Earnings Call: Q1 2018

Apr 24, 2018

Earnings release

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's London Stock Exchange Group's Q1 investor call. At this time, all participants are in a listen only mode. I must advise you that this conference is being recorded today. 22, 24th April 2018. And I would now like to turn the conference over to your speaker today, Paul Fryd. Please go ahead. Thank you. Good morning, everyone. Thanks for joining us on the call this morning. With me is David Warren, who is the interim CEO and the group's CFO, plus Tom and myself. So we're going to do the normal format. We'll briefly summarize some of the key financial highlights and then we'll turn it over to questions very shortly. So let me hand you over to David. Thank you, Paul. Good morning, everyone. Thank you for joining us We've made a strong start to the year. Q1 income increased 13% year on year to £520,000,000 We saw good growth from all of our key business divisions with double digit growth in information services LCH And Capital Markets. On an organic and constant currency basis, income increased by 13%. And we have provided gross profit after cost of sales with 13% reported growth or 12% on an underlying basis. So let me pick out a few other highlights, starting with Information Services, where reported revenues increased 16% and up 11% on an organic and constant currency basis. This includes 18% growth at FTSE Russell, or 11% growth after adjusting for $20,000,000 sterling of revenue from yield book. Dollar weakness in the last quarter has impacted here with approximately 10000000 sterling headwind in Q1 against the same period last year. On to LCH income on a con on a headline basis, increased 18% and was 20% higher at constant currency. OTC clearing was again strong, as revenue rose 15%. Swapclear performed well with good increases in client volume, Forex Clear is growing well and delivered record clearing activity in Q1 with continued benefit from uncleared margin rules. In terms of NCI, there was a 58% year on year increase, reflecting improved returns from investments of cash margin. Moving to post trade services in Italy, both headline and constant currency revenue was broadly unchanged at £28,000,000. NTI remained steady, resulting in reported total income unchanged year on year at £38,000,000. In capital markets, revenue increased 14% and up 13% at constant currency. Both primary and secondary market revenues grew, reflecting good activity levels in the Q1 period. Finally, Technology Services, here revenues decreased 5% on a like for like basis once adjusting for the 2 previously announced noncore disposals made at the turn of the year. In terms of gross profit, we provide cost of sales for the quarter, which totaled 56,000,000 As usual, the main components are in the areas of the most growth. So in LCH And Information Services, reflecting the revenue share arrangements for the OTC services and at Footsie Russell for Bakken data and partnerships. And before I finish, I'll make a few final points. As usual, we have commented on our financial position in general terms, We remain in a strong financial position with a strong balance sheet and over £750,000,000 committed facility headroom. This includes euro commercial paper, which was issued in the period at very beneficial rates. This year, we acquired an additional 2% stake in LCH group taking our holding to 68%. At FTSE Russell has acquired the minority interest to assume a 100% ownership of FTSE TMX Global Debt Capital Markets Limited. In summary, we have made and delivered a strong Q1 performance, we are strategically well placed to develop our many growth opportunities further in partnership with our customers. And we continue to be focused on delivering our stated financial targets. And finally, you will also note that we have announced on 13th April that David swimmer will be joining as CEO on the 1st August. David brings a deep understanding of the Financial Markets Infrastructure sector, strong capital markets experience and a global perspective. I look forward to working with him. So thank you again for your time. We're now happy to take your questions. Your first question comes from the line of Kyle Royce. Please ask your question. Your line is now open. Hi. Thanks for taking my question. First just on the FTSE Russell business, and sorry, David, if I missed this in the prepared remarks, but obviously strong 11% constant currency growth. Could you just give us the organic growth of the yield, the yield book and city fixed income indices or maybe the consolidated organic growth rate if those had been consolidated for the full period. I'm just trying to sense as to whether those businesses are growing. It was approximately $20,000,000, as we've said. And I don't think we we've positioned that in terms of our pro form a number. Okay. Fair enough. Then just on the LCH business, we saw really good growth in clearing activity and vol facility increased in the quarter. However, we saw the average cash collateral actually fell on year on year. Just wondering if you could help us understand the dynamics behind that and what's driving that? Yes, the dynamic really did come down to returns. It was really the increased yields we were able to achieve. On our U. S. Dollar portfolio. That's typically about 50% of the margin pool that we invest. So that was the principal driver of that very strong increase in NCI. And the deals where they're at, I mean, I think it was something like 21% on 21 basis points we're calculating on an annualized basis. Do you think those are sustainable going for? Kyle, I'm not in the business of predicting interest rates. But I think obviously, if you just if you look at the rate environment in the United States, I know. I think I think you can I think you can make some good predictions about where that might be? Yep. Last one for me on LCH, and then I'll get back in the queue. I was just wondering if there's, just getting you increased your stake in the quarter to about 2%. Just wondering if there is a natural one that in terms of where you'd be willing to take that stake over time in order to continue to incentivize your users to continue to use and clear throughout Thank you. No. We actually, we made mention of the additional 2% when we reported at our pre lens. And I think what we saw last year for a number of reasons were a number of minority investors who were looking to sell their shares. All investors have rights of preemption. I think we were just sort of a natural buyer so we were approached by a number of minority shareholders. We we have no sort of we have no limits, at this point in time. I think we were just buying opportunistically. Certainly, we're taking calls from the minority shareholders that wanted to sell But I think the important point that I would make is we still, are very committed to the operating model of LCH. We definitely believe that it needs to continue to operate, as a partnership with minority investors who are also users of the systems and nothing changes in terms of our governance rights with respect to these increases in our economic ownership. Fair enough. Thank you. Your next question comes from the line Philip Middleton. Please ask your question. Your line is now open. Good morning and thank you. I wondered if you could say a little bit more about Footsey Russell. Your your Q1 twenty eighteen was in line with your Q4 2017. I understand FX was an impact there. Was there anything else going on? Have you seen any implications of market volatility on the asset levels, for example, have anything going on pricing of the license sales, or is that is that entirely FX? No, Philip, it's thank you. It's really down to FX. I mean, we have, year on year, it was It was a $10,000,000. And then sequentially, there was another 5% weakness and that was that was definitely probably half of that. So you've got you've definitely got, you've definitely got FX headwinds in this business. That we the life to which we really haven't seen in the past. But I think the important point is on an underlying basis, is continuing to perform well. If you just, if you x out the currency impacts, I think if you were to take that out on a like to like basis, Q1 over Q4 would be about 3% up, which is not a bad Q on Q increase. Yes. I mean, we've always wanted people to look at, the business as it grows year to year, because there will be some variations on the sequential comparisons. Okay. And one thing you've often said in the past is that your license revenues experienced step changes from time time, where are we in that process? As you really go to your annual contracts, Oh, you're still talking about Footsey Russell, correct? Yes. Yes. Yes. Well, there's where are it's an ongoing process, Philip, So we have contracts with all of our large customers and, the process is ongoing. So I wouldn't, I wouldn't highlight any particular step change. All of contracts are up, have different, have various trigger points or renewal points So it's really just it's an ongoing review of existing contracts that we have. Thank you. Your next question comes from the line of Anil Sharma. Please ask your question. Your line is now open. Good morning. I just had two questions. It's a first one. It's just on FX Care and CDS Clear, correct me if I'm wrong, but I think most of the revenues are membership fee related in those two businesses. And I just wanted to get a sense for the outlook given that membership numbers seem to have been stable for at least 6 months now? And sort of how's the business tracking versus the million revenue target you gave by exit 2018? And then the second question was again on LCH. I just wanted your take, what's what do you think the probability is and what do you think the quantum is of business being lost from LCH if CME is successful in their acquisition of NEX and move some of the NEX products out of, and for example, repos, if they take the repos away, Is that a big deal or is that a bit of a non event? Thank you. I think I'll take the second one first. I mean, we wouldn't comment on this at this stage, certainly, we think that, we certainly think that, that the clearing that, is done by our repo clearing services is strong and growing. And I think customers in general like to focus their clearing in one place and I think fragmentation of clearing, particularly in the repo market, is definitely something that customers resist, but I wouldn't want to comment further beyond the fact that it's early days in our repo business continues to grow strongly. I think on the first question, remind me again what that was from. FX and CGS. Yes, it is a membership fee. But we do expect that there'll be continued growth in there, as the uncleared margin rules come into effect for the non dealer community and just impact more broadly, we would expect to see continued good growth in that business. And relative I don't forget, we also get MTI because obviously you get the margin on those as well. And relative to the $25,000,000 to $40,000,000 revenue target for Forex Care that you gave, are you sort of towards the bottom end of that range or upfront? I think we still feel comfortable about that target. Thank you. The next question comes from the line of Owen Jones. Please ask your question. Your line is now open. Hi, good morning. Thank you. Just to follow-up on that last point, can you remind us of the timeline when it comes to the impaired margins for the, for the buy side portion of the of the FX clearing and the CDS clearing, please? And then the second question, could you give us some context, maybe some market context in terms the non deliverable portion of the IRS in terms of your new product initiative? Thanks. Yes. I think we're The general answer is, I mean, we're going to give you the time period over which the uncleared margin rules come into effect, but they they they basically impact a wider class of customers every September. We're looking for that. One second. Yes. So the unclear margin rules, sorry, was top of my mind, onto my mind. So the next introductions we've got is in September this year, both in Europe and also in the U. S. So that's the next, increase that we expect to see come through where we get the next group of users. The increases that follow after that will be September 19 September 20. That's for both the U. S. Users and also for Europeans as well. So there's 3 more waves to come in for the unclear margin rules. Don't forget that, of course, the 1st phase and 2nd phase will also capture the biggest use is first, but nonetheless we spent more momentum coming through. And I think on the FX, I think look, I think we see this as a combination of we're rolling out, features and functionality, this year that will expand the amount functionality we have, and therefore, the amount of contracts that we can clear, not just with the non deliverable forwards, But we can get then get into, when we can introduce the settlement service, we can get into options clearing so we can now begin to offer clearing for the plain vanilla options. I'm not sure that we have characterized the size of those markets, but I think in terms of what trades now, those vanilla options are probably about the same size as what we're doing now in the MBS. Okay, great. Thank you. And just as a quick follow-up, when might we be able to expect you to start publishing client trades for CDS Clear And Forex Clear? I'm gonna look to Paul and Tom on that one because I'm not sure if we've made a decision on that. We haven't said what was do in terms of publishing on that. Your next question comes from the line of Johannes Thormann. Please ask your question. Your line is now open. Good morning, gentlemen. Two questions from my side. First of all, on your OTC clearing, we've seen a nice increase in the no will clear interest rate swaps. And, despite the competition from your former partners at Deutsche Borse, could, which are the reasons in your view for this increase? And secondly, you just show gross profit but maybe you can elaborate a bit more on your current cost run rate. Is it currently in line with the 4% guide or rather above or below? Thank you very much. Yes. Look, I think we've we continue to feel obviously pleased with the growth, in our IRS business, Honestly, we certainly, we certainly watch, with interest, what all of our competitors do, but I think I think I think it just speaks to the fact that, customers, and you know this, I'm not telling you anything you know, no, but basically There is always going to be with 90 when we clear about 90% of the interest rate market, really in any market, there will be adjustments to hedging at and increases, in the amount of clearing that result from that, and customers we'll look to concentrate that activity into 1 CCP because that simply maximizes the margin and capital efficiencies. So I think it is, it is continuing to feature and offer that a traction to our customers so that we really benefit from clearing activity really in any market, as various customers globally adjust their hedges. With respect to the targets, this is really just a trading income that grows at the gross profit level. And we're really not saying more about that, but certainly we just reported on the targets. About a month or so ago. So there's really no change. Thank you. Your next question comes from the line of Benjamin Goy. Please ask your question. Your line is now open. Yes. Hi. Good morning. Also a question on Forex, Leer, please. So you mentioned that FX options will be started in Q2. Seems like your the timing has slipped a bit. Is that driven by regulatory approvals, or is there my, is there demand the driving force? And then also, the, the timeline for FX swaps and deliverable forwards, which are much bigger opportunity probably whether it's still in 2018 or might be only next year? Thank you. Yes. I think with respect to the first question, It isn't it's definitely not about customer demand. There's any number of steps that you need to go through to introduce a new service. So it needs to be rolled out, tested, connected, and seek and you need to get all regulatory clearances. So, I would say there wasn't any one factor that was contributing to this, but These things sometimes take a little bit longer than you might have initially anticipated because there's so many different, other parties that that need to sign off as a result in order to bring something forward. But it is moving forward, and we are confident that we will get it in place, in the latter half of this year, with respect to how this rolls forward. We haven't really made any further announcements as to what further extensions and that and clearing activity we would get into in 2018. But certainly, if we look at this year and into next year, It's always been the plan to be able to, move into the broader options clearing market for FX. Your next question comes from the line of Martin Price ask your question. Your line is now open. Good morning. Just a couple of quick questions for me, please. Firstly, within Information Services, It looks like there was a particularly strong growth within the further revenue line. I was just wondering if you could provide an update on how Univista has been performing, following the implementation of MiFID II and whether they're coming in a harsh reporting requirements have provided much of a a catalyst for that business. And secondly, just within the OTC clearing business, I was just wondering if you could provide an update on what percentage of revenue now comes from client clearing versus the dealer to dealer market? Yeah. Thanks, Martin. Look, on your first question, we are it's still fairly early, obviously, with, with the 2, coming into effect the 3rd January, but we are seeing good activity, in Trade ECHO And Univista. So a lot of what you're seeing there is a direct result still early, of of MiFID II benefit that we have expected to see, not just in information services, but in a number of other other areas, certainly in capital markets with turquoise. So, short answer is yes, in terms of being able to make, anything further in terms of a growth prediction on that. It's still too early, but clearly that's one of the key factors that is influencing that, that growth in that line. Yes. Martin, on your second question on the OTC clearing services, for the interest rate swaps, then probably it's around about fifty-fifty now in terms of the revenue between clients and the member revenues that we get. Thank you. Your next question comes from the line of Arnold Gilblatt. Please ask your question. Your line is now open. Good morning. A couple of questions for me, please. Firstly, on the other income line at LCH historically, that's shown some strong growth. And I think that's probably due to the deployment of cholesterol management services and other new types of services to clients. So I'm wondering if you could give us a bit of an update of what's going on there and how you expect that growth to shape up going forward? And, secondly, if I can come back to the acquisition of NEX by CME, how do you view the risk from from trial to now being owned by CME, one of your competitors doing the compression on the back end of LCH and is that something you could look at doing more of yourself? Thank you. Look, on the first question, it was 20% growth. So, I don't I wouldn't I wouldn't flag anything in particular in that line. It's just it's exhibited good growth and and it's a good result. So I'm not sure exactly what specifics you were looking for, but There isn't anything I'd flag in that one. That's a good performance. I think with respect to I think with respect to, next, but I think it's still very early, but customers look at when customers look at a variety of Optimization Services that are offered both by both by LCH and by NEX. And there's definitely, an exchange of information and flows and activity between those services. The customers have a lot of choice in this as well. So I think it's, it's still early to tell, but I think the customers will have a lot to say about how those different services are used. And with services they'd like to see, maintained going forward. Is it an opportunity where we could continue to grow? Of course, And that's something that we're always looking at. Obviously, compression service is something that we built and established a very strong service really over the last 2 or 3 years. So it's certainly an area of growth for us, but I think what you have to understand here is that as this It will be really a lot about how customers will decide to continue to use the variety of optimization tools that they have between LCH and between Dex. Thank you. Your final question for now comes from the line of Your line is now open. Hi, good morning guys. Just in terms of the launch of the Sonia Futures contract, there's obviously been some momentum behind the, I guess, an alternative to LIBOR. Just where are you? What sort of duration contracts are you looking to launch And I mean, who are the sort of competitors also looking at launching competing products? Yes, we're launching a 3 month contract. And, we would note that others are doing the same, but that's definitely our plan. And, we announced it, we've announced it today. And looking to roll it out within the next few months. Okay. And then just one final question. In terms of the the initial margins in CCNG, obviously they've declined quite significantly year on year, I guess we knew that, but also they've declined sort of further from December. Just any sort of real drivers behind that? And then just on the outlook for that balance number. I think it's just down to activity, which is always, I think, just the right indicator. I mean, they're very correlated. So I wouldn't want to make a prediction about where that would go, but that's really the reason in terms of why the balances are, where they are, in the quarter that we're reporting. Yes, I think if you look at how our derivatives, obviously, the IDM market has performed, you can see that that still down year on year, and we've seen a reduction year on year in the repo side as well. So both of those are having some degree of effect that they just said. Thank Looks like we're out of questions, I think. That was a good run. So thank you very much for joining us. We're going to end the call here now. But I'll see we'll carry on talking to you as you're calling during the rest of the day. Thanks very much. Bye. That does conclude our conference for today. Thank you for participating. You may now disconnect.