Good morning, ladies and gentlemen, thank you for standing by. Welcome to today's London Stock Exchange Group Q1 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 1 on your telephone and wait for your name to be announced. I must advise you that this conference is being recorded today, Tuesday the 24th of April, 2018. I would now turn the conference over to speak today, Paul Froud. 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 CFO, plus Tom and myself. 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. Let me hand you over to David.
Thank you, Paul. Good morning, everyone. Thank you for joining us. We made a strong start to the year. Q1 income increased 13% year-on-year to GBP 520 million. 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%. We have provided gross profit after cost of sales with 13% reported growth or 12% on an underlying basis. 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 GBP 20 million of revenue from Yield Book.
Dollar weakness in the last quarter has impacted here with approximately GBP 10 million headwind in Q1 against the same period last year. Onto LCH. Income 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. ForexClear is growing well and delivered record clearing activity in Q1 with continued benefit from uncleared margin rules. In terms of NTI, 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 were broadly unchanged at GBP 28 million. NTI remained steady, resulting in reported total income unchanged year-on-year at GBP 38 million. 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. Revenues decreased 5% on a like-for-like basis once adjusting for the two previously announced non-core disposals made at the turn of the year. In terms of gross profit, we provide cost of sales for the quarter, which totaled GBP 56 million. 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 FTSE Russell for bought-in data and partnerships. 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 GBP 750 million 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%. FTSE Russell has acquired the minority interest to assume 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. Finally, you will also note that we have announced on the 13th of April that David Schwimmer will be joining as CEO on the 1st of 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.
Thank you again for your time. We're now happy to take your questions.
Thank you. If you would like to ask a question, please press star and one on your telephone keypad now. That's star and one should you wish to ask a question. Your first question comes from the line of Kyle Voigt. Please ask your question. Your line is now open.
Hi. Thanks for taking my question. On the FTSE Russell business, sorry, David, if I missed this in the prepared remarks, obviously strong 11% constant currency growth. Could you just give us the organic growth of the Yield Book and Citi 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 GBP 20 million, as we've said. Have we positioned that in terms of a pro forma number? Let me have a look at the time.
Okay. All right. Fair enough. On the LCH business, we saw really good growth in clearing activity and volatility increased in the quarter. 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.
The dynamic really did come down to returns. It was really the increased yields we were able to achieve on our US dollar portfolio. That's typically about 50% of the margin pool that we invest. That was the principal driver of that very strong increase in NTI.
The yields where they're at, I think it was something like 21 basis points for calculating on an annualized basis. Do you think those are sustainable going forward?
Kyle, I'm not in the business of predicting interest rates. I think obviously, if you look at the rate environment in the U.S., I think you can make some good predictions about where that might be.
Yep. Last one for me on LCH, then I'll get back in the queue. Just wondering, you increased your stake in the quarter by 2%. Just wondering if there is a natural limit in terms of will you be willing to take that stake over time in order to continue to incentivize your users to continue to use and clear through LCH. Thank you.
No. Actually, we made mention of the additional 2% when we reported at our prelims. 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 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. 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, nothing changes in terms of our governance rights with respect to these increases in our economic ownership.
Fair enough. Thank you.
Thank you. The next question comes from the line of Philip Middleton. Please ask your question. Your line is now open.
Yeah. Good morning, thank you. I wondered if you could say a little bit more about FTSE Russell. Your Q1 2018 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 entirely FX?
No, Philip, thank you. It's really down to FX. year-on-year, it was.
GBP 10 million.
It was a GBP 10 million. Then sequentially, there was about a 5% weakness, and that was definitely probably half of that. You've definitely got FX headwinds in this business, the likes of which we really haven't seen in the past. I think the important point is on an underlying basis, it is continuing to perform well 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 Q1 Q increase.
Yeah. 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. One thing you've often said in the past is that your license revenues experience step changes from time to time. Where are we in that process as you renegotiate annual contracts?
You're still talking about FTSE Russell, correct?
Yeah.
Yeah. Well, it's an ongoing process, Philip. We have contracts with all of our large customers, the process is ongoing. I wouldn't highlight any particular step change. All of the contracts have various trigger points or renewal points. It's really just an ongoing review of existing contracts that we have.
Okay. Thank you.
Thank you. Your next question comes from the line of Anil Sharma. Please ask your question. Your line is now open.
Good morning. Just two questions, please. The first one was just on ForexClear and CDSClear. Correct me if I'm wrong, but I think most of the revenues are membership fee related in those two businesses. I just wanted to get a sense for the outlook, given that the membership numbers seem to have been stable for at least six months now. By exit 2018, how's the business tracking versus the EUR 40 million revenue target you gave? Then the second question was, again, on LCH. I just wanted your take.
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, 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. We wouldn't comment on this at this stage. Certainly, we think that the clearing that is done by our repo clearing services is strong and growing. I think customers in general like to focus their clearing in one place. I think fragmentation of clearing, particularly in the repo market, is definitely something that customers resist. I wouldn't want to comment further beyond the fact that it's early days and our repo business continues to grow strongly. I think on the first question, remind me again what that was, Paul.
FX and CDS.
It is a membership fee. We do expect that there'll be continued growth in there as the uncleared margin rules come into effect for the non-dealer community, just impact more broadly, we would expect to see continued good growth in that business.
And relative-
Don't forget, we also get NTI.
Right
You get the margin on those as well.
Relative to the GBP 25 million-GBP 40 million revenue target for ForexClear that you gave, are you towards the bottom end of that range or upper end?
I think we still feel comfortable about that target.
Okay. All right. Thank you.
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 uncleared margin rules for the buy-side portion of the FX clearing and the CDS clearing, please? Then the second question, could you give us some context, maybe some market context, in terms of the non-deliverable portion of the IRS in terms of your new product initiative? Thanks.
Yeah. The general answer is, we're going to give you the time period over which the uncleared margin rules come into effect, they basically impact a wider class of customers every September. We're looking for that. Hang on a second.
The uncleared margin rules, sorry, it was at the top of my mind. The next introductions we've got is in September this year, both in Europe and also in the U.S. 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 for September 2019 and September 2020. That's for both the U.S. users and also for Europeans as well. There's three more waves to come in for the uncleared margin rules. Don't forget that, of course, the first phase and second phase will also capture the biggest users first. Nonetheless, we expect more momentum coming through.
I think on the FX, I think we see this as a combination of we're rolling out features and functionality this year that will expand the amount of functionality we have, and therefore the amount of contracts that we can clear, not just with the Non-Deliverable Forwards, but 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. I think in terms of what trades now, the vanilla options are probably about the same size as what we're doing now in the NDFs.
Okay, great. Thank you. Just as a quick follow-up, when might we be able to expect you to start publishing client trades for CDSClear and ForexClear?
I'm going to 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 we're going to do in terms of publishing on that yet.
Okay. Thank you very much.
Thank you. Your next question comes from the line of Johannes Thormann. Please ask your question. Your line is now open.
Morning, gentlemen. Two questions from my side. First of all, on your OTC Clearing, we've seen a nice increase in the notional cleared in interest rate swaps, despite the competition from your former partners at Deutsche Börse, which are the reasons in your view for this increase? 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% guidance or rather above or below? Thank you very much.
Look, I think we continue to feel obviously pleased with the growth in our IRS business. Johannes, we certainly watch with interest what all of our competitors do. I think it just speaks to the fact that customers I don't know, and you know this, so I'm not telling you anything you don't know, but basically, when we clear about 90% of the interest rate market, really in any market, there will be adjustments to hedging activity and increases in the amount of clearing that result from that. Customers will look to concentrate that activity into one CCP because that simply maximizes the margin and capital efficiencies. I think it is continuing to feature and offer that attraction 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 at the gross profit level. We're really not saying more about that, certainly we just reported on the targets about a month or so ago, so there's really no change.
Okay. Thank you.
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. A question on ForexClear, please. You mentioned that FX options will be started in Q2. Seems like the timing has slipped a bit. Is that driven by regulatory approvals, or is the demand the driving force? The timeline for FX swaps and deliverable forwards, which are much bigger opportunity probably, whether it is still in 2018 or might be only next year. Thank you.
Yes. I think with respect to the first question, it is definitely not about customer demand. There are any number of steps that you need to go through to introduce a new service. It needs to be rolled out, tested, connected, and you need to get all regulatory clearances. I would say there was not 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 is so many different other parties that need to sign off as a result in order to bring something forward. 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 have not really made any further announcements as to what further extensions and clearing activity we would get into in 2018.
Certainly, if we look at this year and into next year, it is always been the plan to be able to move into the broader options clearing market for FX.
Okay, thank you.
Thank you. Your next question comes from the line of Martin Price. Please ask your question. Your line is now open.
Thanks. Good morning. Just a couple of quick questions from me, please. Firstly, within Information Services, it looks like there was a particularly strong growth within the other revenue line. I was just wondering if you could provide an update on how UnaVista has been performing following the implementation of MiFID II, and whether enhanced reporting requirements have provided much of a catalyst for that business. Secondly, just within the OTC Clearing business, I was just wondering if you could provide an update on what % of revenue now comes from client clearing versus the dealer-to-dealer market. That'd be helpful. Thank you.
Yeah. Thanks, Martin. Look, on your first question, it's still fairly early, obviously, with MiFID II coming into effect the 3rd of January. We are seeing good activity in TRADEcho and UnaVista. A lot of what you're seeing there is a direct result, still early, of MiFID II benefit that we had expected to see, not just in Information Services, but in a number of other areas, certainly in Capital Markets with Turquoise. 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 growth in that line.
Yeah. Martin, on your second question on the OTC Clearing services, for the interest rate swaps, probably it's around about 50/50 now in terms of the revenue between clients and the member revenues that we get.
That's very helpful. Thank you.
Thank you. Your next question comes from the line of Arnaud Giblat. Please ask your question. Your line is now open.
Yeah. Good morning. A couple of questions from 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 collateral management services and other new types of services to clients. 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. Secondly, if I can come back to the acquisition of NEX by CME, how do you view the risk from TriOptima now being owned by CME or 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, I wouldn't flag anything in particular in that line. It's just exhibited good growth and it's a good result. I'm not sure exactly what specifics you were looking for, but there isn't anything I'd flag in that line. That's a good performance. I think with respect to NEX, look, I think it's still very early, but when customers look at a variety of optimization services that are offered both by LCH and by NEX, 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. I think 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 what services they'd like to see maintained going forward.
Is it an opportunity where we could continue to grow? Of course, 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 two or three years. Certainly an area of growth for us. I think what you have to understand here is that 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 NEX.
Okay, thank you.
Thank you. As a reminder, it's star and one should you wish to ask a question. Your final question for now comes from the line of Gurjit Kambo. Please ask your question. 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 so you know, where are you, what sort of duration contracts are you looking to launch? Who are the sort of competitors also looking at launching competing products?
Yeah, we're launching a three-month contract. We would note that others are doing the same, but that's definitely our plan. We've announced it today, and looking to roll it out within the next few months.
Okay. Just one final question. In terms of the initial margins in CC&G, obviously they've declined quite significantly year-over-year, which I guess we knew that, but also they've declined sort of further from December. Just any sort of real drivers behind that and 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 obviously very correlated. I wouldn't want to make a prediction about where they 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.
Yeah, I think when you look at how our derivatives side, initially the IDEM market has performed, you can see that that's still down year-over-year. We've seen a reduction year-over-year in the repo side as well. Yeah, both of those are having some degree of effect, as David just said.
Okay, great. Thank you.
Thank you. As a reminder, it's star and one should you wish to ask a question at this time.
Looks like we're out of questions, I think. That was a good run. Thank you very much for joining us. We're going to end the call here now. Obviously, we'll carry on talking to you as you call in during the rest of the day. Thanks very much. Bye.
That does conclude our conference call today. Thank you for participating, and you will now disconnect.