Good afternoon, ladies and gentlemen, and welcome to the Deutsche Borse AG Analyst and Investor Conference Call regarding the Q1 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 hand the floor over to Mr. Jan Strecker.
Welcome, ladies and gentlemen, and thank you for joining us today to go through our Q1 2020 results. With me are Theodor Weimar, Chief Executive Officer and Gregor Pottmeyer, Chief Financial Officer. Theodor and Gregor will take you as usual through the presentation. And after the presentation, we will be happy to take your questions. The presentation materials for this call have been sent out via e mail yesterday and can also be downloaded from the IR section of our website.
As usual, this conference call will be recorded and is available for replay. Let me now hand over to you, Theodor. Thank you, Jan. Welcome, everybody, ladies and gentlemen. Before we enter into the presentation, lead you through the presentation, let me provide with you and share with you some remarks on this unprecedented environment in the Q1 and a summary of the results we have achieved so far.
Afterwards, as always, Gregor will present the results in detail and contact you through the presentation. Clearly, the Q1 was the beginning of a very exceptional time for all of us. The corona crisis has started to significantly affect both the global economy and the society, and it's the biggest crisis we've experienced for a very, very long time. Implications of the virus are massive, And in many regions of the world, we have not reached the peak yet. Supply chain issues, lower productivity and even production stops are resulting in an economic recession.
This was reflected by markets with a collapse of market capitalizations, although it was eased somewhat by unprecedented measures taken by central banks and governments, the famous US12 $1,000,000,000,000 which have been developed. As far as Deutsche Bank is concerned, our top priority in these truly exceptional times is the safety of our employees and their families at all locations. Our incident management has been monitoring the situation closely and we developed a preventive response plan early on to ensure safety for employees as well as continuous full operational readiness. This was important in order to provide orderly and stable markets, especially during days of extreme volatility. Since this week, we are now slowly trying to go back to normal as far as possible.
This includes a ramp up of staff at our different locations according to a phased plan, reflecting local approaches and decisions by the respective governments, as well as complying with all physical distancing rules. But it is quite clear that this will be a slow and steady process over the next couple of months. Despite all the preparations around the globe to start to lift lockdowns, the macroeconomic implications of COVID-nineteen will be felt well into the second and third quarter. And some of its true impact probably remains to be seen. Therefore, we would also expect further market uncertainty over the course of the year and probably elevated levels of volatility.
Due to the exceptional levels of volatility during the Q1, we also achieved an exceptional financial performance. Our net revenue increased by 27% to around €950,000,000 While cyclical growth was the main driver, it is also very encouraging to see the continued positive contribution from our secular growth initiatives. Because of the strong top line growth, higher investments in growth and technology as well as some additional IT expenses due to the corona situation, the adjusted operating cost increased by 10% on a constant portfolio basis. As a result, the net profit and earnings per share increased by 33%. There was a lot of uncertainty in the German market a couple of weeks ago where the annual general meetings could take place during the corona situation and accordingly where the dividend could be paid as planned.
Fortunately, the German legislator has reacted very quickly and has introduced an emergency law that allows companies to hold AGMs on a fully virtual basis. We will make use of this law and hold our virtual AGM as scheduled on May 19. Dividend will then be paid on the 3rd business day following the AGM. Despite a strong start to the year, our guidance for 2020 of an adjusted net profit of around €1,200,000,000 remains unchanged. This is mainly because we expect some cyclical headwinds over the course of the year, for instance, a much lower net interest income at Clearstream.
For the guidance beyond 2020, we have already started to work intensively on our next midterm plan, the Compass 2023, and we are planning to present it at our Investor Day. Originally scheduled for May 28, we have now decided to postpone the event into autumn. While we already have a clear view on our growth opportunities beyond 2020 and believe that the secular growth potential of Deutsche Borse will generally not be affected by the current developments, we believe that the event has much more value for you and for us if you hold it face to face. This will hopefully be possible again in the second half of the year. Finally, in order to increase the transparency with regards to our most important secular growth opportunities, we decided to streamline the segment reporting.
Let me now hand over to you, Gregor, to present the details of the results.
Thank you, Sarah. Let me start with the group financials in the Q1 on Page 2 of the presentation. While the net revenue growth clearly was driven by the strong increase of market volatility, it is very encouraging to see the continued solid secular net revenue growth. Nurex was the biggest contributor with additional net revenue from product innovation, pricing and growth of OTC clearing. But the other growth areas of the group also contributed mid single digit to even double digit secular net revenue growth rate.
Operating costs amounted to €291,000,000 They are adjusted for around €27,000,000 exceptional items, which are quite evenly split into restructuring, litigation and M and A. Adjusted for the consolidation of mainly Axioma, the operating costs increased by 10%. With this, the net profit and the EPS increased by 33% on an adjusted basis, which is clearly an exceptional development. Before I take you through the development of the different business segments, I would like to explain 2 changes to the segment reporting we introduced in the Q1 on Page 3 of the presentation. We decided to streamline the segment reporting to increase the focus on the segments with the greatest secular growth opportunities.
The first change is the allocation of cash and derivative data to the respective trading segments and thus the elimination of the data segment. Our trading platforms are the third of the data and the data is a very important trigger for trading decisions, though there's a natural fit. But this does not mean that we don't see any growth opportunity in data. The platform for growth in advanced data and analytics is now the new Contigo segment where we combined Axioma and STOXX last year. The second change is the reallocation of the Global Securities Financing segment into the Clearstream segment.
The assets that we are safekeeping on behalf of our clients are serving as lendable securities and collaterals, so there's also a natural fit. Furthermore, we generally see some secular growth potential for collateral management services because of increased regulatory requirements. The Central Bank's monetary policies are reducing the demand for the time being. This slide also summarizes the secular growth drivers for the remaining 7 segments. Generally, we regard market share gains, new product or asset class introductions, pointing our client network and pricing changes as secular drivers.
This is because they can be directly influenced by the management team. We are firmly convinced that we can benefit from those drivers, irrespectively of the macroeconomic environment and cyclicality. The current situation might result in a brief delay in one or the other area as it forces our clients to reprioritize their activities while the crisis lasts. But generally, we feel that our model of operating efficient markets and providing effective risk management has been further strengthened by the crisis. I'm now turning to the quarterly results of the segments, starting with Eurex on Page 4.
As expected, the increased market volatility with the volatility stocks peaking above 'eighteen resulted in substantial growth of index derivatives. Despite the continued negative interest rate environment in Europe, we also saw additional demand for our interest rate derivatives because of some volatility of the government bond yields and spreads in Europe. Volumes in single equity derivatives declined, primarily because of a preference for the highly liquided index derivatives in times of high volatility. This decline was compensated by an increase of the revenues per contract due to more positive product mix. OTC clearing volumes and net revenue increased broadly in line with our expectations, and we have made further progress in terms of overall market share and buy side adoption.
The margin fees also benefited from the increased volatility as margin levels in March broadly doubled. The new line item Eurex data relates to the sale of derivatives market data, including real time and historic data and amounted to €15,000,000 in the Q1. This should be a pretty steady number going forward. Our commodities business, EX, also saw some cyclical tailwinds from the development in the Q1, but far less compared to Eurex and Xetran. Power derivatives continue to be the most important net revenue growth driver, primarily because of growth and market share gains in Europe.
But also nodal in the U. S. Continued to perform very well. March was the 20th consecutive month of volume growth. This led to an increase of market share in open interest of U.
S. Power futures to almost 50%. On the gas market, we also saw a strong development, particularly in Dutch TTF products, but gas net revenue increased only slightly because of the product mix and some rebate change. Let me turn to Page 6 and the FX business. 360T also benefited from elevated levels of FX volatility in the Q1.
In March, we saw the best trading day ever of our combined FX offering, including a substantial share of business from the newly introduced FX Futures on Eurex. But the secular component of net revenue growth was even bigger. It was mainly driven by attracting new clients, in particular in the U. S. And higher incremental demand for our swap and forward offerings.
On our cash market, Xika, we also saw a significant increase of activity with around 60% volume and net revenue growth in trading and clearing. Volatility obviously was an important factor, but there was also a sizable secular contribution from a further increase of market share. The market share in debt securities increased by 5 percentage points year over year to 74%. The declines of the newly introduced KedRA data and the other line items are mainly due to the one off effects from the termination of a contract with a partner exchange in the Q1 last year. In our post trading segment Clearstream, we saw solid growth of custody volumes with the decline of equity market being overcompensated by growth of outstanding and fixed income.
Looking at the debt financing needs of corporates and the low interest rates around the globe, this development should continue in the foreseeable future. Settlement activity clearly was driven by the cyclical increase of trading activity in the fixed income market. The revenue per custody and settlement activity improved in the Q1, but some of this is one off in nature. Despite falling interest rates, the net interest income was almost on previous year's level. This is the result of a significant increase of cash balances due to the much higher security settlement activity.
Since the cash balances have already normalized and we are now faced with very low or even negative rates globally, we would expect a substantial decline of the net interest income going forward. Some of the effects will be mitigated by the introduction of a cash handling fee for U. S. Dollar balances of 30 basis points and the increase of the cash handling fee for euro balances from 20 to 30 basis points. From now on, we are expecting net interest income levels of around €15,000,000 to €20,000,000 per quarter.
The Investment Fund Service segment, you'll find on Page 9, showed a very strong increase of business activity and net revenue. Approximately half of the growth was driven by cyclicality and half by structural factors like onboarding of new clients and funds. Furthermore, the acquisition of Osmark in the Q3 last year added around €2,000,000 of net revenue. Slide 10 shows the new Contigo segment, which consists of the Axioma Analytics business we started to consolidate in September last year and the stock index business of Deutsche Borse. The around €21,000,000 of Analytics net revenue in the Q1 is slightly above our expectations.
But due to revenue recognition under IFRS 15, the quarterly numbers can be somewhat volatile. ETF lightened net revenues was somewhat under pressure from lower market levels and outflows out of European products. But this was by far overcompensated by growth of the exchange and other license net revenue. On Slide 11, we provide you with an overview of the 3 components of net revenue growth in the Q1. Consolidation effects resulted in additional net revenue of 3% or €20,000,000 This was mainly driven by the inclusion of Axioma in September last year.
In terms of methodology, the growth of Axioma compared to the Q1 2019 was not included as a consolidation effect, but as a secular net revenue growth. Secular growth being the key component of our strategy to increase net revenue has developed as planned and increased by 8% or €60,000,000 There was a positive contribution by all segments with Eurex being the biggest absolute contributor and 360T showing the highest secular growth rate. As expected, cyclical growth was overall the biggest driver with an increase of net revenue 16% or €114,000,000 Around twothree of that were contributed by the Europe segment, in particular by index derivatives. Adjusted operating costs shown on Page 12, totally €291,000,000 in the first quarter. Operating cost of around 7% was due to consolidation effects from M and A activity, primarily Axioma.
Investments increased by 10% or €35,000,000 This is primarily driven by the planned investments in growth and technology, an increase in personnel to support growth and costs to implement regulatory requirements like CSDR, for instance. Furthermore, the exceptional situation in the Q1 also required some extra spending on IT operations and security. Net inflation was flat as inflationary pressure in staff and other operating expenses was offset by savings from structural performance improvement programs. This brings me to Page 13 with some additional information on our AGM and the dividend proposal. As Theodor already mentioned, our AGM will be taking place as scheduled on May 19.
Against the background of the ongoing global COVID-nineteen pandemic was decided after careful consideration of all aspects to hold a virtual event without personal participation of our shareholders. With the virtual AGM, we make use of an option that the German legislature introduced recently in lieu of the COVID-nineteen pandemic. Thus, we can ensure that all resolutions, including on the appropriation of surplus, can be taken as scheduled. The dividend will then be paid as scheduled on the 3rd business day following the AGM. The rest of the AGM agenda consists mainly of housekeeping items.
We would very much appreciate it if you could all cast your vote through the TechList channel. If you have any questions, please do not hesitate to contact our IR team. With the last page of today's presentation, we would like to reiterate the outlook for 2020. We continue to expect at least 5 percent 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 activities of EX, the expansion of foreign exchange trading and clearing services, growth in investment fund services as well as our index and analytics business Contigo.
On the net profit, we continue to expect growth to a level of around €1,200,000,000 despite the strong Q1. This is mainly due to the cyclical headwind we will be faced with at Clearbean because of a much lower net interest income from now on. This concludes our presentation. Thank you for your attention. We are now looking forward to your questions.
Thank you very much. And the first question comes from Benjamin Goy from Deutsche Bank. Over to you.
Yes. Hi, good afternoon. One question on staff costs. So I think it was on a clean basis 17% up, of course, Contigo played a role. So actually, most interested in the other segments.
And here, the structural growth segment mostly was double digit growth, but in particular, where you have a trading component, whether it's Eurex, EX and 360 key. So maybe you can give us a bit more color on what was or what is investments that should drive secular growth going forward and what was investments to cover some peaks in trading volumes and, of course, quite an extraordinary situation with corona? Thank you.
Yes. Thank you, Benjamin. So overall, we have seen in the Q1 a 17% cost increase, 7% was out of that was on consolidation effects, especially Axioma. So and 10% is our constant portfolio cost increase. There were some exceptional components in it.
So one was and I alluded to that in my speech, additional costs due to the corona crisis. So we had to invest more in IT, in IT security, etcetera. Secondly, there was some front loading of costs, what we have not done in Q1 last year. So overall, this 10% cost increase on a constant portfolio basis is not the new run rate for the next quarter. So we expect that, that increase will go down over the next quarter.
And the biggest decrease you will see in Q4 this year.
Perfect. Thank you.
And now coming to the next question and it comes from Johannes Thormann from HSBC. Mr. Thormann, the floor is yours.
Good afternoon, everybody. Sorry, I was on mute. Just a question, first of all, on the deal with UBS. Is there any delay? Or do you still expect this to be concluded in Q4 this year?
And secondly, on the negative income from associates, do you expect that this can be like compensated in the next quarters? Or is this rather a terminal loss on those investments? Thank you.
Yes. So Johannes, UBS, no, we think there's no delay. We are confident to deliver on closing the deal in the second half year twenty twenty. With regard to the impact negative impact on associated or strategic investments, so that is due to the fact that we have seen that market levels come down. So we had to do some IFRS adjustments here, When the market levels will come back to normal, then you should see that it comes back on the level you have seen earlier.
Okay. Thank you.
The next question comes from Mike Werner from UBS.
Thank you. I guess in the prepared remarks, Theodore, you noted that you're still quite confident the 5% secular revenue growth opportunities for Deutsche Borse. I guess my question revolves around the fact that a core part of your client base, which is the asset measurement industry, has certainly suffered some headwinds. And there's certainly an expectation that consolidation may tick up, which could potentially reduce that addressable market for you guys. I'm just wondering in that environment, do you remain confident about the 5% secular revenue growth?
And ultimately, what why would you remain confident on that? Thank you.
Yes. So you have seen our secular growth rate was 8% in the first quarter. And so we are really confident to continue to achieve at least 5% secular growth. So and you said, why are you confident? So we continue to see good progress, for instance, in our OTC clearing initiative.
So we will deliver €50,000,000 or even above in this year. Last year, it was €40,000,000 So that is a clear secular growth driver. We see continued progress with our MSCI derivatives. We just recently launched new products, and so we are really confident to see here a good secular growth. Total return future, so strong demand in our customer pipeline.
So we are confident that we will also see further growth here. Buy in agents, just a new product. What we recently got as the first one in Europe, a license to do this buying agent service or for a phased settlement transaction that will start February next year. So we increased that by 30 people now on and they are on boarded, and we expect really a nice double digit net revenue growth out of that. So just to give you some examples where we are confident to have to see secular growth on Eurex side.
The same on investment front service. So continued increase to use our much more efficient platform, Vestimart, in our mutual fund business, our hedge fund business. So continued growth here. Contigo, you'll see trend to purchase investment secular growth. We will benefit combining stocks and Axioma having more buy side access, double digit growth here.
So that is also continue. And I see also some initiatives have some delay. And that's right. If you say that the journey maybe there are some other priorities in the banks or as asset managers, But we still are convinced that the far majority of our initiatives will continue and will show progress and therefore quite confident to deliver further on this 5% secular growth.
Thank you very much, Gregor. Appreciate it.
The next question comes from Arnaud Shiblat from Exane.
Yes, good afternoon. I've got just a couple of very quick follow ups. Could you disclose the €1,000,000 contribution from new products in FX? And secondly, I think at the time when you closed Axioma, you said that Axioma was loss making and it looks like it's making about €3,000,000 of profits. Could you maybe help us think through what's happened since you've earned?
Is this the case where you've just accelerated the revenue growth and keep the cost flat? Or has there been some optimization done on the cost base there?
Thank you. Yes, Anno. Thanks for the two questions. So FX is obviously a very strong asset with the highest growth rate here. And they are basically the 2 components.
So the one is our GTX business in the U. S. And the majority of the business here is more cyclical driven, right? So the increase here in the U. S.
Market, we benefit also from cyclicality. In our 360T core business, the far majority is secular growth. And that's now, I don't know how many quarters we have now shown a double digit growth or even more than 20%. So that's really in the right shape now. We are able to gain additional market share to acquire new customers, And we expect that this growth will continue over the next quarters and even years.
With regard to Axioma, obviously, with what was the €21,000,000 we achieved revenue. We are clearly above and strongly above the level of last year. That's good to see. And yes, you are right, Axioma turned now as so far the EBITDA is very negative and that's now positive. And it's also our intention to further scale it up, right, so that we see this revenue growth and still unchanged our view.
We should still have the potential to grow here by 20% on a yearly basis. That you also increase the scalability of that kind of business, so and that we continue to increase our earnings at Akdura.
Thank you.
And the next question comes from Ian White from Autonomous Research.
Hi, good afternoon. Thanks for the presentation and thanks for taking my question. Just a follow-up on EEX, please. Could you give us the market share in European power derivatives for the Q1? And maybe could I ask your views, please, on what do you think is the upper bound of market share that you could achieve in that market?
I'm wondering if there are some products that you would always expect to see trade OTC, for example. And so just interested to get a sense of sort of long term growth trajectory from here, please.
Yes, Ian. So the market share in the European Power Derivatives market is close to 40%, so a little bit below that level. And 6, 7 years ago, we started roughly from 10%. So you have seen continuous demand increase here on our product, and we were able to gain market share from the brokers, so from the OTC. And we expect for the next years that we will continue to increase our market share.
And the reason for that is that we have a superior clearing risk management solution and make sure physical delivery. So these are the ingredients where customers strongly support our platform. Whether there's upper bound or not, I do not know. But there's no reason to believe why this market share of now close to 40% should continue to increase whether 50%, 60% or whatever percentage, but we really expect we see a good opportunity to further
And the next question comes from Martin Price from Jefferies.
Good afternoon. Just a quick question on Clearstream. It looks like the revenue yield on assets under custody increased quite a bit in the Q1. I was just wondering if you could provide some more detail on what was behind that and central level of sustainability. And then maybe just a quick follow-up question on the buy in agent service you referred to earlier, Gregor.
I just wondering if you could provide detail on how you're planning to manage any potential counterparty risk if you're effectively stepping in to buy securities on behalf of a market participant who's failing to deliver? Thank you.
Yes. So with regard to Clearstream, obviously, there were 2 big drivers. So the one is the increased settlement activities, what increased by roughly 60%. And as a consequence, our cash balances even doubled in the days with the highest activities. And both of that leads that we have also some nice cyclical tailwind here.
From a secular perspective, to give you some guidance what is now sustainable here, we say more than 50% of that increase is secular driven. So in the custody, it's even a little bit higher. We'd say it's roughly twothree out of that as sustainable. To give another example, the settlement activity that we do not see as sustainable In the other items where we have some connectivity, some repricing, so there's roughly twothree is sustainable. And on the cash balances side, we introduced this 30 basis points as a collateral fee for U.
S. Dollar cash balances and sustainable. So that's basically roughly so the mix on IFS, we also said it's roughly 50% what is sustainable. So that should give you some guidance how we see the development of Clearstream over the next quarters. The second question, CCP risk management.
Obviously, we were very proud that our risk model at the CCP works as designed. So it was it's under predictable. And that's really key for our customers that they exactly know and that they can calculate depending on the product what kind of margin they have to install at Eurex clearing. So and we got really excellent feedback from the customers that we have that kind of prediction and it's under. With regard to the crisis situation, we have also a clear rule book where we stick to and that is also appreciated.
So any haircut we do on certain summer imports is transparent and there are no big surprises. So overall, we see really great feedback from our customers that our clearing and risk model work as designed and are predictable.
That's helpful. Thanks very much. Just on the buying agent services, the question was really around whether you think that also presents new counterparty risk. Is there anything you can say on that?
Yes. So with regard to the buy in agent model, we have really a risk averse model. So we do not take risk here. So we are here a provider of that kind of services where we have great access to our network where we can help our market participants to find additional partners. They do not find by themselves.
So we act here as an agent here, and it's not our understanding that we will take securities here and have our own exposure and our own books.
Understood. That's very helpful. Thank you, Greg.
All right. That was the last question. So we very much appreciate your participation, and have a good day. Thank you.