Good afternoon, ladies and gentlemen, and welcome to the Deutsche Börse 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 fourth quarter and full year 2019 results. With me are Theodor Weimer, 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 email 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 continued 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 last year, we saw additional net revenue growth from our M&A activities. In total, this resulted in 10% net profit growth to around €1.1 billion, which is also fully in line with our guidance. Please bear in mind, in the year 2018, we achieved €1 billion net income. Now we had €1.1 billion, another €100 million more. On this basis, we are proposing to increase the dividend per share for 2019 by 7% to €2.90, which equals a payout ratio of 48%. This proposal reflects both a commitment to continue to pay an attractive dividend, as well as increasing the free cash available for M&A. Looking back over the last two 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 two years amounts up to 14% and is very well in line with our midterm guidance. The focus on M&A in 2019 has resulted in two attractive and meaningful additions to our business, Axioma and UBS Fondcenter, very recently. With the Axioma transaction, we have strengthened our pre-trading offering significantly and improved access to the buy side for STOXX as well as the entire group. The acquisition of the majority stake in UBS Fondcenter 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 midterm plan, we continue to expect at least 5% growth of secular net revenue and an adjusted net profit of around EUR 1.2 billion, so another EUR 100 million compared to the very good year 2019. For the guide beyond 2020, we are currently working on our next midterm plan, so-called Compass 2023, which we'll present at our Investor Day on the 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, Theodor. Let me start with the group financials in the fourth quarter on page two. Net revenue development was mainly driven by a cyclical volume decline against a very strong fourth quarter 2018. This was partially offset by secular net revenue growth of around 4%, and consolidation effect of around 3%. Operating costs amounted to EUR 347 million. They adjusted for around EUR 33 million, mainly relating to M&A projects and restructuring. Operating cost was mainly driven by the consolidation of Axioma. The adjusted net profit in Q4 increased by 5% to EUR 242 million. Let me turn to the quarterly results of the segments, beginning with Eurex on page three. Due to much lower market volatility, cyclical net revenue declined by around 13% in the fourth 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 clearing. Among the new products, we saw a particularly strong performance in MSCI derivatives, total return futures, and ETF derivatives. In total, all new products on Eurex generated more than EUR 80 million 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 EUR 17 trillion, which represents a market share of 18% of all EUR-denominated interest rate swaps. In our commodities business, EEX, we continue to see good performance, but the fourth quarter 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 fourth quarter. In January 2020, our U.S. subsidiary, Nodal, achieved its 18th consecutive month of record volumes and a 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 five and the FX business. 360T continued to deliver very good organic growth rates in the fourth quarter, 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 offerings. We also made very good progress last year in extending our service and product offerings to FX futures listed on Eurex and the OTCFX clearing service.
This is expected to be an important growth driver for the segment over the next couple of years. Lower market volatility in the fourth 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 fourth 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 levels. This mainly relates to an increased amount of bonds outstanding, a slightly stronger U.S. dollar, and higher fixed income market activity. This is a trend we also continuing in January.
The investment fund service segment, which you find on page eight, showed a strong increase of net revenue. Most of the growth was driven by higher settlement and custody activities, among others, due to onboarding of new clients and funds. Furthermore, the acquisition of OSMAK in the third quarter last year added around EUR 2 million 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 product under EMIR. 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 volumes. Slide 10 shows the new Qontigo segment, which consists of the Axioma Analytics business.
We started to consolidate in September last year the index business of Deutsche Börse. The around EUR 20 million of analytic net revenue in the fourth quarter is slightly above our expectation, but due to revenue recognition under IFRS 15, the quarterly numbers can be somewhat volatile. If you reflect the Qontigo 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 EUR 6.03. On slide 13, we provide you with an overview of the three components of net revenue growth in 2019. Consolidation effects resulted in additional net revenue of EUR 48 million. The discontinuation of the managed services at Clearstream had a negative effect on net revenue, which is amounted to roughly EUR 9 million. Secular growth, being the key component of our strategy to increase net revenue, has developed as planned. The increase of around 5%, respectively EUR 140 million, was mainly driven by Eurex and EEX. Qontigo, IFS, and 360T were important contributors as well.
On the cyclical side, lower market volatility, affecting mainly the Eurex and Clearstream 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 EUR 1.13 billion in 2019. Around 3% operating cost growth was driven by consolidation effects from M&A activities, primary Axioma. The net consolidation number also includes around five million lower costs because of the discontinuation of managed services at Clearstream. Savings from the structural performance improvement program made an important contribution to fund investments in cost 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 provisions for variable compensation. Net inflation thus contributed around 2% operating cost growth.
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%-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 have 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 EUR 2.90. The remaining recurring free cash is planned to be reinvested into the business to support the group's M&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 foreign exchange trading and clearing services, growth in investment fund services, as well as our index and analytics business, Qontigo. On the net profit, we expect growth to a level of around EUR 1.20 billion. With this, we would roughly get to the midpoint of our Roadmap 2020 midterm targets of around 10%-15% net profit growth per annum between 2017 and 2020. While it's still early in the year, we are encouraged by the good start of 2020 during the first six weeks to achieve those goals. 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. We kindly ask all participants to limit their questions to one per person. Please press now nine and star to state your question. The first question comes from Benjamin Goy from Deutsche Bank. Benjamin? Benjamin, just one second. Your line is open now, Benjamin.
Hello. Can you hear me? Sorry.
We can hear you now. Yes.
Okay. Sorry. Yeah. One question, please, on your UBS Fondcenter 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.
Thanks, Benjamin, for the question. It's a strategically important acquisition we made here to strengthen our funds distribution business. Specifically, Swisscanto will benefit from that. We will build here a joint operation center, Swisscanto and UBS Fondcenter. 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 2021. Closing will be in the second half year of 2020. We will see the first full year impact then in 2021. Our current expectation is that we get here out of that additional EUR 60 million net revenues and based on a 70% EBITDA margin.
Very clear. Thank you.
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? Maybe there was some additional project costs allocated to Q4. Second, in terms of the EUR 1.2 billion 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. Thank you.
Yeah. Starting with the 7% organic growth in Q4. Yes, that's the kind of seasonality what we have seen here. Traditionally Q4, they are the highest cost we see over the full year. Here, overall, our cost development was on a constant portfolio basis for 2019 was 5% and 3% basically consolidation impact. 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, our net income guidance, EUR 1.2 billion. Yes, there is obviously some secular 5% growth in it. On top of that, you are aware with all the acquisition we already did and showing now the full year impact out of our Axioma acquisition out of Swisscanto and a certain assumption when we will consolidate UBS Fondcenter.
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. When we look with regards to the first six weeks in January, we have seen a slightly cyclical tailwind, so what obviously would help us to achieve our targets.
Thank you.
Next up is Kyle Voigt from KBW.
Maybe a question on Qontigo. Given it's the first 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? You mentioned that the revenues in that business, due to some revenue recognition, can be a bit lumpy. Wondering if you could help us frame what the right quarterly run rate is for that analytics business in Qontigo. Thank you.
Yeah, Kyle. The guidance to give on a quarterly basis for Qontigo is quite challenging as there are some accounting impacts and it's really a question what kind of contract you made with your customers. What is shown is basically a maintenance revenue and what's a one-time revenue. It really depends on the single contract. In general, Axioma grew over the last 10 years by roughly 20% on a net revenue basis. That's also our expectation for the future that we can show that kind of growth rate. That's for the analytics business. For our index business, we expect that they have a good chance to come back to the roughly 10% secular growth because there is a tendency to passive investments where our STOXX assets will benefit from that.
Overall, let's take the 10% on the STOXX side, the 20% on the analytics side, the blended weight of Qontigo is in between.
The next question comes from Arnaud Giblat from Exane.
Hi, good afternoon. I've got one question on Qontigo. 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 STOXX side of the business? I'm wondering if they've come up with new ideas or helped you think about new ways of growing that business.
Yeah. Obviously, we get good input from our partner here. They have a lot of experience, specifically in the U.S. market. That's always helpful when we discuss the strategy for Qontigo. It's always good to have an external benchmark, right? It's good to see that the things we do is also appreciated by that kind of external benchmarks. On top also with regard to potential M&A opportunities, also GA can give us a good input because it's our intention to also increase our capabilities in Qontigo, and therefore we also get valuable input from General Atlantic.
If I may add, Arnaud, Theodor Weimer speaking. As you can imagine, before this team, the General Atlantic guys, they are very well aware of the challenges and opportunities in the market, way beyond the M&A side, right? They do challenge us on the cost side. They help us to develop the Qontigo plan going forward. We will ask, and have asked Sebastian, the CEO of our index business and Axioma business of Qontigo to show up during the capital markets day to present the strategic plan going forward. You will hear more about this, and it is fun, it is exciting and enriching working together with General Atlantic partners, to be very clear.
Great. Thank you very much.
The next question comes from Andrew Coombs 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, Eurex, analytics, and so forth. How do you think about the return on investment, and the payback period for that investment? What's your timeframe? 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.
Yeah, Andrew. In general, with regard to what do we expect from our investments. We want to create additional value, and you create additional value if your net present value is bigger than zero. That means that you achieve a return what is higher than your WACC. 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 to do some replacements or where you invest in new technology like blockchain or cloud. Here, our expectation is that we should have at least payback within 3-5 years.
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. We feel as a capital market infrastructure provider, we are heavily dependent on the reliability of our IT systems. We fear, as all the financial service industry is fearing, we fear that something might happen, and therefore, 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 invest without basically any kind of business plan. We do it because you cannot calculate any kind of opportunity cost there. 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&A revenue growth is on top of the 5% growth, and you still just guide for, let's say, 8%-9% adjusted EPS growth or adjusted net profit growth. What would you need for the higher end of your three-year plan to grow, I don't know, profit to EUR 1.3? What would be in the bad case scenario, what would be, besides cyclical tailwinds from the markets, the other risk in your view for your guidance?
Johannes, I confirm the 2% consolidation out of already done M&A for 2020. I want to remind you that with regard to this 2% M&A, you will also see a 5% cost increase out of this M&A transaction. Don't forget that. In Q4 it was a 7% cost increase overall. I expect for 2020 out of all of these acquisitions, again, OSMAK, Axioma, and also UBS Fondcenter as front ender, they will have an impact of around 5% additional consolidated costs. That is included in our net income prediction and guidance for 2020. I gave you before already answered that I said with regard to cyclicality, we do not expect that we have headwind with regard to cyclicality. Now I don't want to give you more different scenarios, what could happen better or what could be worse.
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 increase our growth rate by M&A, as guided it too. With regard to cyclicality, we cannot give you guidance, and the only one I can give you is that we estimate in our guidance that we have no cyclical headwind.
Okay. Thank you.
The next question comes from Bruce Hamilton from Morgan Stanley.
Hi, thanks for taking my questions. Just a couple of clarifying ones actually. Sorry, on the answer to the last question, did you say the consolidation impacts add 2% to revenues for 2020 but 5% to cost, just to understand? Therefore, should I assume that the cost normalizes thereafter? Secondly, just on the point you make around needing robust IT and systems, obviously completely agree with that. Can you give us a sense of how much of your investment spend is the IT budget that is not being judged on a WACC or so forth? Then finally, just your latest view on WACC and where you feel your WACC is in terms of what you judge and when you look at the hurdle for new transactions. Thank you.
Yeah. Bruce, yes, I confirm out of consolidation, net revenue increase within the range of 2% and cost increase, OpEx increase within the range of 5% in 2020. Yes, I confirm that. With regard to our investment, in principle, you can say that roughly 50% out of our investment is in IT. For all the majority of the projects, there is always a business component and there is a IT component. Regularly, it's basically half. Half you have to define the business requirements from the product management and marketing department, then the IT has to implement it and to deliver that. Roughly you could say it's 50% is investment in IT and 50% is basically done via our business. With regard to the WACC, is in the range of 7%.
Thank you.
At the moment, there seem to be no further questions. If you would like to state another question, please press nine and the star key.
All right, we would like to conclude today's call. Thank you very much for your participation, and have a good day. Thank you.
Thank you.