Good afternoon, ladies and gentlemen. Welcome to the Deutsche Börse AG analyst and investor conference call regarding Q3 2018 results. At this time, all participants have been placed on a listen-only mode. The floor will be open for your 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 third quarter 2018 results. With me are Theodor Weimer, CEO, and Gregor Pottmeyer, CFO. Theodor and Gregor will take you through the presentation. After the presentation, we will be happy to answer your questions. The presentation materials for this call have been sent out via email earlier today 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, as always, with a short summary of the results of the third quarter and the first nine months of 2018. Afterwards, I'd like to give you a brief update on the progress we've made so far during the year with our growth Roadmap. While activity levels in the third quarter across the group were slightly below the levels of the first two quarters because the summer seasonality saw a very good year-over-year growth in most business segments. In terms of secular growth, the commodities business of EEX, the foreign exchange business of 360T, the OTC clearing, which is part of the Eurex segment, as you are perfectly aware, saw strong double-digit growth rates. Cyclicality again acted as a tailwind in the third quarter.
While equity market volatility continued to be lower compared to the first quarter, we still saw a nice increase of index derivatives trading volumes at Eurex. Furthermore, the speculation around Italy and the widening government bond yields in the Eurozone resulted in growth of fixed income derivatives trading activities. Despite seasonally lower cash balances, the net interest income at Clearstream increased significantly year-over-year due to higher U.S. interest rates. In total, net revenue in the first nine months increased by 11% to around EUR 2 billion. The secular component of this revenue growth amounted to around 7%. Seven out of 11% are secular, and the cyclic component amounted to around 4%. At the same time, operating costs increased by 5%, which resulted in 16% growth of net profit to EUR 772 million.
Having received further confidence from the strong start to the fourth quarter, we are confirming our guidance for 2018 and would expect net revenue and net profit growth rates for the full year to be very similar to the year-to-date development. In addition to achieving our financial growth targets in the first nine months, we also made progress in implementing the Roadmap 2020, my strategic roadmap. The roadmap builds upon our existing strategy and has three main pillars. The first pillar is the improved and accelerated implementation of the existing secular growth opportunities. You have heard we achieved a 7% secular growth in the third quarter. The second pillar is the external and organic growth pillar with a disciplined and focused M&A approach. The third pillar consists of high investment in technology to tap into new revenue opportunities and to further increase efficiency of our exchange group.
We successfully closed both acquisitions that we announced in the second quarter. The acquisition of the GTX ECN business and the FX business closed at the end of June. The Swisscanto Fund Centre acquisition closed in early October. We are convinced that there are further attractive external growth opportunities and are actively screening the market for potential targets or partners. Our main goal is the expansion of selected existing assets in five areas: fixed income, commodities, foreign exchange, IFS Investment Fund Services, and last but not least, our data offering. With regard to the structural cost savings of EUR 100 million, we have made very good progress since the announcement of our program in April. The bulk of the non-staff-related cost measures has been planned in detail and decided upon already. The management delayering is essentially completed, and we recently started to implement the remaining staff-related measures.
The cost savings will be used to fund the development of new technologies, the implementation of our growth options, as well as infrastructure investments. We've made progress with our technology opportunities over the course of the year and have set up dedicated group-wide teams that are further driving those opportunities forward. The four focus areas on the technology side are, first, blockchain or distributed ledger technology. Second, big data and advanced analytics. Third, the use of the software cloud. Four, the robotics and artificial intelligence technology. As previously announced, two new members joined the executive board in July, Thomas Book, who is responsible for the Trading & Clearing, and Stephan Leithner, who is responsible for post-trading data and index business. On November 1st, so the day after tomorrow, Christoph Böhm will formally assume the role of the CIO, the Chief Information Officer.
He joined the company at the beginning of September already and is since a member of the executive team. With this, the changes at the executive board level are completed. I'm convinced we have the right set up now, and I'm very much looking forward to delivering our growth map further, during the end of the year with our entire management team. With this, I would like to hand over to Gregor to present the details of our results of Q3 and year-to-date. Thank you for your attention.
Welcome, ladies and gentlemen. Let me start with the group financials in the third quarter on page two of the presentation. Net revenue increased by 13% to EUR 651 million. As part of net revenue, net interest income across the group reached EUR 49 million. Net revenue is adjusted for a one-off insurance payment of around EUR 9 million in the Clearstream segment, relating to legal expenses for the various U.S. litigations over the last years. Operating costs, adjusted for exceptional items, were up by 5%. Exceptional items stood at EUR 29 million. This includes mainly provisions for the different restructuring initiatives as part of the Roadmap 2020 and legal expenses. Adjusted EBITDA in the third quarter increased by 19% to EUR 395 million. Adjusted net profit amounted to EUR 240 million and adjusted EPS increased by 23% to EUR 1.30.
I'm now turning to the quarterly size of the nine reporting segments, starting with Eurex on page three. The development of Eurex in the third quarter was driven by both secular and cyclical growth. Secular drivers were new derivatives products, an increase of the handling fee for cash collaterals in April, and the further growth in OTC Clearing. We saw double-digit cyclical growth in index and fixed income derivatives trading. In total, net revenue in the Eurex segment increased by 15% to EUR 203 million and adjusted EBITDA grew by 24% to EUR 135 million. Our commodities business, EEX, was driven by favorable net revenue development in all areas of the business. Important secular drivers were the higher market shares in power derivatives and gas spot contracts.
In power derivatives, this includes, to a certain extent, a catch-up effect against the temporary decline of the market share driven by regulation last summer. In total, net revenue in the EEX segment stood at EUR 62 million and adjusted EBITDA amounted to EUR 27 million, both growing in the high double-digit area. In the FX business 360T, net revenue grew by 26% against the previous year. The main driver was the consolidation of the GTX ECN in the third quarter. The continued process of new client onboarding and faster growth in the U.S. and the APAC region resulted in 8% organic net revenue growth. In total, net revenue in the 360T segment stood at EUR 21 million and adjusted EBITDA at EUR 9 million, expanding by 26% and 16% respectively. In our cash market, Xetra, total order book turnover increased by 9%.
Net revenue growth was lower, mainly due to the client mix and because incentives we offered for liquidity provision. In total, net revenue in the Xetra segment remained stable at EUR 53 million, while adjusted EBITDA grew by 6% and reached EUR 30 million. At Clearstream, adjusted net revenue, excluding the net interest income, increased by 4%, driven by a slight increase of activity. Despite a small decline of the higher-yielding U.S. dollar balances, net interest income improved significantly due to higher rates in the U.S. In total, adjusted net revenue in the Clearstream segment reached EUR 175 million and adjusted EBITDA amounted to EUR 110 million, each posting double-digit growth. In the Investment Fund Services segment, both assets under custody and settlement transactions increased by high single-digit growth rates. The main driver was the growing number of funds on the platform.
In total, net revenue in the IFS segment improved by 6% to EUR 37 million and adjusted EBITDA grew by 4% to reach EUR 17 million. Repo outstandings in the global securities financing business continue to be negatively affected by central bank monetary policies, which reduce the need for secured money market transactions. Since the beginning of the year, outstandings in securities lending also decreased slightly because of reduced lending demand. However, lower volumes were more than offset by higher average commissions paid in both businesses as a result of market conditions. Therefore, net revenue in the GSF segment grew by 5% to reach EUR 21 million, and adjusted EBITDA remained stable at EUR 12 million. In the index business STOXX, net revenue growth in the third quarter slowed to 2% despite more meaningful growth of the business indicators.
The main reason for the slower growth is an ongoing contract renewal process, where we expect a catch-up effect in ETF and other licenses net revenue in the fourth quarter. Net revenue amounted to EUR 33 million, a slight improvement, and adjusted EBITDA remains stable at EUR 22 million. In the data business, the number of subscriptions declined year-over-year, which was partly offset by a more favorable average pricing. Furthermore, we saw the expected catch-up of audit-related net revenue out of the second quarter. Normalized net revenue levels in the second and third quarter would have been around EUR 42 million. In total, net revenue in the data segment stood at EUR 47 million, an increase of 25%. Adjusted EBITDA reached EUR 34 million, up by 36% on the previous year. This brings me to the result of the first nine months of 2018 on page 12.
Net revenue increased by 11%, operating costs by 5%, and net profit by as much as 16%. This means that we are currently very well in line with our financial targets and scalability growth for the full year. For the rest of the year, we are expecting continued secular growth and also, on average, positive development in the cyclical part of our business. We, therefore, expect similar growth rates across all indicators for the full year. I am moving on to pages 13 and 14. There is more detailed explanations of the year-over-year changes in net revenue and operating costs. With our secular initiatives, we generated around 7% net revenue growth across the group in the first nine months. This was above our guidance of at least 5% secular net revenue growth for the full year.
The main contributors were Eurex, including OTC clearing and new products, the commodity business, Clearstream, and data, as well as Investment Fund Services. In addition, a more favorable cyclical environment in equity and interest rate markets, as well as further increases in U.S. rates, we are driving around 4% growth of net revenue in cyclical areas. On top of that, the consolidation of Nodal in May 2017 and the consolidation of GTX in July 2018 added another 0.5% net revenue growth. Operating costs increased by around 5% in the first nine months. The main reason for the cost increase was higher variable and share-based compensation due to the strong business performance and the rising share price, as well as inflationary pressures across the business. Furthermore, the consolidation of Nodal and GTX, as well as an increase of investment in new technologies, resulted in higher costs. This concludes our presentation.
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 our participants to limit their questions on their phone to one per person. Please press now nine star to state a question. First question comes from Arnaud Giblat from Exane.
Yeah. Good afternoon. I've got one question on EEX, please. During the call, you mentioned that EEX had gained a market share, and therefore you qualify all the growth at EEX as secular. I was wondering if you could perhaps give us a bit more detail in terms of what the market share on exchange is versus on exchange today and what it was a year ago. Also, I'm trying to better understand the dynamics, because what I observed is last year, volumes were quite depressed because of the separation of contracts between Germany and Austria. So to some extent, there's a bit of a catch-up on that. Also, the way we're looking at volumes evolution here is we're seeing a lot of volatility on electricity prices. Which sounds, if it's secular, that means you're expecting volatility in electricity prices to remain very elevated. Is that the case?
Thank you.
Yes, Arnaud. You are right. We already said that the majority is the catch-up effect compared to the last year, where we had to split up in Austria and Germany. That's the reason why our market share increased here back to the level we have already seen beginning of 2017. It's good that we were able to manage that kind of process over the last 12 months and that we are back on the level we already have been. It's roughly 30% in the power derivatives market, where we gained back from the OTC market. That's why we classify it as structural, because we expect that this will continue. The good thing is that we also, in the U.S. market for Nodal in September, we have also seen here an increase in market share. We increased to roughly 30% in that market.
That's also good that we are back here. Third element is the power spot market, where we were also to see some increase here. With regard, if there are some kind of volatility so far, yes, it's true. We show it 100% by structural growth. Maybe for 2019, we will consider that we do it in a more granular way and also extract some cyclical aspect, if we see that markets are driven by additional volatility.
Thank you.
Next question comes from Kyle Voigt from KBW.
Hi. Just one for me on M&A. You mentioned in your prepared remarks and also at your investor day that you'd be interested in growing inorganically in five different business segments. According to some press reports, there's some sizable assets that could become available in fixed income and FX in the near term. Just wondering if you could update us with regards to your thinking on maximum potential leverage at the firm, and whether large deals would be on the table or they need to be smaller in size like some of the ones you've done in the recent past, such as the GTX and Nodal.
Yeah. Kyle, thanks for the question. What is our maximum potential leverage? It's in the range of EUR 1.5 billion. We have additional cash available still there out of our ISE sale. Yes, we are in the process to finalize our two share buyback program, but still we are currently year-end on a level of roughly EUR 700 million. We would also expect that we could leverage a little bit on that level. You know the leverage. You know our agreement with the rating agency. It's the 1.5 across that EBITDA number. You see currently, we are clearly below this level, 1.2 roughly. There is some leverage potential. Overall, I would summarize it's roughly EUR 1.5 billion as additional firepower we have.
With regard to the targets, we already said in these five business segments that we are open to do M&A transaction. We proactively currently screen the market and would be also interested to do M&A in these five areas. Focus is on our organic growth initiatives, our structural growth initiatives. We are also interested to do complementary M&A.
Next question comes from Benjamin Goy from Deutsche Bank.
Yes. Hi, good afternoon. Maybe just one to follow up on the same theme here, M&A and the interplay with capital return. As you mentioned, your second share buyback is almost fully executed. Just wondering, once we go towards year-end and your full year results, and we haven't seen M&A. What are the decision parameters around, kind of to keep the financial flexibility or potentially launch another share buyback? Thank you.
Yeah. Our basic idea is that we want to invest our money we have available. We want to invest in organic growth initiatives, what we're currently doing to enhance our structural growth initiatives, but also our new technology initiatives. We want to invest in these areas. As I mentioned, we want to do M&A as a complementary activity, and that's our priority. It's not our priority to do another share buyback program in 2019. I don't want to rule it out.
Okay. Thank you.
Next question comes from Johannes Thormann from HSBC.
[Gregor], on your clearing services, could you update us on the state, how much, or how far you have progressed in offering clearing service for EEX and also for 360T? Is there anything combination possible with the
OTC FX clearing you announced last week. Secondly, just to be precise, you said you had a potential leverage of EUR 1.5 billion. Do you completely rule out any equity raising, or would you, in a compelling case, also be able to do some equity raising? Thank you.
With regard to our OTC Clearing activity, our interest rate swap partnership program works very well. You have seen that we have achieved a 10% market share here. That's what we expected for 2018. Our target in 2020 is unchanged and is 25%. You have seen our enlarged partnership program. On top of interest rate swap, we have an attractive partnership program now implemented for repo business and for FX business, because FX clearing is not used in that kind of segment. We were also asked by market participants to increase that program here. That's rightly on track as we planned, and we expect that we will get also some growth out of repo and FX clearing business in 2019 and the following years.
There's also with regard to our 360T element, FX clearing, obviously, yes, that is highly connected, and they work strongly together. The synergies on the commodities part are not as big compared to FX and interest rate swap. With regard to your third question, do we rule out to raise equity? Again, as I mentioned, the €1.5 billion is not including equity. That's our first consideration. If there's a strategic opportunity, what's above that €1.5 billion, we don't want to rule out to raise even equity.
Okay, understood. Thank you.
Next question comes from Jochen Schmitt from Metzler.
Thank you. Good afternoon. I have one question on interest rate derivatives at Eurex. I have calculated an increase in the average rate per contract during Q3. Could you please comment on that? That's my question.
Yeah, Jochen, the revenues per contract can fluctuate per quarter. The product mix obviously plays an important role here. For instance, futures versus options. Options tend to have a lower revenue per contract because more market making is required. The different products sometimes are priced differently. I would say any RPC in all of the products can swing by EUR 0.01 or EUR 0.02 per quarter. Over the longer term, over the last couple of quarters, as you recall, we've changed the Eurex fee model last year, July 2017. Again, slightly July this year. Over a couple of quarters, our expectation would be that the RPCs are slightly increasing, and this is one of the confirmations here.
Thank you.
Next question comes from Chris Turner from Berenberg.
Good afternoon. It's Chris Turner from Berenberg. Thank you for taking the question. My question is on your OTC Clearing activities. Clearing volumes rose 14% quarter-on-quarter, but your revenues rose more modestly, I think about 8% quarter-on-quarter. Would I be right in thinking that we're at a point of inflection now where your revenue sharing agreement start to kick in? If so, how should we think about that relationship between volumes and revenues going forward? I think you mentioned a minute ago we're at a 10% market share. You want to get a 25% market share. Is it just the case that we could map revenues in proportion to that, or would they grow more modestly? Thank you.
Chris, thanks for that question. Obviously, as I stated in earlier call, there's no proportionality between volume and revenue, and it's really also strongly dependent on the kind of business we get here. Currently the majority is the FRA business or the short-term business, where we have also some caps in place. Our general target is to get the dealer-to-buy-side, so the buy-side business. That's what we are working on. The longer-term interest rate swap business, where you have obviously higher margins than in the dealer business. That's currently our focus. We want to increase our buy-side customer base. Currently we have 150 buy-side customers connected. We want to increase that by another 100 customers within the next six months or so, up to 250. We increase also our product base so that we cover more than nine currency pairs.
We want to increase that. We will do that on a short-term basis. Our focus for 2019 is really getting the market share in the dealer-to-buy-side business, where we have also higher margin, and that's where we are focused on the 25% market share, what should deliver EUR 70 million in 2020. That's our target.
Very clear. Thank you.
Next question comes from Mike Werner from UBS.
Thank you. One question on GTX. We saw that EUR 3 million of revenues this past quarter. Gregor, I believe you indicated during the conference call last quarter that the business had about a $25 million annual run rate. I was just wondering what the delta was driven by. Was that seasonality, or was there anything else there? Thank you.
The EUR 25 million is a sales number, and we report here net revenue. We deduct volume-related costs or the direct costs, basically. That's the main reason. For our 2020 full-year run rate, we expect net revenues in the range of EUR 15 million to EUR 20 million, including the synergies we want to achieve.
Perfect. Thank you.
Next question comes from Martin Price from Credit Suisse.
Good afternoon. I was just wondering if you could provide some updated guidance on the timing of the restructuring costs that you expect to report this year and next, just given the progress you've made with the management delayering activity and perhaps any discussions you've been having with the workers councils as well, please. Thank you.
Martin. We make really good progress with regard to the non-staff related measures. We are already implementing these kind of measures. Then you are seeing the delayering of the managers. That's basically done. That's the reason why we fully provisioned already that. With regard to the negotiation with the workers council and the staff delegates, specifically in Luxembourg and in Frankfurt, we are in a good progress here. We started our voluntary leaver program here in Frankfurt, and my expectation is that we can provision the bulk of the staff measures until year-end, so here in 2018. That really depends on final agreement with workers council and staff delegates. But from today's perspective, I'm optimistic that we are able to manage that until year-end.
So far, our guidance where we said already in July, where we expect some EUR 230 million, EUR 80 million was the guidance, EUR 150 million was out of these SPIP programs or structural performance improvement program. That's still the numbers of the EUR 150 out of the EUR 200, what I would see for this year, under the assumption we come to an agreement with the workers council and staff delegates, then you will see the majority of the remaining amount in 2019.
That's great. Thanks, Gregor.
The last question comes from [Anil Sharma] from Morgan Stanley.
Hello. It's Anil Sharma from Morgan Stanley. Just two questions, please. Just on FX, I think you said in your remarks that the organic growth, excluding acquisitions, was about 8% in net revenue terms year-over-year. Could you tell us what the growth was in volumes year-over-year, excluding acquisitions? I'm just trying to understand sort of what's going on in terms of pricing or fee rates there, because I would guess that the volumes are still double digit, but your revenues are high single. It looks like there's some sort of compression going on. If you could just talk us through that. On cost, just to follow up from Martin's point, I think German inflation looks like it's the highest since could you help us think through what that means in terms of 2019 cost growth? Thank you.
Please, can you repeat the second question? There was a noise in the line.
Yeah. Sorry. Can you hear me now?
Yeah.
Yes, we can.
Yeah. Okay, perfect. I was just saying on the second question, German inflation, the stats just came out not that long ago. They look like the highest since February 2012. As you think about 2019 and the negotiations with workers council, et cetera, how should we be thinking about cost growth? Because I think Theo, in his prepared remarks, says at the beginning, the efficiency measures will go back into reinvestment for growth. Is there some more inflation that we should expect that might either delay growth investment or just kind of needs to be managed? I'm just trying to understand.
Okay, good. Understood. Starting with the second question. Yes, this EUR 20 million you raise, the majority is related to the salary increase we do specifically in Frankfurt and in Luxembourg, but also in the other locations. That's basically two-thirds out of that. The other are increases in non-staff related costs like renting costs, purchasing, et cetera. This EUR 20 million is a number what we see out of these two effects in 2018. With regard to 2019, it's still not decided what kind of salary increase we will do in 2019. We are in the middle of the process here. I would expect it's also in that dimension what we have seen in the past year. With regard to the FX, yes, it's 8% organic growth here.
The market model here from 360T in Europe is obviously different from the GTX business, that's the OTC business in the U.S. market. You shouldn't add it up and then build a mixed pricing here. It's two separate markets, and there's two different profitability levels. Therefore, you really have to split the two markets.
Okay. If I look at your slide five, you're saying revenue's up 8% organically. What's the average daily volumes up organically?
Yeah. I'll have to check that, but it's a similar number. Total net revenue growth is 26% or maybe 28 for the trading-related part. Total volume growth is 23%. With regards to FX 360T standalone, 8% net revenue growth and a similar volume growth number, but we can send you that.
Okay, cool. Thank you.
All right. There are no further questions, so we would like to conclude today's call. Thank you very much for your participation, and have a good day.