Good afternoon, ladies and gentlemen, welcome to the Deutsche Börse AG analyst and investor conference call regarding the Q3 2020 results. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions following the presentation. Let me now turn the floor over to Mr. Jan Strecker.
Welcome, ladies and gentlemen, and thank you for joining us today to go through our third quarter 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 email 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 third quarter results, let me begin with some comments on the overall COVID-19 situation and its implications for Deutsche Börse. While markets have recovered significantly and the COVID-19 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 Börse, 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 third quarter was still well above the previous year's level, this did not translate, unfortunately, into growth in all areas of our business. The third quarter did not develop as we would have expected. Especially, Eurex saw a decline of activity across all asset classes, arguably against a relatively strong third quarter last year. 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, EEX and Qontigo are still seeing temporary headwinds resulting from the COVID situation. Despite those conditions, we managed to deliver 4% secular net revenue growth in the third quarter 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 third quarter. Despite the weaker market environment, we continued carrying out the key investment in growth, technology, and regulation. We also decided to minimize the organic operating cost growth in the third quarter to zero by means of several different measures. We wanted to demonstrate to you that we are able to contain our costs if necessary. With this, the adjusted EBITDA decreased to EUR 431 million, and the adjusted earnings per share stood at EUR 1.38 in the quarter. For the first nine months in 2020, we still reached net revenue growth of 10% to a level of EUR 2.4 billion. The adjusted net profit amounted to EUR 928 million, an increase of 8%. This is brought in line with our growth expectation for the full year.
Despite the weaker development in the third quarter, our guidance for adjusted net profit in 2020 remained unchanged at around [EUR 1.20 billion]. COVID continues to be an uncertainty, and among other factors, the guidance is subject to some pickup of market activity in the fourth 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&A is increasing for us. More about that during our Investor Day, which will take place on Wednesday, November 18, at 2:00 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&A session. We are also planning to have a few on-site spaces available for local participants.
Let me now hand over to you, Gregor, and talk about the results in more detail.
Thank you, Theodor, and welcome, ladies and gentlemen. Let me start with the Group financials in the third quarter on page two 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. 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 acquisitions. Operating costs amounted to EUR 288 million.
It is adjusted for around EUR 32 million exceptional items, which were mainly driven by M&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. The at-equity valuation of Tradegate in Xetra segment, which delivered a very strong business performance in 2020, resulted in a positive effect on income from strategic investments, which increased to EUR 12 million. I am now turning to the quarterly size of the segments, starting with Eurex on page three. 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 clearing house throughout the quarter, even though equity market volatility declined compared to the peak we saw in March.
Net revenue growth resulted from the growing outstandings and market share in euro-denominated interest rate swaps. In our commodity business, EEX, shown on page four, 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 five and the FX business. While the FX market volatility came down compared to the first quarter, 360T was able to maintain broadly stable volumes because of business generated from new clients. I'm now turning to page six 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, there was also continuing sizable secular contribution from a further increase in market share.
In addition, the strong growth in equity exchange 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 Tradegate, I mentioned earlier. The EUR 13 million we booked in the third quarter were respectively booked for the first nine months of 2020. We also expect an ongoing higher contribution for coming quarters. As you can see on page seven, 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. Higher outstandings are also resulting in a sustainable increase of activity.
With cash balances seasonally weaker in the third quarter, particularly in August, net interest income stood at the lower end of the EUR 15 million-EUR 20 million quarterly guidance we gave earlier this year. The Investment Fund Services segment, which you can find on page eight, continued to show a strong double-digit performance. This was driven by both cyclical and secular factors. Settlement mainly benefited from higher market activity, while custody and other revenue were driven by onboarding new clients by the good performance of our distribution services and by Ausmaq in Australia, which we acquired last year. On September 30th, we closed the UBS Fondcenter acquisition we announced early in the year. As guided previously, for 2021, we are expecting Fondcenter net revenue of around EUR 60 million, 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 accrued. As a consequence, we will show 100% of this business in our income statement. Slide nine shows the Qontigo segment, which consists of the Axioma analytics business we started to consolidate in September last year, and the STOXX index business. Our acquisition has substantially strengthened the segment, its organic growth was rather muted in the past quarter. The analytics net revenue had been above our expectations the fourth quarter last year and first quarter this year, the EUR 50 million in the third quarter continued to reflect the temporary impact COVID-19 had on our sales and marketing activities. We see some improvement of this situation, which will likely be reflected in the fourth quarter. 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 products, 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 first quarter, a solid second quarter performance, and cyclical headwinds now in the third quarter, we still achieved double-digit net revenue growth in the first nine months of 2020. Due to the less favorable market environment and stronger year-over-year comparisons, the earnings growth rate for the first nine months is now broadly in line with our expectations for the full year. On slide 11, we provide an overview of the three components of net revenue growth in the first nine months. Consolidation effects resulted in additional net revenue of 2% or EUR 48 million.
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 as planned and increased by 6% or EUR 134 million. All segments helped to achieve this, with Eurex being the largest absolute contributor and 360T, IFS, and Qontigo showing the highest secular growth rates. Due to the COVID-related headwinds since the second quarter, the cyclical growth contribution decreased significantly, but still amounted to 2% or EUR 38 million. Adjusted operating costs, shown on page 12, totaled EUR 879 million in the first nine months. Operating cost growth of around 6% was a result of consolidation effects from M&A activities, primarily Axioma. Investments increased by 6% or EUR 47 million.
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 first nine months. Because of the weaker market environment since the third quarter, 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 EEX, the expansion of foreign exchange trading and Clearing Service, growth in Investment Fund Service, as well as our index and analytics business, Qontigo. Despite the weaker development in the third quarter, our adjusted net profit guidance for 2020 remains unchanged at around EUR 1.20 billion adjusted net profit. Amongst other factors, this is, however, subject to an increase of market activity in the fourth quarter. Furthermore, we still see additional net revenues from the sale of the regulatory reporting hub in the fourth quarter, and there's also some flexibility in the cost base in the fourth 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.
Ladies and gentlemen, if you would like to ask a question, please press nine and star on your telephone keypad. If you would like to withdraw your question, please press nine and star again. We kindly ask all participants to limit their questions to one per person. Please press nine and star now to state your question. The first question comes from Johannes Thormann from HSBC. Over to you.
Good afternoon, everybody. Johannes Thormann, HSBC. One question and a follow-up, please. First of all, on the UBS Fondcenter deal, you said you will book no minorities. 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? Secondly, the exceptional cost guidance for this year, what should we expect and what should we expect next year? Thank you.
Yeah, thanks Johannes for the question. With regard to the UBS Fondcenter acquisition, as the pricing for the second tranche is already fixed, that's the reason why we already consolidate 100% and do not show that as a minority. We show that as a financial liability. The valuation of the financial liability depends basically on the EBITDA development in 2021. We have defined a multiple on that basis, and we will see what is the final result of the EBITDA in 2021. Based on that, we would execute beginning of 2020.
2022.
2022. Oh, sorry. Yes. No, 2022. Thanks. 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. Overall, it's difficult to judge because these are exceptional items in principle, and it really depends when we deliver successful M&A transactions, just to give you that kind of example. Obviously M&A is strongly part of our situation, of our strategy. Therefore, it would be even good if we would show successful M&A. That's obviously one angle in the exceptional cost. The other, the litigation and the restructuring cost. Obviously the restructuring cost should go down. The litigation topics, CBF here, you are aware of our cum-ex topic, you are aware of our U.S. litigation topic.
This we currently show as exceptional items and that's really difficult to judge and difficult to plan. 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 from a cyclical perspective, while secular growth 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.
Yeah, Mike. I think you are aware that in principle, our basic strategy is to increase our liquidity pool, so going for products on that side. It's basically not our core strategy to use pricing power here. In principle, you also are aware that we do what makes sense and overall, so 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. Overall, if you say we want to grow more by 5% on a secular net revenue basis, roughly 1% comes out of that, 20% and 80% is focused on getting more liquidity and more customers. 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 IFS and the UBS Fondcenter deal. Now given you're a much bigger player with the new Clearstream Fund Centre, I just wanted to get some more color on the qualitative benefit or maybe also quantitative benefits of being a one-stop shop on the IFS side going forward. Thank you.
Obviously you see that Investment Fund Services is still in that difficult market environment growing on a double-digit basis and that even organically and on top of M&A activity. I think we have a very strong position here now, gained over the last years. Also all of the three acquisitions we did, Swisscanto from Zürcher Kantonalbank, Ausmaq in Australia, and just recently, UBS Fondcenter. That's part of our strategy and obviously the more we get, the stronger is our position. The principal logic behind that is that we have now a big cost efficiency advantage compared to the back office processes in the bank. 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 back office processes.
That in principle gives us good opportunities to further strengthen our opportunity via organic but also via inorganic ways.
30 days. Do you already see from Vestima clients interest also in the new front office solution, so to say?
Yes, sure. That is part of the strategy as with the UBS Fondcenter, we increase the value chain going now more in our funds distribution. 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.
Next up is Bruce Hamilton from Morgan Stanley.
Hi there. Afternoon, and thanks for the presentation. Just a question on the secular growth. I guess, looking at the year so far, you started in the first quarter with about 8% growth or EUR 60 million, which slowed a bit in Q2, then in Q3, it looks like there's been sort of EUR 27 million of incremental secular revenue or about 3.5% growth. Can you give us a bit more color on why that slowed? Is that to do with work from home? If so, does that pose any risk to this sort of 5%-ish as we cast into next year? On the EUR 134 million 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 others. Thank you.
Yeah, Bruce, thanks for the question. Overall, you see some fluctuation over the quarters, 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. Eurex obviously is above currently that 6% level, overall. Investment Fund Services has a higher growth rate here. These are the two elements who contributed the most. In principle, all of these segments contribute in a different way. Even our Clearstream core business in the range of 3%-5% to deliver here on the growth rate. Overall, clear message, all the segments deliver to the secular growth element.
I think we will also give you a little bit more guidance on the different business segments on our Capital Market Days when we do an outlook for the next three 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 a 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. I just wondered if there was any feedback from users that you might share with us regarding the fee change, please. Thank you.
Yeah. With regard to the cash balances, there's a high dependencies on the settlement activities in principle. Yes, with regard to the settlement activities, there's also some cyclical element in it. Our view is unchanged here. 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 EUR 15 million-EUR 20 million. That depends really on the cash balances and volume. In Q3, it was below EUR 13 million. That's why it was closer to EUR 15 million. But if it's EUR 1 billion higher, and then we would be on a yearly basis, EUR 3 million more as we get the 30 basis points on U.S. dollar and in euro.
There is some fluctuation here depending on the settlement activities and the cash balances. There is no structural change here in it. The customer accepted our 30 basis point cash handling fees for euro and for U.S. dollar. That's not an issue.
If I may add to this, Ian. The price elasticity on the handling fee, we have not seen any kind of price elasticity on the handling fee. Right? Exactly what Gregor said. Also the declines did not argue in this way.
Okay. That's helpful. Thank you.
Next up is Arnaud Giblat from Exane.
Hi, good afternoon. One question on cost. Just three months ago, you were guiding for 10%-14% growth for Q3, 0% for Q4. At the current run rate of revenues in October, if you don't see the activity pick up that you're hoping for. In order to achieve your [EUR 1.20 billion] guidance, it looks like you're going to have to bring down cost mid-single digits in Q4. 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 cost? Thank you.
Yeah. As I mentioned in my speech, we do not cut strategic initiatives. This is obviously important for sustainable mid to long-term growth. We do not do that. Nevertheless, there are operational topics where you can decide on a tactical basis. We also obviously look and have a high cost discipline. When we see that the revenues are going not in the right direction because we have cyclical headwinds, obviously we have some flexibility to react. Yes, your math is right. If 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 levels. We will have some tailwind here for the Q4 development.
In principle, looking forward for 2021 and the following years, in principle, we think if we want to continue with our secular growth of at least 5%, we need some comparable roughly 5% increase of investments 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.
The next question comes from Martin Price from Jefferies.
Good afternoon. Just have a quick question on Axioma. 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, I guess are expected to flow through next year. Thank you.
Yes, you are right. It's a question of timing. Our view is unchanged. All the secular trends are here intact in that area of data analytics, portfolio analytics, portfolio compensation, and so on. From a three-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 we are aware that this was in the range of 20% growth over the last 10 years. This year is definitely much more challenging. We see some growth, obviously by far not that growth what we have seen in the past, and that is definitely COVID-related. It's difficult for our marketing and sales teams, and to get access to the customer to get the higher priority.
Overall, the secular trend, we do not see changes here, and are convinced after we are through that COVID crisis, or it's clear that we will go through, 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.