Good afternoon, ladies and gentlemen, and welcome to the Deutsche Borse AG Analyst and Investor Conference Call regarding the Q3 2020 Results. At this time, all participants have been placed on a listen only mode and the floor will be open for questions following the presentation. Let me now turn the floor over to Mr. Jan Streicher.
Welcome, ladies and gentlemen, and thank you for joining us today to go through our Q3 2020 results. With me are Theodor Weimer, Chief Executive Officer and Gregor Pottmeyer, Chief Financial Officer. Theodor and Gregor will take you through the presentation today, and afterwards, we will be happy to take your questions. The presentation materials for this call have been sent out via e mail and can also be downloaded from the Investor Relations 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. Welcome, ladies and gentlemen. Good afternoon. Before we discuss the details of the Q3 results, let me begin with some comments on the overall COVID-nineteen situation and its implications for Deutsche Borse. While markets have recovered significantly and the COVID-nineteen pandemic improved somewhat over the summer months, we all knew that this crisis is far from over.
More recently, the uncertainty around COVID has increased further. Right now, the question is not if there is a second wave, but how exactly it will look like and what implications will be. Even though extensive lockdowns are currently not anticipated, the pandemic will increasingly impact public life and the economy again. At Deutsche Borse, we continue to operate as normally as possible with up to 50% of our staff working from the offices of our core European locations. However, it is very clear that the situation has implications for all capital market participants.
While volatility in the Q3 was still well above the previous year's level, This did not translate, unfortunately, into growth in all areas of our business. Therefore, the Q3 did not develop as you would have expected, especially Eurex saw a decline of activity across all asset classes, arguably against a relatively strong Q3 last year. But we also believe that this is a result of COVID related factors like the remote work situation and temporary deleveraging of some trading desks and buy side firms. Also, AAX and Contigo are still seeing temporary headwinds resulting from the COVID situation. Despite those conditions, we managed to deliver 4% secular net revenue growth in the Q3 across the group.
Together with the inorganic growth, this at least helped to offset some of the cyclical headwinds. More encouraging was the cost development in the Q3. Despite a weaker market environment, we continued carrying out the key investment in growth, technology and regulation, but we also decided to minimize the organic operating cost growth in the Q3 to 0 by means of several different measures. And we wanted to demonstrate to you that we are able to contain our costs if necessary. With this, the adjusted EBITDA decreased to €431,000,000 and the adjusted earnings per share stood at €1.38 in the quarter.
For the 1st 9 months in 2020, we still reached net revenue growth of 10% to a level of €2,400,000,000 The adjusted net profit amounted to €928,000,000 an increase of 8%. This is brought in line with our growth expectation for the full year. And despite the weaker development in the Q3, our guidance for adjusted net profit in 2020 remains unchanged at around €1,200,000,000 But COVID continues to be an uncertainty. And among other factors, the guidance is subject to some pickup of market activity in the 4th quarter. As for the outlook for the next couple of years, we continue to be convinced that we can deliver very solid levels of secular growth and that the importance of M and A is increasing for us.
But more about that during our Investor Day, which will take place on Wednesday, November 18, at 2 p. M. CET. Against the background of the COVID situation, it will be possible to participate in the event in a fully virtual environment, including the Q and A session, but we are also planning to have a few on-site spaces available for local participants. Let me now hand on over to you, Gregor, and talk about the results in more detail.
Yes. Thank you, Theodor, and welcome, ladies and gentlemen. Let me start with the group financials in the Q3 on Page 2 of the presentation. The 4% secular net revenue growth in the quarter was primarily driven by Eurex, with additional net revenues from product innovation, pricing and growth of OTC clearing. But the Clearstream and the IFS segment achieved solid secular growth as well, mainly through their well performing custody services.
In contrast to the secular growth, we saw a 9% decline of cyclical net revenue. This resulted from lower trading activity in index and fixed income derivatives at Eurex, a COVID related decline of power derivatives trading and the interest related decrease of net interest income at Clearstream. Inorganic initiatives added another 2% net revenue growth, primarily contributed by the Axioma acquisition. Operating cost amounted to €288,000,000 It is adjusted for around EUR 32,000,000 exceptional items, which were mainly driven by M and A integration and restructuring charges out of our structural performance improvement program. Without the consolidation effects, operating costs were flat compared to the previous year.
We had equity valuation of TradeGate in the Zetra segment, which delivered a very strong business performance in 2020, resulted in a positive effect on income from strategic investments, which increased to €12,000,000 I'm now turning to the quarterly results of the segments, starting with Europe on Page 3. While the total number of derivatives contract traded was down compared to the previous year, We saw a continuously high level of margin fees. They were driven by still higher levels of collateral held in our clearinghouse throughout the quarter, even though equity market volatility declined compared to the peak we saw in March. In addition, net revenue growth resulted from the growing outstandings and market share in euro denominated interest rate swaps. In our commodity business, EX, shown on Page 4, we saw continued COVID related headwinds in power and gas products because of lower energy consumption and less hedging need.
Let me turn to Page 5 in the FX business. While the FX market volatility came down compared to the Q1, 360T was able to maintain totally stable volumes because of business generated from new clients. I'm now turning to Page 6 in our cash market, Xetra, where we continue to see growing activity and an increase in net revenue. Most of this was driven by equity market volatility, but there was also a continuing sizable secular contribution from a further increase in market share. In addition, the strong growth in equity change traded funds activity related to the trend towards passive investments partly fueled the performance of the segment.
EBITDA in the Xetra segment benefited from the higher at equity valuation of Trade Debt, I mentioned earlier. The €13,000,000 we booked in the 3rd quarter were respectively booked for the 1st 9 months of 2020. But we also expect an ongoing higher contribution for coming quarters. As you can see on Page 7, in our post trading segment Clearstream, we saw continued solid growth of custody net revenue. This is mainly driven by growing outstandings in fixed income securities due to higher debt financing needs across the board.
Settlement activity was again mainly driven by the cyclical increase of trading activity in fixed income markets, but higher outstandings are also resulting in a sustainable increase of activity. With cash balances seasonally weaker in the Q3, particularly in August, net interest income stood at the lower end of the €15,000,000 to €20,000,000 quarterly guidance we gave earlier this year. The Investment Fund Service segment, which you can find on Page 8, continued to show a strong double digit performance. This was driven by both cyclical and secular factors. Settlement mainly benefited from higher market activity by custody and other revenue were driven by onboarding new clients, by the good performance of our distribution services and by OSMUG in Australia, which we acquired last year.
On September 30, we closed the UBS ForceCenter acquisition we announced early in the year. As guided previously, for 2021, we are expecting Force Center net revenue of around €60,000,000 which includes some revenue synergies from cross selling. UBS will retain a stake of 49% in this business. This stake will not be shown as minority stake, but as financial liability, as the sale of this stake is already agreed. As a consequence, we will show 100% of this business in our income statement.
Slide 9 shows the Contigo segment, which consists of the Axioma Analytics business. We started to consolidate in September last year and the stocks index business. While our acquisition has substantially strengthened the segment, its organic growth was rather muted in the past quarter. After the Analytics net revenue had been above our expectations of Q4 last year and Q1 this year, the EUR 50,000,000 in the 3rd quarter continued to reflect the temporary impact COVID-nineteen had on our sales and marketing activities. We see some improvement of this situation, which will likely be reflected in the Q4.
But some clients still have different priorities in the current market environment. ETF license net revenue continued to be somewhat under pressure from the flow situation in European product, but this was overcompensated by growth of other license net revenue. Let us now come back to our group financials on Page 10. With the exceptional development in the Q1, a solid second quarter performance and cyclical headwinds now in the 3rd quarter, we still achieved double digit net revenue growth in the 1st 9 months of 2020. Due to the less favorable market environment and stronger year over year comparison, The earnings growth rate for the 1st 9 months is now broadly in line with our expectations for the full year.
On Slide 11, we provide an overview of the 3 components of net revenue growth in the 1st 9 months. Consolidation effects resulted in additional net revenue of 2% or EUR 48,000,000 This was mainly driven by the inclusion of Axioma in September last year. Secular growth, being the key component of our strategy to increase net revenue, developed Aspland and increased by 6% or €134,000,000 All segments had to achieve this, with Eurex being the largest absolute contributor and 360T IFS and Contigo showing the highest secular growth rate. Due to the COVID related headwinds since the Q2, the cyclical growth contribution decreased significantly, but still amounted to 2% or €38,000,000 Adjusted operating costs shown on Page 12 totaled €879,000,000 in the 1st 9 months. Operating cost growth of around 6% was a result of consolidation effects from M and A activities, primarily Axioma.
Investments increased by 6% or €47,000,000 This is primarily driven by the planned investments in growth and technology, an increase in personnel to support growth and by the cost to implement regulatory requirements such as CSDR. Furthermore, the exceptional COVID situation also required some extra spending on IT operations and security earlier in the year. Net inflation was flat as inflationary pressure in staff and other operating expenses was offset by savings from the structural performance improvement program. Due to the business and share price performance, variable and share based compensation is almost flat as per the 1st 9 months. Because of the weaker market environment since the Q3, we decided to minimize the organic operating cost growth by means of several different measures, but without cutting the key investments in growth.
With the last page of today's presentation, we would like to reiterate the outlook for 2020. We continue to expect at least 5% growth of secular net revenues in 2020. This will mainly be driven by further progress in the OTC clearing business, new Eurex products, the commodities activity of EX, the expansion of foreign exchange trading and clearing service, growth in investment fund service as well as our index and analytics business, Contigo. Despite the weaker development in the 3rd quarter, our adjusted net profit guidance for 2020 remains unchanged at around €1,200,000,000 adjusted net profit. Amongst other factors, this is, however, subject to an increase of market activity in the Q4.
Furthermore, we still see additional net revenues from the sale of the regulatory reporting hub in the 4th quarter. And there's also some flexibility in the cost base in the 4th quarter due to the relatively high level at the end of last year. This concludes our presentation.
Thank you for your attention. We are now looking forward to your questions.
And the first question comes from Johannes Thormann from HSBC. Over to you.
Good afternoon, everybody. Johannes Thormann, One question and a follow-up, please. First of all, on the U. S. Sun Center deal, you said you will book no minorities.
And then in the press release you've linked to your presentation, there is no detail on the sales price for the remaining 48.8%. Could you provide some more details on this, please, how and when this will happen? And secondly, the exceptional cost guidance for this year, what should we expect? And then what should we expect next year? Thank you.
Yes. Thanks, Johannes, for the question. With regard to the UBS Force Center acquisition, so as
the pricing for the second tranche is already fixed, so that's the reason why we already consolidate 100% and do not show that as a minority. So we show that as a financial liability. And the valuation of the financial
liability depends basically on the EBITDA development in 2021. So we have defined a multiple on that basis. And you will see what is the final result of the EBITDA in 2021. And then we would based on that, we would execute beginning of 2020.
2022. 2022. Sorry, yes, 2022. The second question, exceptional costs. Yes, I would expect that for this year, it would be slightly above previous year level and for the next year in a comparable dimension.
But overall, it's difficult to judge because these are exceptional items in principle. And it really depends when we deliver successful M and
A transaction, just to give you that kind of example. And obviously, M and A is strongly part of our situation, of our strategy. Therefore, it would be even good if we would be would show successful M and A. So that's obviously one angle in the exceptional cost. And the other, the litigation and the restructuring cost, So obviously, the restructuring costs should go down.
The litigation topic, CVF here, you are aware of our cum ex topic. You are aware of our U. S. Litigation topic. So and this we currently show as exceptional items, and that's really difficult to judge and difficult to plan.
Therefore, that's the reason why we usually give no guidance on that side.
Okay. Thank you.
The next question comes from Mike Werner from UBS.
Thank you very much.
I guess looking at the past quarter, we certainly saw headwinds on a cyclical perspective, while secular growth has held up. I guess going forward, you have a number of businesses where you operate fairly strong franchises, which we would argue do have very strong pricing power. What's your view towards implementing some of that pricing power over the next couple of quarters, should the cyclical revenues remain a headwind for you? Thank you.
Yes, Mike. I think you are aware that in principle, our basic strategy is to increase our liquidity pool. So going for growth on that side, but basically now our core strategy to use pricing power here. But in principle, you also are aware that we do what makes sense. And overall, so in over the past years and it's comparable also with this year that we have the opportunity to have roughly 1% out of our net revenue growth coming from price increases.
So overall, if you say, we want to grow more by 5% on a secular net revenue basis. So roughly 1% comes out of that. So 20% and 80% is focused on getting more liquidity and more customers. So that's our basic strategy.
Thank you.
The next question comes from Benjamin Goy from Deutsche Bank.
Yes. Hi, good afternoon. One question, please, on IFF and the UBS Force Center deal. Now given you're a much bigger player with the new Clearstream Fund Center, I just wanted to get some more color on the qualitative benefits or maybe also qualitative benefits of being a one stop shop on the IFF side going forward? Thank you.
Yes. Obviously, you see that investment on services is still in that difficult market and while growing on a double digit basis and that even organically and on top of M and A activity, I think we have a very strong position here now, now gained over the last years. So also all of the 3 acquisitions we did, so Swisscanto from Zurich Cantonalbank, Osnag in Australia and just recently, UBS PhoneCenter. So that's part of our strategy. And obviously, the more we get, the stronger is our position.
And the principal logic behind that is that we have now a big cost efficiency advantage compared to the back office processes in the bank. So it's more than 50% as we have more straight through processing with our vestima platform. And customers really appreciate that. And cost is obviously very important topic for all the bank office processes. So that in principle gives us good opportunities to further strengthen our opportunity via organic but also via inorganic ways.
Early days. But do you already see from Westima clients' interest also in the new front office solutions, so to say?
Yes, sure. That is part of the strategy. As With the UBS Funds Centre, we increased the value chain going now more in our funds distribution. And that's obviously part of our business strategy and our synergy cases that we have more customer access and that we can increase revenue synergies in that area. Yes, that's part of our business strategy.
Thank you.
And next up is Bruce Hamilton from Morgan Stanley.
Just a question on the secular growth. I guess looking at the year so far, you started in the Q1 with about 8% growth or €60,000,000 which slowed a bit in Q2. And then in Q3, it looks like there's been sort of €27,000,000 of incremental secular revenue or about sort of 3.5 percent growth. Can you give us a bit more color on why that's slowing? Is that to do with work from home?
And if so, does that pose any risk to the sort of 5 ish percent as we cast into next year? And on the €134,000,000 of secular revenue growth year to date, can you give broad percentages in terms of how much I mean, it sounds like Eurex is the biggest bit, but sort of Eurex versus IFS and other? Thank you.
Yes, Bruce. Thanks for the question. So overall, you see some fluctuation over the quarter, but really our focus is on the year to date or the full year number. And therefore, the 6% secular growth we show here is a reasonable number and shows that we are able to deliver on the far majority of our growth initiatives. With regard to the contribution of the different business segments, so Eurex, obviously, is above currently that 6% level overall.
Investment Fund Services has a higher growth rate here. So these are the 2 elements who contributed the most. And but in principle, all of these segments contribute in a different way. So even our Clearstream core business in the range of 3% to 5% to deliver here on the growth rate. So overall, clear message, all the segments deliver to the secular growth element.
And I think we will also give you a little bit more guidance on the different business segments on our Capital Market Days, and we do an outlook for the next 3 years.
Got it. Thank you.
The next question comes from Ian White from Autonomous Research.
Hi, afternoon. Thanks for taking the call. Just one question from me, please. Basically, I just wondered how confident can we be that the decline in Clearstream cash balances is not structural response to the increase in cash collateral fees that was introduced earlier this year. I'm just conscious that the cash balance has fallen quite sharply despite settlement activity having remained relatively high.
And just wondered if there was any feedback from users that you might share with us regarding the fee change, please? Thank you.
Yes. And so with regard to the cash balances, so the high there's a high dependencies on the settlement activities in principle. And yes, with regard to the settlement activities, there's also some cyclical element in it. But our view is unchanged here. So in principle, when the settlement activity increase and also the cash balances will increase, but it's also very clear that there's a higher cyclical component here.
And that's when you see our guidance with regard to the NII of where we say €15,000,000 to €20,000,000 And so that depends really on the cash balances and volume. And so in Q3, it below €13,000,000,000 That's why it was closer to the €15,000,000 But if it's €1,000,000,000 higher and then we would see on a yearly basis €3,000,000 more as we get the 30 basis points on U. S. Dollar and in euro. So there is some fluctuation here depending on the settlement activities and the cash balances.
But there's no structural change here in it. So the customer accepted our 30 basis points cash handling fees for euro and for U. S. Dollar. So that's not an issue.
If I may add to this, Ian, the price elasticity on the handling fee, we do not we have not seen any kind of price elasticity on the handling fee, right? Exactly what Gregor said. And also the declines did not argue in this way.
Okay.
That's helpful. Thank you.
And the next up is Arnaud Chitla from Exane.
Hi, good afternoon. One question on cost then. The just 3 months ago, you were guiding for 10% to 14% growth for Q3, 0% for Q4. And at the current run rate of revenues in October, if you don't see the activity pickup that you're hoping for, in order to achieve your EUR 1,200,000,000 guidance, it looks like you're going to bring down cost mid single digits in Q4. As you over the presentation, you said you've got some flexibility.
Can you please explain what sort of investments you're delaying? And what sort of flexibility you have? If I think longer term, if I think after 2021, what
sort of flexibility again do
you have on costs? Thank you.
Yes. So as I mentioned in my speech, so we did we do not cut strategic initiatives. So as this is obviously important for sustainable mid- to long term growth, so we do not do that. But nevertheless, there are operational topics where you can decide on a tactical basis. And we also obviously look and have a high cost discipline.
And when we see that the revenues are going not in the right direction because we have cyclical headwind, obviously, we have some flexibility to react. And yes, your math is right. If the trading activity does not increase in Q4, obviously, we should be able to compensate partly that with regard to our cost development. Therefore, my expectation is that the Q4 costs are below previous year level. So we will have some tailwind here for the Q4 development.
In principle, looking forward for 2021 and the following years, so in principle, we think if we want to continue with our secular growth of at least 5%, so we need some comparable roughly 5% increase of investment or investing in people or investing in processes and systems to ensure that we have also that 5% secular growth in the future.
Thank you very much.
And the next question comes from Martin Price from Jefferies.
Good afternoon. Just have a quick question on Axiomi. I was just wondering if COVID related headwinds have changed your expectations regarding the size or the timing of the synergies that you announced at the time of the acquisition and I guess are expected to flow through next year? Thank you.
Yes, you are right. It's a question of timing. So our view is unchanged. There are all the secular trends are here intact in that area of data analytics, portfolio analytics, portfolio compensation and so on. And from a 3 year perspective or medium term perspective, there's no reason to believe why we shouldn't come back to the growth rates we have seen in the past.
And you are aware that this was in the range of 20% growth over the last 10 years. So this year is definitely much more challenging. We see some growth, but obviously, by pharma, that growth what we have seen in the past, and that is definitely COVID related. And it's difficult for our marketing and sales teams to get access to the customer to get us a higher priority. But overall, the secular trend, we do not see changes here and are convinced after we are through that COVID crisis.
It's clear that we will go through and that we will increase revenues also on the Axioma side.
That's helpful. Thanks, Gregor.
All right. 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.