Good afternoon, ladies and gentlemen, welcome to the Deutsche Börse AG Analyst and Investor Conference Call regarding Q2 2018 results. At this time, our 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, thank you for joining us today to go through our second quarter and half year 2018 results. Gregor Pottmeyer, CFO. Theodor and Gregor will take you through the presentation today. After the presentation, we will be happy to answer 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, the conference call will be recorded and is available for replay. Let me now hand over to you, Theodor.
Thank you, Jan. Good afternoon, ladies and gentlemen. Let me start today's presentation with a short summary of the results of the second quarter, let me highlight the first half of the year 2018. Afterwards, I will give you an update on the progress we have made so far in implementing our Roadmap 2020 growth program. In the second quarter, the good performance of most of our secular growth areas continued and stabilized. In particular, the commodities business of our EEX subsidiary, the foreign exchange business of 360T, the investment fund service business, saw strong double-digit net revenue growth numbers. Net revenue in OTC clearing, which is part of the Eurex segment, as you perfectly know, also expanded further. Cyclicality continued to be a tailwind in the second quarter.
While equity market volatility declined somewhat compared to the first quarter, we saw an increase of demand of our fixed income derivatives. This was triggered by the central bank decisions in Europe and the U.S., as well as the situation specifically in Italy. Furthermore, net interest income at Clearstream continued to increase due to higher U.S. interest rates. The current annualized group-wide net interest income stands at around roughly EUR 220 million, which is only slightly below the peak level of around EUR 240 million in 2007 and 2008. In total, net revenue in the first half increased by 11% to around EUR 1.4 billion. The secular component, which is of utmost importance for us, of this net revenue growth amounted to around 7%. At the same time, operating costs were managed in order to achieve full scalability of the business model.
This resulted in a 15% growth of the net profit of around EUR 0.5 billion. With this, the financial development in the first half of 2018 is very well in line with our guidance and midterm plan under the Roadmap 2020 strategy program. As you recall from last quarter's earnings call and our investor day on May 13th, 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 and cyclical growth opportunities. The second pillar is external growth with a disciplined and focused M&A approach. The third pillar consists of higher investments in technology to tap into new revenue opportunities and further increase the efficiency.
The additional investment need for the accelerated implementation of the growth opportunities and the development of new technologies will be fully financed through the EUR 100 million reduction of structural cost. Beyond the achievements on the financial side, in the first half of the year, we also made progress in implementing the strategy. We successfully executed acquisitions in the investment fund service business with Swisscanto Fund Services, and the EEX business with the GTX ECN in the U.S. Both acquisitions with a value of around EUR 80 million each are attractive add-on to our business, and the evaluation levels are also quite reasonable. We are convinced that there will be further attractive external growth opportunities for us.
Our main goal is the expansion of selected existing assets in the five areas you are aware of: fixed income, commodities, foreign exchange investment, and investment fund services, as well as our data offering. With regards to our structural cost savings of EUR 100 million, we have made very good progress since the announcement of the program in April this year. The bulk of the non-staff cost measures have been planned in detail and decided upon already. The management delayering is progressing well, and we will already see most of the benefits in the second half of the year. Finally, the staff-related measures, the HR measures, have been defined already and are worked out in detail. We will enter into the negotiations with the respective workers councils and employee representatives shortly. Furthermore, we have made progress with our technology initiatives.
The four focus areas are blockchain and distributed ledger technology, big data and advanced analytics, improvements in economies of scale through the use of software cloud, as well as robotics and artificial intelligence. We have now set up dedicated group-wide teams that are further driving these opportunities forward. Also, two new management board members joined the ExCo, the executive board, in July. As previously announced, Thomas Book is now responsible for trading and clearing, and Stephan Leithner for trading data and index. Christoph Böhm, our new Chief Information Officer, will start effectively as of September 1st, and will get appointed as an ExCo member as planned on November 1st. There is still a lot of work to be done in the coming quarters across all initiatives, but I'm convinced that we have the right set-up, and the management team will further deliver on the targets.
With this, I would like to hand over to Gregor to present the details of the financials of Q2. Thank you for your attention.
Welcome, ladies and gentlemen. Let me start with the group financials in the second quarter on page two of the presentation. Net revenue increased by 10% to EUR 687 million. As part- income across the group continued to increase and reached EUR 55 million. Operating costs, adjusted for exceptional items, were up by 7%. One of the reasons why cost growth was above our 5% maximum target for the full year was the spending pattern at Clearstream. In the first quarter, other operating costs at Clearstream were below average, and in the second quarter they were above average. This is something that will average out for the full year. Exceptional items increased to EUR 54 million. Besides the typical M&A integration and legal expenses, this includes provisions for the implementation of the management layering as part of the Roadmap 2020.
Including the provisions for staff-related measures, which we are planning to book in the second half, we expect around EUR 230 million of exceptional items in total for 2018. Adjusted EBITDA in Q2 increased by 12% to EUR 426 million. Adjusted net profit amounted to EUR 262 million, and adjusted EPS increased by 14% to EUR 1.42. Net profit was adjusted for an exceptional write-off, which mainly resulted from the accelerated decommissioning of IT infrastructure. I am now turning to the quarterly results of the nine reporting segments, starting with Eurex on page three. The Eurex development in Q2 was mainly driven by secular growth. Secular drivers were new derivatives products, an increase of the handling fee for cash collaterals, and the further growth in OTC clearing. In addition, we saw double-digit cyclical growth in fixed income derivatives in light of developments in interest rate markets.
In total, net revenue in the Eurex segment increased by 13% to EUR 240 million, and adjusted EBITDA grew by 19% to EUR 169 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. Furthermore, the consolidation of Nord Pool in May 2017 resulted in an increase of net revenue against the previous year. In total, net revenue in the EEX segment stood at EUR 61 million, and adjusted EBITDA amounted to EUR 27 million, both growing in the double-digit area. In the FX business 360T, average daily volume grew by 6% against the previous year. This was mainly driven by the continued process of new client onboarding. In addition, the increased share of higher-margin products has a positive effect on net revenue growth.
In total, net- stood at EUR 19 million and adjusted EBITDA at EUR 8 million, expanding by 13% and 15%, respectively. In our cash market, Clearstream, total order book turnover increased by 17%. Net revenue growth was mainly driven by an increase of our market share. However, revenue per order book volume declined due to incentives we offered for liquidity provisions. In total, net revenue in the Clearstream segment stood at EUR 56 million, and adjusted EBITDA amounted to EUR 32 million. At Clearstream, custody and settlement net revenue was broadly stable against the previous year. In settlement, this is now a like-for-like comparison after T2S introduction and the discontinuation of domestic settlement charges in February last year. Despite a small decline of the average cash balances, net interest income improved significantly due to higher U.S. rates.
In total, net revenue in the Clearstream segment stood at EUR 181 million and adjusted EBITDA amounted to EUR 109 million. Each growing by 10%. In the investment fund service 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. Net revenue grew to a considerably larger extent. This is mainly a result of higher connectivity net revenue since the third quarter last year. In total, net revenue in the IFS segment increased by 17% to EUR 38 million, and adjusted EBITDA grew by 28% to reach EUR 16 million. Repo outstanding in the global securities financing business continued to be negatively affected by central bank monetary policies, which reduced the need for secured money market transactions. Since the beginning of the year, outstanding in securities lending also decreased slightly because of reduced lending demand.
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 stood at EUR 21 million, adjusted EBITDA amounted to EUR 11 million. Our index business STOXX was driven by a small decline of the number of exchange licenses sold primarily to Eurex and continued secular growth of assets under management in ETFs. Net revenue in the previous year's quarter had been higher than normal due to one-off effects. Therefore, net revenue in the STOXX segment declined slightly to EUR 35 million. Adjusted EBITDA amounted to EUR 24 million. In the data business, the number of subscriptions declined year-over-year, which was partly offset by more favorable average pricing. Furthermore, there was no positive impact from audit-related revenues in the second quarter, but we are expecting a catch-up in the second half.
In total, net revenue in the data segment stood at EUR 38 million and adjusted EBITDA reached EUR 28 million. This brings me to the results of the first half year 2018 on page 12. Net revenue increased by 11%, operating cost by 5% and thus net profit was up by 15%. This means that we are currently very well in line with our financial targets and scalability goals 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. I am moving on to pages 13 and 14. There's 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 half.
This was slightly 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 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, were driving around 4% growth of net revenue in cyclical areas. On top of that, the consolidation of Nord Pool in May 2017 added another around 1% net revenue growth. Operating costs in the first half year increased by around 5%. The main reason for the cost increase was higher variable and share-based compensation due to strong business performance and the rising share price, as well as inflationary pressure across the business. Furthermore, the consolidation of Nord Pool and an increase of investments in new technologies resulted in higher costs.
For the remainder of the year, we will proactively manage costs in a way that around 5% on a constant portfolio basis is the maximum growth number for the full year. One of the levers will be the cost-saving measures we are currently implementing. With that, we will ensure full scalability of the business model and deliver earnings growth outreaching our revenue gains as planned in our business forecast. 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 to one per person. Please press nine star now to state your question. The first question comes from Arnaud Giblat from Exane.
Good afternoon. Arnaud Giblat from Exane. My question relates to the restructuring costs, sir. You've indicated that you've stepped up the restructuring costs for this year from EUR 80 million to EUR 230 million. Thinking further out, especially if I look back in time over the past eight, nine, 10 years, every year you've had restructuring costs. I'm wondering to what extent this is a permanent feature within your accounts, and should we be expecting a step-up versus what you've done historically in terms of restructurings? Notably, if I think about the shift towards new technology, I suppose there's quite a big shift to go along still. Any guidance in terms of future restructurings would be helpful. Secondly, I'm wondering what sort of impact we should be thinking about deploying surplus capital in buybacks. What impact the step-up will have. Thank you.
Yeah. Thanks, Arnaud, for the question. The increase from EUR 80 million to EUR 230 million on the restructuring cost purely resides from our structural performance improvement program. We guided you on our capital markets day that it's around EUR 200 million, and this additional EUR 150 million is now the contribution we see in 2018 to this year. We have already booked provision for the management delayering because we have made decisions here and have basically or nearly executed that topic. We were not able to build the provisions now for the staff measures because we have defined it now for us, but we are now starting the negotiation process with the workers' council and for the staff delegates. My expectation is, or our target is to book the provision if we finalize the negotiation until year-end, that you will see the bulk of that in Q4.
Your question, is this a permanent approach? Obviously not in that size, because that's now different. We have now defined a program for the next three years, and obviously that needs more attention and therefore you see a specific higher investment what we have to do in 2018. Regularly, we also include, besides these restructuring costs, some smaller items for litigation costs, and also some M&A integration costs. That also depends on kind of M&A that we do for the next year. As a summary, 2018, this is EUR 230 million. That's an exceptional high number. In normal years, it would be a double-digit million EUR number. Second question, capital management buybacks. You are aware that we finalized our first EUR 200 million planned in Q1 as our share buyback program.
We are currently preparing the next EUR 200 million for our share buyback program, we want to start in Q3 this year and to finalize the program until year-end.
Okay, thank you.
The next question comes from Benjamin Goy from Deutsche Bank. Please go ahead.
Yes. Hi, good afternoon. One question on OTC clearing. You're making progress on the shorter-dated swaps, but also wondering of any progress or any views on the longer-dated instruments. Related to that, it's only two weeks ago, but the U.K. White Paper was released. I'm not sure whether you can already give some more color out of discussions with clients following that paper. Thank you.
Yeah. You have seen in our announcement that we have now cleared notional outstanding of more than EUR 7 trillion. That's good to see that kind of progress. That relates in a market share of 8%. That's really good progress from our perspective, what we achieved so far. Yes, you are right. It's still focused on the short-term related deals, and obviously our focus is now to get more traction on the longer-dated business. For that, we are still in the process to connect to stronger buy-side and asset management firms, and we are here right on track. We hope that we will have done, or we expect that we have it done until year-end, so that in 2019, we expect also to get a bigger part of the longer-term dated business. Overall, we are right on track what we have planned.
You have seen our OTC clearing revenues were EUR 6.2 million. Times four, that's basically the EUR 25 million what we guided to you. We are perfectly on track here and confident to achieve our midterm to long-term targets. With regard to the U.K. White Paper, what is published, I think it's too early and there's still uncertainty in the market and no one knows how it will finally end at the end of the day. Some opinions are around a hard Brexit exit March 2019. It's still unclear and it's still uncertain how final solutions will look like. Obviously, that kind of uncertainty basically helps us because the solution Deutsche Börse offers via Eurex Clearing is the only safe alternative you have currently in the market.
Okay, understood. Thank you.
The next question comes from Kyle Vogt from KBW.
Hi. Thanks for taking my question. In the first half, it seemed like a common theme across a number of the segments was pricing. I think last year you made some changes to transaction fee pricing in Eurex. This quarter, you made some fee changes for handling of collateral in Eurex. The STOXX business, I think, is typically one that exhibits some pricing power. There were fee changes last year with Clearstream and around T2S. Just wondering if you could help us frame how much of your year-on-year organic revenue growth in the first half was from pricing versus other factors, and what your expectations are for pricing to drive continued growth moving forward.
Yeah. Thanks, Kyle, for the question. We continuously review and adapt our pricing scheme. Last year, with regard to the regulatory changes of T2S and MiFIR, MiFID. We took the opportunity and increased in certain areas our prices because we were below market levels, there was a good opportunity for us to catch up. Overall, we gave the guidance that that is basically 1% out of our net revenue growth. For 2018, out of the measures we did in 2018, that translates in EUR 25 million. In addition, we did on April 1st, we increased our cash collateral fees by 10 basis points. What's basically on a full year basis, another EUR 25 million. That were opportunities.
We did hit the market, we do not promise to do further price increases, because we always have to consider what is the current situation we are in. What we do is that we constantly review our pricing, and we will do that on a yearly basis.
Thanks.
The next question comes from Johannes Thormann from HSBC.
Good afternoon, everybody. Johannes Thormann, HSBC. First of all, could you elaborate a bit more on the revenue and cost contribution from your recent Swisscanto and GTX acquisitions, in which quarter we will see those effects and then probably also specify some amounts. Secondly, could you give us an update on Clearstream's TARGET2-S ecurities customer migration pipeline, which was given at the investor, if anything has changed or have more clarity which customers are moving towards Clearstream's platform. Thank you.
Yeah. Starting with the second part, Clearstream T2S pipeline. You have seen our announcement in Q2 that we migrated to these five European markets where we were in the past, not in. France, Italy, the Benelux countries, Spain will also follow. We have started that process now that we are now present in this market. We expect now, and we said it's not a jump start here, it will take some time to collect the business or the local business from the CSDs in that market.
Hello? Sorry, can't hear you.
Ladies and gentlemen, please stay in the conference. We will continue shortly.
Hey, sorry guys. It's Jan from Deutsche Börse. We are back. Unfortunately, our line has been disrupted. Just to comfort you, we are not operating this. This is a party provider. I think last question was from Johannes. Johannes, are you still on?
Yes, I am. On, the line got lost when you talked about you have migrated some markets. Can you be a bit more specific on customers plans as well, or is it too early to talk about?
I think it's not appropriate in such a call to talk about specific customer discussions we have. Obviously, yes, we have with these big customers here. Obviously good conversations. We stick to our approach. When we have something to announce, then we will do that. So far, I can tell you that we are in a good progress here. Again, it's not a jump start. It will take some time, and if a customer decides to move to our platform, there's always a process of around 12 months to migrate here to get the business. Our view is unchanged. The economics are quite clear. We have a strong euro liquidity. There's liquidity efficiencies if you use the T2S Clearstream platform. We are right on track here.
If I may add, Johannes, from my side. On the CSD side, we are widening the EU clearing infrastructure via T2S. It's the issue of connectivity for on-exchange flows. More specifically, as Philip pointed out during the Capital Markets Day on the ICSD side, it's a globalization of the issuance market ongoing. The markets we are focused on is the Chinese bond markets and the emerging markets, specifically in Kazakhstan, Ukraine, and so forth. We can share with you that as per the second half of 2018, we continue to expect that we have on the Investor CSD model that we will cover 80% of the European T2S market settlement.
Okay. Thank you.
The other question with regard to what is the revenue and cost contribution, GTX and Swisscanto. For GTX, we just closed it. You don't see P&L impact in the first half year. We said it's just in our balance sheet, but not in our P&L. For the second half year, you will see obviously positive contribution. Overall for GTX, it's a sales number in the range of $25 million on a full year basis. That's the starting point here. With regard to the cost, we will see the integration cost. What the level here is needed to achieve our synergy cases. With regard to Swisscanto, the deal still has to close. We gave guidance that it still can take until Q4. Therefore, depending on that kind of situation, you will see a contribution on our P&L or not.
Okay. Thank you.
The next question comes from Michael Werner from UBS. Please go ahead.
Thank you. A quick question on the STOXX business and the indexing side. We've seen, I know there was some one-offs in last year's quarters, but we've seen essentially the pricing from this business when it comes to the ETFs licenses trend downwards in recent quarters. I was just wondering, is this due to competitive market pressures? Is this an attempt to win new business? How should we think about this going forward? Then just a quick follow-up to one of the earlier questions with regards to the restructuring costs and the timing. Should this imply that most of the EUR 100 million in terms of gross cost savings on an annualized basis, we should see that coming through in 2019, assuming you're able to finish the management delayering in the second half of this year as well as the rest of the staff restructuring? Thank you.
Yeah, Mike, starting with the second question. It's obviously a good signal if you are able to book with slack trends because then you will see immediately the savings. Rightly you will see savings out of our management delayering already in the second half year of 2018. With regard to how distribute the EUR 100 million savings for the next three years, that really also depends on the outcome of the negotiation with the workers council and with the staff delegates. According to our plan, we want to close that kind of discussions until the end. You would see then obviously a bigger part of the EUR 100 million already in 2019. Today it's too early to give you concrete guidance. Overall, I can assure you that we are fully on plan and to deliver that kind of cost-saving target what we gave as guidance.
With regard to your first question on the STOXX index pricing topic. So far, yes, last year we increased in some areas our pricing, we see some positive impact here in 2018 on the STOXX business. It's now flattish in Q2 due to the fact that there was a big one-timer in 2017. Our view is unchanged that our STOXX index business will show a double-digit revenue growth also in 2018. There was no need to do a price reduction. We are not aware of that.
Okay. Thank you very much, Gregor.
The next question comes from Philip Middleton from Merrill Lynch.
Yeah. Thank you very much. I'm afraid Mike's just asked my question, I will have to hand over to somebody else.
All right. Thank you, Philip. Could we have the next question, please?
Sure. The next question comes from Martin Price from Credit Suisse.
Good afternoon. Just have a couple of quick questions on Xetra. First, just to follow up on the earlier question on fees. I was just wondering if you plan to make any adjustments to the clearing tariff, following the decision to introduce open access or an open access clearing model to the cash market. I think that will initially include EuroCCP, which has some quite aggressive pricing. Second, I know it's small, but I just wonder if you could confirm roughly what the revenue impact is of the Irish Stock Exchange migrating their technology to Euronext infrastructure. Thank you.
With the move of Irish Stock Exchange, our view is that there are still a contract in place, and we expect that that kind of contract will be fulfilled and that it takes some time before it will be migrated, and it will move to the other platform. The first question with regard to the Zetral fees. Far, it's good to see the progress. We still keep a high market share in our DAX area, it's in the second quarter in the range of 68%, compared to the level two years ago, that's positive. There are different elements what is positive impacting that. It's our IT infrastructure, what we improved. It's also some liquidity incentives we did to make sure that we are really the first-class provider and we offer the biggest part of the liquidity here.
Your specific question with regard to the access of EuroCCP in our cash equity business. Yes, we got the request, and yes, we will do that. We don't expect material impact this year, obviously, as processes and functions still have to be implemented. With regard to the next years, we cannot rule out that our clearing fees will go down.
Understood. Thanks, Gregor.
The next question comes from Chris Turner from Berenberg.
Yes, good afternoon. It's Chris Turner from Berenberg. Just one question, actually, please, that's regarding your structural growth and what you class as cyclical growth. Just to take one example, you introduced a new price schedule on your cash collateral, I think back in 2015, but you actually delayed implementation of that fee schedule because of the negative yield environment. You finally pushed through the full 20 pip charge in Q2, You've treated the EUR 8 million of revenues from that as structural rather than cyclical. In doing so, you've raised your structural revenue growth for this quarter from below your 5% hurdle to above it. Really my question is, where do you draw the line between the structural growth and cyclical revenues?
How do you get to a situation where net interest income falls on one side, but this cash handling fee falls onto the other side? Thank you.
Yeah, thanks for the question, good to have the chance to clarify that in that round. With regard to the NII topic, obviously if the U.S. Fed increase the rates and we benefit from that, obviously that's not part of our decision, it's not in our hand, and that's why we classify that kind of impact as a cyclical impact. With regard to the increased cash collateral fee on the cash margins in our Eurex Clearing, it was our decision, and obviously we had some intensive discussions with the customer, to increase that, and that's the logic why we say, okay, that's a structural growth area because we can influence that. In principle, we define this between structural and cyclical. We say structural is when we are able to increase our market share or when we introduce new products, or new markets.
That's typically what we address to the structural growth area. Does that answer your question?
Yeah, that's very clear. I guess the confusion comes from the point where sometimes, I guess, a cyclical backdrop or change in the cyclical backdrop can make it easier for you to make a certain decision. Nonetheless, I see your logic, and it makes sense to me. Thank you.
Okay.
The next question comes from Owen Jones from Citigroup. Mr. Jones, your line is open now.
Hi, good afternoon. Thank you. Just looking at the Clearstream segment, and the move in your margin, the adjusted EBITDA margin that you have reported. The Q2 period actually saw a slight decline versus the Q2 last year. Just curious to understand better what the moving parts are there, because if you look at the drivers of your NII improvement, actually the bulk of it comes from your NII, which I would assume carried a fairly high drop-through rate in terms of the margin benefit. If you could just help us understand what the moving parts are there, that would be helpful. Thank you.
Yeah. Obviously, in principle, our focus is not to optimize our margin. Your concrete question, you have seen in Q2 in Clearstream, a higher cost level. I gave also some guidance that in Q1 it was a little bit lower. In Q2 it's a little bit higher. It will basically average out for the full year in 2018. The increased costs are basically the main reason for the decrease of the EBITDA margin in Clearstream.
Okay, thank you.
We don't have any further questions in the pipeline. Therefore, we would like to conclude today's call. Thank you very much for your participation, and have a good day.