Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's London Stock Exchange Group Q3 Results investor call. At this time, all participants are in a listen-only mode. There will be a presentation, followed by a question and answer session. At which time, if you wish to ask a question, you will need to press star and one on your telephone keypad and wait for your name to be announced. I must advise you this conference is being recorded today on Friday the 19th of October, 2019. Now I would like to hand the conference over to your speaker today, Paul Froud. Please go ahead, sir.
Thank you. Good morning, everyone. Thank you for joining us on the call. With me this morning, David Warren, Group CFO, Tom Woodley, and myself. Normal format. We're going to summarize the Q3 performance very briefly. We're going to turn it over to questions at the end of that. Let me hand you over to David.
Thanks, Paul, good morning, everyone. We've delivered another quarter of progress and growth. Let me give you some of the highlights. Q3 income increased 8% year-on-year to GBP 522 million. For the year-to-date, we are up 10% at GBP 1.58 billion. Gross profit for Q3 is up 8% after cost of sales and up 11% for the nine months year-to-date. As you will have seen from our statement this morning, we are now incorporating the impacts of adopting IFRS 15. This accounting standard affects the way we recognize revenues in the primary markets businesses within the capital markets segment. The effects of the changes are backdated to the start of 2018, we give more detail for Q1 and Q2 in the announcement. In summary, the net P&L effect is to reduce admission fee income by GBP 9 million, which is an aggregation of the changes for the nine months year-to-date.
This changes what would have been a 2% increase in Q3 revenue for capital markets to an 8% reduction. At a group level, Q3 income would have risen 9% rather than by 8%. To be clear, this does not impact the cash we receive for new and further admissions, which is collected as before. It is just that we recognize the revenue over a period of between four to 11 years in most cases, depending on the service. We'll give more detail on the effects when we report our full-year numbers. Now let's pick out a few highlights. Starting with information services, where reported revenues increased 17% and up 9% on an organic and constant currency basis. This comprised 20% headline growth at FTSE Russell, or 9% growth after adjusting for FX and revenues from Yield Book.
Real-time data revenues were flat, while revenue from other services grew following year-on-year growth at UnaVista. Turning next to LCH, total income increased 15% on both a reported and like-for-like basis. OTC clearing performed strongly as revenue increased by 12%, with SwapClear growth driven by increases in client clearing. NTI increased 49%, partly reflecting a 5% year-on-year growth in average cash collateral and mostly following the effects of better investment returns with an increase in September as U.S. interest rates rose again. Post-trade services in Italy saw a 4% reduction in total income. Clearing revenues increased following higher equities, repo, and derivatives volumes, with offset from a decline in custody and settlement revenues, which is largely the effect of netting T2S costs against revenue. Gross profit was up 3%. Turning to capital markets, Q3 revenue declined 8% and by 7% on a constant currency basis.
As stated earlier, without the IFRS 15 adjustment to primary markets, revenue would have been 2% higher year-on-year. In secondary markets, revenues were 1% higher in equities and up 6% for fixed income derivatives trading. Finally, technology services. Here, revenues increased 15% on a like-for-like basis at GBP 16 million. Let me just point out a few more things before I wrap up. We announced this morning that we are in a process to acquire up to a further 15.1% stake in LCH Group, which we expect will take our ownership to over 80%. We expect to complete this before the end of Q4. This is the continuation of our strategy that has run over the last 12 months as we are a natural buyer to anyone wanting to sell. Increasing our majority stake makes sound strategic and financial sense. It is accretive to earnings on completion and achieves a return on invested capital that is above our medium-term WACC.
In sum, it reflects our continued confidence in LCH's opportunities for further growth as it develops its business. 14 minority shareholders remain invested and committed to the success of LCH. Open access and customer partnership approaches are unchanged, with banks fully part of the governance process, as well as contributing to new product development and the extension of services. We're happy to increase our holding in this valuable strategic asset. Our financial position remains strong with a good level of funding flexibility in place. As at 30th September of this year, the group had available committed facility headroom of circa GBP 500 million, having paid the interim dividend to shareholders and other normal course payments.
On a pro forma basis, including the acquisition of up to a further 15% stake in LCH, for up to circa EUR 438 million, the group's net debt to EBITDA ratio would be towards the top end of our target leverage range, though normal strong cash generation will bring leverage down again in 2019. Continued good strategic and financial momentum in the third quarter, and now I will turn it back to Paul.
Thank you, David. Right. We're going to go to Q&A now. I know we don't normally do this, but if we could just ask people to limit themselves to one or two questions, given we got quite a number of people on the line that have queued up to ask. Okay, in that case, we'll go to the first question, please.
Thank you. Ladies and gentlemen, just as a quick reminder, if you would also like to ask a question, press star and one on your telephone keypad and wait for your name to be announced. Your first question comes from the line of Arnaud Giblat. Please go ahead, your line is open now.
Yeah, good morning. Could I ask two questions? First on your leverage, are you indicating, post the acquisition, if you get the 15% stake, you'll be towards the top end of the net debt to EBITDA. Does that mean you're probably going to wait a while to do another acquisition or for the right kind of deal? Are you willing to go above that net debt to EBITDA target? Secondly, on LCH, on the OTC business. We've seen three quarters now where revenues have been broadly flat. How are you thinking about growth there? What specifically should we be looking out for to start seeing growth resume sequentially? More specifically, is there a price renegotiation at SwapClear coming up? Thank you.
Right. Okay. Let me take the first question, I'll turn the second question to Paul about it. I'll make a few comments on the OTC arrangement first. With respect to our leverage, as I said, we'll be toward the top end of the range. We have said in the past, nothing really changes, we are committed, we have in the past and would continue, to take that leverage above the top end of the range, if there was a compelling transaction. We would do that. We still have some flexibility here as we get to the top end of the range.
I think the important part of our program will still be, as it is with the acquisition of the LCH stake, that with good, strong cash generation, we can bring the leverage down, within a reasonable period of time, back into the target range. There is nothing that we are announcing with respect to the OTC agreements. As to the SwapClear growth, I think it has exhibited strong growth over a period, and I can turn it to Paul for more specifics.
Yeah. Thanks, David. Arnaud, you're right. It varies and it has varied over a number of periods as to exactly what level of growth you see from quarter to quarter. It's still showing good year-on-year growth, obviously. Half the business in SwapClear line is from the client. The client business is very much driven by volumes on the market. We've clearly seen a slower, naturally quieter Q3 period. This is our summer period. Probably not surprising we're not seeing a big increase from that side. Longer term, of course, we've been talking about the range of services in this area. SwapClear has exhibited very strong growth, but naturally that does start to slow down. We have been talking very much more about FX and the opportunity to grow there. We've launched the options at the start of Q3.
Again, we would expect to see some pickup there in the OTC line going forward. Other initiatives, including things like SwapAgent in time, will also start feeding through to increase the growth in this line. I think we're at a good point. The business is performing very much as we would expect it to be at this stage, but there's further growth opportunities as we move ahead.
If I could just follow up on one thing. On FX options, how many members do you have?
I think we've got six paying members now on the options side. I think, as I said, about nine firms in total that are connected in there. We'll begin to see a pickup now in the FX options. It's still very early days for that.
We know from conversations with banks that they had been testing. They're in the process of connecting.
Thank you.
Thank you. Your next question comes from the line of Philip Middleton. Please go ahead. Your line is open.
Good morning. Just one question. I wondered if you could tell me a little bit about how you're thinking about the forthcoming negotiations about the U.K. leaving Europe, given you're just buying 15% more of an asset, which does appear to be sensitive to that debate.
I think we feel very confident in the business under any number of scenarios. I think our commitment, represented by our purchase of further shares, is showing that support. I think it's also important that we have 14 minority shareholders, including 13 banks that are major customers of LCH, and they are remaining as shareholders of the business. In a number of cases, those banks are also part of the OTC network. I think, as I said in my prepared remarks, I feel that it is a very good business, it's a strategic asset for us, and it's one that we feel good about making a further commitment to. With respect to Brexit overall, I'm not going to really comment on any of the ongoing negotiations, obviously, or try to predict an outcome.
I think that we are encouraged by recent meetings with regulators and central banks. We think there is a new urgency, obviously, about getting some solutions and some legal certainty in the very near future. It's very clear that our customers want continuity of service. They have made that increasingly clear. They put their views on an increasingly clearer way through organizations such as FIA, ISDA, and AFME. Philip, back to the original part of your question. Very strong support for this, and it reflects our continued confidence in LCH under any range of outcomes.
Okay. Thank you.
Thank you. Your next question comes from the line of Kyle White. Please go ahead.
Hi. Yeah. I guess just one on the FTSE Russell business. Just continued good growth there. Just given the recent pullback that we've seen in the ETF market over the past month or so, and just given the revenue mix has changed over the past few years for that business given the number of deals, can you just remind us the current percentage of that revenue line item that's market sensitive or fees paid on AUM?
Yeah. Over time, it's been between 35% and 40%. It's right now about 35%, and that is split between tracking funds and ETFs. There's also a portion that are licenses for traded derivatives products. That's where it is. We don't generally break that down further. That is basically the amount of our revenue right now that's volume sensitive.
I guess, in your kind of medium-term target of achieving that 10% growth, is there a level of kind of market returns that's assumed in that? If so, could you please provide that?
There are clearly some assumptions in our targets, of course. I think the important part about the business overall, and we're giving targets for the overall business, is that it's a very diversified business. 65% of the revenues comes from subscription revenues, and there is increasing demand for data and analytics. As we continue to go through, as you know, the secular shift from active to passive, there's more demand for data and analytics, and indexation, and fixed income. All areas where we are well positioned for that growth. I think the confidence in the target that we put out and the fact that on a reported basis, we're achieving 20% rise, I think that speaks to the diversity and mix of businesses within that business.
Okay. Thank you.
Thank you. Your next question comes from the line of Chris Turner. Please go ahead.
Yes, good morning. It's Chris Turner from Berenberg. Just one question from me then on your treasury income. That was very strong again this quarter. Can you kind of decompose that into how much of the strength was from changes in the way that you run that book? I see you've increased your value at risk substantially. You've termed out the duration of that book over time. How much of that is driven by just the conditions in the money markets in Q3 that might maybe be reverting in Q4? Thank you.
Yeah, Chris. As I said in my prepared remarks, most of it was coming from the increase in U.S. dollar yields in anticipation of the Fed move, which occurred, as you know, in September. That happened at the beginning of the year, where we saw a strong NTI performance. I think we were saying that in the absence of that for Q3, you wouldn't expect to see NTI growth continue. In fact, we did have further upward actions within rates. I think that's what drives most of it. I think there is a small increase in the collateral. Paul, would you add anything to that?
No, you're right, David. It's gone up about 5%. Chris, there's no change really to the value at risk. The risk thresholds themselves haven't changed. It's not been driven by any change of policy or approach. It's more about markets.
That's great. Thank you.
Thank you. Your next question comes from the line of Martin Price. Please go ahead.
Good morning. Most of my question's been answered, actually, but I was just wondering if you could share some thoughts on when you expect the shared services facilities to be fully operational, and perhaps the magnitude of the savings that you might expect to accrue as a result. Any updated thoughts on cost guidance for next year would also be helpful. Thank you.
Okay. I think I now understand your question. Look, we're continuing to execute on that plan of changing and developing our business service centers. There's no update I would give on costs. This is a quarterly update. As you know, we just give revenue, income, and gross profit. Those have achieved, as I said, within the LCH and FTSE Russell, good double-digit growth. There's no update on how we're progressing that I would say today on our continuing investment of the new operating model.
Understood. Thanks, Dave.
Thank you, ladies and gentlemen. As a quick reminder, it is star and one on your telephone keypad for questions, please. Your next question comes from the line of Johannes Thormann. Please go ahead.
Good morning, everybody. Johannes Thormann, HSBC. One follow-up and one other question. First of all, on the outlook for treasury income, just to clarify, if we see another increase in Q4, this would imply that we should expect another uplift in net treasury income at LCH. Is that correct? Secondly, regarding LCH SwapClear, there was this Bloomberg article around the termination of some clearing contracts on 29 December, if you could shed some color and give more input on this, and probably also say if we come to a worst-case Brexit, have you already applied for an IRS clearing license in Paris now? Thank you.
Yeah. Johannes, on the first part of your question, again, really consistent with what we were saying at the interims. If there really isn't any further rate moves, particularly in the U.S., you would not expect to see that continuing growth in NTI. Absent that, I would think that for Q4, NTI would be probably in the low 40s. I think with respect to the last part of your question, as we've said before, we are committed to providing continuity of the existing service. Our customers do not want us to make an application to Paris. We continue to work with our customers to work through the Brexit situation and be in a position to provide a continuity of service. As to the second part of your question-
Yeah, on the termination of contracts, Johannes, there's a public rule book which people have seen, which gives a period of notice of three months on both sides, both from us to members and members back to us. Just to be clear, no notice has been served at all, and we're not at the point of time where we would need to do anything.
Okay.
Thank you very much. The next question comes from the line of Anil Sharma. Please go ahead. Your line is open.
Hello, morning. It's Anil Sharma from Morgan Stanley. Just two questions, please. First, on the indices business, has the sort of repricing on the Yield Book and the 50 position, has that been done now? Is that sort of in the numbers or is there more to kind of come? On LCH, just to kind of, I guess, follow up really, you talked about continuity of service. What sort of conversations are you having with your banks? How are you actually going to provide that in a hard Brexit, no-deal scenario? Because I guess if we rewind the clock sort of 18 months ago, there was, I think, maybe not direct quotes from yourselves, but there was at least an indication that you could apply to Paris or other jurisdictions to get a license.
Now that it sounds like that's not what you're going to do, what is the kind of contingency plan? If you could help-
Yeah
kind of quantify how much of EU-based clients are the volumes in SwapClear, that'd be helpful.
Right. Okay. With respect to the first part of your question, the integration of Yield Book into the company continues to go well. The various changes that we are making to commercial policies are continuing. Some of them are reflected in the numbers now, in the reported numbers. We're still in process of delivering all of the synergies that we spoke of when we announced the transaction last year. With respect to the other part of your question, I'm not going to comment on them publicly on this call. We are having discussions with banks on various contingency planning. Those are really between LCH and the banks, and I'm not going to say anything more about that other than to say that those discussions have been ongoing. In terms of the impact, this continues to be a relatively small part of our total IRS clearing.
As we've said before, most of this is US dollar. The actual euro flows are about 25%, the actual amount of euros that originate from EU entities is about 25% of that. Depending on how you count it's sort of in the 7%-14% range. It is a small part of a business, and we have been saying that consistently over the last year, and nothing has really changed in terms of the various flows that we're seeing by currency in the SwapClear business.
Okay, sure. If you don't mind, just one quick follow-up. That's EU-based clients doing euro currency, but if you include all currencies from euro-based clients, what % would it be?
We haven't given that exact number.
Okay. All right. Thank you.
Thank you. There are no further questions at the moment. Please continue.
Okay, great. That looks like we're through everyone's questions. Thank you very much for joining the call. We are around for the rest of the day, obviously, if you've got any more follow-up questions. Otherwise, we'll finish things now. Thanks very much.
Thank you, ladies and gentlemen. That does conclude our conference for today. Thank you all for participating. You may now disconnect.