Earnings Call: Q1 2019

May 1, 2019

Earnings release

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to today's London Stock Exchange Group Q1 Results 2019 Investor Call. At this time all participants are in a listen only mode. I must advise you that this conference is being recorded today, the 1st May 2019. And I would now like to hand the conference over to your speaker today, Paul Froud. Please go ahead, sir. Thank you. Good morning, everyone. Thanks for joining the call. With us this morning, David Warren, the group CFO, Tom, and myself. So it's going to be the usual format we're going to give a quick introduction and briefly summarize the highlights and then we're going to turn over to questions. So let me pass you to David. Thank you, Paul. Good morning, everyone. Thanks for being with us, this morning. We've delivered a good overall Q1 income performance Total income was increased by 5% year on year to £546,000,000. Against the challenging market backdrop, we saw growth in both information services and LCH, which is offsetting a reduction in capital markets. Gross profit after cost of sales increased 6%. So let me pick out a few of the other headlines We start with LCH income on a headline basis increased 17% and was 16% higher at constant currency, OTC clearing was again strong as revenue rose 16%. Swap cleared performed well with further increases in member revenues in client business and at swapagent. Forex Clear is growing well and other revenue increased by £5,000,000 mainly due to increased noncash collateral. Percent year on year increase, reflecting a 10% increase in the average cash collateral, as well as improved returns from investments of cash margin. Next to Information Services, reported revenues increased 6% including 7% growth at FTSE Russell, or 2% growth, constant currency as the dollar is strengthened in Q1 against the same period last year. In our announcement this morning, we have split out the FTSE Russell Revenues between subscriptions and asset based revenues. From this, you'll see that subscription revenues increased well at 11% year on year, while the asset based revenues were flat in reported terms. The weakness in this ladder line is attributable to the fall in AUM and ETFs and other funds that occurred in late Q4 last year, language due to a lag in reporting impact on our revenues into Q1 this year. We saw some improvement in the March results. And as we've said in our statement this morning, we expect Q2 revenue to be stronger. Moving to post trade services in Italy, while the revenue declined NTI increased 13%. Allowing for the accounting change last year for reporting T2S revenue and cost at the gross profit line, we saw a 3% increase. And in capital markets, revenue decreased 9% with the main impact in equities trading at the London Stock Exchange. Borcey of Taliana and Turquoise as volumes reduced. Derivatives trading was also down year on year. The filing technology services revenue increased 9% on a like for like basis. In terms of gross profit, Cost of sales for the quarter was flat at 1000000, contributing to a 6% increase in gross profit at £490,000,000. Capital markets cost of sales reduced due to change in fee structure at Turquoise, And while at LCH, cost of sales grew as the OTC clearing revenue and associated NTI increased, And you will have noted in our statement, that we confirm we have an updated agreement at Swap Clear with effect from the start of the year. As before, the terms of the OTCD banks are remaining confidential, but the net result is an expected circa $30,000,000 saving in cost of sales for 2019. And also I think important to repeat that the core principle of partnership remains in place as the various OTC businesses continue to develop and grow. So in summary, we have delivered a good overall Q1 income performance. We are continuing to execute on our strategy, and are well positioned to develop our growth opportunities further in partnership with our customers. Again, thank you for your time And now with that, we'd be happy to take your questions. Thank you. Please standby while we Your first question comes from the line of Philip Mickelton Please ask your question. Yes, good morning. Thanks for the extra disclosure on FTSE Russell. I wonder if you could just say a little bit about the LCH agreements, in particular, does this mean that if, for example, forex clearly takes off, you'll keep a greater share of the economics of forex clearly, you would have done under the previous arrangements term. And so is this a percentage gain or an absolute amount amount gain, the 1,000,000? Yeah, I think, I think how you think about it. So first of all, this is just on the swap cleared service. Just to be clear, and it is a it is an updated agreement that reflects effectively the share of the surplus. So as we wanted to discuss it with you today, all else being equal, we would see an impact of 30,000,000 reduction in the cost of sales line, for this year. So it's within a, with effect from the 1st the year. So it's in that part of the model as opposed to elsewhere. So if the surface doubles, then the COGS saving doubles roughly? Yes. It is. So obviously, the cost of sales line will vary as it relates to just general activity. So as you're saying, as it grows, then obviously, the cost of sales will grow, but it is our portion of that. The changes. Your next question comes from the line of Ana Gibla. Please ask your question. Hi. I've got 3 quick questions, please. On for T Russell, thanks for the disclosure. So you grew revenues subscription by 7% year on year. From the previous disclosure you used to give between the split of assets and subscription, I estimate that over the from 2015 to 2018, you were growing subscription revenues by about 13% in the year. So I was wondering if you could comment a bit on the slowdown we've seen, if there's it's just a lot of big numbers or is there a trend going on? 2nd question is on on the increase in members at Otoclear. You've added 9 members in Q1. Have we seen the full impact on the P and L yet? Or are we working off of average numbers? Should we expect an uplift going further looking out further? And, finally, on, on LCH, the reduced cost of sales that you've arranged with dealers, I'm wondering if you have a similar opportunity to revisit pricing on the client side? Yes. So let me take those in order. I think, I think it was important for us to provide, the full historical trends as we did a further breakdown. Look, I think what we have said is that, that, that is aligned. The sales of data and the sales of data and now increasingly analytic service, will exhibit strong growth over the period of time I wouldn't point to any one thing, that I would say happening in this reporting period as compared to it's compared to to any other. What I would say just to underscore our general confidence in that business is that demand for data and analytics continues to grow, and we expect that to be a strong contributor to the revenue growth going forward. I think with respect to the increase in the members, This was, really more about existing members, as part of their Brexit planning tying in other branches within the bank. So they are already existing members they're basically making sure that all parts of the bank are connected. There really would be a very small really very small P and L impact from this. So you're not it's really just a report and it's an increase in the number of members as existing members, connected more parts of their institution into the service. But they're already, they're already tied into the existing member fee arrangement. And, at LCH, with respect to the reduced costs. So I think we've given good disclosure on what it is. Those agreements are very confidential. They are updated from time to time. And I think at this point in time, I wouldn't, I'm not really in a position to say anything beyond that. I think this is an important development with the OTT Banks. It continues, it reaffirms the partnership And it's part of, the new agreement that we struck, but there's the confidential agreements and I'm really not going to be able to comment any more beyond that. Your next question comes from the line of Chris Turner. Please ask your question. Yes, good morning. It's Chris Turner from Berenberg. Yeah, just two quick follow ups for me, please, as well. Firstly, coming back to the revenue sharing agreement with not clear. I guess banks are not known for their altruism. So can you perhaps give some color on what in in return LCHs has provided in return for this reduced rebate has the gross fee, for example, been changed? And then secondly, on the other revenues line at LCH, that grew very strongly this quarter. Was that due to a rising portfolio compression or was there something else going on there? And then more generally with portfolio compression given, I guess, the change in ownership of leading provider there. How is LCH approaching portfolio compression services? Do you see capacity to take market share from, I guess, what is the market leader? Thank you. Okay. Take the first 2 and Paul can comment on the next one. I think the first one, I appreciate the question, Chris, but, I think it if you look at us over time and there have been times in the past where we have, where we have renegotiated these agreements, and we're we have not said much, and that's respecting the confidentiality of the agreement on our strong relationship that we have with the OTC Banks. So what we're giving today in terms of the change in the economics is what we're going to say. I would say that this is an agreement that, that I think importantly reaffirms the partnership that we have, with the member banks and sets a good foundation, for continued growth. In the area of non collateral, and the other income, that was an increase in noncash collateral that we were able to invest this quarter compared to past. That was the biggest part of what was driving that. Compression is in that line. But that wasn't really the, that wasn't really the driver of that variance. And then on the portfolio, question. On the compression side, Chris, I think you're saying about the opportunity to increase market share on which pit Just simply saying with the, the change in ownership with CME buying Tri Optima, is there an opportunity there for LSE to maybe, take some of some of the slice of that cake? Well, I mean, the way LCH works is that you can apply any number of compression tools to the portfolio. I think the majority of the compression now takes place through using LCA and proprietary tools. There's also the former NEX products, and there's some other new ones that have been introduced as well. The important point is that whichever tools you use, LCS takes a fee for using those. So to a degree, we're agnostic as to which ones customers want to use. So There's been no change to the arrangements that are in place. Your next question comes from the line of Kyle Boyd. Please ask your question. 2 from me. One is, with respect to Vanguard specifically, I think they announced that they'd be reducing some fees on some ETFs tied to foot the Russell on the seas, in late February. I just wanted to see if there's anything to note in terms of a potential impact or flow through. To your asset based fees going forward just given their size? And then my second question is, it's really just on the fed fund futures curve in the U. S. Now suggesting a cut in short term rates within the next year. Can you help frame where the yield annualized yield on LCA's cash collateral could move if we do get into that type of environment? Yes. Thanks, Kyle. On the first question, there's nothing specifically I would comment on. Obviously, you're referencing it. But I think it is just it is all part of the broader customer relationship that we have with Vanguard over a range of products and services that we provide for them. So there isn't any more that I would say on that, but the relationship with the company remains strong and we continue to innovate and develop new products for them. On the on the on the futures curve and the Fed funds, look, I think if you want to take a step back and think about NTI for the balance of the year, I think, you know, what would I predict? Obviously, you know, the old saying is if could predict this business, we'd be doing something else. I just don't think we are going to see the same yield environment in the U. S. That we saw. I mean, last year we saw both activity that was driving increase in cash collateral as well as increasing yields. I think I think what we are going to see for this year, it's certainly not going to be the same pattern. I'm not really predicting the rates I don't think we're going to see the same kinds of sort of upward pressure on yields, certainly. And I think, where we are right now at this level of activity is probably about where we're going to be. As I discussed, I just think we're going to be in a different rate environment. Particularly in the U. S, for this year, if that's kind of getting to the thrust of your question. If I could just clarify, I think if we go back into your results, back before the the Fed started its hiking cycle, or calculating something like a 13 basis point annualized yield on cash collateral, if you look at the NTI and LCH? I'm just wondering, can we get back to that level if the Fed, you know, does return to the similar trade policy that it was in 2015? Because I know there's a number of steps that you took to increase or broaden the, the available securities and what you invested in. So I'm just trying to understand what could be the potential downside there if we do get into a cutting or a recessionary environment? Yeah. Well, I think the efforts that we have taken to expand counter parties, and just do a better job on the investment side have definitely contributed to the increase, and those efforts, certainly are continuing and we're always looking at at different opportunities. But it's just not something that I feel I can, I can get into? It's gonna be somewhat predictive on any rate environment. So it's hard to say where it'll and where we'll tend to settle out, I think the best we have been able to do in the past is give you a bit of a sense of where we are at any particular quarter. And how you might think about that moving forward into the next 2 or 3 quarters. Your next question comes from the line of Anil Sharma. Please ask your question. Good morning. Yes, Anil Sharma from Morgan Stanley. Just two questions. The first is just around the physical business. So I think in the commentary you're saying that you expect the asset base part to rebound in Q2 given markets. How should we interpret that? Does that mean you expect a rebound on an organic constant currency basis back to the low double digit that you've guided to or is it on a reported basis that we should think about that? And then second question was just around the subscription side of the business. If I look at some of the other index providers globally, they've they haven't seen a slowdown in their constant currency growth rate. So could you perhaps elaborate and expand as to why the subscription slide is slowing and what's actually going on in that business? Is it that, I don't know, pricing, you haven't been able to do the 4.5 percent to the nominal price rises that you normally do, or is it that subscription rates are lower? Can you just help us understand why why the growth isn't at double digit? And when everyone else is reporting double digit? Okay. So I think on, on the business going forward, as it relates to the AUMs, I think we have talked about before that there is a lag impact and we obviously have seen you can see that in in publicly reported numbers. That AUM balances are going up from the beginning of the year and is increasing, throughout the really since, you know, from, certainly from March into April. So we would expect to see what we suffered in Q1 was the lag effect of the downturn in Q4 and AUM, particularly on the fund side, what we will see, as we go through the year, will be the pickup of that as the AUM grows, but the revenue pickup of that will lag, by a month in with respect to the funds and to a lesser extent to the ETFs. So that revenue growth will lag by about a quarter on the AUM changes. In terms of where we would be, looking forward, We're not making any change today. We confirmed our targets, at the beginning, at the pre wins. We're not making any change to that. I have I have always focused on, the reported, the reported growth rate for these businesses and for the targets. That's the one that generates the cash. That's the one that contributes to the valuation. So those are the targets. When we when we, when I confirm the targets, those are the targets that I'm confirming. And I'm not making any change or any new statements on those today, because I we've just made the statement and, and underscored our confidence in those, at the beginning of the year. You talked a little bit about, about the subscription growth compared to competitors. Look, I don't, 1st of all, we don't, we make those comparisons, but we're much more focused on how our business is performing and what our growth opportunities are. I'm not in a position to really comment on the different mixes of products and pricing and currencies mix within the competitors. So I wouldn't, I don't necessarily draw anything to the comparisons. I just continue to believe that the business will continue to grow and grow strongly, because I think the, as we've said before, I think the underlying growth factors are still very much there. We've had a bit of a market downturn as everybody knows. But I think we're well positioned to continue to capture the growth going forward. It is it is in all the areas that we're increasing case ability and multi asset fixed income, and factor investing. So I think the business overall is positioned for some very good growth. Okay, that's Your next question comes from the line of Hi, good morning. It's Gajuk combo, JP Morgan. A few questions. Just firstly, in terms of the OTC business in LCH, I know you don't break this out specifically, but just could you just give us some color on the momentum you're seeing in products like Forex Clear and obviously it's been strong in the past. So just sort of maybe just some broad sort of, trends there will be helpful. Secondly, on the LCH cost saves, is there any of that million which has come through in the first quarter? Of this year? And then, the third one, just on the FTSE Russell business, just in terms of, again, thinking about the growth drivers going forward? You mentioned Smart Beta, I guess, things like ESG, emerging markets in China. Just what's the sort of growth trajectory in some of those sort of areas? Right. I'm trying to remember what the first one was. Yes, first question was on 4, I guess. Sorry, I got it. Okay, sorry. Yes, no, look, we continue to be pleased with that. It's growing. I think you'll have seen that we've announced and we've announced in our release that we've, added additional currency pairs in the NDF world, in emerging markets, We're continuing to get traction in the, in the settlement business that we rolled out at the end of last year. The unfair margin rules are continuing to, impact a wider range of notional amounts. So we would expect to see more clients, and more clients looking at, Forex Clear as a way to comply with the uncleared margin rules as they're now going to impact them when a year ago or 2 years ago, they didn't. So still have very good confidence in all of the in all of the drivers and products that we've launched, in that business. So we're not at a point yet where we're really breaking it out, but I will tell you that we've had some good progress in that business, in the quarter. In the cost of sales at LCH, probably a way to think about this might be to look at the sequential change. Obviously, you will see what you will see is that there has been some, obviously, there's some growth in the business. So the revenue increasing, but there has been, a like for like basis a bigger sharing of that surplus because of the agreement, that's been that was being new agreement that we reached with effect from the beginning of the year. There are also going to be smaller impacts in the cost of sales line overall. So there are various things going on in that line away from LCH, one of them being in turquoise where we eliminated, the make or take a rebates, which, a prior flow through, the cost of the cost of sales line. So I would direct you to look, not necessarily year on year, but sequentially, to see a little bit of how that impact starts to play in. I think the last question was just I think it was more of a general question on trying to put Zebra in growth. Look, I think I kind of already said it. Our confidence in this business, and the fact that the the strong growth drivers, most of them you already mentioned in asking me the question, Those are those are strong and continuing drivers for continued growth. They represent secular changes in investment style. They represent demand for new products and analytics, and this business is increasingly well positioned, to, to continue to grow, well with those, with those against those factors. Okay. Thanks very much. Your next question comes from the line of Mike Werner. Please ask your question. Thank you. Mike Werner from UBS here. Two questions, please. And again, thank you for the change in the reporting format on the information services. I noticed there's about a 10,000,000 pound or so shift per quarter. Out of the previous WTSU vessel classification into other information services. And I was just wondering if you could provide a little bit of color as to what that revenue consisted of? And then second, I was just looking at the the LSC derivative volumes and saw them down about 56% year on year and then close to 40% quarter on quarter. I was just wondering you could provide a little color what happened in Q1 with regards to those derivatives. I assume that's mostly current level. Thanks. Right. We actually do provide a bit of a note on page 5 of the R and S. What's going on there is that we've had we've shifted, income from revenue from mergent and some other items that were previously in, in subscriptions. We've now moved those into, into other information services. So that's really just a grouping impact. And then on, on the derivatives, on the derivatives question, Look, if it was a challenging market, I wouldn't point to anything in the business itself, but, feel free to add to all of it. Yes. So it's not it's not curve as we continue to grow. What you're seeing there is we have shuttered the, the London based LSCDM market. So we've got a bit of impact there. And we've obviously seen some pressure in Italy as well, but it's across a number of things. But there's no big factor there. Your next question comes from the line of Johannes Storman. Please ask your question. Good morning, everybody. On the summary, JBC. Most of my questions have been answered. So just if you could provide us an update on your Brexit preparations as we got a delay again, what is the status of Turco's license in Amsterdam? And have you changed your view on licensing the OTC clearing in Paris? Or are you still waiting for other situations to occur? Thank you. Thank you, Hans. Look, there really have been no changes or updates. I think the important point is we were we took all the steps necessary to be prepared for Brexit, when we needed to be, in advance of of the original March deadline. So we do have all contingency plans in place. We have the regulatory licenses that we need to operate, the businesses in Amsterdam, trade.co, and MTS is, already operational in Italy. So we're fine there. And with respect to the clearing services, there has been no change, obviously, But the framework that we had for, temporary recognition and then a transition to permanent recognition under Article 2.2 is still very much the plan. But we haven't made any changes to our efforts because point they don't need to be updated. We are well prepared. Your next question comes from the line of Christophe Blee 1st. Please ask your question. Good morning, Christophe Bleecker dot Commerzbank. One question on LCH, please. The clearing obligation for category 3 clients in the EU will start at the end of the quarter. What are your expectations with regard to the annual industry revenue pool and your anticipated market share? Hi, Christoph. I think you're right. There is, I think there's been some carve out or some exemption now on the June introduction. So I think in effect, some of the very small participants through the, I think it's the 3rd wave got some exemptions, they don't hit certain thresholds. What's that going to mean? I mean, at the margins, I'll probably it will reduce some of the uptake on it, but I don't think it's off a significant basis that is going to really have that much impact Okay. Thanks. So I think we've reached the end of the questions. We've got no more questions schedule. And I think we've probably got most people who've had the opportunity. So thank you very much for joining the call. It you got more comments or questions to make, then obviously we're around for the rest of the morning. So please do get in touch. But otherwise, thank you for joining us, and we'll be in touch soon. Thanks. Bye. This does conclude our conference for today. Thank you for participating. You may all disconnect.