Flow Traders Ltd

F:O3I

Earnings Call Transcript 2018-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the Flow Traders' Quarter 2 and Half Year Results 2018. [Operator Instructions] I would now like to hand the call over to the Chairman (sic) [ Investor Relations Officer ], Mr. Serge Enneman. Go ahead please, sir.

[Serge Enneman, Manager of Investor Relations]

Thank you, operator. Good morning, all. On behalf of Flow Traders, I would like to thank you all for joining us today. This morning we have released our second quarter and first half 2018 results. Our Co-CEO, Dennis Dijkstra, and our CFO, Marcel Jongmans, will present prepared remarks on the first half of 2018. After which, they will be available to answer your questions.Before we begin, let me draw your attention to the disclaimer on Page 2. Please be advised that if you continue to listen to this presentation, you are bound to this disclaimer. Also please note that the results we will discuss in this presentation are unaudited results.With these formalities out of the way, I would now like to hand over the call to Dennis for his opening remarks.

[Dennis Désiré Matthijs Dijkstra, Co]

Thank you, Serge. Good morning, all, and thank you for joining this call, where we provide more color on the second quarter and first half 2018 results which we released this morning.When looking at the underlying growth dynamics in the ETP market in the first half of 2018, we want to highlight that assets under management in ETPs continued to grow to new record levels. Compared with the first quarter, market volatility in the second quarter was lower, impacting value traded and spreads in the market. Despite this slowdown, the market ETP value traded grew by 35% in the first half of 2018 versus the second half of 2017 and 21% versus the first half of 2017. The impact of MiFID II on the ETP market so far led to an increase of reported volumes traded on MTS in Europe.So despite the geopolitical developments in the second quarter, market volumes decreased versus the first quarter. As always, these dynamics affected the product mix traded and the market spreads in the second quarter somewhat. Overall, the market dynamics in the first half 2018 were very favorable to Flow Traders. The investments Flow Traders made in its infrastructure and trading capacities have enabled Flow Traders to capture more of the trading in moments of elevated trade making.The continuous initiatives as part of our organic growth strategy resulted in a broader presence and increased the scale in trading. Flow Traders now trades over 6,000 ETPs as an official liquidity provider at 109 venues in over 40 countries. Furthermore, we initiated diversification into products like FX. Our performance is being supported by an increasing number of products in all regions.Flow Traders is now a better company than it was before as we increased our total value traded by 45% versus the second half of 2017 and by 25% versus the first half of 2017. That supported a record net trading income of almost EUR 267 million in the first 6 months of 2018. This was achieved while keeping a tight grip on our fixed costs.Strong financial management led to an earnings per share of EUR 2.73 for the first 6 months of 2018. This was achieved while keeping a [Technical difficulty]. Taking all this into account, Flow Traders has decided to pay an interim dividend for 2018 of EUR 1.35. Marcel will go into detail about this later on this presentation.We will now take a closer look at the market developments and Flow Traders accomplishments. On the next slide, we discuss the ETP market dynamics in the first 6 months of 2018. As shown on this slide, market ETP value traded continued to show an upward trend since the third quarter of 2017, with an exceptional jump in the first quarter of 2018. Besides value traded, the market growth was illustrated by the continued growth of assets under management; second, by more inflows into commodities such as gold and oil; and fixed income ETPs.Velocity consequently showed an upward trend as well. In the graph on this graph, we show the velocity developments in the different regions. So the market dynamics continued to be supportive and in an expansion mode overall despite the slowdown in the second quarter versus the first.Now let's turn to performance overview for the first half 2018. On this slide, we present an overview of our KPIs for the first half of 2018. As said before, Flow Traders ongoing focus on executing its organic growth strategy resulted in a record level of value traded and a record NTI for this period. Flow Traders gained market share in all of its regions in that period. The performance in the second quarter however was not as strong as in the first as market dynamics slowed down.When looking at our performance in the second quarter of 2018 per region, APAC and the Americas stood out. As in APAC our market grew above 3% on exchanges, Flow Traders saw the first benefits of the investments made in the infrastructure in the region. In addition, our OTC value traded reached the highest monthly levels ever in the region. With the developments reported in the second quarter on the Honk Kong Stock Exchange and the Tokyo Stock Exchange, we expect to further expand our market position in the future in this region.In the U.S., our OTC value traded grew to 25% of our total U.S. ETP value traded. As the number of counterparties grew by 66%, market share in the U.S. grew to well above 2% on exchanges. We will remain focused on growing our OTC business as well as our market footprint in the U.S.In Europe, Flow Traders value traded somewhat lagged the market in the second quarter. Overall, Flow Traders still grew its value traded more than the market in the first 6 months of 2018. The difference in value traded in the second quarter relates to a remarkable trade report from MTS in May where we did not recognize about EUR 10 billion in trades. That did not reoccur in June.Operationally Flow Traders had a strong second quarter performance on as well as off exchanges. Flow Traders remained the biggest market marker in ETPs in EMEA with a market share of more than 20% on and off exchanges.Now let's turn to slide 6, where we have updated our long-term NTI performance versus the most important market dynamics in the ETP market. Looking back at the performance in the first 6 months of 2018, Flow Traders has every reason to reiterate its long-term organic growth strategy. This means that Flow Traders will continue to grow organically to further leverage on our leading position in the ETP market; continue to grow its presence in all of its regions, but especially in Americas and APAC; accelerate diversification of its trading into new asset classes and related products, while remaining cost conscious.In the next 2 slides, we will highlight the steps Flow Traders has taken in 2018 so far to support that strategy. Flow Traders market leading position is derived from a combination of our 4 key competencies, which are our pricing excellence, our technology, our risk and control framework and our very strong team-driven culture. The achievements highlighted in the coming 2 slides will relate to those 4 key competencies.On this slide, we show the most important steps we achieved when it comes to our pricing excellence and our technology. The continuous focus on improving our trading setup is driven by the importance of creating scale. The more products Flow Traders trades, the better certain products can be priced. Scalability of our business remains key to the success of our pricing capabilities, which has improved also in optimizing trading in related products like FX.In technology, Flow Traders was able to improve efficiencies and start new trading desks at the same time. The modularity of our trading system allowed for the rollout of our growth strategy through new desks in different asset classes and on new venues, while at the same time we had to comply with regulatory changes like CRR and MiFID II. We optimized our adjusting operations, which reduced dependency on third-parties, allowing for more grip on cost developments.Developments in the other 2 key competencies are shown here. In our team-driven culture, we grew our FTEs by 4.5% since the end of 2017 to support all of our growth initiatives by hiring new employees while at the same time encouraging knowledge sharing through initiatives like our internal Flow Academy and through active internal rotation. A strong foundation has been built to support our growth.Another example is the start of our Graduate Software Development Program, which will start in the second half of this year. Just like in trading, we will start a traineeship for graduate software developers.In risk and control, the grip on the processes resulted in shift -- swift implementation of the new regulatory capital requirement calculations on the CRR. New trading desks and trading venues have gone live and more counterparties have been connected to our trading system.Our strong risk management framework and the expansion of the risk controls with the trading of new asset classes prevented loss days from happening in the first 6 months of 2018. New prime brokers have been added, dedicated amongst other things to FX trading.This concludes the general update. For the presentation of our financial performance in the first 6 months of 2018, I will now hand over to our CFO, Marcel.

[Marcel C. Jongmans, Former CFO & Member of the Management Board]

Thank you, Dennis, and good morning, all. After the strong first quarter performance, it was expected that the first half of 2018 would be strong as well on a comparison base. The value we traded in the first half of 2018 grew ahead of the market and our financial performance benefited from that, especially from the exceptional market conditions in February of this year.As is shown here, the sharp increase in EBITDA was supported by prudent cost management. Fixed operating expenses grew 1.7% in the first half of 2018 versus the previous 6 months, as technology expenses decreased 5% and fixed employee expenses grew 5% versus end 2017. The tight grip on fixed expenses led to a limited increase in fixed cost of 4.1% year-on-year, which comes well within the guided limit of 15% annually.Regarding the variable employee expenses, the treatment of our employee participation plan under IFRS leads to a lower cash amount than the fixed 36% we normally report. We are not allowed to account for the amount from the plan as a liability on the balance sheet, which affects the 36% variable employee expenses in the P&L. So the amount from the plan is considered an off balance sheet liability, which will flow into the P&L in the coming year when the amount -- years -- when the amount is invested. The variable compensation pool amounts to 32% of profit before tax when corrected for the IFRS treatment of the employee participation plan or exit.The effective tax rate in the second quarter was 16.6%, bringing the effective tax rate in the first half of 2018 to 16.7%. All these developments result in a net profit of EUR 126.8 million or EUR 2.73 per share over the period.Now we turn to the next slide for an update on our capital. On this slide, we show our capital; first, the required capital level from a regulatory as well as prime broker perspective. The development of Flow Traders N.V. own funds requirements under CRR is shown here from EUR 151 million at the end of March 2018 to EUR 179 million at the end of June 2018, and we show an excess capital position of EUR 111 million. That excess capital reflects our capital position after payment of the final 2017 dividends and provision for the 2018 interim dividend. Therefore, it's safe to say that Flow Traders continue to meet the CRR requirements comfortably.On the right hand side, we show the development of our prime broker solvency ratio and our total trading capital. In addition, this confirms that we continue to meet the prime broker requirements comfortably at the end of the second quarter. So both from a regulatory and prime broker perspective, Flow Traders remains well buffered to meet its obligations.Taking all of the above into consideration, it means that given our conservative, strong and unleveraged balance sheet and our prudent capital management, we announce an interim dividend of EUR 1.35. That confirms our dividend growth track record, as we will show on the next slide.Here we show the historic development of our divided since 2010. The dividend growth trend line shows a healthy 30% CAGR since 2010, which complies with the long-term growth trend we are in. As we state on the slide, since the IPO in 2015 we have returned EUR 4.75 per share to our shareholders, which is also a confirmation of the strength of our business model. Flow Traders therefore reiterate its dividends policy, where we aim to return at least 50% of net profit to shareholders through dividends.This concludes our prepared remarks. Now I would like to hand back the call to Serge.

[Serge Enneman, Manager of Investor Relations]

Thank you, Marcel. This concludes our presentation. We would now like to open up the floor for any questions you may have. Operator?

[Operator]

[Operator Instructions] Our first question is coming from Ms. Rosine Van Velzen from ING.

[Rosine Van Velzen, Research Analyst]

I would like to come back to your comments on the market share in Europe in the second quarter, because if you adjust for EUR 10 billion in your market share, it was actually higher than the last 3 months in 2017, if I am correct there. But could you elaborate a bit on the competitive dynamics you have seen in the European market this quarter? And my second question is on the current trading, because the VIX has been down this quarter to 12 and it's somewhat lower -- somewhat above last year's level of 10. So how would you compare the current market of [ 50 ] compared to last year where we have seen quite a slowdown in the summer?

[Dennis Désiré Matthijs Dijkstra, Co]

Good morning, and thank you for the questions. As said, we have not seen any big changes in the competitive landscape in Europe. I think, as always, it has been and is a very competitive market. We have not seen any changes in our market shares either on or off screen. And as said, we've seen some EUR 10 billion of trading being -- page being printed on one of the -- or a few MTS, which we could not reconcile with our data. So that's one of the things we want to just highlight. Yes, and on the -- and on the July trading -- I think we do not comment on current trading and we will release the numbers at mid-August on the July trading.

[Operator]

Next question is from Mr. Anil Sharma, Morgan Stanley.

[Anil Kumar Sharma, Equity Analyst]

These are difficult questions really. Just trying to understand a little bit better what's going on in terms I guess the U.S. business really. So it looks like your market share is picking up quite nicely. So some of the benefit I am assuming of -- the licenses that you've got there is coming through. But just in terms of the revenue margin dynamics or the NTI margin, they seem to be extremely volatile. So could you just help me walk through, is there some gaps in your offering at the moment which could help kind of stabilize that or are there certain products that you're not doing which you kind of need to expand into? If you just help me think through how we should be forward thinking on the NTI margin there?

[Dennis Désiré Matthijs Dijkstra, Co]

Yes. Thanks, Anil. I think -- also there I think comparing quarter over quarter is very difficult, especially as the first quarter was an exceptional quarter with very high elevated volatility, especially in the U.S. markets. As said, nowadays about 25% of our value traded in ETPs comes from OTC trading. That's still early days. So we hope that it will continue. We only have onboarded, let's say, about 50 counterparties nowadays. So we are pushing hard and working with a lot of effort to continue onboarding a lot of other counterparties in the coming period. So there, yes, it's very difficult. We do not have huge gaps in our offering. As said, the U.S. is not fully covering all products very competitively yet, but we have a very good product offering. We cover especially all the fixed income products, but also a lot of the equity related products in addition to the commodity and other underlying. So we do have full coverage -- not as competitive as we want. Perhaps we want to be in every product. But that's something we will focus on also in the coming period.

[Anil Kumar Sharma, Equity Analyst]

Okay. And could I just ask one quick follow-up? In terms of MiFID II and some of the other regulations now with, what, 6, 7 months in, just if you give us update, do you think we've had all of the impact now in the numbers or do you think there's more to come? And what other sort of trends do you see happening on the back some of the regulations?

[Dennis Désiré Matthijs Dijkstra, Co]

On MiFID II, I think the impacts on -- especially more visibility on trading of ETPs I think has come. It's clear now with the MTS. I think there's still a debate out there, is the impact of SIs, although not very big for ETS at the moment. I think that's still something that is I'd say on everybody's radar. I think the impact for the normal equity market is probably more significant, but it's something that's still out there, still on the debate. I do think that the focus on, let's say, total cost of ownership and the [ ways ] of active versus passive investments is still not done yet. I think that's also early days. So also there focus on best execution both from a trading, but also from an investment amendment perspective I think there's still a lot to be gained to be honest. So that will take probably longer, where the -- I think the passive investment industry or the ETPs as a whole will benefit from. But that will just take longer to materialize I guess.

[Operator]

The next question is coming from Mr. Ron Heijdenrijk, ABN AMRO.

[Ron Heijdenrijk, Analyst]

It's Ron Heijdenrijk, ABN AMRO. A quick question. You say you have 6,000 ETPs that you're trading currently, which is more than 50% of all the ETPs outstanding. Can you run us through the ones that you don't cover at this point in time? And what is the outlook when you're going to onboard those ETPs, so to say, in respect to how much assets under management are we talking about, how much turnover are we talking about? Could you shed some color on that please?

[Dennis Désiré Matthijs Dijkstra, Co]

Yes. Thanks, Ron. So the 6,000 is the number where we are a registered liquidity provider, right? So this is where we have a commitment to the exchange to provide continuous quotes on a continuous basis with a given, let say, size and a maximum spread. And we do trade a big portion of the other, let's say, 45% of the ETFs out there, albeit not on a continuous basis. And that's across every region. So especially in Asia, it's difficult to become a registered liquidity provider because you need to have local presence, be a member of the local exchanges. So that's where we use local firms to give -- to get access. So for some products and ETPs, we are a registered liquidity provider, but we need other firms to become or local brokers to become it. And also here in Europe and in the U.S. sometimes we do make a conscious decision to be a, let say, unofficial liquidity provider as opposed to an official liquidity provider.

[Ron Heijdenrijk, Analyst]

That's very clear. And can you then also maybe run us through the differences in revenue capture when you are an official liquidity provider and when you are not? Is it fair to assume that where you are not the official liquidity provider, actually your revenue capture is bigger because you can time your trades better?

[Dennis Désiré Matthijs Dijkstra, Co]

We do not have any numbers on that, but I think your reasoning sounds fair. Also there like -- it also has to do with the cost of having positions and trading inventories. So we are not an official market maker in a product. And there are also other things that play into this. So we tend to focus on becoming an official liquidity provider because that's where we -- also where the market really benefits. But, yes, we do not have any specific numbers of that to be honest.

[Operator]

The next question is from Mr. Arnaud Giblat, Exane.

[Arnaud Maurice Andre Giblat, MD & Research Analyst]

It's [indiscernible] from Exane. Three questions please. Firstly, I was wondering if you could shed a bit of light on the contribution in terms of revenues from your FX business and how that's shaping up over the coming quarters? Secondly, if I look at your net capture in Europe for Q2, you're about a 2.9. That's roughly where you were in Q1, Q2 last year. Yet the volatility levels in Q2 were actually quite a bit higher than they were back then. So is it a matter of product mix or is anything else going on, because volatility was actually -- I mean, clearly not at the level of Q1 of this year, but at a decent level? And finally, you've slowed down your rate of investment. You're guiding to 15%. How are you seeing that rate of investment shaping up over the coming quarters?

[Dennis Désiré Matthijs Dijkstra, Co]

Marcel, you want to have a go at the last one first?

[Marcel C. Jongmans, Former CFO & Member of the Management Board]

Yes, we can do that. We are not slowing down our -- a lot of our investments. I think that most of the growth came from our FTE base where we hired a lot of people over the last few years. Because of the fact that we are developing much more software ourselves, so we had to keep up with hiring more FTEs there. I think that we are still not there because we are still hiring FTEs, but I think we are at the right levels now. So that's one. And secondly -- and that's what I said last quarter as well. We had some reduction in cost on data lines, on communication cost and that's the reason why you see that we are -- that we have much more grip now on our cost and that's also the reason why we have said, "Okay, we are capturing our cost increase by 50%." And what you have heard today in the call already is that we are quite good and at the right levels at the moment. So that's the answer for that.

[Dennis Désiré Matthijs Dijkstra, Co]

So coming back to your first question about the FX offering, so as said, there are multiple angles for our -- it's fairly easy to become also a FX liquidity provider. So first of all, it's internalization. So having better matching and internalization of our currency exposures. I think that's been done. So that's -- well, I think we've mentioned that this will save us a few millions of NTI on an annual basis. Second, as you've seen and what we mentioned is that we've increased the infrastructure and we've added new venues. So what we've done in the first half is we've connected to a handful of currency platforms for ETFs in addition to the ones we were already connected to, where it could be a spot platform or currency exchanges. So the actual market making in the business will start as of now or late second quarter. So that's where we start offering liquidity to our counterparties on a bilateral or all-to-all platforms. So that's starting now so we do not have any visibility yet on the profitability of the FX liquidity providing, but we do have -- done the internalization, the efficiencies from the training perspective. On the question about the revenue capture in Europe, I think that's not a -- there are some changes in the products that are trade, but it's more a reflection of the market activity and the volatility in the market itself than anything else. So there's nothing worth mentioning or that we saw in the markets on our changes in our revenue capture in Europe this quarter.

[Operator]

Our next question is from Mr. Martin Price, Crédit Suisse.

[Martin Price, Former Research Analyst]

Just a couple of quick questions from me please. First, I was just wondering if you could provide some more detail on the new prime broker relationship that you've added in FX. I would just be interested to know if that's a global or a regional tie up and whether we should expect much impact on revenue -- on regulatory capital? Secondly, yes, just on the dividend. Is there any reason why the split of the interim and final dividend will be any different this year to usual? I guess generally the interim is about 35% or 40% of the full year payout. So I just wanted to get some background on how we should be thinking about.

[Marcel C. Jongmans, Former CFO & Member of the Management Board]

Okay. Thank you, Martin. Good morning. Yes, we have selected a more specialized prime broker servicing our FX business. So we are building up the relationship -- we have been building up the relationship with them. The reason why we have selected this PB is because of the fact we have that hybrid model where we do a lot of trading and liquidity profiling via the different platforms. And on the other hand, we have relationships with a lot of institutionals. And for that reason we needed a more specialized PB in this area. They are fairly experienced and they have supported us very well so far. And, yes, because of the fact we have splitted that FX business to another prime broker doesn't have a lot of impact on our capital cost for -- our step-up is still that with our current PBs, we also have still some FX business for our hedging purposes. But on the other hand, for the real liquidity profiling, we are going to use this one. Is that sufficient for your question? Then I move into your question about the dividend. Yes, we do not give a lot of guidance on that one. What we have said during the call is that we stick to our at least 50% dividend payout ratio. We have taken, I would say, a consistent approach there, also looking at the interim dividend. Over the last 2 years, we paid out on an interim basis around an average of 50% and we did the same this time. So we are now 49.45% of the EPS and, yes, that's where we stick to. So again, that's the consistency we have in our dividend payout ratio and we will give you a bit more guidance in the rest of the year.

[Martin Price, Former Research Analyst]

That's great. And maybe just a quick follow-up on ETF connect in Hong Kong and China. Just wondering what you're hearing on that and whether we should expect much in the way of impact on the business?

[Dennis Désiré Matthijs Dijkstra, Co]

Well, we haven't heard any latest updates, but it's still, let's say, being worked on. So I think with the office in Hong Kong -- we were ready when it happened and well positioned both, let's say, northbound and southbound trading. So both China Mainland -- having the ability to trade on Hong Kong and other exchanges, but also via Hong Kong, let's say, into China. So that's one of the reasons why we've set up an office in Hong Kong. So we're ready. But there is no, let's say, visibility or clarity on when that will happen any time soon. But...

[Operator]

[Operator Instructions] Our next question is from Syed Anil Akbar of Kempen & Co.

[Syed Anil Akbar, Analyst]

One question on the market share in your -- so as far as I understand, what you're saying is that you can't reconcile the EUR 10 billion of trades that you got from the MTS platform from the data that you have and that's why there's -- it seems that you have lost market share over there. Is that true or not?

[Dennis Désiré Matthijs Dijkstra, Co]

Yes.

[Syed Anil Akbar, Analyst]

Okay. And one question on the Hong Kong, China -- and China uplink. What time frame can you give like, for example, for this to come live so that you guys can start trading ETFs in China? Is there like any time frame that we should consider?

[Dennis Désiré Matthijs Dijkstra, Co]

Well, it's difficult to give an answer where we are dependent on, I don't know, Asian and Chinese regulators. So that's very difficult I think. As I said, Hong Kong is in itself a very important ETF hub for the whole region, so they're also making a big push in listings and also the trading of ETPs and related products. And from that [Technical difficulty], it's important to be there. In addition, Hong Kong is a very big hub for the issuers and also for a lot of broker and the broker-dealers are there, so also from an OTC perspective it's important. So as said, I think we're ready, when we do have visibility that we are prepared. And it's just -- there's not a lot we can do to accelerate, let's say, the ETF link becoming in operation, unfortunately. But of course we are looking at other options to trade in products in China Mainland, but that is not, let's say, related to the ETF link itself.

[Operator]

Chairman, there are no further questions. Please continue.

[Serge Enneman, Manager of Investor Relations]

Thank you, operator. Thank you all for your questions and remarks. Please note that we will host our next earnings call when we release our full year 2018 results. Details for this call will follow in due course.We will release our third quarter trading update through a press release on the 18th of October, 2018. There will be no analyst call on that day.We will now end this call. Thank you very much for your attention and have a good day. Thank you.

[Operator]

Ladies and gentlemen, this concludes this conference on behalf of Flow Traders. Thank you for attending. You may disconnect your line now.