Good afternoon, ladies and gentlemen, and welcome to Deutsche Borse AG Analyst and Investor Conference Call regarding the Q2 2019 Results. At this time, all participants have been placed on a listen 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 Q2 2019 results. With me are Theodor Weimer, CEO and Gregor Pottmeyer, CFO. Theodor and Gregor will take you through the presentation today. 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 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, ladies and gentlemen. Let me start with a short summary, as always, about the highlights of the reporting period Q2. Afterwards, Gregor then will present the results in greater detail. The favorable development of Deutsche Borse, in line with our strategic plan, also continued in the Q2.
We achieved a 6% increase of net revenue, which was primarily driven by our secular growth initiatives. Of particular note, we increased net revenues from Eurex OTC clearing business as well as product innovation in the Eurex segment. In addition, our commodities business, AAX, continued to develop extremely well. Market shares, both in Europe and in the United States, are meanwhile on record levels. Meanwhile, the cyclical development remained moderate across the group.
While the higher U. S. Interest rate level has supported a net interest income from banking business at LeerStream, we saw some headwinds from lower market volatility compared to a strong development in 2018. Our adjusted operating costs increased on a non GAAP basis by 4%. This is fully in line with our expectation and reflects, on the one hand, organic growth investments, new technology trends such as blockchain and the public cloud as well as regulatory initiatives.
On the other hand, it results from our efficient management of operating costs and our endeavors to further leverage the scalability of our business model. As a result, our adjusted net profit increased by 10%. The results for the first half of twenty nineteen confirm the sustained growth trajectory of Deutsche Borse. Therefore, we are confident to reach our targets of at least 5% secular growth of net revenues and around 10% growth of the adjusted net profit for the full year 2019. Apart from these, more than satisfying financial results, as I think, we made further progress in implementing our strategic plan in the Q2.
Our efforts aimed at closing the Axioma transaction has made excellent progress. We now have all the necessary approvals from the relevant authorities. Closing of the transaction is affected towards the end of the Q3. As you are well aware, by mid April, we disclosed that we are in negotiations with Refinitiv concerning the potential purchase of certain FX businesses. The negotiations and the assessment of potential transactions are still ongoing, and we need to be diligent.
Please bear with me that we cannot comment upon this process any further, especially not on the potential time line. If I take a step back and look at the first half of our midterm planning period from 2018 to 2020, I think it is fair to say that we have made very good progress in implementing our strategy and are fully in line with our financial targets for the year 2020. We exceeded our midterm organic growth targets in 2018 through a combination of a strong secular growth and cyclical tailwind. In 2019, we have been well on track to deliver upon our guidance despite some cyclical headwinds. After we completed attractive smaller bolt on acquisitions in 2018, our M and A focus in 2019 is on larger transactions to gain further scale.
The Axioma acquisition is one example, but others will hopefully follow. Our main focus in technology is currently on distributed ledger technology and the adoption of public cloud services for our regulated businesses. In both areas, we have made good progress since last year. The Structured Performance Improvement Program, SPIP, we initiated last year with the objective of increasing our cost flexibility has largely been implemented. The ramp up of the savings is faster than expected, and the total savings are somewhat above our originally estimated EUR 100,000,000 With this, we are confident that we can continue to deliver on our promises.
Let me now hand over to Gregor to present the financials in more detail.
Thank you, Theta. Let me start with the group financials on Page 2. In the Q2, Deutsche Borse achieved net revenue and earnings growth rate slightly above the Q1, even though the environment continues to be not particularly easy. Net revenue increased by 6%, €725,000,000 to which net interest income contributed €67,000,000 As we mentioned in the Q1 call, the implementation of IFRS 16 resulted in some shift from operating expenses to depreciation. We adjusted the previous year's numbers in the presentation to ensure a like for like comparability.
Operating expenses amounted to €260,000,000 in the 2nd quarter. They were adjusted for around €32,000,000 in terms of exceptional items relating to restructuring initiatives and M and A expenses. This also includes some costs for legal advice in relation to the Axioma transaction, which has not been considered in our guidance so far. To fully reflect the Axioma transaction, we increased our guidance for exceptional costs for the full year by €20,000,000 to €120,000,000 The EBITDA increased in line with net revenue and operating expense development by 6%. The financial result includes a positive one off effect from a partial reversal of interest rate provisions for potential tax payments of around €5,000,000 In combination with the lower tax rate of 26%, the adjusted net profit increased by 10% and reached €288,000,000 Let us now turn to the quarterly results of the segments, beginning with Eurex on Page 3.
The development of Eurex in the Q2 was driven by secular growth in net revenue from OTC clearing as well as new products. This overcompensated the cyclical headwind that remains, for example, in interest rate derivatives, especially against a strong 2018. This leads to 1% net revenue growth and 3% growth in adjusted EBITDA. Page 4 shows the outstanding development of our commodity business, EX, which achieved an increase of net revenue by 17%. Net revenue growth was mainly driven by power derivatives, which significantly above the previous year, mainly due to the good performance of the Felix DE futures and as a consequence, a considerable gain in market share within Europe.
Moreover, the U. S. Power derivatives business at Nodal Exchange continued to grow significantly. Higher volumes made an important contribution to net revenue growth. They were mainly driven by higher market share, but also by increased overall market volumes.
At the end of June, Nodal achieved a spectacular 39% market share in power derivatives open interest in the U. S. As a result, the adjusted EBITDA of EEX improved by 24% and reached €35,000,000 Let me turn to Page 5 and the FX business. 360T's net revenue saw an increase by 18% to €22,000,000 This was mainly driven by consolidation effects of GTX ECM. Adjusted by this effect, 3.62 still grew by 4%.
It's worth mentioning that June has been a record month for 360T. We achieved the highest average daily volumes ever seen at 360T. Adjusted EBITDA increased 12% on the amounted to €10,000,000 C plus development was mainly driven by lower equity market volatility and muted trading activities. So much for the bad news. But there are good news as well.
CITRA was able to further expand its market position for equity trading in DAX stock and reach 70% market share amongst regulated markets. This proves that we have not only successfully defended our function as a key market for German stocks, but has even considerably enhanced it. All in all, Zitra net revenue stood at €55,000,000 and adjusted EBITDA at €33,000,000 Our post trading segment Clearstream was mainly driven by growth of the net interest income. Higher U. S.
Interest rates and increased U. S. Dollar balances resulted in a net interest income of €51,000,000 The favorable development of Clearstream's core business, including settlement and custody, was partially offset by a declining net revenue from 3rd party services as we decided to discontinue this non core business. In total, net revenue in the Clearstream segment was up by 8% and reached €196,000,000 Adjusted EBITDA stood at €131,000,000 which corresponds to an increase of 15%. The Investment Fund Service segment, which you'll find on Page 8, shows a sound increase of net revenue by 16% and achieved €44,000,000 This was mainly driven by the consolidation of the Swisscanto fund center in the Q4 last year.
The business has now been fully integrated into Clearstream and operates under the brand Clearstream Funds Desk. But even though equity trading activity was weaker in the Q2, both settlement transactions and assets under custody in investment funds increased again the previous year. Adjusted EBITDA grew by 21% and reached €21,000,000 While market conditions in the Global Securities financing business remain challenging because of low interest rates, volumes and net revenue from collateral management service improved slightly in the This was offset by a decline in securities lending business, which reflects a lower market demand for such services. As a consequence, adjusted EBITDA declined to €10,000,000 The weaker equity market environment and outflows out of European equities also adversely affected our index business stocks, While new contracts in the other licenses line item helped to overcompensate this effect, our net revenue remained more or less stable with an increase of 2%. Year over year, the adjusted EBITDA stood at €23,000,000 The data segment profited from slight growth in every line item, amongst others because of new products, such as regulatory reporting services and pricing measures.
The number of subscriptions, unfortunately, is not the best business indicator anymore as we are seeing a trend towards higher priced non display data subscriptions used by automated trading systems. Net revenue in data grew by 7% and achieved €41,000,000 while EBITDA stood at €27,000,000 On Page 12, I would like to put the Q2 results into the context of the first half year of twenty nineteen. The slightly better net revenue growth rate in the second quarter has helped to achieve net revenue growth of 5% during the 1st 6 months of the year, which is essentially all driven by secular growth. Adjusted operating costs increased by 3% and reached €509,000,000 as a consequence of higher investments. However, these were partially offset by cost savings resulting from our structural performance improvement program.
In total, adjusted net profit increased by 9% year. On Slide 13, we provide you with an overview of the 3 components of net revenue growth for the 1st 6 months of 2019. Compared to the previous year, secular growth being the key component of our strategy to increase net revenue has developed very well. The increase of 5%, respectively €65,000,000 was mainly driven by Eurex and EX, but 360T stocks and IFRS contributed as well. As expected at the beginning of the year, the market environment developed in a slightly more muted way compared to 2018.
This was mainly due to lower market volatility. Contributions from higher U. S. Interest rate only partially compensated this effect. Consolidation effect resulted in further net revenue growth by altogether €13,000,000 but the discontinuation of the 3rd party services at Clearstream had a negative effect on net revenue, which amounted to roughly €6,000,000 Adjusted operating costs shown on Page 14 increased in the first half of twenty nineteen as planned by around 3% and reached €509,000,000 This includes inflationary pressure in staff and other operating expenses.
However, this was largely offset by lower provisions for variable and share based compensation. Savings from the structural performance improvement program made an important contribution to fund investments in growth new technology and regulations. Net investments grew by €8,000,000 Furthermore, consolidation effects from M and A activities resulted in an increase of operating costs by €5,000,000 This concludes our presentation. Thank you for your attention. We are now looking forward to your questions.
And the first question comes from Chris Turner from Berenberg. Please go ahead with your question.
Good afternoon. It's Chris Turner from Berenberg. Just a short question for me. Given that you can raise debt at less than 2%, your shares have an earnings yield of less than 5%, Are you tempted to lower that 10% return on invested capital target for M and A? Thank you.
No. We have clearly stated our financial targets for M and A transaction. And we clearly said we want to be that in the 1st year, it should be cash earnings accretive and latest after 3 years. And with regard to the return on invested capital number, our targeted number is unchanged 10%.
And that's 10% within 5 years?
Yes. In such a range over the next 5
years. The
next question comes from Mike Werner, UBS. Please go ahead with your question.
Thank you. Just a couple of questions on my behalf. We saw a pretty healthy uptick or a sizable uptick in equity index pricing and the futures, especially given the relatively good volumes that we saw in the quarter. I was just wondering what drove that? Was that a mix effect?
And then, 2 quick questions here. On Clearstream, we saw other revenues grow by about 20%, about $4,000,000 year on year. I was just wondering what's in that other revenue bucket and then was any of that related to consolidation? And then finally, with regards to the 3rd party services in Clearstream and as you expect to kind of relinquish that business, should we expect those revenues to trend to 0? And are there any expense offsets on that?
Thank you.
Yes. Okay. So starting with the 3 questions. So the equity index pricing, yes, there's on the one hand side a product mix, as for instance, so dividend derivatives is a positive. So it's a higher margin product.
So we saw some positive development here. So it's a kind of product mix, but we have also seen some pricing impacts out of measures we already did in 2018, where you see now also a positive catch up effect here. Second question with regard to Clearstream other revenues, this increase. Yes, our basic strategy and idea is that we bring additional services to our customers like reporting services, tech services, also connectivity elements are included here. So that's the kind of what we from a strategic perspective, we would expect that this growth will continue.
3rd, third party services, yes, we made the decision to discontinue that kind of business and that will keep on for the next 18 months. So it will go down to 0.
And then any guidance on the potential expense offsets as you discontinue that business or if there is any?
Yes. There is also some cost reduction element in it, and it will take over time. So there are immediately some cost saving, but there are some remnant costs that we have to work on that topic. So overall, I would expect that we can more than 50% cover of the costs, what we had before.
Thanks, Peter.
The next question comes from Gary Campbell, JPMorgan.
Just one question on the interest rate environment. So clearly, it feels like it's more of a risk that rates may move down maybe in the second half of this year. Just can you help us understand the sort of effect of the declining interest rates? Because it feels like there's a lag effect in both rising and Yes.
So I
Yes. So I would assume that you would refer to the Fed or let's start with the Fed and then I can answer
the ECB.
With regard to the Fed, U. S. Rate, yes, there's an expectation of the market that the Fed will do a rate decrease, maybe one step or potentially a second step until year end. So with regard to our NII, so net interest interest income on Clearstream, so you could calculate from a with some 25 basis points translate into some €15,000,000 less net interest income. So 25 basis points times €6,000,000,000 cash dollar balances.
So that's roughly the impact here. On the euro side, another rate decrease would not impact our NII as it's already a negative number and we just charge the additional cost to the customer. So there wouldn't be any negative impact. With regard to our fixed income products, obviously, that could potentially help for these products if there is more volatility in that area and some speculation as it's now 1 or 2 cars or whatever happens here. So potentially, there should be some positive elements for us.
And if I look on our development in July, so it's a fixed income product, So they are currently 25% above previous year. So not sure whether this will continue, but here you see there's a higher volatility at least in July.
Just a quick follow-up. So on the €7,900,000,000 of cash balances in dollars, in terms of how quickly does the effect come through? Is there a it feels like there was a lag effect on the way up. Is there a similar impact on the way down?
No. It will happen very, very fast.
Okay. Fine. Thank you very much.
The next question comes from Johannes Thormann, HSBC. Please go ahead with your question.
Good afternoon, everybody. Johannes Thormann, HSBC. Three questions from my side, please. First of all, just a follow-up on the impact of Brexit. When you said last Investor Day 2018 that you expect a positive impact on Clearstream, we still don't see anything.
Any guidance or ideas when this might come? Or is this anyway a gone and a missed opportunity? And secondly, just looking at your big rise in cash balances versus probably normally, this goes in line with the more with the balance sheet size. And now we have a slightly different move. What is driving this significant rise in cash balances?
And last but not least, it would be great if you could remind us for the P and L impact of the Axiomal deal and the Orsmark deal, what is coming in this year? Thank you.
Okay. So let's start with the Brexit topic. So positive impact on Clearstream, I didn't think that we said that. So Brexit is more a topic with regard to our euro clearing initiative. So we have some uncertainty in the market.
So what could happen here. And therefore, we think there could be potentially positive impact on our euro clearing initiative. With regard to Brexit, what we communicated was that Brexit has for our customers, for banks, a higher priority to be prepared. And therefore, that was one of the reasons why we had some negative impacts at Clearstream with regard to our target to securities implementation. And therefore, that was one of the reasons why we said this target to security secular growth opportunity, there's some delay to Brexit.
So that's our view on Brexit. With regard to the cash balances, unchanged, the main driver are the settlement activities. And when you see an increase in settlement activities, then proportionally, you should see a cash balance increase. And indeed, the settlement activities increased and as a consequence, cash balances also increased. 3rd, P and L impact, Axioma and Osmark.
So Osmark is not really a material impact here. It's a small transaction with a low double digit investment we did. With regard to Axioma, so here we expect closing in Q3 this year. But I would not expect big impact out of that acquisition as it would just be a few months. And until now, the revenue impact, for instance, so we gave some guidance that the annual contracted volume is around €100,000,000 or U.
S. Dollar, but this won't be shown fully in a P and L as you have to do some adjustments here. So there are some positive impacts on top line, obviously. But on bottom line, I wouldn't see a big material impact here.
Okay, understood. Thank you.
The next question comes from Anoj Blaiksen. Please go ahead with your question.
Hi. I've got a question on OpEx and a follow-up on 3rd party services. First one on OpEx. So if I include back depreciation and amortization, it looks like you've grown costs, including D and A, by 2.5% in H1. At the time of Investor Day, you were saying that you would be happy to sacrifice some EBITDA margin to try and get some growth.
So I'm wondering how we should be thinking about costs, including D and A going in H2? Or are you growing at a 3% rate from here? And how should we think about costs looking forward? Because from your investments in technology, it sounds like this is going to go on for a bit. So if you can just clear up a bit on the cost guidance, that would be helpful.
And secondly, on 3rd party services. So from the presentation, my question, it sounded like that business line is still profitable today. So could you indicate what's happening and why it's being shut down? Thank you.
Okay. Starting with the third question, third party services. So we made the decision last year to close it because first, what kind of business are we talking about? So it was some very specific outsourcing business in the Luxembourg market where we did some outsourcing IT outsourcing element to banks in Luxembourg. And then we looked at it, we said it's not a strategic element for us or that's true.
And secondly, the margin we get out of that business was not as we had expected. So from a strategic financial perspective, that was the 2 reasons. With regard to your first question, OpEx, so we do not give precise OpEx guidance. So we say overall, we give a clear guidance with regard to our revenues and specifically with regard to our secular growth where we say we want to increase our net revenues by secular growth elements by at least 5%. So we are right on track here.
In addition, we say we want to achieve net earnings growth of 10%. So therefore, the costs are in between. You see that we make sure that the scalability works. So our intention is unchanged, that the cost increase should be lower than the net revenue increase, obviously, and we are able to deliver on that side. But our focus is, again, net earnings, so really bottom line impact, where we again say it's roughly 10% and net revenue growth and in between are other cost elements.
Okay. Thank you.
The next question comes from Ian White, Equity Research.
Just one for me on OTC clearing, please. I think you previously guided to expect €50,000,000 of revenues from OTC clearing during FY 'nineteen. You've done sort of a less than €19,000,000 in the first half. So just wondering what gave you conviction that you can still hit the €50,000,000 target this year and indeed continue to drive growth in that revenue line in future years, please? Thank you.
Yes. As you rightly mentioned, had roughly €19,000,000 net revenues in the first half year and that's 65% more compared to the comparable half year one in 2018. So we see a strong growth rate here. We have roughly a market share of 15% €14,000,000,000,000 notional outstanding volume. I think that clearly shows that the right that we are on the right growth trajectory here.
In addition, in the first half year, we continue to constantly connect new clients, specifically from the buy side. And we expect additional revenues already in the second half year of 2019. Out of that, the buyback will come in 2020, but we expect that really we get now more revenue from that buy side. As you know, that is also more the long dated interest rate swap and the much more profitable business. So assuming that we get more of that kind of business, our assumption is that the second half year will be higher from a net revenue perspective than the first half year.
Whether we finally make the €50,000,000 we will see our target is to come as close as possible to that kind of number.
Got it. Thank you.
And the next question is coming from Karl Voigt, KBW. Please go ahead with your question.
Hi. Maybe just try one on the negotiations with Refinitiv. Just wondering if you could give us some more color as to what's holding up the deal, the price or just difficulty carving out the entity or something else. And also wondering if you think you're still first in line, so to speak, or if you have any type of exclusivity agreement with Refinitiv for that asset?
Hi, Kai. Ted speaking. From my side, I mean, thanks for the question. Please bear in mind, I cannot disclose more than what we have said here, but I can ensure you we are in-depth discussions with Refinitiv here, and the negotiations and the assessments are ongoing on both sides. The kind of deal we are envisaging here is a carve out deal and carve out requires on both sides a very thorough due diligence, right?
And that is the reasoning why it takes longer predominantly.
Okay. And then just one follow-up, if I could, on the Clearstream cash balances. I believe there was a pretty significant increase in the U. S. Dollar balances in June, up to $8,700,000,000 Just wondering if you could give some color as to what drove that increase in June?
Thanks.
Yes. So again, in principle, as I said, and so the settlement activities are the main driver for that. And so far, it's on the customer decision what kind of collateral they provide us. And in principle, we see that and that's obviously a very good message that the U. S.
Cash balances even increased even the fact that some 8, 9 rate increases. So there was some fear that could be reduced, but the opposite is the case. And so this just shows you that really the settlement activities are the main driver. And as these increase, also the cash balances increased in Q2.
Thank you.
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.
The conference is no longer being recorded.