Afternoon, ladies and gentlemen, and welcome to the Deutsche Borse AG Analyst and Investor Conference Call regarding the Q1 2021 Results. At this time, all participants have been placed on a listen only mode and the floor will be open for questions following the presentation. Let me now turn the floor over to Mr. Jan Strecker.
Welcome, ladies and gentlemen, and thank you for joining us Today to go through our Q1 2021 results. With me are Theodor Weimar, Chief Executive Officer and Gregor Pottmeyer, Chief Financial Officer. Theodor and Gregor will take you through the presentation today, and afterwards, we will be happy to take your questions. The presentation materials for this call have been sent out by e mail and can also be downloaded from the Investor Relations section of our website. As usual, This conference call will be recorded and is available for replay.
Let me now hand over to you, Theodor.
Thank you, Jan. Welcome, ladies and gentlemen. As usual, I will start today's call with my own perspective on the developments in the reporting period Q1. Afterwards, Gregor We'll present the results in more detail. As we all expected, net revenue in the Q1 declined because of the record activities Of last year, beginning of last year, Q1 last year, which we are very much driven by the initial COVID-nineteen outbreak.
We were able to mitigate some of those effects with continued secular net revenue growth and an increasing M and A contribution. Due to the cyclical headwinds, we managed the organic operating costs as prudently as possible, and we were successful. Therefore, the overall operating cost increase in the Q1 on a constant basis was almost entirely driven by consolidation effect And no increase on the consolidation on the CP side. EBITDA in the Q1 amounted to €521,000,000 normalizing for the strong swings last year. This was significantly above the average quarterly level in 2020.
On February 25, We successfully closed our ISF transaction ahead of schedule. The performance so far is very much in line With our expectations, but the more we engage with ISS since on a day to day basis, The big and the joint opportunities to address the demand for ESG products and services become. Shortly before closing of the ISS transaction, we issued €1,000,000,000 bonds transaction in 2 tranches To partly finance the acquisition, with an average yield of just 0%, they rank at the very top of all historic corporate issues globally. So our strong credit rating clearly also has advantages. With the first quarter results, We are very well on track to deliver upon our guidance for 2021, and the development is also fully in line with the expected COMBAT 20 3 growth trajectory.
Lastly, let me invite all of you And all investors to participate in this year's Annual General Meeting on May 19. Against the background of the The ongoing COVID-nineteen pandemic, we have decided to hold in the virtual format again, but we will try to make it as interactive That's possible. The proposed dividend of €3 per share is scheduled to be paid a couple of days after the meeting. With that, let me hand it over to you, Gregor.
Thank you, Teodor. Let me start with the detailed financials in the Q1 on Page 2 of the presentation. Net revenue amounted to €855,000,000 and included, amongst others, The first time consolidation of ISS as well as an exceptional item of around EUR 17,000,000 related to a reimbursement of legal fees at Clearstream. The operating cost amounted to EUR347,000,000 Since we have now started to only report all in numbers, the operating costs are not adjusted for exceptional items anymore. As a reference point, what we would consider exceptional in nature in the Q1 It's very much in line with the level we saw in the same period last year.
The EBITDA includes the result from financial investments of €13,000,000 which benefited from a positive development of different shareholdings, including again Tradegate. Depreciation amounted to €62,000,000 and includes effects of around €19,000,000 related to Purchase price allocation of acquired assets in accordance with IFRS. We decided to start to break out this number to make the relevant noncash effect of M and A transparent. On this basis, the cash EPS amounted to EUR 1 €81 whereas the normal EPS stood at €1.73 Slide 3 puts the overall Q1 results into perspective as a development since 2019, which is the base case for our Compass 2023 midterm targets, both in terms of net revenue and EBITDA growth. We are fully in line with the growth trajectory we expect until 2023.
Also, If we normalize the exceptionally strong Q1 last year and look at the average quarterly EBITDA in 2020 of around EUR 4 €67,000,000 The first quarter is fully in line with our growth target. On Slide 4, we provide an overview of the 3 components of net revenue growth in the Q1, Again, compared to the same period in 2019. Consolidation effects resulted in additional €54,000,000 net revenue or CAGR of 4%. This was mainly driven by the addition of Irefs, Axioma and Forcecenter. Secular growth, being the key component of our strategy to increase net revenue, developed as planned And increased by €87,000,000 or a CAGR of 6%.
All segments have to achieve this with Clearstream, Europe and IFS Being the largest contributor. The cyclical growth contribution was slightly negative at minus €6,000,000 or CAGR of minus 1%. This was mainly driven by the much lower net interest income at Clearstream. Reported operating costs shown on Page 5 totaled €347,000,000 in the Q1. The by far biggest driver for the overall increase of 9% compared to the previous year were consolidation effects.
This was mainly driven by the consolidation of ISS, quantitative broker and Forcecenter. Besides that, we managed operating costs very prudently considering the strong cyclical headwinds in the quarter. Inflationary pressure were offset by increase of operating efficiency and variable as well as share based compensation was broadly flat. Thus, the small organic cost increase resulted from slightly higher investments in growth and technology. And now turning to the quarterly results of the segment.
In all Trading and Clearing segments, we We're faced with high levels of activity in the last year's quarter. Eurex on Page 6 saw the toughest comparables across the group. The key driver for the declines of net revenue and EBITDA was the weaker performance of index derivatives Due to much lower equity market volatility levels. Most other products were broadly in line with the previous year's quarter. Other net revenue benefited from the consolidation of quantitative brokers at the end of last year, which contributed EUR 5,000,000 in the Q1.
In our commodity business, EX, shown on Page 7, we saw a slight decline of net revenue against the Strong Q1 last year, especially in Power Derivatives. But it's encouraging to see that the COVID related headwinds in the second and third quarter last year were only of temporary nature. Let me turn to Page 8 and the FX business. Even though FX market volatility in the Q1 was significantly lower compared to the same period last year, we saw a relatively stable development of activity. This is because the cyclical decline was partly compensated by business generated with new products and clients.
I'm now turning to Page 9 in our cash market Xetra, where we also saw a decline in activity. Despite much lower equity market volatility in the Q1, cash market volumes also held up quite nicely And we are still significantly above the 2019 levels. The result from financial investments in the Xetra segment Amounted to €8,000,000 and benefited again from very positive development at Tradegate. In our post rating segment Clearstream shown on Page 10, we still saw a significant decline of the net interest income. This is now normalizing.
And from the Q3 onwards, comparable will be like for like. In addition, net revenue in Clearstream included an exceptional item of around EUR 17,000,000 related to a reimbursement of legal costs. Adjusted for the cyclical net interest income and the exceptional item, Clearstream's net revenue increased by around 5%, which is quite a solid level for a stable recurring business. The Investment Time Survey segment, which you'll find on Page 11, continued to show an extremely strong performance. On the one hand, this was driven by secular growth based on the continuous onboarding of new clients and funds.
On the other hand, the consolidation of the fund distribution business from UBS in the Q4 last year Added €17,000,000 of net revenue. Given the scalability of the core business And the high margins in the distribution business, the EBITDA increased significantly. Looking at the valuation of assets in current situations in the Investment Fund Services market, we certainly feel That the value of our fund business is not yet fully appreciated. Slide 12 shows the Contigo segment, which on the positive side benefited from ETF And other licensing growth in the Q1. On the negative side, exchange licenses saw a cyclical decline due to lower level of index derivatives trading activity.
Also, analytics came in slightly below the On Slide 13, we show the new reporting segment, its Institutional Shareholder Services. Given that we started consolidating ISS only on February 25, Financials on this page basically refer to 1 month of ISS performance only. On the Q2 onwards, We will be showing a more detailed split of net revenue. But almost 80% of net revenue in the ISS segment It's driven by Stuartship Solutions and ESG Analytics. Since we are Not adjusting for exceptional items anymore.
Net revenue and operating costs of ISS included some Non operating items relating to the transaction and integration efforts. Adjusted for those items, The financial performance is fully in line with our expectations. The last page of today's presentation Shows our guidance for 2021
in the
context of Compass 2023 midterm plan. Despite the headline decline of net revenue in the Q1, we are fully in line with our guidance for the full year of around EUR 3,500,000,000 net revenue and around EUR 2,000,000,000 EBITDA. And As mentioned, we are also fully in line with the expected comparable 2023 growth trajectory. This concludes our presentation. Thank you for your attention.
We are now looking forward to your questions.
And the first question comes from Benjamin Goy from Deutsche Bank. Over to you.
Good afternoon and thank you for taking my question. Thank you for providing the cash EPS. I'm just double checking For the 2023 target, which is implicitly €8 per share, are they still based on reported EPS? Or will you move Cash EPS. And maybe in that context, I would assume PPA is going up from next quarter.
Maybe you can give a guidance on the run rate and How this might impact depreciation and amortization going forward? Thank you.
Okay. Thanks, Benjamin, for that question. So in principle, we did not guide for the What you mentioned, what we said is that our earnings per share would increase by 10% on average From 2019 to 2023. So that's the guidance what we have. And we Give you now some guidance what kind of PPA we have included here.
And so for Q1, So basically, the number for the full year is in the range of €90,000,000 as a PPA so That you have as your basis for your model. And the PPA guidance with regard to PPA, that's only A little bit challenging because it really depends on our M and A success here. So far, the €19,000,000 are the is the number for that year. And most probably, it will increase As we included in our 2023 guidance, additional M and A. So we are still missing €200,000,000 net revenues to conclude from an M and A perspective.
So you should expect that the PPA continues to increase For the next year. Okay.
Understood. And implies that also the D and A is moving up slightly from Q1 level?
Yes, Gerard.
Thank you.
And now we're coming to the next question. It comes from Johannes Thormann from HSBC. Over to you.
Good afternoon, everybody. Johannes Thormann, HSBC. First of all, on your EEX segment, You explained that the power and gas volume declines in Europe have been driven by the pandemic. But in the U. S, We already saw a recovery in Q1 in the power derivatives business.
Do you expect this to happen in the next quarters in Europe as well? Or have there been other drivers? And Could you elaborate a bit on the volume trends you're expecting? And then secondly, a follow-up on M and A, please. Probably 2 of the biggest players in the fund business are now slightly out of reach for you guys.
What are the alternatives? And would you also be willing to do a joint venture in the funds business where you only own 51% in the long term? Thank you.
Yes. So starting with the first question around EX. So the good thing is that we Stabilized or even slightly increased our market share both in the European Power Derivatives market and in the U. S. Market.
So in the European Power Derivatives market, so we are still in the range of roughly 40%. So that's good to see That we are able to stabilize that. And for the next years, we even see a good chance to continue to increase our market share As we have a superior clearing solution here in place and there's no change from that perspective. In the U. S.
Market, even good to see that we are slightly Above that level, so we have 42% market share in the power market in U. S. And so that's good to see that Our entity Noden is winning market shares and is now a well established Partner in the U. S. Market.
And from a perspective, we see that the structural trends are all in place. So trend to clear solutions, so that's a continued trend to Renewable Energy is a good topic here. So we expect that our EEX asset will continue to grow And the comparable size you have seen in the past. Your second question with regard to M and A, oil funds, And facts and so on, at least you were referring to these 2, not mentioning them. So we have a clear strategy here.
We have, as explained, a 50% cost advantage with regard to our vestima Process IT solution here, and we have a long list of customers who are interested to join forces with Deutsche Borse a year. And we are open whether they purely connect to our platform, whether they want to do an outsourcing or whether they want to sell businesses. And we have a very long and strong customer pipeline. So and you see this extraordinary growth, We are able to deliver from organic but also from an inorganic perspective. And you should expect that, that kind of growth level They continue in all of these three formats, connectivity, outsourcing And that they want to sell business to us.
In principle, I also do not want to rule out Joint venture type. So we are open for any format what is appreciated by the customers. But obviously, it's our target to consolidate the assets of below 50% is not of interest for Deutsche Borse.
Understood. Thank you.
And the next question comes from Bruce Hamilton from Morgan Stanley. The floor is yours.
Hi there. Good afternoon, guys. Thanks for the presentation. Just two quick ones. On I mean, obviously, there's a lot of good going on.
But in Contigo, I guess, the Axioma business still feels like it's not showing very much growth at all. Is there something that Kind of need fixing there? Or how would you sort of view that business' progress since you've acquired it? And then secondly, on the I guess the weaker volumes were pretty expected, but I guess revenue margins also look to be under pressure across index, Across rates and single stock options, so the revenues are weaker than the volumes. Is that simply mix effects or is there anything else going on?
Thank you.
Yes. So the second question, easy answer. Yes, it's product mix. So no change here. First question around contigo axioma.
Yes, there is still some negative impact Out of the COVID-nineteen situation in the U. S. Market, Q1 was a very, very strong Q1 2020 was a very strong quarter also in our risk analytics area at Axioma. So that comparison is quite tough, yes? In principle, it's our clear understanding that all the secular growth drivers Like trend from passive from active to passive investment, increased demand of buy side To Superior Risk Management Analytics Solution, ESG, etcetera, they are all intact.
And so our basic understanding is independent from potentially quarterly developments and comparison topics That we are able to show double digit top line growth in Axioma in stocks and also in Contigo overall. So That is our expectation also for the next year, and that's included in our Compass 2023 strategy And no reason to see a change here.
Thank you.
And the next question is coming from Tobias Lukesch from Kepler Cheuvreux.
Yes, good afternoon and thank you for the presentation. Quickly on regulation and Brexit, there any update, anything that potentially looks a bit more positive with regards to Deutsche Buch's business case? Potentially, secondly, on the April volumes, we just discussed the slight change in product mix. So volumes, revenues were not that correlated as before. How was April looking like and especially also with regards To EX360T Business and so on?
Thank you.
Yes. So starting with the first Question around Brexit. So the main topic for Brexit is for Deutsche Borse, basically topic around our euro clearing activity. And so that's basically an upside potential, obviously. Think you are aware of the discussion that European regulators and politicians 4th, banks to do with the euro business within the EU, and so not in London anymore.
So our view here is that we are really focused on a market less solution here. So we are in intensive dialogue with all our customers To fulfill all the regulatory requirements, and therefore, we have a very good dialogue. We have now more than 500 Customers onboarded, not all of these, roughly 50% is active. So the other 50% It's clearly connected. So good is still a very good chance for us to win additional business.
And therefore, that should have a positive dimension for Deutsche Bank this year. With regard to the April volume, I think you are aware as we publish these numbers And made it available even on a daily basis. So in Eurex, specifically in the Equity index sales, there are still low volatility. So between 15, 16 The volatility level, so it's very low. So therefore, Equity Indexed Products is clearly in April Below previous year level, on the other hand side, on the fixed income side, we see some positive elements As there's a discussion around reinflation and market participants consider us to do some hedging here.
So and for EX and 360T, I think we should start to show here growth As the comps we have seen in Q1 are in Q2, not on that high level. So we expect To see here for EXM 360T growth.
Thank you very much.
And the next question comes from Kyle Voigt from KBW. Over to you.
Hi, thanks for taking my question. So I think the Trade Gate business, The retail business continues to grow quite nicely in the equity line, equity investments line. Think you have a 20% stake there. Just given that the value of that stake has likely increased significantly, Wondering whether you consider monetizing that at some point or whether that's a strategic stake for your core business?
Yes. Obviously, we are also happy to see that kind of development. And indeed, so Trade Gate Already more than doubled their volumes. And it looks like that in 2021, it continues to be very successful here. And obviously, that Tradegate is in opposite to our platforms focusing on the retail business.
And so we have now seen a big uptick in the retail business. And we are also currently considering how can we benefit That kind of development. And so we are in the process to think about how do we want to position Our sales also in the retail business, but decisions are not done And also no intention to monetize our stake at Trinket.
Just to follow-up on that a little bit. So is that mostly you're thinking about How you can launch new retail oriented products within Eurex? Or is there something else there that we should be thinking about?
Yes, product is 1 and what could be offered to the retail customers. So there are obviously opportunities Deutsche Borse, as you see that Tradegate is very successful here. So we are open from that perspective. What can we offer through the markets for retail customers and of retail products?
Understood. The other thing I want to touch on was, it's really Just cryptocurrency, the industry continues to grow strongly. I think you've listed some exchange traded notes that are crypto related. But if we take a step back and look at blockchain tech more holistically, I guess, there is a potential use case For settlement and kind of regulated infrastructure. I'm just curious if you've considered this in context The Clearstream business, I think you've made some investments there.
I've been doing interesting stuff there. So I'm just curious on what the developments have been With using blockchain technology in kind of the either the settlement infrastructure that you own or in the business at large? Thank you.
Yes. Obviously, blockchain is an interesting technology for us. And And so far, we made really good progress with regard to our use case at Clearstream and the use cases around collateral management. So and there's a high demand in the market. And basically, all of the big players, all the global ones And also regional ones connect to our platform or even have some shareholdings in our platform with HQLH, high quality Liquid assets, so what is a legal entity and what is Luxembourg based.
And together with our technology provider, R3, So we developed here a solution and that's now live. And so far, We will see in 2021 how strong is the port, but the demand is very strong It's of high interest to digitize all your collaterals, so that you can mobilize all your collaterals on a global basis And to allocate it to a transaction, sometimes you need low quality of collateral, sometimes high quality. And if you have everything digitized, If you have a tokenized, then it's obviously a very efficient process for the market participants and also for us as Carestream as a service provider. And the same is also true from a collateral management perspective in our clearinghouse. So in this area, and if you see that, that is successful, What is our expectation that it will be successful?
Then we could consider also in the second step to use that kind of blockchain technology in our settlement processes. So settlement process today is T plus 2, so you have 48 hours time. And so that is from a technology perspective, It could be also interesting for us to introduce blockchain and the settlement activity. What is also just to say, very clear for the next years, we don't see a use case in the trading and clearing space Because here we don't talk about hours, here we talk about seconds, microseconds, even nanoseconds. And therefore, the blockchain technology where blockchain And will be replaced every 10 minutes is not able to deliver on that side.
So for trading and clearing, so for the next years, we are not optimistic here. But for collateral management and potentially also settlement, we see a good chance to use that kind of technology.
In addition to what you have said, Agriva, allow me to add the following, Kai. We truly believe The tokenization, right, of asset losses will become a very valid and a very interesting asset loss expansion, Which you want to tap, point number 1. Point number 2, it is necessary that we do more than one use cases and more The one investment in this area, he was referring to HQLX, right, on the high value collateralized side. From a technological perspective, we do many other use cases.
A very famous one is
the so called blockbuster Use case, it's a use case together with large banks and the German, Deutsche Bundesbank, right, because we think it's not only for crypto A topic it's also a topic for the digital euro, right? And you need to understand that all cryptocurrency or crypto assets Our assets are based within a circle of computers, right, and use the blockchain. But the trick is you need to be In a position that you can create an exchange between a blockchain based circle And get it out in a normal payment systems. And that's the background where we have done a very successful blockbuster project with Deutsche Bundesbank. And we have demonstrated a life that you can get trigger solution out of the crypto space, out of the blockchain space Into the normal payment and settlement space.
And that's what we have done on the bond side very successfully, which was a big effort and a big success the last couple of weeks. And you should expect more to come in this area.
Thank you very much.
And the next question comes from Gurjit Kambo from JPMorgan. Over to you.
Hi, good afternoon. Thanks for the presentation. Just a couple of questions. Firstly,
in terms of the sort of
headroom that you have M and A, could
you just give us an indication
of how we should think about that? So I'm thinking about headroom from cash and debt rather than sort of equity at this point. And then secondly, in Clincher, obviously strong revenue growth in the settlement business, which obviously was driven by higher settlement transactions. But just I'm trying to understand what's driven that sort of 26% growth in settlement transactions?
Yes. Thanks, Cammer, for the question. So with regard to headroom M and A, so just to remind all of us, It's €1,500,000,000 what we have available until end of this year. So again, we are able to do M and A on that cash debt level. And you are aware that on top we have the AGM authorization to increase also our equity.
And thirdly, in that context, I would like to mention, we could also consider to do Joint venture or that we bring in some assets where we would not need cash as we did with the Axioma transaction Where we haven't to pay anything that we bought in our stock index business with €2,600,000,000 And included basically GA, our PE partner, who at the end of the day paid for that. So We have different formats and enough opportunities to continue to do M and A, so I can just confirm that. With regard to your second question, Clearstream increased settlement activity. The main reason for that increased settlement activity is Also on is the retail area where we see an increased activity. We also talked about it Just a minute ago, Erinn, in our cash equity business that there's increased retail activity, and that's obviously good.
But we see that also from a Germany perspective where the equity culture was not as exciting compared other countries, so we see here that retail customers are interested together With some new new progress to do activity here, and so we benefit also from that trend here in the settlement area.
Thank you.
And now we're coming to the next questioner. It is Mike Varner from UBS. Over to you.
Thank you very much.
Two quick questions, please. First, on the over the counter clearing Business. We saw a little bit of a slowdown in revenue growth. This is the weakest, I think, quarter in the past I was just wondering if there's any one offs or anything to explain that. And then second, my understanding is that open access It comes online on July 1 this year.
If that's the case, how do you expect or how do you think that will impact Your exchange traded derivative business? Thank you.
Yes. Thanks, Mike, for the question. So As I also referred to the Brexit question from Tobias some questions ago. So the main driver here is around Brexit, right? And so far, so this open access and topic, It's a challenge for regulators to judge on the topic.
1st, What is a political agreement? And if politicians would agree To define the rules, how to do business together, then obviously, it would be much easier for regulators To think about open access, as long there is no clarity, it's obviously not so easy to decide upon This is open access rule. And so far from our perspective, it's still open, what happens here. But we see a tendency, as I mentioned earlier, that European regulators and politician Would like to see the European business as handled within Europe. And that obviously would play in our hands.
But our focus is again, so it doesn't make sense if they are forced to do it or it would be much better if they do that on a voluntary basis Because they are convinced that they get a good solution here, and I think we have a lot of reason To think so in that way. With regard to the revenue development in compared to previous year, So we are very much interested to increase our liquidity. So it's good to see that our market share is 20%, And so it continues to increase. And all our effort is to convince market participants to join our platform. Well, I talked about the 250 customers are not active.
They are connected, but they are not active on our platforms. And that's why we also give some incentives to move to our platform. And so that's Due to that kind of incentivization, that's the reason that you see not the same increase in our revenue basis From that compared to our volumes.
Thank you, Gregor.
And the next question comes from Andrew Cope from Citigroup. Over to you.
Yes, good afternoon. If I could just follow-up on one of the previous questions. Notably on the settlement Timothy, clearly strong. The revenue per transaction also elevated. And I think you alluded to the fact that, that was predominant because The spike in the retail client base.
So would it be fair to look at Tradegate as a Proxy, but also the settlement activity that's coming through at that higher margin. And can you give us an idea roughly of How the margin would spread between your Standard Client base and that Retail segment for the settlement revenues? Thank you.
Yes, Andrew, that's only partly the case because Trade Gate has also there's a brokerage component. So they're making markets, they're taking the Brett, in order to generate revenues and profits, so that's a little bit of a different model. And it also develops nicely Because they've taken market share, so another component. But generally, if retail trading activity, especially in foreign Product, so U. S.
Tech stocks, for instance, is growing then Clearstream is benefiting because also those foreign equity transactions Originating in Germany are processed through our Clearstream system. So that's definitely a good driver here.
Okay. I guess, worded another way. If I look at your Clearstream banking fee schedules, it doesn't look like there's been any Material changes of late. So the pickup there is entirely due to the volume mix. Is that fair?
No, not entirely just to volume, but foreign equity transactions Are typically higher priced compared to domestic transactions. So there is a fee differential, which is why we saw this over proportional Growth in the revenue versus the volume, so a more favorable product mix.
Understood. Thank you.
All right. This concludes our call today. Thank you very much for your participation, and have a good day.