Good afternoon, ladies and gentlemen, and welcome to the Deutsche Borse AG Analyst and Investor Conference Call regarding Q2 2018 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 second quarter and half year twenty eighteen results. With Gregor Plottmeyer, 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 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. Good afternoon, ladies and gentlemen. Let me start today's presentation with a short summary of the results of the Q2, and let me highlight the first half of the year twenty eighteen. Afterwards, I will give you an update on the progress we have made so far in implementing our Roadmap 2020 Growth program. In the Q2, the good performance of most of our secular growth areas continued and stabilized.
In particular, the commodities business of our AAX 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 Europe segment, as you perfectly know, also expanded further. Cyclicality continued to be a tailwind in the Q2. While equity market volatility declined somewhat compared to the Q1, 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 income net interest income stands at around roughly EUR 220,000,000 which is only slightly below the peak level of around EUR 240,000,000 in 2,007 and 2,008. In total, net revenue in the first half increased by 11%
to around
€1,400,000,000 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 €500,000,000 With this, the financial development in the first half of twenty eighteen 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 13, the road map builds upon our existing strategy and has 3 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 and A approach. And the 3rd 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 100,000,000 reduction of structural cost. Beyond the achievements on the financial side, in the first half of the year, we also made progress in implementing this strategy. We successfully executed acquisitions in the Investment Fund Service business with Swisscanto Fund Centre and the FX business with the GTX ECN in the United States.
Both acquisitions with a value of around €80,000,000 each are attractive add on to our business and the valuation 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 5 areas you are aware of: fixed income, commodities, foreign exchange investments and investment fund services as well as our data offering. With regards to our structural cost savings of €100,000,000 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'll already see most of the benefits in the second half of the year. And 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 4 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, 2 new management board members joined the ex co, the executive board in July. As previously announced, Thomas Bork is now responsible for trading in Clear and Stefan Leitner for 4th trading data and index. And Christoph Bohm, our new Chief Information Officer, will start effectively as of September 1, and will get appointed as an ex co member as planned on November 1. There is still a lot of work to be done in the coming quarters across all initiatives, but I am convinced that we have the right set up and the management team will further deliver on the target. With this, I would like to hand over to Gregor to present the details of the financials of Q2.
Thank you for your attention.
Yes. Welcome, ladies and gentlemen. Let me start with the group financials in the Q2 on Page 2 of the presentation. Net revenue increased by 10% to €687,000,000 As part of the program across the group continued to increase and reached €55,000,000 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 Q1, other operating costs at Clearstream were below average. And in the Q2, they were above average. This is something that will average out for the full year. Exceptional items increased to €54,000,000 Besides the typical M and A integration and legal expenses, this includes provisions for the implementation of the management delayering 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 €230,000,000 of exceptional items in total for 2018.
Adjusted EBITDA in Q2 increased by 12% to €426,000,000 Adjusted net profit amounted to €262,000,000 and adjusted EPS increased by 14% to €1.42 Net profit was adjusted for an exceptional write off, which mainly resulted from the accelerated decommissioning of IT infrastructure. I'm now turning to the quarterly results of the 9 reporting segments, starting with Eurex on Page 3. 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 €240,000,000 and adjusted EBITDA grew by 19% to €169,000,000 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 Nordil in May 2017 resulted in an increase of net revenue against the previous year. In total, net revenue in the EEX segment stood at €61,000,000 and adjusted EBITDA amounted to €27,000,000 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 product has a positive effect on net revenue growth. In total, net revenue growth stood at €19,000,000 and adjusted EBITDA at €8,000,000 expanding by 13% 15%, respectively. In our cash market, Cletra, 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 Xetra segment stood at €56,000,000 and adjusted EBITDA amounted to €32,000,000 At Clearstream, custody and settlement net revenue was broadly stable against the previous year. In settlements, this is now a like for like comparison after T2L's 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 €181,000,000 and adjusted EBITDA amounted to €109,000,000 each growing by 10%. In the Investment Fund Service segment, both assets under custody and settlement transaction 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 Q3 last year. In total, net revenue in the IFS segment increased by 17% to €38,000,000 and adjusted EBITDA grew by 28% to reach €16,000,000 Repo Outstandings 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. 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 stood at €21,000,000 adjusted EBITDA amounted to €11,000,000 Our index business stock 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 has been higher than normal due to one off effects. Therefore, net revenue in the stock segment declined slightly to €35,000,000 Adjusted EBITDA amounted to €24,000,000 In the Data business, the number of subscriptions declined year over year, which was partly offset by a more favorable average pricing. Furthermore, there was no positive impact from audit related revenues in the Q2, but we are expecting a catch up in the second half. In total, net revenue in the data segment stood at €38,000,000 and adjusted EBITDA reached €28,000,000 This brings me to the results of the first half year twenty eighteen 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'm moving on to Pages 1314 with 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 Nodal 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 Nodal 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 as the maximum growth number for the full year. 1 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.
And the first question comes from Arnaud Giblas from Exane.
Yes, good afternoon. Arnaud Giblatt from Exane. My question relates to the restructuring costs. So you've indicated that you've split up the restructuring costs for this year from EUR 80,000,000 to EUR 230,000,000. Thinking further out and well, especially if I look back in time, over the past 8, 9, 10 years, you've had every year, you've had restructuring costs.
So 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. And so any guidance in terms of future restrictions would be helpful. And secondly, I'm wondering what sort of impact we should be thinking about deploying surplus capital in buybacks?
What impact does the step up will have? Thank you.
Yes. Thanks, Anur, for the question. So the increase of from €80,000,000 to €230,000,000 on the restructuring cost This purely or purely resides from our structural performance improvement program. So we guided you on our Capital Markets and they that it's around €200,000,000 and this additional €150,000,000 is now the contribution we see in 2018, so 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 this now for us, but we are now starting the negotiation process with the Workers' Council and for the staff delegate. And my expectation is 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. And 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 3 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 this restructuring cost, some smaller items for litigation costs and also some M and A integration costs. So that also depends on kind of M and A we do for the next year. But as a summary, so 2018, this is €230,000,000 that's an exceptionally high number.
In normal year, this would be a double digit €1,000,000 year over number. 2nd question, capital buybacks, capital management buybacks. So you are aware that we finalized our first EUR 200,000,000 plan in Q1 as our share buyback program. We are currently preparing the next €200,000,000 for our share buyback program, and 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. And then related to that, it's only 2 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.
Yes. So you have seen in our announcement that we have now cleared notional outstanding of more than €7,000,000,000,000 So that's good to see that kind of progress. So that relates in a market share of 8%. So 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 buyback 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 data business. But overall, we are right on track what we have planned.
You have seen our OTC clearing revenues were €6,200,000 so times 4, that's basically the €25,000,000 what we guided to you. So we are perfectly on track here and confident to achieve our midterm to long term target. With regard to the UK 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 hot Brexit exit March 2019. But it's still unclear and it's still uncertain how final solutions will look like.
But obviously, that kind of uncertainty basically helps us because the solution Deutsche Borse 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 stocks business I think is typically one that exhibits some pricing power and then there were fee changes last year with Clearstream and around T2S. 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?
Yes. Thanks, Kai, for the question. So we continuously review and adapt our pricing scheme. And last year, with regard to the regulatory changes of T2S and MiFID, so we took the opportunity and increased in certain areas our prices because we were below market levels. And so 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. So for 2018, out of the measures we did in 2018. So that translates in €25,000,000 In addition, we did on April 1st, we increased our cash collateral fees by 10 basis points, but basically on a full year one base another €25,000,000 So that were opportunities we did in the market and we do not promise to do further price increases because we always have to consider what is the current situation we are in. But 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 from HSBC. First of all, could you elaborate a bit more on the revenue and cost contribution from your recent Swiss country and GTX acquisitions, in which quarter we will see those effects and then probably also specify some amounts? And secondly, could you give us an update on Clearstream's target to securities customer migration pipeline, which was given at the Investor Day, if anything has changed or have more clarity which customers are moving towards Clearstream's platform? Thank you.
Yes. So starting with the second part, the Clearstream T2S pipeline. So you have seen our announcement in Q2 that we migrated to these 5 European markets where we were in the past, not in France, Italy, but then a large countries and Spain will also follow. So we have started that process now that we are now present in this market. And we expect now and we said it's not a jump start here, so it will take some time to collect the business or the local business from the CCSDs in that market.
Hello? Sorry, can't hear you.
Ladies and gentlemen, please stay in the conference. We will continue shortly. We will continue shortly.
Bye.
Hey, sorry guys. It's Jan from Deutsche Borse. We are back. Unfortunately, our line has been disrupted. Just to comfort you, we are not operating this.
So that's a third party provider. And I think last question was from Johannes. Johannes, are you still on?
Yes, I am. So 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 we it's not appropriate in such a call talk about specific customer discussions we have. Obviously, yes, we have with big customers here. Obviously, good conversations, but we stick to our approach. So when we have something to announce this, then we will do that. And so far, I can tell you that we are in a good progress here.
But 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. So but our view is unchanged. The economics are quite clear.
We have a strong euro liquidity. There's liquidity efficiencies if you use the P2S Clearstream platform and we are right on track here.
If I may add Johannes from my side, on the CSD side, right, we are widening the AU clearing infrastructure via T2S. So it's the issue of connectivity for on exchange flows. And more specifically, as Phil pointed out during the Capital Markets Day on the ICDS side, it's a globalization of the issuance market ongoing. And the markets we are focused on is the Chinese bond markets and the emerging markets, specifically in Kazakhstan, Ukraine and so forth. And you can and we can share with you that as per the second half of twenty eighteen, 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.
So the other question with regard to what is the revenue and cost contribution GTX and Swisscanto. So for GTX, so we just closed it. So you don't see a P and L impact in the first half year with that. It's just in our balance sheet, but not in our P and L. So for the second half year, you will see obviously positive contribution overall for GBX.
It's a sales number in the range of $25,000,000 on a full year basis. So that's the starting point here. And with regards to the cost, we will see the integration cost. So what the level here is needed to achieve our synergy cases. With regards to this Canto, the deal still has to close.
We gave guidance that this bill can take until Q4. And therefore, depending on that kind of situation, you will see a contribution on our P and L or not.
Okay. Thank you.
The next question comes from Mike Werner from UBS. Please go ahead.
Thank you. A quick question on the stocks 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 ETF licenses trend downwards in recent quarters. And I was just wondering, is this due to competitive market pressures? Is this an attempt to win new business?
And how should we think about this going forward? And then just a quick follow-up it's one of the earlier questions with regards to the restructuring costs and the timing. Should this imply that most of the $100,000,000 in terms of gross cost savings on an annualized basis, we should see that my signal if
you're able
to book restructuring because then you signal if you're able to book with structure rents because then you will see immediately the savings. So rightly, you will see savings out of our management delay already in the second half year of twenty eighteen. With regard to our distribute the €100,000,000 savings for the next 3 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 year end. So you would see then obviously a bigger part of the €100,000,000 already in 2019.
But today, it's too early to give you concrete guidance. But overall, I can assure you that we are fully on plan to deliver that kind of cost saving target what we gave as guidance. With regard to your first question on the stock index pricing topic, so far, yes, last year, we increased in some areas our pricing. So we see some positive impact here in 2018 on the stocks business. It's now flattish in Q2 due to the fact that there was a pickup one timer in 2017.
So our view is unchanged that our stock in this business will show a double digit revenue growth also in 2018. There was no need to do a price reduction. So we are not aware of that.
Okay. Thank you very much, Gregor.
The next question comes from Philip Middleton from Merrill Lynch.
Yes. Thank you very much. I'm afraid Mike's just asked my question. So I will have to hand over to somebody else.
All right. Thank you. Could we have the next question, please?
Sure. The next question comes from Martin Price from Credit Suisse.
Good afternoon. I just have a couple of quick questions on Zitra. First, just a 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 Euro CCP, which has some quite aggressive pricing.
And 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.
So with the move of IX stock exchange, so our view is that there is still a contract in place. 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. First question with regard to the aircraft fees. So far, it's good to see the progress. So we still keep a high market share in our debt area.
So it's in the second quarter the range of 68%, so compared to the level 3 years ago. So that's positive. So 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 1st class provider of the and the biggest part of that we offer the biggest part of the liquidity here.
Your specific question with regard to the excess of EuroCCP in our cash equity business, yes, we will deduct 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.
And the next question comes from Chris Turner from Berenberg.
Yes, good afternoon. It's Chris Turner from Berenberg. Just one question actually, please, and that's regarding your structural growth and what you class as a cyclical growth. And 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 bps charge in Q2, and you've treated the €8,000,000 of revenues from that as structural rather than cyclical.
And in doing so, you've raised your structural revenue growth for this quarter from below your €0.05 headwind to above it. So really my question is, where do you draw the line between the structural growth and cyclical revenues? And 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.
Yes. Thanks for the question. We'll have the chance to clarify that even in that round. So with regard to the NII topic, so obviously, if the U. S.
Fed increase the rates and we benefit from that, obviously, that's not part of our decision. So it's not in our end. 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 clearinghouse, Eurex Clearinghouse, 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 and cross level because we can influence that.
In principle, we define this between structural and cyclical. So we say structural is when we are able to increase our market share or when we introduce new products, so or new markets. So that's typically what we address to the structural growth area. Does that answer your question?
Yes. 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. But 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. This period actually sort of 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 net revenue 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.
So if you could just help us understand what you're picking apart from there, that would be helpful. Thank you.
Yes. Obviously, in principle, our focus is not to optimize our margin. But your concrete question, so you have seen in Q2 in Clearstream a higher cost study. And I gave also some guidance that in Q1 it was a little bit lower. In Q2 it's a little bit higher.
So it will basically average out for the full year in 2018 and the increased costs are basically the main reason for the decrease of the EBITDA margin in Clearstream.
Okay. Thank you.
So we don't have any further questions in the pipeline. Therefore, we would like conclude today's call. Thank you very much for your participation, and have a good day.