The conference is now being recorded.
Good afternoon, ladies and gentlemen. Welcome to the Deutsche Börse AG analyst and investor conference call regarding Q1 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. Thank you for joining us today to go through our first quarter 2019 results. With me are Theodor Weimer, CEO, and Gregor Pottmeyer, 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 email 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 first quarter. Gregor will present the results in detail. In terms of net revenue development in the first quarter, we achieved our target of 5% growth of secular net revenue. This was mainly driven by Eurex, with increases in OTC clearing, new prices, and new products. In addition, EEX, 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 first quarter 2018. The declines in these areas were almost entirely offset by the future increase of the net interest income at Clearstream. As a result, cyclical net revenue declined slightly by 1%.
In total, net revenue in the first quarter 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 first quarter onwards. Gregor will explain the details in a moment. Like for like, adjusted operating costs 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 first quarter in spite of the weaker cyclical environment, because it would have come at the expense of future growth.
As a result of the revenue and cost performance, adjusted net profit increased by 8% and adjusted earnings per share by 10% to EUR 1.59. With this, the first quarter 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 with General Atlantic as equity partner helps to crystallize the value of our index business in terms of value generation and preserves our firepower for further M&A.
Last but not least, my colleagues in the executive board and I 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, Theodor. Welcome, ladies and gentlemen. Let me start with the group financials in the first quarter on page two of the presentation. Net revenue increased by 4% to EUR 721 million, and as part of net revenue, net interest income across the group reached EUR 62 million. As Theodor mentioned, the reporting of operating costs, EBITDA, and depreciation has been affected by changes as a result of the IFRS 16 introduction. The objective of IFRS 16 is to increase the transparency of lease 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 results 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, but provide you with the non-GAAP indicative figures for the purpose of comparison. Considering IFRS 16, operating costs would have been lower by around EUR 12.5 million in the first quarter 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 first quarter, adjusted for exceptional items, were like-for-like up by 3% to EUR 249 million. Exceptional items were in line with our full-year guidance and stood at EUR 24.6 million. This includes mainly provisions for the different restructuring initiatives as part of the Roadmap 2020 and M&A expenses.
Adjusted EBITDA increased by 6% to EUR 476 million, and depreciation increased slightly to EUR 53 million. We expect depreciation to sequentially increase as we go through the year. In total, adjusted net profit amounted to EUR 292 million and adjusted EPS increased by 10% to EUR 1.49. I am now turning to the quarterly results of the segments, starting with Eurex on page three. The development of Eurex in the first quarter was driven by secular growth in the face of cyclical headwinds. Positive secular drivers were the further growth in OTC clearing, both against the first quarter and fourth quarter last year. While the annualized OTC clearing net revenue of the first quarter is still below our full-year target of around EUR 50 million, the continuous growth is very encouraging.
Furthermore, new derivatives products and the increase of the handling fee for cash collaterals in April last year contributed to secular growth. However, the weaker equity market environment, especially against a strong first quarter 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 EUR 238 million and adjusted EBITDA grew like-for-like by 4% to EUR 176 million. Our commodities business, EEX, 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 first quarter, which is a significant step up even against the end of last year. In total, net revenue increased in the EEX segment to EUR 74 million and adjusted EBITDA amounted to EUR 37 million, 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 ECN. Organically, 360T achieved net revenue growth of around 7%. This is a very good result, as the FX market overall was under cyclical pressure in the first quarter. In total, net revenue in the 360T segment stood at EUR 21 million and adjusted EBITDA at EUR 10 million. In our cash market, Clearstream, 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 Clearstream segment was down by 5% and reached EUR 59 million, while adjusted EBITDA stood at EUR 38 million. 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 EUR 49 million. In total, net revenue in the Clearstream segment reached EUR 189 million and adjusted EBITDA amounted to EUR 127 million. 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.
Because of the consolidation of Swisscanto Fund Centre, net revenue increased to EUR 42 million and adjusted EBITDA reached EUR 21 million. Market conditions and the global securities financing business continue to be challenged by the low interest rates. Net revenue only grew slightly to reach EUR 19 million, adjusted EBITDA increased by double digits to EUR 12 million. The index business STOXX, the impact of the weaker equity market environment was visible in the exchange and ETF licenses 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 EUR 35 million and adjusted EBITDA stood at EUR 24 million. In the data business, the number of subscriptions continued to decline year-over-year. This was partly offset by average pricing.
As it does in the Xetra segment, the line item, other net revenue, includes a small one-off effect from the termination of a contract with a partner exchange. In total, net revenue in the data segment increased to EUR 44 million and adjusted EBITDA grew by 14% to EUR 31 million. On page 12, we show the reconciliation of net revenue and operating costs compared to the first quarter 2018. With our secular initiatives, we generated around 5% net revenue growth across the group. The main contributors were Eurex, including OTC clearing, new products and pricing, as well as the commodity business of EEX. The impact of the weaker equity market environment for Eurex and Xetra was partly offset by growth of net interest income. On balance, cyclical net revenue decreased by around 1%.
The consolidation of GTX in July 2018, Swisscanto Fund Centre in October 2018, and Grexel, 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 EUR 7 million to EUR 249 million in the first quarter. As part of net inflationary pressure in staff and other operating expenses, we are fully compensated by lower provisions for variable compensation as a result of lower growth rates in the first quarter. Increased investments in growth initiatives, new technology and regulations were largely offset by cost savings from the structured performance improvement program. The consolidation effect I just mentioned also resulted in additional operating costs of around EUR 3 million.
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 & Poor's. As S&P has adjusted its method for rating market infrastructure providers, we have adopted the new indicators. In order to achieve a minimal financial risk profile consistent with an double A rating in accordance with the S&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&P.
To determine EBITDA, reported EBITDA is adjusted for the results from strategic investments, as well as 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 net debt is reconciled by first deducting 50% of the hybrid bonds, as well as the surplus cash as at the reporting date from cost debt. Liabilities from operating leases and unfunded pensions obligations are then added. S&P bases the determination of the key rating indicators on the corresponding weighted average of the reported or expected results 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.
Ladies and gentlemen, if you would like to ask a question, please press nine star on your telephone keypad. We kindly ask all participants to limit their questions to one per person. Please press now nine star to state your question. The first question comes from Kyle Voigt, calling from KBW. Over to you.
Hi. If I could just ask one question on M&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 acquire 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, Kyle. Indeed, that's true. We have consciously structured the deal around Axioma with the purpose to create long-term value for our investors and shareholders. We accept it as a certain minimal dilution on the cash side over time. We have to be sure that we can dramatically increase the value of our index business together with Axioma, in the best interest of our shareholders. As we have said on April 11th, for example, we confirmed that we are in negotiations with Refinitiv Group concerning a 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 Capital Markets Day will apply.
We are looking for this kind of deals where the deal is strategically very sensible and where we have a cash accretion within one, latest three years' time. Indeed, we are 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. Now for three quarters you consolidate GTX. I think there's a bit of a complementary nature with your original 360T business. 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.
Indeed, these are really smaller numbers as we talk about here, revenues in a very low double-digit million EUR area and costs even obviously below that level. Commenting on the business development on GTX, here you see really some cyclical headwind. What we've seen here as our FX infrastructure providers see basically it's the same here. We reacted here on the cost side. To compensate for that, the markets are compared to our 360T core business, it's really complementary as GTX is basically a dealer-to-dealer platform, and 360T is focused on corporate customers. There are not so many large cost synergies to achieve, 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. Johannes from HSBC. One follow-up question, first of all. Is there any timeline on the FX or talks with Refinitiv? Secondly, thanks for sharing the German market share data in EEX. Do you have any data or at least a guesstimate for the European market share of EEX nowadays?
I start with the timeline on FX, Johannes. The negotiations and the assessments of a potential transaction regarding the FX businesses of Refinitiv are ongoing. I'll ask you for your professional understanding that we will not disclose further details, as I said, the negotiations are ongoing. More clarity will be disclosed, most likely within the next few weeks.
That's already helpful. Thank you.
With regard to the market share, yes, we comment the market share in the EEX business in Germany for more than 40%. For the EEX Group in Europe, it's 38%, and that clearly show a strong increase overall, as last year we were slightly above the 30% range. 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, EUR 60 million-EUR 80 million 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? What new products you have in the pipeline that could drive that structural revenue growth from here? Thank you.
Chris, thanks for the question. Overall, from the structural growth at Eurex in the first quarter, there was a strong increase in the OTC clearing path for interest rate swap. We make really good progress here, and it is more than EUR 9 million we achieved. Yes, it is below the run rate for the EUR 50 million we want to achieve. We really make great progress, and it is 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 buy-side clients, and we will benefit from that in the second half year. Currently, we have already achieved a EUR 15 trillion notional volume, and that translates in a market share of 14%. You see here continued increased market share, what we are able to achieve.
That is first from a structural perspective. Secondly, there are still some positive pricing elements, what I already mentioned. Thirdly, with regard to new products, we make good progress, specifically with regard to MSCI derivatives, that we introduced also MSCI dividend product now. That is good, and we are already in the range of a double-digit million EUR range for MSCI derivatives. That is contributing. Dividend derivatives in general are strongly participating to our structural growth here. Total return future is another element. Last but not least, what I would like to mention is the repo business, what is also part of our partnership agreement with the banks is also positive. Here you see there are different elements who really contribute to the structural growth of Eurex.
That is very useful. Thank you.
Thank you. The next question comes from Arnaud Giblat, calling from Exane. Over to you.
Hi. 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 coming back quite quickly. I think you've issued comments 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?
If I could just have a quick follow-up on it with the second question is, when you're talking about FXall, you mentioned as a criteria cash earnings accretion, which should happen if it's financed in debt for a company that's a portion debt for a company that's possible. I'm wondering if your ROIC is greater than WACC over three years criteria would apply for FXall. Thank you.
We're starting with a new rating, credit rating metric. As I mentioned in my speaking notes, S&P changed the method, and we basically adapted. The main points are here, it's not core debt EBITDA, it's now net debt EBITDA, and there's another criteria, free funds from operation. This change in the method does materially not impact our financial flexibility, what we have. We said earlier than when we used our former core credit rating metric. We said it's EUR 1.5 billion additional firepower we have, and the same is true when we use that new methodology. Material, yes, the numbers change, but from materiality level, no change. What would be accepted downgrading for the right deal? Our understanding is that we need the AA rating for the clearing business, and we could play around one notch differential on Deutsche Börse Group.
We could have here a AA- rating on Deutsche Börse AG. That's just a minor impact what we could create here. A lower rating level of Deutsche Börse AG, we do not plan. With regard to the FXall cash earnings accretive ratio, as Theodor mentioned. It's in general our target that the deals are cash earnings accretive, hopefully in the first year but latest in the second or in the third year. That is a criteria what still should be fulfilled for our M&A targets. With regard to Axioma, as it was not fulfilling that criteria, was a different approach because we brought in our assets with a nice valuation. We have a PE guy who joined that.
It was a completely different structure for FXall I would expect, if it would come to a transaction, a more straightforward on financing. The question with the WACC, obviously, that you have to consider if you do a discounted cash flow method. Obviously, we assume the right WACC, what we attribute to Deutsche Börse business and the business we would take over. Obviously, there should be a positive net present value. Overall, that assumes that internal rate of return is higher than the WACC.
Just a quick follow-up. You mentioned you could accept the double A minus rating. How much extra firepower would that give you?
That's a lower three-digit million EUR amount.
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 EEX 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. On STOXX, I just wondered if you could give a little bit of clarity on that other line and the sort of the growth potential. I guess you're probably seeing some growth in the structure 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 STOXX question. 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. From a structure perspective, it's still okay. From a structure perspective, we still see the 10% growth, but unfortunately, there are strong cyclical headwind. As you have seen, our equity index products were down. We also see currently that there's a reduced asset under management level, that's 20% reduced compared to last year. We see that currently that that has a cyclical component, and we do not expect if you see a longer time horizon of one or two years, that it will continue on that level.
We are unchanged our views, 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. Unchanged our view here. With regard to EEX, it's really good to see that we increased our market share, and we increased our market share basically in all European markets. I mentioned Germany more than 40%, overall at 38%. You see in Italy and in Spain, we are at 70%, 80%, 90%. That's really good to see, that we are able here especially to win from the broker side. 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.
Our focus is really to get additional market share. It's not pricing. 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 London. In the U.S. market, we have increased our market share to 33%, compared to a 20% level in the first quarter last year. It continued already in 2018 and now it continues in 2019. We are able here, we introduce our new trading platforms here, which we can make attractive offers to our market participants. In the second half year, we want also to expand in the gas market. So far, it's purely power market. 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. The last question for today comes from Michael Werner, who's calling from UBS. Over to you.
Thank you. Good afternoon. Since it's the last question, I may ask two, 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. If I recall, a lot of the pricing changes you make in that division occur on July 1st, 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 on July 1st this year. 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.
Yeah. Starting with the second part of your question. Yes, obviously, as we all know that the comps in Q2 are lower than the comps in Q1. So far, if you follow our volumes on Eurex, we are roughly 10% ahead of last year. Especially the equity index products are better than last year. That will help us definitely to have higher growth rates than in the first quarter. Obviously, we cannot give any guidance with regard to cyclicality. The only thing that we can guide is that we want to achieve the 5% secular growth. We are seeing we achieved that in Q1, and we expect to achieve the same secular growth level in the next quarters. Again, with regard to April, now the cyclicality we have tailwind instead of headwind, at least in April.
With regard to the pricing of Eurex, the main contribution from a pricing perspective in Q1 was the increase of the cash collateral fee in April 2018. Where we have that kind of benefit in the first quarter to 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 into different markets. For the rest of the year in Eurex, 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.