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. To ask a question during the session, you will need to press star one on your telephone. I must also advise you that this conference is being recorded today, Friday the 18th of October, 2019. I would now like to hand the conference over to your first speaker today, Paul Troub. 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 Schwimmer, and also CFO, David Warren. In terms of the running order, David Warren will shortly summarize the Q3 performance, and then David Schwimmer will give an update on the group's strategy and progress on Refinitiv before we then hand over to questions from you at the end. With that, let me hand you to David Warren.
Thank you, Paul. 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. Q3 income increased 12% year-on-year to GBP 587 million. For the year-to-date, we are up 9% to GBP 1.73 billion. Gross profit for Q3 is up 14% after cost of sales, and up 10% for the nine months year-to-date. Information services revenue increased 9%, with 10% headline growth at FTSE Russell, with 5% growth after adjusting for FX. Subscription revenues grew strongly, up 15%, reflecting new sales across a number of indices. FTSE 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. Revenue from other information services grew following increases across a number of the products in this line. Turning next to LCH, total income increased 19% and rose 17% on a like-for-like basis. LCH Clearing performed strongly as revenue increased by 22%, with SwapClear growth driven primarily by increases in client clearing. NTI increased 16%, mainly reflecting a 20% year-on-year growth in average cash collateral. We think NTI will stabilize around these levels, all other things being equal. Post Trade Italy saw an 8% increase in total income, with higher clearing revenues following growth in Italian equities and recall volumes, leading to an increase in custody and settlement revenues as well. Turning to capital markets, Q3 revenue grew 14%.
Taking out the effect of the GBP 8 million 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 and 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 GBP 16 million. Finally, our financial position remains strong, with a good level of funding flexibility in place. As at the 30th of September, the group had available committed facility headroom of approximately GBP 750 million. We will repay the 10-year, $250 million, nine and an eighth bond that matures today from these existing resources. Now let me hand over to David Schwimmer.
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. We are making good progress with Refinitiv. Today, we announced the establishment of an Integration Management Office, bringing together the planning and other work already underway with senior managers from both LSEG and Refinitiv. To lead this team, we have appointed David Shalders as Chief Integration Officer and a member of the LSEG Executive Committee, reporting to me. He joins the group on November 18th. David brings over 30 years experience in integration, technology, and operations in the financial services sector. He has successfully led a number of global integration programs, most recently at Willis Towers Watson, encompassing the convergence of technology platforms, business operations, front-to-back operations re-engineering, as well as cultural integration designed to support growth and to drive operational efficiency.
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. We remain on target to close the transaction in the second half of 2020. 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. We continue to drive group-wide collaboration, which I identified as a priority earlier this year. Today, we have confirmed that the group's post-trade businesses, which are currently reported separately as LCH and Post Trade Italy, will be aligned into one post-trade division with effect from January 1st, 2020.
Post trade division will be led by Daniel Maguire, CEO of LCH Group, and it will include LCH Group, our Italian post trade businesses, Monte Titoli and CC&G, and UnaVista, our trade reporting business that currently reports as part of the Information Services division. The 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. We are not moving businesses.
Finally, today, we announced that David Warren, Group Chief Financial Officer, has informed the group of his intention to retire from the company and 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 through the close of the Refinitiv transaction to ensure a smooth transition to his successor. We will now commence a global search led by the board's nomination committee. David has given the board and me ample time to identify a world-class successor. It's not quite the end of an era yet, but I would like to express my thanks now for David's partnership during my first year at LSEG, and for his significant contribution to the group's success.
I look 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 want to add a word?
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 seven years that I have been here. 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 transaction's 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 success, delivering on the synergies and the significant growth opportunities with the Refinitiv transaction. There will 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. More to say later, but thank you very much. With that, I will round up and I think hand back to Paul for start of some Q&A. Thanks.
Great. Thanks, David. All right, time to turn the lines over to questions. Operator, if you could tee that up, please.
Thank you. As a reminder, if you wish to ask a question, you may press star and one, 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. Your line is now open.
Morning, everyone. Could I ask two questions, please? First one on post trade. Obviously another strong result in OTC revenues. Just to help us think about the trend points, could you identify for us how much of the growth did come from swap from the client trade volumes versus perhaps the increases in FX and CDS notional value cleared? I guess in that spirit as well, just thinking about the likely future impact of introducing €STR clearing and further benefit from the introduction of FX forwards clearing. Any thoughts you have there would be very welcome. A second question just on net treasury income. Obviously, here your guidance that you expect it will stabilize at around these levels, all other things being equal. I just wondered, is there any particular reason for the increase in average 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. I think with respect to OTC, obviously very strong growth there. Most of that, as we've said in the past, is from the SwapClear business. Although FX and CDSClear are growing strongly, which we can comment on. It is largely down to a strong increase in client clearing, those trades being up over 40% for the quarter. As it relates to ForexClear, 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 a regulatory mandate, it's more of an economic mandate that's coming from the imposition of the uncleared margin rules and the increased cost of holding that additional collateral against the efficiencies of clearing FX contracts centrally. We are pleased with the further development in FX. I think we're also quite pleased with the announcement that we made a week or so ago, that we have launched, in partnership with CLS, our first physical FX settlement functionality. 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. It's not just the deliverable options in the NDFs, we are now able to deliver a much wider range of forward contracts.
We think that that also is a significant development, one that we've been working on for a long time. All of these things I think will continue to support further growth in forex clearing. On the NTI, look, the increase there is really down to the volatility and the increase in clearing activity and the resulting additional margin that we collect. NTI is far more dependent on the margin invested than it is on the actual spreads. I think your question was more why do 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. Obviously as volatility grows and clearing activity increases, so will collateral balances, and therefore that will have an upward effect on NTI. Happy to respond to that.
David, do you want to add anything?
No. The only thing I would add, you also asked about €STR clearing. We've just announced that, so that's not moving the needle at this point, but we have had a healthy trajectory, and really positive contribution from SONIA and SOFR swaps in LCH, we expect a similar contribution in growth rate from €STR going forward. I should refer to that as Euro €STR, I believe is the.
€STR, sorry.
the terminology.
Thank you very much.
Thank you.
Thank you. Your next question is from the line of Chris Turner. Your line is now open.
Yes. Good morning. It's Chris Turner from Berenberg. Three quick questions, if I may. Firstly, just to come back to the net treasury income. You spoke a lot about the sorts of cash balances and how they may move. Can you give us a feel for the treasury margin, how that might be impacted by U.S. rate cuts so that have a material impact? Secondly, if we look at the subscription revenues at FTSE Russell, it looks like those grew very strongly this quarter, about 10% in constant currency. I think in my claim that was about 5% kind of constant currency growth the previous quarter. Can you give us some color on why that line, why that growth rate is maybe moving quite as much as it is? I would've expected a sort of more gradual evolution given their subscription revenues. What is it that I'm missing?
Finally, in today's statement, you talk about the bridge financing you have in place for Refinitiv. There was a press article out there saying that these bridge facilities will be for three years in duration and only cost you something crazy like LIBOR plus 50 basis points. 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. That is what has driven that. Not much more really behind that. For your question on NTI and bridge financing, I'll turn it over to David.
Yeah. Look, I think our guidance on NTI is, and you know this, I think in terms of the U.S. market right now in anticipation of what any future Fed actions might be, I think that is largely priced in. In terms of how the interest rate works, we really benefit only from capturing the spread between the secured overnight rate and the unsecured rate that is quite short in maturity. The actual absolute levels of interest rates up or down matter, but they also tend to adjust well in advance of any signaling that the Fed may have done. For those reasons, I don't really expect there to be too much yield impact in NTI for the balance of the year.
Therefore my comment that it will really be as it largely is all the time, a function of volatility clearing activity and collateral collected. I think your final question, and if I missed it, you can ask me the detail. I did see the article that you referenced. Without going into all the details, it is a standard bridge facility. It is LIBOR-based. It is as a bridge facility priced with increasing ratchets as to rate, because it's intended to be short-term financing. 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 it's indicated, bridge in place to be able to deal at closing with the Refinitiv debt stack.
Our expectation would be, following a presentation to the rating agencies and then to the wider market, to replace that bridge with permanent financing, which we would expect would be a mix of fixed and variable rate financing. We'll be saying more of that obviously closer to the time of closing. Did that cover the question you were asking on the bridge?
Yes, it is. I will take that. Thank you very much. Also, just as a final word, I was very sad to hear the news of your retirement. I ran some quick numbers actually using some Refinitiv software, and I worked out that the total return on LSE shares since you joined the company has been 800%. I guess that's not a bad time to announce your retirement. Thank you.
Thank you. I'm delighted to hear the source.
Cheers. Bye.
Thank you. Your next question is from the line of Arnaud Giblat. Your line is now open.
Yeah. Good morning. I've got three quick questions, please. I was wondering if you can give us an update on the temporary access for LCH clearing. That expires in March 2020. What are you hearing about a renewal? If I can come back to the 10% growth in subscription-based revenues at FTSE Russell. You mentioned that that came from new business. Could you give us maybe a bit more color around what that new business is? My final question is, in the release, there's an indication of a 4% and 7% decline in terminals at LSE and Borsa Italiana. In this context, you managed to grow data revenues nonetheless. I'm wondering if some of these dynamics could apply to Refinitiv, or should we expect a short-term headwind perhaps at Refinitiv before you change the revenue models there? Thank you.
Thanks, Arnaud. On the temporary access, as we have said in the past, with respect to European market participants' access to LCH 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 about the systemic 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. Beyond that, we think that the understanding amongst the various stakeholders is this continues to be systemically extremely important. 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.
With respect to 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. Not much more to report on than that. For your third question, I'll turn it over to you, David.
Your question on our real-time data and the terminals. No, absolutely. Look, our 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 terminal 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. This is exactly the point that we are making and the opportunity we see with Refinitiv. It's absolutely the case. Certainly with respect to any specifics on Refinitiv, which I think part of your question was asking, we'll definitely be saying more as part of the circular.
What we had been doing with our real-time data business is just a small part of what we see as the much broader opportunity with Refinitiv because we know terminals will continue to be in decline, and we know that customers will be increasingly taking data and analytics services over a wider range of distribution channels. 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. We can price a license accordingly to that usage.
Great. Thank you very much.
Thank you. Your next question is from the line of Ian White. Your line is now open.
Hi. Morning. Thanks for taking my questions. Just two from my side, please. First of all, just a follow-up really on SwapClear. How should we think about growth in SwapClear client clearing during the third quarter? Essentially, is this kind of more secular growth, clients clearing more products, an increase in the number of client accounts? Should we be thinking that as purely driven by cyclical factors during the quarter, please? 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 Economy and Finance might be comfortable with a combination between MTS and Tradeweb, if you were to maintain a physical presence in Italy and maintain a Borsa Italiana representative on the group board. Would you be prepared to comment on that at all?
I guess it just strikes me that, I just wonder if that broadly reflects how the debate is with regard to antitrust and the combination between MTS and Tradeweb. I guess it just struck me that these conditions aren't particularly onerous. Thank you.
Ian, I'll comment on your second question then David will address the SwapClear, client clearing question. Nothing really to say at this point on. We've obviously seen some of the speculation in the media about the Italian businesses. I would just point to, there was also a comment from the Bank of Italy, really saying, basically denying a lot of the speculation in the marketplace. 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 early. I'm sure we'll see plenty of speculation in the media going forward, but there's really nothing to add to that at this point and really nothing to that at this point.
I think, on the question on SwapClear, obviously, when you clear 90%-95% of the world's interest rate swaps, you'll obviously have all the impacts of rising and declining markets. 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 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 activity continuing in the future. It's not one that we have historically broken out and probably won't do, but I just want to 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.
Understood. Thanks very much.
Thank you, Ian.
Thank you. The next question is from the line of Kyle Voigt. Your line is now open.
Hi, good morning. Maybe just first one just on the asset-based fees within FTSE Russell. Can you help frame the size of the impact due to that catch-up in billing in last year's period? I'm just trying to gauge what the kind of true organic pace of growth is there year-over-year.
Yeah. Is that your only question?
Sorry. No. I have a couple more.
I knew you did. You paused there. I didn't believe you were done.
Sorry. Yeah, sorry. The other two would just really be any color, maybe for David Schwimmer or David Warren, any color, even qualitatively on the pace of growth at Refinitiv through the first nine months of the year. Also any timeline you could give with respect to the global CFO search. Is it six months? Do you want to have something done, close by or any details there?
Sure. I'll take that, then you can go back to your first question. Thomson Reuters has their Q3 results on October 31st. I think that's probably the best time to wait and get the latest on the performance out of Refinitiv. Nothing really to add on that question. With respect to our timeline for the CFO search, as you know, these processes can take, call it several months. I think David has put us in a very strong position here with his timeframe, and I look 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 planning for the closing and integration with Refinitiv. David will be with us through that. At the same time, the nomination committee of the board will lead the search.
We have plenty of time to do that.
Kyle, back to your first question. I think that, let me help you think about that. It's probably best to think about it when you just look at the sequential numbers. I think that gives you some sense of sort of what the amount of that catch-up. I would say that if you didn't have it, you would be able to sort of see that sequentially, we were 52 in second quarter 55. It would've been down a bit from 59. I won't say much, but it would be a little bit more in line with sequential, maybe a little bit higher than Q4. That just gives you a sense of the magnitude of those catch-ups. They will happen occasionally.
I think 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 Kambo. Your line is now open.
Hi, good morning. It's Gurjit at JP Morgan. Just two questions. Firstly, just in terms of the ETF AUM within FTSE and Russell, there's about a 5% sort of delta in the growth year-over-year. Is that purely just a foreign exchange impact? Is there something else within that? Is there more new products coming out of FTSE, et cetera, on the AUM side? That's the first question. Secondly, just quickly on the primary revenues, if you adjust for IFRS 15, revenues have basically been broadly stable year-over-year. The new issuers and money raised I think quite significantly year-over-year. I just want to understand how you've kept it flat. Those key metrics down quite significantly year-over-year.
I want to make sure I understand the question on ETF. Are you talking about ETF volumes?
No. The ETF AUM that you have in FTSE is up like 7%, and then the ETF AUM in Russell is I think up 2%. Just want to understand the difference. Is that just foreign exchange or is there something else in play?
No, of course. I can look to Paul for that. It is a mix of what we have in ETFs, right?
Yeah.
Go ahead.
It's not really been driven by the FX rate per se, Gurjit. It's more about the amount of products out there and the market value. That's what's driving it.
Okay. Fine.
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, we are operating under IFRS 15. There was an impact on it last year when we implemented it. Part of IFRS 15 is that you will recognize listing activity over a period of time. 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 seven-year period. That will be a bit of a constant in our primary market revenue going forward.
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. We'll recognize over seven years the amount of an IPO fee.
Yeah. Gurjit, just to follow up on your question, given then, as David said, that once you take out the effects of the IFRS change, then it looks like the revenues are broadly flat, although the metrics in the period are down. What's driven it, and then as you know, we apply some very low-level price increases year to year, so you do get some benefit from that. That's what you're seeing.
Okay. Great. Thank you.
Thank you. Your next question is from the line of Johannes Thormann. Your line is now open.
Morning, everybody. Johannes, HSBC. One follow-up, one question left actually, regarding your statement about the combination of your post-trade businesses in one division. So far, you've been very carefully separating LCH and the Italian businesses. Does this change, do we see a change in legal structure in collateral pools, or what has been the driver for this one? Thank you.
Thanks. No change in legal structure, no change in collateral pools. This is just about basically combining the reporting 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. 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. We're not moving leadership in any jurisdictions. 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.
Yeah, thanks. I haven't got a question. I just wanted to thank David Warren for all he's done and for all his help over the years, and to say he looks really young to me. That's not funny.
Oh, it's very funny, Philip. Thank you, Philip. Appreciate it. Been good to work with you.
You're welcome.
Thanks.
Thank you. Once again, it's star one if you wish to ask a question. 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. Morning, guys. Thanks. Most of my questions are asked. Just maybe a follow-up on the post-trade combination point. It sounds like this is really aimed at enhancing top line rather than driving any sort of cost efficiency benefits. I guess outside of post-trade, are there any other areas where perhaps the group looks less integrated than you'd like, and there could be further moves to enhance collaboration, cooperation, and so forth?
Thanks, Bruce. This is part of an ongoing process that we have been working through. We announced in our March 1st 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 past few weeks, moving, I think we've had five offices consolidated into one. That's an example of that. I think the formation of the post-trade division is another good example of that. It's an opportunity to work more closely across the Group really for the benefit of our customers. The post-trade division will do that. These are businesses that have been serving either identical or very similar customers across very similar products.
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 the leadership of these different businesses. We'll continue to work for greater collaboration across the Group. We'll continue to work for greater efficiency across the Group. We think that will enhance the top line and improve the bottom line.
Great. Thank you.
Thank you. There are no further questions at this time, sir.
Great. Thank you 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. That does conclude our conference for today. Thank you for participating. You may all disconnect.