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Good morning, ladies and gentlemen. Thank you for standing by. Welcome to today's London Stock Exchange Group Q1 Results 2019 Investor Call. [Operator Instructions] I must advise you that this conference is being recorded today, the 1st of May 2019. And I would now like to hand the conference over to your speaker today, Paul Froud. Please go ahead, sir.
Thank you. Good morning, everyone. Thanks for joining the call. With us this morning, David Warren, Group CFO; Tom and myself. So it's going to be the usual format. We're going to give a quick introduction and briefly summarize the highlights, and then we're going to turn over to questions. So let me pass you to David.
Thank you, Paul. Good morning, everyone. Thanks for being with us this morning. We delivered a good overall Q1 income performance. Total income was increased by 5% year-on-year to GBP 546 million. Against the challenging market backdrop, we saw growth in both Information Services and LCH, so offsetting a reduction in Capital Markets. Gross profit after cost of sales increased 6%. So let me pick out a few of the other headlines. We start with LCH. Income on a headline basis increased 17% and was 16% higher at constant currency. OTC clearing was again strong as revenue rose 16%. SwapClear performed well with further increases in member revenues, in client business and at SwapAgent. ForexClear is growing well and other revenue increased by GBP 5 million mainly due to increased noncash collateral. And in terms of NTI, there was a 26% year-on-year increase, reflecting a 10% increase in the average cash collateral as well as improved returns from investments of cash margin. Next to Information Services. Reported revenues increased 6%, including 7% growth at FTSE Russell, or 2% growth constant currency as the dollar strengthened in Q1 against the same period last year. In our announcement this morning, we have split out the FTSE Russell revenues between subscriptions and asset base revenues. From this, you'll see that subscription revenues increased well at 11% year-on-year while the asset base revenues were flat in reported terms. The weakness in this lateral line is attributable to the fall in AUM and ETS and other funds that occurred in late Q4 last year, when which due to a lag in reporting impacted on revenues into Q1 this year. We saw some improvement in the March results, and as we've said in our statement this morning, we expect Q2 revenue to be stronger.Moving to Post Trade Services in Italy. While the revenue declined, NTI increased 13%. Allowing for the accounting change last year for reporting T2S revenue and cost at the gross profit line, we saw a 3% increase.And in Capital Markets, revenue decreased 9% with the main impact in equities trading at the London Stock Exchange, Borsa Italiana and Turquoise as volumes reduced. Derivatives trading was also down year-on-year. And finally, in Technology Services, revenue increased 9% on a like-for-like basis. In terms of gross profit, cost of sales for the quarter was flat at GBP 56 million contributing to a 6% increase in gross profit at GBP 490 million. Capital Markets cost of sale has reduced due to change in fee structure at Turquoise. And while at LCH, cost of sales grew as the OTC clearing revenue and associated NTI increased. And you will have noted in our statement that we confirm we have an updated agreement at SwapClear with the effect from the start of the year. As before, the terms of the OTCD banks remain confidential, but the net result is an expected circa EUR 30 million saving in cost of sales for 2019. And also, I think important to repeat that the core principle of partnership remains in place as the various OTC businesses continue to develop and grow. So in summary, we have delivered a good overall Q1 income performance. We are continuing to execute on our strategy and are well positioned to develop our growth opportunities further in partnership with our customers. Again, thank you for your time. And now with that, we'd be happy to take your questions.
[Operator Instructions] Your first question comes from the line of Philip Middleton.
Thank you for the extra disclosure on FTSE Russell. I wonder if you could just say a little bit about the LCH agreements. In particular, do this mean if, for example, ForexClear really takes off, you'll keep a greater share of the economics of ForexClear you would have done under the previous arrangements to? I mean, so is this a percentage gain or an absolute amount gain, the GBP 30 million?
Yes. I think how you think about it, Philip, first of all, this is just on the SwapClear service, just to be clear. And it is an update agreement that reflects effectively the share of the surplus. So as we wanted to discuss with you today, all else being equal, we would see an impact of GBP 30 million reduction in the cost of sales line for this year. So it's with effect from the first of the year, so in that part of the -- in that part of the model as opposed to elsewhere.
So if the surplus doubles, then the COGS saving doubles roughly?
Yes, it is. So obviously, the cost of sales line will vary as it relates to just general activities. So as you're saying, as it grows, then obviously cost of sales will grow. But it is our portion of that, that changes.
Your next question comes from the line of Arnaud Giblat.
I've got 3 quick questions, please. On FTSE Russell, thanks for the disclosure. So you grew revenues in subscription by 7% year-on-year. From the previous disclosure, you used to give between the split of assets and subscription, I estimate that over the -- from 2015 to 2018, you were growing subscription revenues by about 13% a year. So I was wondering if you could comment a bit of on the slowdown we've seen, if there's just a lot of big numbers or if there's a trend going on.Second question is on the increase in numbers at SwapClear. You've added 9 numbers in Q1. Have we seen the full impact on the P&L yet? Or are we working off of average numbers? Should we expect about this to -- going further -- looking out further? And finally, on LCH, the reduced cost of sales that you've arranged with [indiscernible] , I'm wondering if you have a similar opportunity to revisit pricing on the client side.
Yes. So let me take those in order. I think it was important for us to provide the full historical trend as we did the further breakdown. Look, I think what we have said is that, that is a line -- the sales of data and now increasingly analytics service will exhibit strong growth over the period of time. I wouldn't point to any one thing that I would say happening in this reporting period as compared to any other. What I would say, just to underscore our general confidence in that business, is that demand for data and analytics continues to grow, and we expect that to be a strong contributor to the revenue growth going forward. I think with respect to the increase in the members, this was really more about existing members as part of their Brexit planning tying in other branches within the bank. So they are already existing members. They're basically making sure that all parts of the bank are connected. They are really would be a very small -- a really very small P&L impact from this. So you're not -- it's really just a report and an increase in the number of members as existing members connected more parts of their institution into the service. But they're already tied into the existing member fee arrangement.And at LCH with respect to the reduced cost, so that include -- given good disclosure on what it is, those agreements are very confidential. They are updated from time to time. And I think at this point in time, I wouldn't -- I'm not really in a position to say anything beyond that. I think this is an important development with the OTC banks. It continues -- it reaffirms the partnership, and it's part of the new agreement that we struck. But they’re confidential agreements, and I'm really not going to be able to comment any more beyond that.
[Operator Instructions] Your next question comes from the line of Chris Turner.
It's Chris Turner from Berenberg. Yes, just 2 quick follow-ups from me, please, as well. Firstly, coming back to the revenue sharing agreement with SwapClear. I guess banks are not known for their altruism, so can you perhaps give some color on what in return LCH has provided in return for this reduced rebate? How do the gross fee, for example, being changed? And then secondly, on the other revenues line, at LCH, that grew very strongly this quarter. Was that due to a rising portfolio compression? Or was there something else going on there? And then more generally with portfolio compression given, I guess, the change in ownership of the leading provider there, how is LCH approaching portfolio compression services? Do you see capacity to take market share from, I guess, what is the market leader?
Okay. I'll take the first two, and Paul can comment on the next one. I think the first one, I appreciate the question, Chris. But I think if you look at us over time, and there have been times in the past where we have renegotiated these agreements and we have not said much, and that's respecting the confidentiality of the agreement or a strong relationship that we have with the OTC banks. So what we're giving today in terms of the change in the economics is what we're going to say. I would say that this is an agreement that, I think, importantly, reaffirms the partnership that we have with the member banks and sets a good foundation for continued growth. In the area of non-collateral, in the other income, that was an increase in noncash collateral that we were able to invest this quarter compared to past. That was the biggest part of what was driving that. Compression is in that line, but that wasn't really the -- that wasn't really the driver of that variance. And then on the portfolio question.
On the compression side, Chris, I think you're saying about the opportunity to increase market share on which pit.
Just simply saying with the change in ownership with CME buying TriOptima, is an opportunity there for LSE to maybe take some of the slice of that cake?
Well, I mean the way LCH works is that you can apply any number of compression tools to the portfolio. I think the majority of the compression now takes place for using LCH and proprietary tools, but there's also the former Nex products and there are some other new ones that have been introduced as well. Important one is whichever tools you use, LCH takes a fee for using those. So to a degree, there's -- we're agnostic as to which ones customers want to use. So there's been no change to the arrangements that are in place.
Your next question comes from the line of Kyle Voigt.
Two for me. One is with respect to Vanguard specifically. I think they announced that they're reducing some fees on some ETFs tied to FTSE Russell indices in late February. I just wanted to see if there's anything to note in terms of potential impact or flow through to your asset base fees going forward just given their size? And then my second question is really just on the Fed fund futures curve in the U.S. now suggesting a cut in short-term rates within the next year. Can you help frame where the yield -- the annualized yield on LCH's cash collateral could move if we do get into that type of environment?
Yes. Thanks, Kyle. On the first question, there's nothing specifically I would comment on. Obviously, you're referencing it. But I think it is just -- it is all part of the broader customer relationship that we have with Vanguard over a range of products and services that we provide for them. So there isn't any more that I would say on that, but the relationship with the company remains strong, and we continue to innovate and develop new products for them. On the futures curve and the Fed funds, look, I think if you want to take a step back and think about NTI for the balance of the year, I think what would I predict? Obviously, the old saying is if we could predict this business, we'd be doing something else. I just don't think we are going to see the same yield environment in the U.S. that we saw. Last year, we saw both activity that was driving increase in cash collateral as well as increase in yields. I think what we are going to see for this year is certainly not going to be the same pattern. I'm not really predicting the rates, but I don't think we're going to see the same kinds of sort of upward pressure on yields, certainly. And I think where we are right now at this level of activity is probably about where we're going to be. But I just think we're going to be in a different rate environment particularly in the U.S. for this year, if that's kind of getting to the thrust of your question.
If I could just clarify, I think if we go back into your results back before the Fed started its hiking cycle, we're calculating something like a 13 basis point annualized yield on cash collateral both to NTI and LCH. Just wondering can we get back to that level if the Fed does return to the similar [ strict ] policy that it was in 2015 because I know there's a number of steps that you took to increase or broaden the available securities and what you invested in. So I'm just trying to understand what could be the potential downside there if we do get into a cutting or recessionary environment.
Yes. Well, I think the efforts that we have taken to expand counterparties and just do a better job on investment side had definitely contributed to the increase. And those efforts certainly are continuing, and we're always looking at different opportunities. But it's just not something that I feel like I can get into. It's going to be somewhat predictive on any rate environment. So it's hard to say where we will tend to settle out. I think the best we had been able to do in the past is give you a bit of a sense of where we are at any particular quarter and how you might think about that moving forward into the next 2 or 3 quarters.
Your next question comes from Anil Sharma.
Anil Sharma from Morgan Stanley. Just 2 questions. The first is just around the FTSE Russell business. I think in the commentary you're saying that you expect the asset base part to rebound in Q2 given markets. How should we interpret that? Does that mean you expect to rebound on an organic constant currency basis back to the low double digit that you've guided to? Or is it on a reported basis that we should think about that? And then the second question was just around subscription side of the business. If I look at some of the other index providers globally, they haven't seen a slowdown in their constant currency growth rates. So could you perhaps elaborate and expand as to why the subscription slide is slowing? And what's actually going on in that business? Is it that pricing, you haven't been able to do the 4% or 5% number of price rises that you normally do? Or is it that the subscription rates are lower? Can you just help us understand why the growth isn't the double digit when everyone else is reporting double digit?
Okay. So I think on the business going forward as it relates to the AUMs, I think we have talked about before that there is a lag impact, and we obviously have seen, and you can see it in publicly reported numbers, that AUM balances are going up from the beginning of the year and increasing throughout really since certainly from March into April. So we would expect to see -- what we suffered in Q1 was the lag effect of the downturn in Q4 in AUM, particularly on the fund side. What we will see as we go through the year will be the pickup of that as the AUM grows, but the revenue pickup of that will lag by a month with respect to the fund and, to a lesser extent, to the ETFs. So that revenue growth will lag by about a quarter on the AUM changes. In terms of where we would be looking forward, we're not making any change today. We confirmed our targets at the beginning -- at the prelims. We're not making any change to that. I have always focused on the reported growth rate for these businesses and for the targets. That's the one that generates the cash. That's the one that contributes to the valuation. So those are the targets -- when we -- when I confirm the targets, those are the targets that I'm confirming. And I'm not making any change or any new statements on those today because we just made the statement and underscored our confidence in those at the beginning of the year. You talked a little bit about the subscription growth compared to competitors. Look, I don't -- first of all, we don't -- we make those comparisons, but we're much more focused on how our business is performing and what our growth opportunities are. I'm not in a position to really comment on the different mixes of products and pricing and currencies mix within the competitors, so I wouldn't -- I don't necessarily draw anything to the comparisons. I continue to believe that the business will continue to grow and grow strongly because, I think, the -- as we've said before, I think the underlying growth factors are still very much there. We've had a bit of a market downturn as everybody knows, but I think we're well positioned to continue to capture the growth going forward. It is in all the areas that we're increasing capability in: multi-asset, fixed income and factor investing. So I think the business overall is positioned for some very good growth.
[Operator Instructions] Your next question comes from the line of Gurjit Kambo.
It's Gurjit Kambo at JPMorgan. A few questions. Just firstly, in terms of the OTC business in LCH. I know you don't break this out specifically, but just -- could you just give us some color on the momentum you're seeing in products like ForexClear? And I understand that's been strong in the past, so just sort of -- maybe just some broad sort of trends there will be helpful. Secondly, on the LCH cost saves. Is there any of that GBP 30 million, which has come through in the first quarter of this year? And then the third one, just on the FTSE Russell business. Just in terms of, again, thinking about the growth drivers going forward, you mentioned smart beta, I guess, things like ESG, emerging markets in China. Just -- is -- what sort of growth trajectory in some of those sort of areas?
Right. I'm trying to remember what the first one was.
Yes. First was on ForEx and breaking out the [indiscernible]...
Yes. Sorry, I got -- Okay, sorry. Yes. Look, we continue to be pleased with that. It's growing. I think you all have seen that we've announced and we've announced in our release that we've added additional currency payers in the NDF world in emerging markets. We're continuing to get traction in the -- in the settlement business that we rolled out at the end of last year. The unclear margin rules are continuing to impact a wider range of notional amounts, so we'd expect to see more clients and more -- or clients looking at ForexClear as a way to comply with the uncleared margin rules as they're now going to impact them when a year ago or 2 years ago, they didn't. So still have very good confidence in all of the drivers and products that we've launched in that business. So we're not at a point yet where we're really breaking it out, but I will tell you that we've had some good progress in that business in the quarter. In the cost of sales at LCH, probably a way to think about this might be to look at the sequential change, because you -- obviously you will see -- what you will see is that there have been some -- obviously, there's been growth in the business, so the revenue increasing. But there has been, on a like-for-like basis, a bigger sharing of that surplus because of the agreement that's been -- that was being -- new agreement that we reached with effect from the beginning of the year. There are also going to be smaller impacts in the cost of sales line overall. So there are various things going on in that line away from LCH, one of them being in Turquoise where we eliminated the maker-taker rebates, which prior, flowed through the cost of sales line. So I would direct you to look not necessarily year-on-year, but sequentially to see a little bit of how that impact comes -- starts to play in.And the -- I think the last question was just -- I think it was more of a general question on FTSE Russell and growth. Look, I think I kind of already said it. Our confidence in this business and the fact that the strong growth drivers, most of them you already mentioned in asking me the question, those are strong and continuing drivers for continued growth. It represents secular changes in investment style. They represent demand for new products and analytics. And this business is increasingly well positioned to continue to grow well with those -- against those factors.
Your next question comes from the line of Mike Werner.
Mike Werner from UBS here. Two questions, please. And again, thank you for the change in the reporting format on the Information Services. I know that there's about a GBP 10 million or so shift per quarter out of the previous FTSE Russell classification into other Information Services. And I was just wondering if you could provide a little bit of color as to what that revenue consisted of? And then second, I was just looking at the LSE derivative volumes and saw them down, about 56% year-on-year and close to 40% quarter-on-quarter. I was just wondering if you could provide a little color what happened in Q1 with regards to those derivatives? I assume that's mostly curve level.
Right. We actually do provide a bit of a note on Page 5 of the RNS. What's going on there is that we've had -- we've shifted income from revenue from emergent and some other items that were previously in subscriptions. We've now moved those into other Information Services. So that's really just a grouping impact.And then on the derivatives question, look, I mean it was a challenging market. I wouldn't point anything in itself, but feel free to add, Paul, but...
Yes. So it's not curve. Curve continues to grow. What you're seeing there is we have shots at the London-based LSEDM, so we've got a bit of impact there. And we've obviously seen some pressure in Italy as well, but it's across a number of things. But there's no big factor there.
[Operator Instructions] Your next question comes from the line of Johannes Thormann.
Johannes Thormann, HSBC. Most of my questions have been answered. So just if you could provide us an update on your Brexit preparation as we got a delay again. What is the status of your Turquoise license in Amsterdam? And have you changed your view on licensing the OTC clearing in Paris? Or are you still waiting for other situations to occur?
Thanks, Johannes. Look, there really have been no changes or updates. I think the important point is we were -- we took all the steps necessary to be prepared for Brexit when we needed to be in advance of the original March deadline. So we do have all contingency plans in place. We have the regulatory licenses that we need to operate the businesses in Amsterdam, TRADEcho, UnaVista, and MTS is already operational in Italy. So we're fine there. And with respect to the clearing services, there has been no change obviously. But the framework that we had for temporary recognition and then a transition to permanent recognition under Article 2.2, is still very much the plan. But we haven't made any changes to our efforts because, at this point, they don't need to be updated. We are well prepared.
Your next question comes from the line of Christoph Blieffert.
Christoph Blieffert at Commerzbank. One question on LCH, please. The clearing obligation for category 3 clients in the -- you've started at the end of the quarter. What are your expectations with regard to the annual industry revenue pool and your anticipated market share?
Christoph, I think you're right. There is -- I think there's been some carve-out or some exemption now on the June introduction, so I think, in effect, some of the very small participants through the, I think, the third wave, have got some exemptions if they don't hit certain thresholds. What's that going to mean? I mean, at the margins, are probably -- it will reduce some of the uptake on it, but I don't think it's of a significant basis, so it's going to really have much impact. So I think we've reached the end of the questions. We've got no more questions scheduled. And I think we've probably got -- most people have had the opportunity. So thank you very much for joining the call. If you got more comments or questions to make, then obviously we're around for the rest of the morning, so please do get in touch, but otherwise, thank you for joining us, and we'll be in touch soon. Thanks. Bye.
This does conclude our conference for today. Thank you for participating. You may all disconnect.