Earnings Call: Q3 2019

Oct 18, 2019

Earnings release

Thank you. Ladies and gentlemen, thank you for standing by, and welcome to the London Stock Exchange Group Q3 Results 2019 Investor Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. I must also advise you that this conference is being recorded today, Friday 18th October 2019. And I would now like to hand the conference over to your first speaker today, Paul Froud. Thank you. Please go ahead, sir. Thank you. Good morning, everyone. Thank you for joining us. On the call this morning, we have CEO, David Schlima and also CFO, David Warren. And in terms of the running order, David Warren will shortly summarize the Q3 performance, and then David Swimmer will give an update on the group's strategy, and this one would be definitive. Before we then hand over to questions from you at the end. So with that, let me hand you to David Warren. Thank you, Paul, and good morning to all of you As you have seen from this morning's release, we delivered a strong Q3 performance. Let me give you the highlights and then a bit more detail by segment. 23 income increased 12% year on year to £587,000,000. And for the year to date, we are up 9% to £1,730,000,000. Gross profit for Q3 is up 14% after cost of sales and up 10% for the 9 months year to date. Information Services revenue increased 9% with 10% headline growth at FTSE Russell, 5% growth after adjusting for FX. Subscription revenues grew strongly, up 15% reflecting new sales across a number of indices. 50 Russell's asset based revenues also increased by 3% on a reported basis against a strong comparative period last year that included some catch up billing. Real time data revenues increased 4% despite a reduction in terminal numbers. Reflecting enterprise arrangements and growth in direct or non display data feeds. Finally, revenue from other information services grew following increases across the number of the products in this line. Turning next to LCH, Total income increased 19% and rose 17% on a like for like cases. RTC clearing performed strongly as revenue increased by 22% with swap cleared growth driven primarily by increases in client clearing. FTI increased 16%, mainly reflecting a 20% year on year growth in average cash collateral. We think MTI will stabilize around these levels, all other things being equal. Postrade Services in Italy saw an 8% increase in total income. With higher clearing revenues following growth in Italian equities and retail volumes, leading to an increase in custody and settlement revenues as well. Turning to Capital Markets, Q3 revenue grew 14%. Shifting out the effect of the 8,000,000,000 sterling IFRS 15 adjustment to last year's primary market figure. Capital markets revenue would have been 5% higher year on year. In secondary markets, revenues were 2% lower in equities up 10% for fixed income derivatives trading following market volatility in the period. In technology services, revenues increased 1% on a like for like basis at £16,000,000. And finally, our financial position remains strong with a good level of funding flexibility in place. As at the 30th September. The group had available committed facility headroom of approximately £750,000,000 and we will repay the 10 year 250,000,000 9 and 8th bond that matures today. From these existing resources. And now let me hand over to David Schimmer. Thanks, David. Let me give you some context on the other items in today's announcement related to the group's strategy, leadership, and Refinitiv. First, we are making good progress with Refinitiv. Today, we announced the establishment of the integration management office. Bringing together the planning and other work already underway with senior managers from both LTIG and Refinitiv. To lead this team, we have appointed David Childers as chief integration officer and a member of the Elsevier Committee reporting to me. He joined the group on November 18th. This brings over 30 years experience in integration, technology and operations in the Financial Services Sector. She has successfully led a number of global integration programs most recently at Willis Towers Watson, encompassing a convergence of technology platforms, business operations, front to back operations reengineering, as well as cultural integration. Designed to support growth and to drive operational efficiency. Next, we expect to release a circular shortly. Ahead of a general meeting for shareholder approval later in November 2019. The process to achieve regulatory approvals has commenced in several jurisdictions, and we remain on target to close the transaction in the second half of twenty twenty. Turning to other matters, as today's results demonstrate We continue to execute on our business strategy across our core businesses of information services, post trade, and capital markets. And we continue to drive group wide collaboration, which I identified as a priority earlier this year. Today, we have confirmed this group's post trade businesses, which are currently reported separately as LCH And Post Trade Italy, will be aligned to 1 post trade division effect from January 1, 2020. Post trade division She led by Daniel Maguire, CEO of LCH Group, and will include LCH Group, our Italian post trade businesses must NCCMG, and Unavista, our trade reporting business that currently reports as part of the Information Services division. New division will ensure greater group wide collaboration and aim to facilitate coordination amongst these different businesses. To develop commercial activities for the benefit of our customers. We will continue to operate all our businesses on an open access basis in partnership with customers and stakeholders. Importantly, all local legal entity governance and regulatory oversight will remain unchanged. This is about enhanced collaboration and benefits for customers. Today, we announced that David Warren, Group Chief Financial Officer, as informed the group of his intention to retire from the company. Step down from the board by the end of 2020. David will continue in his current role as group CFO. And a member of the board for the close of Refinitiv transaction to ensure a smooth transition to his extension. Okay. We will now commence a global search led by the board's nomination committee. David has given the board an ample time to identify a world class successor. Is not quite the end of an era yet, but I would like to express my thanks now for David's partnership during my 1st year at Eltek and for his significant contribution to the group success. He looks forward to continuing to work closely with him to drive our core business and to deliver the Refinitiv transaction in the year ahead. David, do you wanna add a word? Yeah. Thanks, David. So now I need it's not an easy decision to make. I've been very proud to have been a part of the huge transformation, that this company has made, over the 7 years that I had been here. And, David, I am enjoying working closely with you and being a part of your leadership team. I'm also absolutely committed to getting the Refinitiv, transactions completion and working on the preparation, for the integration. There'll be more work to do after that. And David, you and the board now have ample time, to recruit someone to partner with you, to continue with the next phase of the group's future development and and success. Delivering on the synergies and the significant growth opportunities, with the Refinitiv transaction. And you'll be a very strong and experienced team here to contribute to that effort. I'm not leaving this afternoon. I'll be around for a while yet. And there's much to do. So more to say later, but, thank you very much. And so with that, I will, round up and I think we'll hand back to Paul, for, start ups and q and a. Thanks. Great. Thanks, Elliot. I'd like to turn the lines over to questions. So operator, if you could tee that up, please. Thank you. And should you wish to cancel the request, you may press the hash key. We now have your first question from the line of Haley Tam. Good morning, everyone. Could I ask two questions, please? First one on post trade, obviously, another strong result in OTC Revenues. Just just to help us think about the trends, did you identify for us how much of the growth did come from swaps and client trade volumes versus perhaps the increases in FX? And CDS, notional value cleared. And I guess in that spirit as well, just thinking about the the likely future impact of introducing s to clearing and further benefit from the introduction of ethics towards clearing any thoughts you have, that would be very welcome. And then the second question just on net Treasury income, obviously, here your guidance that you expect it will stabilize around these levels, all other things being equal. I just wondered, is there any particular reason for increasing average cash balance cash collateral balances. Is that something you're asking for or is it something the clients themselves are doing? Thank you. I'm happy to start. Look, I think with respect to, FTC, obviously, very strong growth there. Most of that, as we've said in the past, is from, is from the spot clear business. Although, FX and CVS pre are growing strongly in which we can comment on. And it is largely down to a strong increase in client clearing, those trades being up over 40%, for the quarter. So as it relates to, Forex Clear, again, that's a business that is continuing to develop. We have, I think, been clear that we will expect it to develop, over time, but are pleased with the progress. As we have said, the mandate for this is not, regulatory mandate. It's more of an economic mandate. That's coming from the imposition of the uncleared margin rules and the cost or the increased cost of holding that additional collateral against the efficiencies of clearing FX contracts centrally. So we are pleased with the further development in FX and I think we're also, quite pleased with the announcement that we made a week or so ago that we are now have launched, in partnership with CLS, our our our first basically, 1st physical CapEx settlement, optionality. So we will now be able to clear and have significantly expanded the universe of contracts that we can clear, we will now be able to deliver FX forwards. So it's not just the deliverable options and the NDS we are now able to deliver a much wider range of forward contracts. So we think that that also It's a significant, development, one that we've been working on for a long time. And so all of these things, I think, will will continue to support further growth in Forex Clearing. And on the NTI, look, the increase there is really down to the the volatility and the increase in clearing activity and the resulting additional margin, that we collect It is, NTI is, far more dependent on the margin invested that is on the actual spreads. I think your question was more sort of why we think that sort of all else equal. I think if we see the same levels of activity that we have seen, we would expect NTI to remain, but obviously as volatility grows, including activity increases, So we'll, collateral balances, and therefore, that will have an upward effect on, on NTI. So happy to respond to that. David, if you want to add anything. The only thing I would add, you also have have after clearing. We've just announced that. So that's not moving the needle at this point, but we have had a healthy trajectory and believe positive contribution from Sonia and Silver swaps in LCH, and we expect a similar contribution in growth rate from Epsilon Court. My I can't remember that as Euro FTR. I believe it's the No. ETR. Sorry. Terminal. Thank you very much. Thank you. Thank you. And your next question is from the line of Chris Turner. Yes. Good morning. It's Chris Turner from Battle Bank. Three quick questions, if I may. Firstly, just to come back to the net treasury income. You spoke with a lot about cash balances and how they may move. Could you give us a feel for the treasury margin, how that might be impacted by US rate crudes so that can material impact? Secondly, if we look at the subscription revenues at First Russell, it also seems to be very strongly this quarter with 10% in constant currency. Intersecting saying that was about 5%, constant currency growth for the previous quarter. So can you give us some color on on why that line, why that growth rate is is maybe moving quite as much as it as it is, I would have expected a sort of a more gradual contribution given their subscription revenues. So what is it that that I'm missing? And then finally, in case that we need to talk about the bridge financing you have in place for related steps, there was a press article out there saying that these bridge facilities will be for 3 years duration and only cost you something greater, like, liable for safety tips. Are you able to comment on that at all? Thank you. Okay. I think David and I can trade on those answers. Sure. Maybe just on your question on the, FTSE subscription revenue that's really mainly new business, new business with existing clients largely. And so that is what has driven that not much more, really behind that. For the question on NPI and Rich Lansing. I'll turn it over to David. Yeah. Look, I think I think that I think our guidance, on NTI, is, you know, you know, this, I think in terms of the U. S. Market, right now in anticipation of what any future head actions might be that is largely priced in. And so in terms of how the interest rate works, we really benefit only from, capturing the spread. Between the short, the secured overnight rate and the unsecured rate that is quite short in maturity. So the actual absolute levels of interest rates were down, matter, but they're also they're also tend to adjust well in advance of any signaling that the Fed may have done. So for those reasons, I don't really expect that to be too much yield impact, in PTI for the balance of the year, But what I also, so therefore, my comment that it will really be, as it continues, as it largely is all the time, the function of volatility clearing activity and collateral collected. I think your final question, and if I missed it, you can ask me the detail. There wasn't a I did I did see the article that you referenced. It is, without going into all the details, it is a standard bridge facility. It is LIBOR page. And it is as a bridge facility, priced, with increasing ratchets as to as to rate, because it's intended to be short term financing. And so to go back to our plan as we announced the transaction, we wanted to have a fully committed and it is fully committed and now syndicated bridge in place to be able to deal at closing with the Refinitiv debt stack. But then our expectation would be following presentation to the rating agencies and into the wider market, to replace that bridge with permanent financing. Which we would expect to be a mix of fixed and variable rate financing, but we'll be paying more of that, obviously, closer to the time of closing. Did that cover that It was that the person you're asking on the bridge? Yes. It is. I will set up. Thank you very much. And also just as a final word, I was very to have a news of of your retirement. I run some quick numbers actually using some profanity software, and I I worked out a simple return on on LSE share since you joined the company has been 800%. So I'm glad it's not that time to announce your time. Thank you. Thank you. I'm delighted to hear the source Thank you. And your next question is from the line of Arnold Giblet. Your line is now open. Stephanie, I was wondering if you can give us a update on the temporary access for LCH clearing, that expires in in March 2020. What are you hearing about, an avenue? Secondly, I can send back to you in terms of growth in subsidies, subscription based revenue. So I I think you also you mentioned that that that came from new business. Could you give us maybe a bit more color around what what that new business is? And my final question is, you in the release there, there's an indication of a 4 and 710 decline in terminals, at an SGM, Gaussi Cali now. In this case, you you managed to to grow, data revenues on on the list. I'm wondering if, some of these dynamics could apply to Refinitiv or should we expect a short term headwind that has to facilitate before you you change the revenue model there? Thank you. Okay. Thanks, Ronald. So on the temporary access, as we have said in the past, we with respect to European market just gives access to PH limited, that temporary access probably goes through March of 2020. We expect that that will be extended. We think that there is a recognition among all the stakeholders in the marketplace the importance of access to this market. The messaging that we have gotten has been very clear that nothing is likely to be clarified around that until after October 31st. And put me on that We think that the understanding, amongst the various stakeholders is, this continues to be systematic, systemically, extremely important. And therefore, we expect that the same recognition that was granted in December of last year, We expect to have an extension probably in November, but hard to predict the exact timing. And then with your with respect to the the follow-up question around the new business, there's really nothing specific, to point out there. It's really across a range of products. And range of products of new business with primarily existing clients. So, not much more to report on than that. And then for your first question, I'll turn it over to you, David. Yes, your question on our real time data and the terminals. Yep. No, absolutely. Look, our, our terminal terminals have been in a steady, decline over a period of time. And yet, we've been able to grow the real time data line, because we have really been focusing on the enterprise arrangement with each customer and also, just increasingly, aware of and responding to the fact that customers are increasingly and will increasingly take less of this data over a term or over a desktop. It will be coming in through a variety of distribution sources, whether it's just simply feeds or through the cloud. And this is exactly the point that we are making and the opportunity we see with Refinitiv. So it's absolutely the case. Certainly with respect to any specifics on the tentative, which I think part of your question was, was sort of was asking, we'll definitely be saying more as part of the circular. But what we've what we have been doing with our real time data business, is just a small part of what we see as the much broader opportunity with repetitive because we know terminals will continue to be in decline. And we know that our customers will be increasingly taking data and analytics services over a wider range of distribution channels. And that's really what we're able to do with real time data. Customers are taking it more now through non display or through feeds and less through terminals. And we can price a license accordingly to that usage. Thank you. And your next question is from the line of Ian White. Your line is now open. Is from my side, please. First of all, just a follow-up, really, on the, on swap clear. How should we think about growth in swap clear client clearing? During the third quarter. To achieve this, it is kind of more secular growth, client clearing more products, an increase in the number of client accounts. Or should we be thinking that as purely driven by by 60 or factors during the quarter, please? And then second one, a different question. We've seen some commentary in the Italian press this week in relation to MTS. It says essentially the Italian Ministry of Finance So if you're comfortable with a combination between MTS and Tradewear, if you need to maintain a physical presence in Italy, and maintain a border with Taliana represents on the group board. And would you be prepared to comment on that all? I guess it just strikes you that, I'd rather that roughly reflects what the debate is with regard to antitrust and the combination between NCS and Tradeweb. I guess you struck me that these conditions aren't particularly onerous. Thank you. Ian, I'll comment on your a second question, then, David will address the spot clear, client clearing question. Nothing really to say at this point on, we've obviously seen some of the the speculation. In the media about the Italian businesses. I would just point that there was a also a comment from the bank of Italy really, basically denying a lot of the speculation in the marketplace. So Nothing really to add on that. We're not in a position to comment on anything related to, regulatory approvals at this point. And it's all very, very early. So I'm sure we'll see plenty of fluctuation, in the media going forward, but there's really nothing to that at this point and really nothing to that at this point. I think, Arnie, the question on Swaddlers Clear, Obviously, when you're clear, 90 to 95% of the world's interest rate swaps, you'll obviously have all the impacts of rising and declining markets. So we'll be the full beneficiary of that market activity and market volatility what we are seeing and continue to see, with client clearing is that more there is a secular growth component to this growth. More clients are connecting through members, increasing the range of products, that they clear, there's just generally a good feeling about that that activity continuing in the future. It's not one that we have historically broken out and probably won't do, but I just would just wanna tell you that when we think about the growth of that business, we do see continued, increases in client clearing. And that's been supported by the results that we've seen to date. Thank you, Ann. Thank you. And the next question is from the line of Kyle Wirth. Your line is now open. Hi. Good morning. Maybe the first one just on the asset base fee within thrifty household. Can you help frame the size of the impact due to that catch up in billing in last year's period? Just trying to gauge what the kind of true organic case of growth is there year over year. Yes. Did you want a question? Sorry, no, I've come a little more. So I knew you did. I'm sorry. I I didn't believe you were done. Yeah. Sorry. So, the other 2 would just really be any any color maybe for David, swimmer, or or or David Warr, any color even qualitatively on kind of rotation drills, ever since, through the 1st 9 months of the year. And then also any timeline you can give, with respect to this, the the global CFO search, is it 6 months, see if you wanna have something from, close by or any any details there. Sure. I'll take that and then you can go back to your first question. So Johnson Reuters has their Q3 results on October 31st. And I think That's probably the best time to wait and get the latest on the performance out of repetitive. So nothing really to add on that on that question. We'll stick to our timeline, for the CFO search. As you know, these processes can take, call it several months, and think David has put us in a very strong position here, with this time frame, and have looked forward to working closely with him over the course of next year. We'll manage to be very focused on executing on our core business. Executing on the the planning for the closing and integration representative. And David will be with us for that. And at the same time, the nominations committee of the board will lead the search, and we have plenty of time to do that. Yeah. So Kyle, back to your first question. I think that, yes, I'm going to just help you think about that. Probably best to think about it when you just look at the sequential numbers. And I think that gives you some sense of sort of what the the amount of that catch up. I would say that if you didn't have it, you would look at it, you would be able to sort of see that sequentially, we're 52 in 2nd quarter, 55. So it would have been down a bit from 59 won't say much, but it would be more in a little bit more in line with, sequential, maybe a little bit higher than Q4. But that just gives you a sense of magnitude of those catch ups, and they will happen occasionally. But I think if you if that helps to give you some sense of where it is as compared to what we were able to book for Q3 this year. Okay. Thanks, Kyle. Next question, please. Thank you. Your next question is from the line of Gurjit Tombo. Your line is now open. Hi, good morning. It's Richard, JP Morgan. Just two questions. Firstly, just in terms of the ETF, AUM within FTSE and Russell. There's about a 5% of delta in in the quote for you on here. Is that purely just the foreign exchange impact, or is there something else within, you know, is there more new products coming out of suits, etcetera? The AUM side. So that's the first question. And then secondly, just quickly on the primary revenues, if you adjust for IFRS 15, revenues are basically been broadly stable year on year, whereas, you know, the new issuers and money raised significantly year on year. I just wanna understand, you know, how you've kept it flat. Like, you know, those key metrics sound quite different than the year on year. I wanna make sure I understand question on ETF. Are you talking about ETF volumes? No. So the so the ETF AUM that you have in foot fees up like 7%. And then the ETF AUM in Brussels, I think up 2% sure. And I understand the difference. Is that just for an exchange, or is there something else in there? I mean, I can look to part of that. It is a mix of what we have in ETFs, right? Go ahead. Yeah. It's not really been driven by, yeah, thanks for the sake of about the amount of products out there and the market value. And then on, I think the question about, IFRS 15, or capital markets, I think if you take that effect from last year out, I'll look to Paul on this for some of the detail. If you take that out, I mean, we are operating under IFRS 15. There was an impact on it last year when we implemented it. But part of IFRS 15, is that you will be recognizing, you will recognize, listing activity over a period of time. So some of which you'll have recognized in every period and some of the recognition of revenue that you've deferred, following from the annual listing. We do recognize that now over a 7 year period. So that'll give you some that will that will be a bit of a, you know, that will be a bit of a constant in our primary market revenue going forward. And that will be the case in both primary markets that are going up as well as primary markets that maybe are staying flat or going slightly down. You are recognizing, you will recognize over 7 years the amount of an IPO fee. Yeah. So so just to follow-up on your question, given then, as David said, why don't you take out the effects of the IFRS change? And it looks like the revenues are will be flat, although the metrics in the period are down. So what was given there, and then as you know, we apply some very low level price increases year to year So you get some benefit from that. That's what you're seeing. Thank you. And your next question is from the line of Yana Sorman. Your line is now open. Good morning, everybody. Yana's HSBC. One for, one question left, actually, regarding your statement, about the combination of your post trade businesses in one division. So Fire has been very carefully separating LCA and detailing businesses. Does this change? Do we see a change in legal structure in in in collateral pools, or what is the driver for for this one? Thank you. Thanks. No change in legal structure, no change in, collateral pools. This is just about, basically combining the recording and having, more coordination across what businesses that are all in the post trade space, all generally working with the same customers. Generally working in, either very similar or adjacent businesses. So we are doing this because we think there's opportunity to have those businesses work more closely together, for the benefit of our customers. It's really just as simple as that. There's no change in terms of the regulatory structure in terms of the governance, in terms of the local reporting lines. And we're not moving leadership in any jurisdictions. So it's it's really as simple as that. Okay. Thank you. Thank you. Thank you. The next question is from the line of Philip Middleton. Your line is now open. And, I just wanted to thank David Warren for all he's done and for all his help over the years and his faith. He looks really into me. That's not funny. Oh, it's pretty funny, sir. That's fine. Appreciate it. Thank you to work. You're you're welcome. Thank you. And should you wish to cancel the request, you may press the hash key. The next question is from Bruce Hamilton. Your line is now open. Hi, yes. Good morning guys. Thanks. Most of my questions asked, but just maybe a follow-up on the post trade combination points. It sounds like this is really aimed at enhancing sort of top line rather than driving any rather than, you know, driving any sort of cost efficiency benefits. But I guess outside of post trade, are there any other sort of areas where perhaps the group looks less integrated than than you'd like and and, you know, there could be further move to enhance sort of collaboration, corporation and so forth? So thanks Bruce. This is part of an ongoing process that we have been working through We announced in our March first, results that we were going to be going through a number of areas of greater efficiency and collaboration. We have talked about, bringing multiple offices in, the same jurisdiction together we have been doing that in New York just over the last few weeks moving. And we've had 5 offices consolidated into 1. And so that's an example of that. I think the, the formation of the post trade division is another good example of that. An opportunity to work more closely across the group for the benefit of our customers. And the post trade division We'll do that. These are businesses that have been, serving either identical or very similar customers across very similar products. And for a variety of reasons over the years, they have been reported separately. We think it makes sense to report them as part of one division, and we think it makes sense to have greater coordination across leadership of these different businesses. So, we'll continue to work for greater collaboration collaboration across the group. We'll continue to work for greater efficiency across the group. And we think that will enhance the top line and strengthen the bottom line. Great. Thank you. Thank you, Karen. No further questions at this time, sir. Great. Thank you very much for joining us. We're ending the call now and any more questions, please just call us as usual. Thank you very much. Thank you. And that does conclude our conference for today. Thank you for participating. You may all disconnect.