The conference is now being recorded. Good afternoon, ladies and gentlemen, and welcome to the Deutsche Borse AG Analyst and Investor Conference Call regarding Q1 2019 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 turn the floor over to Mr. Jan Strecker.
Welcome, ladies and gentlemen, and thank you for joining us today to go through our Q1 2019 results. With me are Theodor Weimar, CEO and Gregor Putmeyer, CFO. Theodor and Gregor will take you through the presentation today. 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 available for replay. Let me now hand over to you, Theodor.
Thank you, Jan. Welcome, ladies and gentlemen. Let me begin today's presentation with a short summary as usual covering the financial highlights
of the
Q1. Gregor will then present the results in detail. In terms of net revenue development in the Q1, we achieved our target of 5% growth of 2nd and net revenue. This was mainly driven by OREX with increases in OTC clearing, new prices and new products. In addition, EAX, our commodity player, achieved significant secular growth by continuously increasing its market share.
The weaker equity market environment resulted in cyclical headwinds for index derivatives and cash equities, especially against the very strong Q1 2018. However, the declines in these areas were almost entirely offset by the future increase of the net interest income at Clearstream. And as a result, cyclical net revenue declined slightly by 1%. In total, net revenue in the Q1 improved by 4%, which is a better outcome than what was to be expected in the current market environment. This demonstrates the strength and resilience of our business model with its stronger secular growth drivers and excellent diversification.
The implementation of IFRS 16 resulted in a small shift from operating expenses to depreciation from the Q1 onwards. Gregor will explain the details in a moment. Like for like, adjusted operating costs increasing increased only slightly. This is mainly the effect of higher investments in organic growth, new technologies and regulation, which was not completely offset by the cost reductions as part of our structural performance improvement program. We deliberately took the decision not to reduce investment spending in the Q1 in spite of the weaker cyclical environment because this would have come at the expense of future growth.
As a result of the revenue and cash on cost performance, adjusted net profit increased by 8% and adjusted earnings per share by 10%
to €1,590,000
With this, the Q1 is in line with our expectations for the full year 2019 of at least 5% growth of secular net revenues and around 10% growth of adjusted net profit. As part of our external growth ambitions, we announced the Axioma transaction on April 9. It will strengthen our pre trading offer significantly and will improve access for the buy side, which is growing in importance for us. In addition, the smart transaction structure, which our Atlantic as equity partner helps to crystallize the value of our index business, ensures value generation and preserves our firepower for further M and A. Last but not least, my colleagues in Executive Board now will give you an update on the progress of the implementation of our strategic roadmap 2020 at our Investor Day, which will take place on May 22 in London.
We're looking forward to seeing many of you there. With this, I would like to hand over to you, Gregor.
Thank you, Deirdre. Welcome, ladies and gentlemen. Let me start with the group financials in the Q1 on Page 2 of the presentation. Net revenue increased by 4% to €721,000,000 And as part of net revenue, net interest income across the group reached €62,000,000 As Theodor mentioned, the reporting of operating costs, EBITDA and depreciation has been affected by changes as a result of IFRS 16 introduction. The objective of IFRS 16 is to increase the transparency of new transactions.
To meet that objective, assets and liabilities arising from most leases have now to be recognized on the balance sheet. Exempted are leases with a term of less than 12 months or leases where the underlying asset is of low value. Therefore, the IFRS 16 introduction resides in a shift of some operating costs to depreciation and the financial result in our income statement. We have not formally adjusted the previous year's results, I'll provide you with non GAAP indicative figures for the purpose of comparison. Considering IFRS 16, operating costs would have been lower by around €12,500,000 in the Q1 2018.
All growth rates of operating costs and EBITDA in this presentation
are
based on the non GAAP indicative numbers. The introduction did not have any impact on net profit and EPS. Operating costs in the Q1, adjusted for exceptional items, were like for like, up by 3% to €249,000,000 Exceptional items were in line with our full year guidance and stood at €24,600,000 This includes mainly provisions for the different restructuring initiatives as part of the Roadmap 2020 and M and A expenses. Adjusted EBITDA increased by 6% to €476,000,000 and depreciation increased slightly to €53,000,000 We expect depreciation to sequentially increase as we go through the year. In total, adjusted net profit amounted to €292,000,000 and adjusted EPS increased by 10% to €1.49 49 I'm now turning to the quarterly results of the segment, starting with Eurex on Page 3.
The development of Eurex in the Q1 was driven by secular growth in the face of cyclical headwinds. Positive secular drivers were the further growth in OTC clearing, both against the Q1 and Q4 last year, While the annualized OTC clearing net revenue of the Q1 is still below our full year target of around €50,000,000 The continued growth is very encouraging. Furthermore, new derivatives products and the increase the handling fee for cash collaterals in April last year contributed to secular growth. However, the weaker equity market environment, especially against a strong Q1 2018, resulted in a decline of the index and fixed income derivatives net revenue. In total, net revenue in the Eurex segment was flat at €238,000,000 and adjusted EBITDA grew like for like by 4% to €176,000,000 Our commodities business, CEX, was characterized by favorable net revenue development, primarily in power derivatives.
This was driven by electricity price volatility and further increases of market share in Europe and the U. S. In Europe, market share levels have increased in all markets. In the German market, which is the biggest contributor, they are now solidly above the 40% mark. Our U.
S. Power exchange model achieved a market share of around 33% in the Q1, which is a significant step, up even against the end of last year. In total, net revenue increased in the EEX segment to €740,000,000 and adjusted EBITDA amounted to €37,000,000 both growing in the double digit area. In the FX business, 360T's net revenue grew by 22% against the previous year. The main driver was the consolidation of the GTX PCM.
Organically, 360p achieved net revenue growth of around 7%. This is a very good result as the FX market overall was under cyclical pressure in the Q1. In total, net revenue in the 360T segment stood at €21,000,000 and adjusted EBITDA at €10,000,000 In our cash market, Tika, total order book turnover decreased by double digits, primarily because of the lower equity market volatility. Net revenue performance was slightly better because of higher average revenue and a one off effect from the termination of a contract with a partner exchange. In total, net revenue in the Seacraft segment was down by 5% and reached €59,000,000 while adjusted EBITDA stood at €38,000,000 Clearstream's development was mainly driven by growth of net interest income.
Higher average U. S. Interest rates and an increase of the U. S. Dollar balances resulted in an interest income of €49,000,000 In total, net revenue in the Piercing segment reached €189,000,000 and adjusted EBITDA amounted to €127,000,000 dollars In the Investment Fund Services segment, the weaker equity market environment resulted in a small decline of the number of settlement transactions, while assets under custody remained stable.
However, because of the consolidation of Swisscanto Funds Centre, net revenue increased to €42,000,000 and adjusted EBITDA reached €21,000,000 Market conditions in the Global Securities Financing business continued to be challenged by the low interest rates. Therefore, net revenue only grew slightly to reach €19,000,000 but adjusted EBITDA increased by double digits to €12,000,000 Index Business stocks, the impact of the weaker equity market environment was visible in the exchange and ETF licensees line items. This was compensated by higher other license income, which is expected to be sustainable on this level for the remaining quarters in 2019. In total, net revenue amounted to €35,000,000 and adjusted EBITDA stood at €24,000,000 In the data business, the number of subscriptions continued to decline year over year. This was partly offset by average pricing.
As regards in the Xetra segment, the line item other net revenue includes a small one off effect from the termination of a contract with the partner exchange. In total, net revenue in the data segment increased to €44,000,000 and adjusted EBITDA grew by 14% to €31,000,000 On Page 12, we show the reconciliation of net revenue and operating costs compared to the Q1 2018. With our secular initiatives, we generated around 5% net revenue growth across the globe. The main contributors were Eurex, including OCC clearing, new products and pricing as well as the commodity business of EEX. The impact of the weaker equity market environment for Eurex and Cletra was partly offset by growth of net interest income.
On balance, cyclical net revenue decreased by around 1%. In addition, the consolidation of GTX in July 20 18 Swisscanto Fund Centre in October 2018 and Krekfe, the leading provider of energy certificate registries in Europe in January 2019, further added around 1% net revenue growth. On a like for like basis, adjusted operating costs increased by €7,000,000 to €249,000,000 in the Q1. As part of that inflationary pressure in staff and other operating expenses, were fully compensated by lower provisions for variable compensation as a result of lower growth rates in the Q1. Furthermore, increased investments in growth initiatives, new technology and regulations were largely offset by cost savings from the structural performance improvement program.
Lastly, the consolidation effect
I
just mentioned also resulted in additional operating cost of around €3,000,000 Before we conclude today's call, let me briefly explain the change to the credit rating indicator we introduced this year on Page 13 of the presentation. Since 2007, our key rating indicators were based on the calculation method used by Standard and Poor's. As S&P has adjusted its method for raising market infrastructure providers, we have adopted the new indicators. In order to achieve a minimal financial risk profile, consistent with the AA rating and in accordance with the S and P methodology, We aim to achieve the following targets for the new key rating indicator: a net debt to EBITDA ratio of no more than 1.75 free funds from operation to net debt greater than 50% and an interest coverage ratio of at least 14%. When calculating these key rating indicators, we will closely follow the method used by S and P to determine EBITDA.
The reported EBITDA is adjusted for the result from strategic investments as valid by expenses for operating leases and unfunded pensions obligations. In order to determine FFO, interest and tax expenses are deducted from EBITDA, applying the respective inputted adjustments for operating leases and unfunded pension obligations. The group's net debt is reconciled by first deducting 50% of the hybrid bond as well as the surplus cash at the beginning at the reporting date from cost debt. Liabilities from operating leases and unfunded pensions obligations are then added. S and P bases the determination of the key rating indicators on the corresponding weighted average of the reported or expected result of the previous, current and following reporting periods.
To ensure the transparency of the key rating indicators, we report them based on the respective current reporting period. This concludes our presentation. Thank you for your attention. We are now looking forward to your questions.
The first question comes from Kyle Voigt calling from KBW.
Hi. If I could just ask one question on M and A. Axioma is a
deal and a deal structure that may provide a lot of value creation for your shareholders longer term. But obviously, from a short term standpoint, the deal is not going to be earnings accretive. Going forward, if there's a deal in which you utilize cash and debt financing capacity, and one where you acquired the entirety of an asset, should investors think about a different, more near term financial targets for that type of deal versus Axioma, which is a little more strategic and unique of a deal
structure? Yes, Kai. Indeed, that's true. We have consciously structured these around Axioma with the purpose to create long term value for our investors and shareholders, and we accept it as a certain minimal dilution on the cash side over time. And we have to be sure that we can dramatically increase the value of our index business together with Axioma to the best in the best interest of our shareholders.
And as we have said on April 11, for example, we confirmed that we are in negotiations with Refinitiv Group concerning the potential purchase of certain FX business units. That is a kind of a deal where we are looking at and where we would say that our criteria, which we formulated during our last calendar market, they will apply. So we are looking for this kind of deal where the deal is strategically very sensible and where we have a cash acquisition within one latest 3 years' time. So indeed, we're looking predominantly in value creation deals, of course, whenever we use our debt and cash capabilities.
Thank you.
The next question comes from Benjamin Goy calling from Deutsche Bank. Over to you.
Yes, hi. Good afternoon. One question on FX. So it's now for 3 quarters, so you consolidate GTX. I think there's a bit of a complementary nature with your original 360T business.
So maybe you can comment on the revenue synergies or cost synergies you realized so far. Appreciate it's probably small numbers. So any qualitative color is also appreciated here. Thank you.
Yes. So indeed, these are really smaller numbers as we talk about here, revenues in a very low double digit €1,000,000 area and cost even obviously below that level. Commenting on the business development on GTX, here you see really some cyclical headwind, what we see here as our FX infrastructure providers see basically the same here. We exit here on the cost side and so to compensate for that. The markets are compared to our 360p core business, it's really complementary as GTX is basically a dealer to dealer platform and 3602 is focused on corporate customers.
So there are not so many cost synergies to achieve. But nevertheless, we are doing what is necessary here to achieve good results.
Okay. Thank you.
Thank you. The next question comes from Johannes Thormann calling from HSBC. Over to you.
Good afternoon, everybody. Jonas from HSBC. One follow-up question.
First of all, is there any timeline on the FX or talks with Refinitiv? And secondly, thanks for sharing the German market share data in EX. Do you have any data or at least a guesstimate for the European market share of EEX nowadays?
Let's start with the timeline on FX, Johannes. Negotiations and the assessments of a potential transaction regarding the FX businesses of Refinitiv are ongoing. And I'll ask you for your understanding for your professional understanding that we will not disclose further details. As I said, The negotiations are ongoing and more clarity will be disclosed most likely within the next few weeks.
That's already helpful. Thank you.
And with regard to the market share, yes, we comment on market share in the EX business in Germany for more than 50 40%. For the EMEA group in Europe, it's 38%, and that clearly show a strong increase overall as last year we were slightly above the 30% range. So 38% is really a great achievement here.
Okay. Thank you.
Thank you. The next question comes from Chris Turner calling from Berenberg. Over to you.
Yes, good morning. It's a good afternoon. It's Chris Turner from Berenberg. Half of the structural growth you delivered this quarter came from Eurex. If I cast my mind back to your Investor Day last year, you were targeting, I think, €60,000,000 to €80,000,000 of revenue growth at Eurex coming from new products specifically.
Can you tell us what proportion of that structural growth you've delivered so far? And what new products you have in the pipeline that could drive that structural revenue growth from here? Thank you.
Yes, Chris, thanks for the question. So overall, from the structural growth at Eurex in the Q1, So there was a strong increase in the OTC clearing part for interest rate swap. And we made really good progress here. And it's more than €9,000,000 we achieved. Yes, it's below the run rate for the €50,000,000 we want to achieve, but we really make great progress.
And it's also expected that the second half year will be stronger here compared to the first half year as we are in the process to connect all further by clients, and we will benefit from that in the second half year. So currently, we have already achieved €15,000,000,000 notional volume, and that translates in a market share of 14 percent. So you see here continued increased market share, what we are able to achieve. So that's first from a structural perspective. Secondly, there are still some positive pricing elements what I already mentioned.
And thirdly, with regard to new products, we make good progress, specifically with regard to MSCI derivatives. We introduced also MSCI dividend product now. That's good.
And we are already in the range of
a double digit €1,000,000 range for MSCI derivatives. So that is contributing. Diligent derivatives in general are strongly participating to our structural growth here. Total return future is another element. And last but not least, what I would like to mention is the repo business, which is also part of our partnership agreement with the banks is also positive.
So here, you see there are different elements who really contribute to the structural cost of Eurex.
That's very useful. Thank you.
Thank you. The next question comes from Arnaud Giblatt calling from Exane. Over to you.
Hi. Yes, I've got a quick question on the change in credit rating. I was wondering if you could explain the reasons that are behind the change. And if like with the previous credit rating, if there was scope in the near term to go beyond the covenants with a view of going back very quickly? I think you've reached your covenants in the past and then get downgraded.
Do you see scope for that to happen? Is that something you'd look to do for the right type of deal? Or are you envisaging perhaps going beyond for the right kind of deal? And if I could just have a quick follow-up on it, but the second question is, when you're talking about FX oil, you mentioned as a criteria cash earnings accretion, which should happen if it's financed in debt for a company that's partially in debt for a company that's as possible. I'm wondering if your ROIC is greater than WACC over 3 years criteria would apply for FX4?
Thank you.
Yes. We're starting with the new rating credit rating metrics. So as I mentioned in my speaking notes, so S and P changed the method and we basically adopted. And so and the main points are here, it's not cost debt EBITDA, it's now net debt EBITDA. And there's another criteria, free funds from operations.
But this change in the method does materially not impact our financial flexibility, what we have. So we said earlier than we used our former core credit rating rate, so we said it's €1,500,000,000 additional firepower we have, and the same is true when we use that new methodology. So material, yes, the numbers change, but from materiality levels, no change. What would be excess of downgrading for the right deal? So our understanding is that we need AA rating for the Clearstream business, and we could play around 1 notch differential on Deutsche Borse Group.
So we could have here a AA- rating on Deutsche Berzer AG. So that's just a minor intake what we could create here. A lower raising level of Deutsche Borse AG, we do not plan. With regard to the FX or cash earnings accretive ratio, as Teodor mentioned, so it's in general our target that the deals are cash earnings accretive, hopefully, in the 1st year, but latest in the 2nd or in the 3rd year. That is a criteria what still should be fulfilled for our M and A target.
With regard to Axioma, as it was not fulfilling that criteria, was a different approach because we brought in our asset to a nice valuation. We have a PE guy who joined that. So it was a completely different structure for FX, or I would expect if it would come to a transaction more straightforward financing. And the question is, this is back. Obviously, that you have to consider if you do a discounted cash flow method.
Obviously, we assume the right debt, what we attribute to Deutsche Berzer business and the business we would take over. And obviously, there should be a positive net present value. So overall, that assumes that internal rate of return is higher than the bank.
Just a quick follow-up. So you mentioned you could accept the AA minus rating. How much extra firepower would that give you?
That's the lower three digit made on the enrollment.
Thank you.
Thank you. The next question comes from Joanna Nader, who's calling from RBC. Over to you. Hi.
Just a couple of questions. I was wondering first if you could elaborate a little bit on sort of where you think EX can go sort of the competitive strategy that you're using in Europe, whether it sort of is around the clearing side or the transaction side or pricing? And then also in the U. S, sort of how you're competing so successfully against ICE in terms of taking market share? And then on stocks, I just wondered if you could give a little bit of clarity on that other line and sort of the growth potential?
I guess you're probably seeing some growth in the structured products because of the change in the CFD regulation, but also some buy side growth. I don't know if that's related to benchmark regulation or white labeling or what. I just wonder if you could give a bit more color.
Okay. Starting with the soft question. So yes, the growth rate is not a double digit growth rate, what we guided for and the reason for that is that we have cyclical headwind. So from a structural perspective, it's still okay. So from a structural perspective, we still see the 10% growth.
But unfortunately, the strong cyclical headwind, as you have seen on our equity index product, we are down. And we also see currently that there's a reduced asset under management level. So that's 20% reduced compared to last year. So we see that currently that has a cyclical component, and we do not expect if we see a longer time horizon of 1 or 2 years that it will continue on that level. So we are unchanged our view.
And even if we combine it now with this Axioma where we see nice complementary synergies on that business that we are able over the next years to grow revenues on a double digit percentage basis. So unchanged our view here. With regard to EX, so it's really good to see that we increased our market share and we increased our market share basically in all European markets. And so we I mentioned Germany more than 40%, overall at 38%. You see in Italy and in Spain, we are 70%, 80%, 90%.
So that's really good to see that we are able here especially to win from the poker side. So that's why our product is best positioned where we have strong liquidity, where we have a settlement guarantee, where we have a clearing advantage what we can offer to our customer. And our focus is really to get additional market share. So it's not pricing. So it's we want to achieve additional market share that we have strong liquidity and that we can make good offers to our customers.
The same is true for volume in the U. S. Market, where we increased our market share to 33% compared to a 20 percentage level in the Q1 last year. And it's continued already in 2018 and 'nine continues in 2019. So we are able we will introduce our new trading platforms here, which we can make attractive offers to our market participants.
And in the second half here, we want also to expand in the gas market. So far, it's purely power market. And it's basically the same strategy in Europe where we are focused to get additional liquidity and market share.
Thank you very much.
Thank you. And the last question for today comes from Mike Werner, who's calling from UBS. Over to you.
Thank you. Good afternoon. Since it's the last question, I may ask 2, if that's all right. One is on pricing. You mentioned that there is some good secular growth in Eurex over the past 12 months helped by pricing.
And if I recall, a lot of the pricing changes you make in that division occur on July 1. And I was just wondering if you had any plans and what those plans might be to adjust pricing in the second half of this year or on July 1 this year? And then second, I know the comps were quite challenging in Q1 on a year on year basis, but they get notably easier in Q2 and Q3. I was just wondering if you could provide a little bit of color in terms of how Q2 is progressing versus April of last year? Thank you.
Yes. So starting with the segment part of your question. Yes, obviously, as we all know that the comps in Q2 are lower than the comps in Q1. And so far, if you follow-up our volumes on Eurex, so we are roughly 10% ahead of last year. And especially the equity index products are better than last year.
So that will help us definitely to have higher growth rates than in the Q1. Obviously, but we cannot give any guidance with regards to City Canopy. The only thing that we can guide is that we want to achieve the 5% secular growth. We have seen we achieved that in Q1, and we expect to achieve the same secular growth level in the next quarters. And again, with regard to upgrading now the cyclicality we have settled instead of hedged at least in April.
With regard to the pricing Eurex, so the main contribution from a pricing perspective in Q1 was the increase of the cash collateral fee in April 2018. So where we have that kind of benefit in the Q1 2019. So far, I would not expect comparable high pricing impacts in the Eurex segment as our focus is for Eurex to increase market share to gain additional liquidity in the different markets. So for the rest of the year in U. S, I would not expect bigger pricing impact.
Thank you.
With this, we would like to conclude today's call. Thank you very much for your participation, and have a good day.