Good afternoon, ladies and gentlemen, and welcome to Deutsche Borse AG Analyst and Investor Conference Call regarding the Q4 and Full Year 2019 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 preliminary 4th quarter full year 2019 results. With me are Theodor Weimar, Chief Executive Officer and Gregor Pottmeyer, Chief Financial Officer. Theodor and Gregor will take you 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 and can also be downloaded from the Investor Relations section of our website. As usual, this conference call will be recorded and is also available for replay.
Let me now hand over to you, Theodor.
Thank you, Jan. Welcome ladies and gentlemen. Let me start today's call with a short summary and afterwards as always Gregor will present the results in more detail of the financial year 2019 and Q4 2019. Let me calibrate the results after the strong development in 2018. I think it is fair to say that last year, we overall achieved a very solid financial performance.
In line with our guidance, we continue to deliver 5% secular net revenue growth. For me, it is particularly encouraging to see that Eurex was able to overcompensate a lower market volatility with secular growth from new products, OTC clearing and pricing measures. It is also very good to see that our growth segments commodities, foreign exchange, investment fund services, as well as index and analytics yet again achieved double digit growth in 2019. While cyclicality across the group was a small headwind loss year, we saw additional net revenue growth from our M and A activities. In total, this resulted in 10% net profit growth to around €1,100,000,000 which is also fully in line with our guidance.
Please bear in mind, in the year 2018, we achieved €1,000,000,000 net income. Now we had €1,100,000,000 another €100,000,000 more. On this basis, we are proposing to increase dividend per share for 2019 by 7% to €2.90 €2.90 which equals a payout ratio of 48%. This proposal fits both a commitment to continue to pay an attractive dividend as well as increasing the free cash available for M and A. Looking back over the last 2 years, I think we are very well on track with the implementation of our growth strategy, our roadmap 2020.
We achieved consistent secular revenue growth each year and each quarter since the beginning of 2018. The average annual net growth over the last 2 years amounts up to 14% and is very well in line with our mid term guidance. The focus on M and A in 2019 has resulted in 2 attractive and meaningful additions to our business, Axioma and UBS Formcenter very recently. With the Axioma transaction, we have strengthened our pre trading offering significantly and improved access to the buy side for stocks as well as the entire group. The acquisition of the majority stake in UPS Formcenter complements our product offering on the fund distribution side and thus strengthens our leading position in investment fund services further.
In terms of outlook for 2020, the last year of our current mid term plan, we continue to expect at least 5% growth of secular net revenue and an adjusted net profit of around €1,200,000,000 so another €100,000,000 compared to the very good year 2019. For the guidance beyond 2020, we are currently working on our next return plan, so called Compass 2023, which we will present at our Investor Day on 28th in London. We're looking forward to seeing many of you there. Let me now hand over to Gregor to present the details of our financial results.
Thank you, Theda. Let me start with the group financials in the Q4 on Page 2. Net revenue development was mainly driven by a cyclical volume decline against the very strong Q4 2018. This was partially offset by secular net revenue growth of around 4% and consolidation effect of around 3%. Operating costs amounted to €347,000,000 They adjusted for around €33,000,000 mainly relating to M and A projects and restructuring.
Operating cost was mainly driven by the consolidation of Axioma. The adjusted net profit in Q4 increased by 5% to €242,000,000 Let me turn to the quarterly results of the segments, beginning with Eurex on Page 3. Due to much lower market volatility, cyclical net revenue declined by around 13% in the 4th quarter. This was to some extent compensated by good secular net revenue growth rates, with the main drivers continuing to be product innovation and OTC clearance. Amongst the new products, we saw a particular strong performance in MSCI derivatives, total return futures and ETF derivatives.
In total, all new products on Eurex generated more than €80,000,000 of net revenue in 2019. We also made good progress in OTC clearing by connecting more sell side and buy side clients to our platform. This resulted in strong growth of outstandings in January to around €17,000,000,000,000 which represents a market share of 18% of all euro denominated interest rate swaps. In our commodities business, EX, we continue to see good performance, but the Q4 was the strongest quarter in 2018. Therefore, the net revenue growth rate decelerated somewhat compared to the previous quarters in 2019.
Growth continues to be driven by power derivatives, in particular in U. S. Products, which increased by more than 50% in the 4th quarter. In January 2020, our U. S.
Subsidiary Nodu achieved its 18th consecutive months of record volumes and the market share of 45% of U. S. Power futures. Nodal also recently successfully completed the migration of its power open interest from NASDAQ Futures. Let me turn to Page 5 and FX business.
360T continued to deliver very good organic growth rates in the Q4 despite relatively low FX volatility. This was mainly driven by attracting new clients, in particular in the U. S, and higher demand for our swap and forward offering. We also made very good progress last year in extending our service and product offering to FX futures listed on Eurex and the OTC FX clearing service. This is expected to be an important cost driver for the segment over the next couple of years.
Lower market volatility in the 4th quarter also resulted in a decline of cash equity volumes on Xetra. Some of this cyclicality was compensated by further strengthening our position as a reference market for trading German blue chips with weekly market shares levels as high as 78% in the 4th quarter. In our post trading segment Clearstream, lower U. S. Interest rates were partly compensated by an increase of client cash balances held in U.
S. Dollar, resulting in only a 3% decline of net interest income. In the core settlement and custody activities, we saw solid cost levered. This mainly relates to an increased amount of bonds outstanding, a slightly stronger US dollar and higher fixed income market activity. This is a trend we're also continuing in January.
The investment fund sales segment, which you find on Page 8, showed a strong increase of net revenue. Most of the growth was driven by higher settlement and custody activities, amongst others due to onboarding of new clients and funds. Furthermore, the acquisition of Osmark in the Q3 last year added around €2,000,000 of net revenue. The growth of net revenue in the collateral management business of the GSF segment was mainly the result of more favorable product mix and growing volumes, for instance, in initial margins aggregation products under EMEA. In securities lending, negative interest rates and ample liquidity provided by the ECB put pressure on commission levels, resulting in a decline of net revenue despite growing volume.
Slide 10 shows the new Contigo segment, which consists of the Axioma Analytics business. We started to consolidate in September last year and the index business of Deutsche Borse. The around €20,000,000 analytic net revenue in the Q4 is slightly above our expectation. But due to revenue recognition under IFRS 15, the quarterly numbers can be somewhat volatile. If you reflect the Contigo segment in your estimates now, please do keep in mind that around 22% of the net profit will be distributed to the minority shareholders.
In the data segment, we continue to see the trend that individual or display data subscriptions are declining. From a net revenue point of view, this decline is compensated by higher priced non display data subscriptions, which are typically used by other trading platforms or quantitative trading systems. With regard to the full year 2019 development on Page 12, we achieved our target of at least 5% secular net revenue growth and around 10% growth of the adjusted net profit. The adjusted earnings per share in 2019 increased by 11% to €6.03 On Slide 13, we provide you with an overview of the 3 components of net revenue growth in 2019. Consolidation effect resulted in additional net revenue of €48,000,000 But the discontinuation of the managed services at Tierstream had a negative effect on net revenue, which is amounted to roughly €9,000,000 Secular growth being the key component of our strategy to increase net revenue has developed as planned.
The increase of around 5%, respectively €140,000,000 was mainly driven by Eurex and EEX, But Contigo, IFS and 360T were important contributors as well. On the cyclical side, lower market volatility affecting mainly the Eurex and Xetra segment was partly offset by the increased net interest income due to higher average U. S. Interest rates in 2019. Adjusted operating costs shown on Page 14 totaled to €1,130,000,000 in 2019.
Around 3% operating cost growth was driven by consolidation effects from M and A activities, primarily Axioma. The net consolidation number also includes around €5,000,000 lower costs because of the discontinuation of managed services at Kjerstin. Savings from the structural performance improvement program made an important contribution to fund investments in growth initiatives, new technology and regulations. Net investments resulted in another around 3% operating cost growth. Net inflation includes inflationary pressure in staff and other operating expenses, which was offset by lower provision for variable compensation.
Net inflation thus contributed around 2% operating cost cost. This brings me to our dividend proposal for 2019 on Page 16. As part of our long standing distribution policy, we generally aim to distribute 40% to 60% of the adjusted net income to shareholders via the regular dividend. Within this range, the dividend payout ratio mainly depends on the business development and dividend continuity considerations. Since the earnings of the group has been growing, the payout ratio has come down over the last couple of years.
For 2019, the proposal of the executive board combines a reduction of the payout ratio to 48%, with an increase of the dividend per share by 7% to €2.19 The remaining recurring free cash is planned to be reinvested into the business to support the crude M and A strategy. The last page of today's presentation is the outlook for 2020. We expect at least 5% growth of secular net revenue also in 2020. This will mainly be driven by future progress in the OTC clearing business, new Eurex products, the commodity activities of EEX, the expansion of forex exchange trading and clearing services, growth in investment fund services, as well as our index and analytics business, Contigo. On the net profit, we expect growth to a level of around €1,200,000,000 With this, we would roughly get to the midpoint of our Roadmap 2020 midterm target of around 10% to 15% net profit growth per annum between 2017 2020.
While it's still early in the year, we are encouraged by the good start of 2020 during the 1st 6 weeks to achieve those goals. This concludes our presentation. Thank you for your attention. We are now looking forward to your questions.
And the first question comes from Benjamin Goy from Deutsche Bank. Benjamin, just one second. So your line is open now, Benjamin.
Can you hear me? Sorry.
We can hear you now.
Yes. Sorry. One question please on your UBS France Center acquisition. Can you speak on synergies across revenues and costs with your Swisscanto business, but also your more traditional investment fund services business across custody and settlement? Thank you.
Yes. Thanks, Benjamin, for the question. It's a strategically important acquisition we made here to strengthen our funds distribution business. So specifically, Swisscanto will benefit from that. So we will build here a joint operation center, Swisscanto and UBS Force Center.
And obviously, there are good cost synergies and it's much more efficient. And we have now a much more scalable business than before. With regard to our expectation of what do we get out of that is that we say for 'twenty one. So closing will be in the second half year of twenty twenty. So we will see the 1st full year impact then in 'twenty one.
And our current expectation is that we get here out of that additional €60,000,000 net revenues and based on a 70% EBITDA margin.
And the next question comes from Michael Werner from UBS.
Thank you. Just two questions, please. First, on the 7% organic cost growth that we saw in Q4, I was just wondering how much of this was expected to be a run rate going forward and maybe there was some additional project costs allocated to Q4. And then second, in terms of the $1,200,000,000 of estimated earnings targeted for 2020, you indicate that implies secular net revenue growth of at least 5%. But internally, I was just wondering what type of assumptions you are making for the cyclical revenue growth factor?
Yes. And so starting with the 7% organic growth in Q4. Yes, that's the kind of seasonality what we have seen here. So traditionally, Q4, they are the highest cost we see over the full year. So here, overall, our cost development was on a constant portfolio basis for 2019 was 5% and 3% of basically consolidation impact.
And so that 5% cost increase is a realistic number. And you shouldn't overestimate that kind of Q4 effect with regard to a run rate in 2020. The second question, the one our net income guidance, €1,200,000,000 Yes, there is obviously some secular 5% growth in it. On top of that, you are aware with Swisscanto and a certain assumption what Swisscanto and a certain assumption when we will consolidate UBS PhoneCenter. So there will be roughly another 2% growth out of that in 2020, purely a consolidation impact.
On top of that, we expect that we do not have cyclical headwind, obviously. And when we look with regards to the 1st 6 weeks in January, we have seen slightly cyclical tailwind. So what obviously would help us to achieve our targets.
And next up is Kyle Voigt from KBW.
Hi. Just maybe a question on Contigo, just given it's the 1st full quarter it's been consolidated in your results. Can you just provide some update with respect to the organic growth rate ultimately achieved in 2019? And you mentioned that the revenues in that business due to some revenue recognition can be a bit lumpy. Just wondering if you could help us frame what the right quarterly run rate is for that analytics business in Contigo?
Thank you.
Yes, Kyle. So the guidance to give on a quarterly basis for Contigo is quite challenging as there are some accounting impacts and it's really a question what kind of contract you made with your customer. So what is shown is basically a maintenance revenue and what's a one time revenue. So it really depends on the single contract. But in general, so AXIOMA grew over the last 10 years by roughly 20% on a net revenue basis.
And that's also our expectation for the future that we can show that kind of growth rate. And that's for the analytics business. And for our index business, we expect that there's a good chance to come back to the roughly 10% secular growth because there is a tendency to passive investments where our stock asset will benefit from that. And so overall, let's take the 10% on the stock side, the 20% on the analytics side, the blended rate of Contigo is in between.
I've got one question on Contigo. So you've been working with General Atlantic with Private Equity for a few months now. Can you talk a bit about the contributions they might have made, especially on the stock side of the business. I'm wondering if they've come up with new ideas that helped you think about new ways of growing that business.
Yes. Obviously, therefore, we get good input from our partner here. So they have a lot of experience specifically in the U. S. Market.
And that's always helpful when we discuss the strategy for Contigo. And it's always good to have an external benchmark, right? And it's good to see that the things we do is also appreciated by that kind of external benchmarks. And on top, also with regard to potential M and A opportunities, also GA can give us a good input because it's our intention to also increase our capabilities in Contigo and therefore we also get valuable input from General Atlantic.
And if I may add, Arnaud Theodora Weimer speaking. As you can imagine, right, before this team, the General Atlantic guys are very well aware of the challenges and opportunities in the market way beyond the MRA side, right? They do challenge us on the cost side. They help us to develop the Contigo plan going forward. And we will ask and have Sebastien, JEA, the CEO of our index business and the Axioma business of Contigo to shop during the Capital Markets Day and to present the strategic plan going forward.
So you will hear more about this and it is fun, it is exciting and enriching working together with general analytic partners to be very clear.
Great. Thank you very much.
The next question comes from Andrew Collins from Citigroup.
Good afternoon. If I could just ask you a bit more on some of the investment initiatives that you outlined. You mentioned it was across a number of different areas, Europe, CEX, analytics and so forth. How do you think about the return on investment and the payback period for that investment? And what's your time frame?
Because I know you've obviously not changed your revenue guidance for the next 12 months from a secular perspective, yet the investment spend
is perhaps a little bit
higher than we might have thought? Thank you.
Yes, Andrew. So in general, with regard to our what do we expect from our investments? So we want to create additional value, and you create additional value if your net present value is bigger than 0. So that means that you achieve a return what is higher than your back. And that's our basic key KPI to create additional value here.
On the other hand side, if you have to look on IT investments where you have some to do some replacement or where you invest in new technology like blockchain or cloud. So here, our expectation is that we should have at least payback within 3 to 5 years.
And then there is one area, Andrew, which is our investments on the IT security side. We do not calculate any kind of business plans for this, right, because we feel as a capital market infrastructure provider, we are heavily dependent on the reliability of our IT systems And we fear, right, as all the financial service industry is fearing, we fear that something might happen. And therefore, right, we are encouraged by all our regulators to invest more, to do more on the IT security side. This is the only exception where we invested out basically any kind of business plan. We do it because you cannot calculate any kind of opportunity cost there, but it's massive what we are investing there.
Okay. Thank you.
The next question comes from Johannes Thormann from HSBC.
Good afternoon, everybody. Johannes Thormann, HSBC. Two questions, please. First of all, just to confirm, the 2% M and A revenue growth is on top of the 5% growth and you still just guide for, let's say, 8% to 9% adjusted EPS growth or adjusted net profit growth, what would you need for the higher end of your 3 year plan to grow, I don't know, profit to 1.3? And what would be in the bad case scenario, what would be besides cyclical tailwinds on the markets, the other risk in
your view for your guidance?
Yes, Johannes. Yes, I confirm the 2% consolidation out of already done M and A for 2020. And also, I want to remind you that with regard to this 2% M and A, you will also see a 5% cost increase out of this M and A transaction. So don't forget that. In Q4, it was a 7% cost increase.
So overall, I expect for 2020 out of all of these acquisitions. So again, Osmark, Axioma and also UBS form center, they will have an impact of around 5% additional consolidated costs. And yes, that is included in our net income prediction for and guidance for 2020. So and I gave you before already answers that I said with regard to cyclicality, we do not expect that we have headwind with regard to cyclicality. And now I don't want to give you more different scenarios what could happen better or what could be worse.
So you know all of that. We manage what we can influence, and that's obviously the secular net revenue growth. And here we are unchanged, committed to deliver our 5% secular growth. We are able to also to increase our growth rate by M and A as I've guided it too. And with regard to cyclicality, we cannot give you guidance and the only one I can give you is that we have not that we estimate in our guidance that we have no cyclical headwind.
The next question comes from Bruce Hamilton from Morgan Stanley.
Hi. Thanks for taking my questions. Just a couple of clarifying ones actually. Just sorry, on the answer to last question, did you say the consolidation impacts add 2% to revenues for 2020, but 5% to cost? Just to understand.
And therefore, should I assume that the cost normalizes thereafter? Secondly, just on the point you make around the needing robust IT and systems, obviously, completely agree with that. But can you give us a sense of how much of your investment spend is the sort of IT budget that is not being judged on a WACC or so forth? And then finally, just your latest view on WACC and what you where you feel your WACC is in terms of what you judge and when you look at the hurdles for new transactions? Thank you.
Yes. Bruce, so yes, I confirm out of consolidation, net revenue increase will be in the range of 2% and cost increase, OpEx increase will be in the range of 5% in 2020. Yes, I confirm that. With regard to our investment, so in principle, you can say that roughly 50% out of our investments is in IT. So there's for all the majority of the projects, there's always a business component and there is a IT component.
And regularly, basically half. So half, you have to define the business requirements from the product management and marketing department, and then the IT has to implement it and to deliver that. So roughly, you could say it's 50% is investment in IT and fifty percent is basically done via our business. With regard to the WACC is in the range of 7%.
At the moment, there seem to be no further questions.
All right. Then we would like to conclude today's call. Thank you very much for your participation and have a good day. Thank you. Thank you.