingly resilient and efficient business model through a dedicated optimization of the firm's trading costs, while simultaneously growing the firm's trading capital base to accelerate the monetization of all existing and new trading strategies across asset classes and regions.... The second is to expand and enhance trading capabilities. As such, we will leverage and build out our proprietary infrastructure capabilities and expertise to expand into adjacent products and enhance existing trading strategies. The third is to increase our research capabilities and speed of iteration.
We will further adopt emerging technologies to enhance automation and efficiency, increase our reporting and tracking abilities to improve pricing, hedging, and automation, and deploy a global competitive research framework to improve modeling and training strategies. And last but not least, we seek to diversify our business and explore adjacent growth opportunities, and as such, we will invest in adjacent business propositions related to connectivity, platforms, data, and tokens via dedicated partnerships and to explore growth opportunities adjacent to our core. We want to grow our role as a globally leading market maker by driving innovation across financial markets and to diversify existing revenue streams. I will now hand back the call to Eric.
Great. Thanks, Mike. This concludes the formal part of our presentation. We would now like to open up the floor for any questions you may have. Operator?
Much. We are now opening the floor for question and answer session. If you'd like to ask a question, please press star one. Again, that's star one. We will pause for a brief moment to wait for the questions to come in. We have our first question coming from Reg Watson from ING. Your line is now open.
Morning, all. Morning, Mike. Apologies for quoting your words back to you, but in your statement today, you have said that you've concluded that the central pillar of your capital management plan and the most cost-effective means of increasing trading capital is to increase the level of retained earnings in the business. But when I look at the balance sheet, retained earnings since 2020 have risen by 8%, but trading capital has declined by 24%. So despite an increase in retained earnings, trading capital continues to decline, and I'd like to understand the mechanics behind that, and why you feel suspending the dividend will change that particular dynamic.
Yeah. Thank you so much, Reg, for the question. So part of our internal exercise, we very much looked into the cumulative dividends paid since IPO, and you might have seen that number in our PowerPoints relating to EUR 746 million in dividends paid since IPO. And this relating then to the, let's say, trading opportunities we see emerging, and very much different now with the meaningfully broader set of global reach and asset class coverage. We feel that there's a distinct opportunity for them to really bring in more capital and also attract external capital, as indicated by the EUR 25 million bank term loan we now initially put onto our balance sheet in order to drive our profits.
So I see the gist here for us very much is that there is an opportunity cost embedded in our business. This relates both to structurally building our trading strategies, but this also relates to market anomalies, occurring around us, where, an ability to deploy more capital clearly will drive P&L.
Okay, that's clear. Thank you. And then, obviously, the EUR 25 million bank loan is just a start. Where do you see your capacity to increase that? Where, where's the upper limit of what you're comfortable and what your lenders are comfortable with in terms of how much debt you can take onto the balance sheet?
Yeah, I'm glad that you asked that question, because clearly we want to be and remain highly conservative on this. So as it stands now, the EUR 25 million is indeed just a starting point. There's the intent to look into either upsizing this, this tranche or tapping into alternative sources of financing. I think a good reference to give you a more tangible perspective on what we mean by being conservative is the amount of our trading capital. So we would like to be quite cautious in upsizing it, while at the same time bringing back the clear proof points that the incremental capital being retained in the company delivers attractive trading capital returns.
I'm quite mindful that, you know, we related back that, over the last years, our trading capital return, and even since IPO, has been strong, close to 80%. Our intent is that we scale up the incremental capital coming from the outside, that, we are able to demonstrate a healthy return on trading capital nonetheless. And then coming back to the trading capital as a reference rate, so if you take a reference, from the U.S. TLB market, just as an example, where it's prudent to, lever your balance sheet up to half of our trading capital, I think that's, more or less a good indication.
I think the more relevant point in my mind is that we want to collect the data points needed, so that you understand that the increased leverage has an immediate impact in our profitability over the years to come.
Okay. Thanks, Mike. And I'm glad you mentioned that you're taking it cautiously and that you're requiring proof points internally. Obviously, I don't expect you to sh- but it would be useful for us externally, as both analysts, and I think your shareholders would like to understand what proof points you will be disclosing to us to show that this strategy is actually delivering. Because I know in some quarters, there was a lot of disappointment that you dropped the market share metric. So what do you plan to propose... Oh, sorry, what do you plan to replace that with?
Yeah. So, I think one key message is that we listened and understood the perspective on increasing transparency. There is a clear point that the return on trading capital for us is the key metric to look at. And as I say, if the strategy deployed now gives us, A, the opportunity to attract more capital, and B, make a point that it will be impactful for our return on trading capital, with outsized returns, that's clearly the intent. The fact that we are bringing back the regional breakdown is a recognition of the level of transparency you need. The internal discussion still centers around how can we add some more insight without revealing competitive intelligence around our trading activities?
But also as discussed before, this is a continued process on our side, and we'll make sure that there's an increased attention to the trading capital return pattern across the firm.
Okay, thank you. And then, Mike, what do you think a reasonable through the cycle return on trading capital is?
For us, it's hard to predict the future, as stated before. But I'm quite confident, just looking back the last five years or even since the IPO, seeing that we have, at the bare minimum, demonstrated returns of slightly above 50%, and then with spiking moments, which are part of our business, returns of well above 80%. So I feel quite comfortable saying that this is a return we feel comfortable about with even more capital coming to our firm. And let's just, let me take one step back. The reason why I'm saying that is that, A, we have meaningfully increased our scope, and sometimes I relate to it as the radar screen, so we see a significantly higher number of opportunities around us.
And now with the broadened infrastructure, we are able to act upon it. I did mention in the past, if you remember, our ability also to shift capital left and right to, to these opportunities in order to benefit from them. So this gives me a deep confidence. And secondly, I also look at, the very talented, trading leadership team and, and trading team in order to be able to be in these moments, able to act, and this brings me then back to the opportunity cost. So with more capital, we will also, just by default, able to capture more for arising or in arising opportunities, where at least until today, there was a natural, just relatively spoken, a limit on how far we could go.
So that does not imply any change in our risk management or risk appetite, but it really relates to opportunity with more capital. And by the way, this should be an exponential curve as there's a compounding effect in capital being retained in the firm and in trading opportunities. So it gives us a significant chance in quite greatly.
So, Mike, on previous calls, you've highlighted the fact that you've lost share in some of your core markets because of more trading capital being deployed by your key competitors in these areas, that has necessarily driven down returns on share. If you're also increasing your trading capital, doesn't this just lead to a war of capital and simply a diminution of returns?
Yeah, I, I'm glad that you highlighted, but, if I take, really a step back and look at, the, let's say, differences in trading capabilities, I think it's fair to say that we have a very, a very distinct, trading capability set. So very much, able to embrace fragmentation, very much able to benefit from market circumstances that are hard to, to model from a prediction point of view. And then having more trading capital, I feel we can act in a protected set of markets with, with attractive returns nonetheless. But I do strategically want to add the decision to now also dive into a multifaceted, capital plan is the gist of what matters for us. So it's not about the EUR 25 million or any kind of capital, debt capital, increase intention for the next 18 months.
What we feel is this is a significant milestone for the firm to really transform the company over the next 3-5 years into a powerhouse related to the core capabilities we developed.
Okay, thank you. Appreciate, appreciate your answers. Thank you, Mike.
Mm-hmm.
Our next question comes from Iulian Dobrovolschi , from ABN AMRO. Your line is now open.
Hello, good morning, gentlemen, once again, and thanks for the presentation. Couple of questions across a couple of topics, but maybe the first one, also to follow up on the trading capital outside the EUR 35 million. Just a really quick one: Do you already see any clear... Like, are you thinking in, you know, in terms of like clear pockets of growth, that it can grow this additional capital and, maybe areas where you feel you are currently underrepresented? And maybe I just want to kind of couple this question with the fact that market shares in EMEA dropped in the ETP business to 25%, where it was about 27%, at the end of Q4 2023, and obviously 30% and above, even before that.
So I believe in the past, you highlighted the fact that the reason that's happening is just because, you know, you know, you're basically facing higher competition on pricing, and, you know, you basically not having, in a way, you know, enough capital to basically play all the strategies. Now, with this EUR 25 million upsizing, even though I appreciate it's not too much, should we expect a bit of a recovery in the market shares in EMEA as well?
Hi, Iulian , Coen . I'll take this question. So yeah, correct. Like, like Mike alluded to earlier, like being constrained in capital means that, yeah, we have to pick where we deploy it at any given point in time... and by definition, having more capital allows you to be active at more areas at the same time. So as part of our global diversification strategy, we're, we're across regions, asset classes, of course. So having more capital will just allow us to, you know, apply our full resource and attention to, to more areas at the same time. And, Europe, of course, being a key area for us, will, yeah, this will definitely help us to, to maintain our leading position in Europe. The more capital, the better for us.
At what cost can you deploy this EUR 25 million? Is it literally at zero cost? So we can basically assume, you know, all the NTI that you generate would drop through immediately to the net profit line. Well, you know, excluding the interest rate, obviously.
Sorry, can you repeat the question?
What is the cost of the additional EUR 20 million of trading capital that, let's say, the debt portion that you took from the issuers?
It's fair to say it's slightly below 10%. And if I compare that to the earlier from the expected return on trading capital, you see that economic sense. It is highly accretive. When we look into, you know, then the the upscaling and looking into alternative sources of debts, either in the PM market or the private credit, the private credit facility market, I think it's fair to say that the is in a broad range between, let's say, around 12% plus, minus.
And clearly, as shared with you before, Iulian , we are quite dedicated to really bring this across as a multi-year plan related to the idea and the intent to create a bit of a benchmark effect, so that over time, just being able to deploy more capital and bringing in more capital, that our interest rates on these debt facilities will decrease over time, which is good news for shareholders, clearly.
Yeah, that's, that's... I appreciate the answers. Thanks, Mike. I'm also trying to kind of, you know, connect the discussion more on the fact that obviously, maybe not now, but, you know, the more you grow, grow the trading capital, I believe you also alluded to numbers like even, let's say, EUR 1 billion and, you know, even higher than that. Obviously, you know, one cost element would be the interest on this, let's say, debt portion, but the other cost, in my view, would be the fact that you have to scale up the trading capabilities, maybe even the infra, but definitely, you know, the, the number of traders.
Did you run a bit of an, you know, sensitivity exercise, let's say, on a run rate figure, where would you land in terms of EBITDA margins if trading capital would go all the way to, let's say, EUR 1 billion? Sorry, EUR 1 trillion.
Hi, Iulian . Maybe I'll answer the first part of this question. So obviously, as we are a company that's trading ETPs, we are already connected broadly across the globe to different regions, asset classes, to trade our ETPs. So for us to deploy into new strategies, this will go incremental. It's not that we need enormous investments in order to try to deploy new strategies or try to develop them. So I think that's a big benefit of state of our business. So I think, like, as we will expand our capital and some expenses in our cost base, these will only happen if the NTI will follow. So it won't be necessary to make large investments in our base before we can see results in NTI. So in that sense, I think this is a very low risk, high reward, path that we're embarking upon.
Okay. Then, on the competition. So I think, yeah, you kind of discussed briefly about the fact that, you know, obviously you might kind of... There is a potential running into diminishing returns, given the fact that everybody's, you know, fighting for more trading capital. But now that you're moving from, let's say, core ETP trading into kind of being a proper multi-asset market-making firm, running a couple of strategies across different asset classes and obviously across many regions, just wondering, how do you look now at the competitive environment? I just want to leave it a bit of a loose question. So just, yeah, curious, how do you look at that?
But I think as you alluded to, our competitors, some of them, have larger capital bases. So I think if anything, this is us creating a more level playing field. So I only see this as a positive development. Other than that, it's hard to comment on the activities of our competition. But if I look at our internal roadmap, the boosted trading capital we have now, and if I just this morning, walking across the floor, feel the excitement and the positivity of the whole trading floor with this announcement of the increased trading capital, I'm very, very confident that, yeah, we're on a strong growth path here.
Mm-hmm. Looks like there are some desks which are first capital, so that's good news. And maybe a final one. It's something that I've noticed a couple of quarters ago, but I kind of missed asking this. I did notice that you've changed the vesting of the remuneration pool from four years in the past to three years now. Why and what kind of effects this might have on the attrition of staff?
Yeah, so this is, that's, that's an important point. So we are constantly reviewing the attractiveness of our broader comp packages, and clearly, we are not ignorant of the global dynamics we see also from competition. And this was one piece embedded in making sure that we remain competitive. I shall say this was not, you know, an isolated effort. So we, as I said, we are constantly reviewing these elements, but it was important for us to make sure that with increased competition, specifically in core parts of the global industry, New York, as a highlight, we found effective ways to remain competitive. And then in terms of attrition, I only can echo what Coen highlighted. So today is, for us as a firm, a significant milestone.
We come out of, you know, a very in-depth review of where we stand as a firm and how we see the different growth opportunities emerging. And today is the day marking a significant point into being perceived as a growth stock and us embracing these opportunities with more capital. That's truly exciting, and I can see that inspiring many of our staff in becoming part of it. So as such, I think this is also it's a more qualitative piece that we are mindful of competition, but also feel that there are very specific elements as to our strategy and as to our culture where we are proud of, and these elements helping us to to drive our growth.
All right, thanks. I appreciate the answers and, yeah, obviously enjoy the summer holiday.
Same for you, Iulian . Thank you.
Hello, everyone. Again, if you'd like to ask a question, please press star one. Again, that's star one. We will pause for 10 seconds to wait for the questions to come in. As of right now, we don't have any raised hands. I'd now like to hand back over to the management for the final remarks.
Great. Thank you, operator. We would like to thank all the analysts for participating in today's call. Please note that we will host our next analyst call when we release our third quarter trading update in October. Details and timing for this call will follow in due course. This now ends the call. Thanks again. Have a great day.
Thank you, everyone, for attending today's conference call. You may now disconnect. Have a wonderful day.