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London Stock Exchange Group PLC
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Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the London Stock Exchange Group first quarter results. [Operator Instructions] I must also advise you that this conference today, the 21st of April 2020, is being recorded. I would like now to hand the conference over to your first speaker today, Paul Froud. Please go ahead.
Thank you. Good morning, everyone. Thank you for joining us. On the call this morning are -- is David Schwimmer, Chief Executive Officer; and David Warren, CFO. What we're going to do is let's just summarize the main points from this morning's Q1 release, and then we'll turn over to questions. So let me hand you over to David Schwimmer to start.
Thanks, Paul. Before David Warren walks us through the Q1 financials, I do want to start with a few remarks on the actions taken by the group arising from the COVID-19 global pandemic. We recognize the significant impact on our employees, customers and other stakeholders. Employee health and well-being has been a key focus, with the vast majority of our employees working remotely. We continue to adapt our technology and working practices to this changing environment, and we'll continue to adjust our response, as needed, in the period ahead. As a systemically important financial markets infrastructure business, we place a high priority on ensuring the orderly functioning of markets and continuity of services for our customers. From this unprecedented period, the group has prioritized operational resilience across the group's Capital Markets, Information Services and Post Trade businesses. All systems have performed well to date, including the new LSEG Technology clearing platform, which went live on LCH EquityClear in early March and processed 6 of its biggest volume days ever in the first 7 days of operation. In terms of financial resilience, we continue to assess balance sheet strength and stress test our liquidity positions under various market scenarios. We strongly believe we have sufficient cash resources and access to liquidity to maintain continuity of business with no need to materially adjust any operations or incur significant additional costs. As of the 31st of March 2020, the group had committed facility headroom of over GBP 600 million available for general corporate purposes and over GBP 550 million of free cash within the group. Reflecting the strong 2019 results and ongoing financial strength, the group intends to pay its final dividend in relation to 2019 financial year, subject to shareholder approval at today's AGM. So over to David Warren for some detail on the Q1 results.
Thank you, David, and good morning, everyone. We have delivered a good Q1 performance. Total income increased 13% year-on-year to GBP 615 million, driven by increased equity trading in Capital Markets and higher clearing activity, which, in turn, led to higher NTI in Post Trade. Gross profit, after cost of sales, increased by 13%. Now to pick out a few other headlines. Let me start with Information Services, revenues increased by 7% to GBP 215 million. FTSE Russell grew 8%, with good year-on-year growth in both subscription and asset-based revenues, the latter reflecting growth in ETF AUM in the prior Q4 2019 quarter. ETF AUM fell sharply at the end of Q1, reflecting market turbulence in March, and this will have an impact on revenues in Q2. Real-time data and other information services increased by 3% and 2%, respectively. Next, to the Post Trade division. Income was up 17% to GBP 271 million. LCH saw 11% growth in clearing revenue, driven by strong activity in both listed and OTC clearing. CC&G also cleared high volumes, driving a 15% increase in revenue. These higher volumes meant that we collect more cash margin, which is the main driver of our stronger NTI, up 39% and 10% in LCH and CC&G, respectively. It's worth highlighting that LCH saw a record cash margin in the period, which has decreased slightly in Q2, although remains at high levels. The level of margin is predominantly driven by clearing volumes rather than any change to the risk or margin models. Next, to Capital Markets, where revenues rose by 15% to GBP 112 million. This strong result principally reflects higher equity secondary markets activity in London and Milan, driving a 33% increase in equity trading revenues. In a challenging environment for new listings, our Primary Markets revenues increased by 13%, due in part to the smoothing effects of IFRS 15 reporting. Finally, in Technology Services, revenues remained unchanged at GBP 14 million. Before we turn to questions, I'll just confirm the update on the Refinitiv transaction that we gave in the Q1 statement this morning. We continue to make good progress on planning for integration with a number of work streams well developed, including planning for the future organization and delivering synergies. We are also making progress with various regulatory approvals, with U.S. foreign investment clearance received from CFIUS. We have received merger control clearance from a number of jurisdictions, and reviews have commenced in several other locations. While there has been a delay to submission of filings in the EU, we continue to work constructively with the European Commission case team and will file as soon as it is possible to do so. The group is committed to completion of the transaction in the second half of 2020. So a good set of results and a lot of focus on group financial and operational resilience. And with that, we'll now take your questions.
[Operator Instructions] Our first question comes from the line of Philip Middleton from Bank of America.
Congratulations on the robustness you've shown and the concern you've also shown for your staff over the quarter, which is much appreciated. Looking at what's overall a really strong set of results, could you say a bit more, please, about FTSE Russel subscription business? Because that seemed a bit weak to me, particularly given it's supposed to be highly robust. So I wonder if you could give us some context for that, how you're thinking about that business going forward and how you respond to those issues.
Thank you, Philip. I appreciate the question, and yes, we do have confidence in the business. Let me give you a few comments. I think we would start with -- well, I know you're looking at sequential comparisons. I think I would certainly state that we had 7% year-on-year growth, which definitely reflected some new data sales over the period. And there are a number of factors which will influence quarter-to-quarter sequential comparisons. As an example, in our analytics business, we had some customers that had analytics capacity from last year which they rolled into this year. But I think an important part of this, as we have said, is that we are shifting away from a sales-driven model to a more relationship model and price increases are now being focused and linked to value enhancements. We think this is a change in strategy, but we think it will develop a more collaborative approach, which we expect will strengthen our competitive positioning and future growth. So as we look at where we are now, and I think what we would see as the outlook for the year, we definitely have confidence in this approach working over time. I think it's still too early to say too much more about the balance of 2020. I would say that our retention rates remain high. We're not seeing any notable cancellations, and we're still seeing very good demand for data products and very confident in the long-term growth drivers for this business. But if we look, I think, more specifically at this year and what we would see as impacts that we're seeing or could see as part of the current environment, I think for this year, we would expect to see sales cycles lengthen and the pipeline for new products take longer to develop. It will be a challenging environment for new business growth. But we remain very committed to the business, confident in the long-term growth drivers and quite confident in the positioning that we will be establishing with the shift in approach with customers to a much more collaborative relationship-based approach.
We will now be taking our next question from the line of Haley Tam from Crédit Suisse.
Just one question for me, please. In relation to the OTC LCH revenues, I wonder if you could just help me. The revenue there was robust and it was up 9% year-on-year. But the 26% increase in the notional clearance, SwapClear and the 37% increase in client trades, I perhaps thought it might be even better result than that. So I just wondered if you could help us better understand that relationship between the volumes there and the revenue. And perhaps maybe this is a ForexClear or CDSClear story instead. Any color you can provide would be much appreciated.
Yes. Thank you. It's mostly in SwapClear. There was very strong pickup in March in SwapClear activity, as you note in your question. In SwapClear, the revenues that we earn there are largely 50% from members and 50% from clients. And our member clearing is -- works on a fixed fee model. So basically, a fixed fee, all you can clear model. So we would have seen -- while there was an increase in member clearing, we would see a little benefit from that given the pricing structure for member clearing which has been in place for a long time. We did see an increase in client clearing. But here revenues are a function of trading activity and risk. And what we saw in client clearing in margin, in particular, was while there was a very good mix of new and existing clients, most of the clearing, most of the contracts that were cleared by clients in March were shorter-dated positions. And with these shorter tenors, that drove a decrease in the unit cost that we would receive from that activity, just given the shortness of those tenors. So those are a couple of the factors, just in terms of the mix between members and clients and the fact that in March, there was high notional, but it tended to be much shorter tenors. And we've not seen that type of pattern in the past, if that helps.
We will now be taking our next question from the line of Andrew Coombs from Citi.
If I could follow up with a couple more on LCH. Firstly, could you just give us some color on the average cash balances, how those have trended over February and March and then onto April as well, please? Secondly, if there's anything you can say on the sensitivity of NTI to recent move in Fed Bank of England rates and implications on short-term versus overnight. And then finally, just getting thoughts on number of clearing members. Obviously, some of those clearing members have had to go through a pronounced period of volatility, some have had to take losses on behalf of their clients. So do you see any disruption to the current ecosystem as it stands?
Right. Picking up on the first part of your question on NTI and cash collateral. Yes, as we've said and as we reported today, cash collateral did increase and grew pretty significantly in March as a function of market volatility and the increased clearing activity. The NTI is a function of the collateral we invest as well as the investment yield that tends to generally be more sensitive to collateral. Well, in March, as your question notes, rates did fall. The benefit to that from rates falling was that our cost of holding that cash collateral decreased. At the same time, we were able to maintain the higher investment returns because of the shorter-term investments that we had made before March, before the rates fell, notably in some bonds and, as an example, U.S. Treasury FRNs. So active program on the part of LCH to sort of expand counterparties and look for opportunities within obviously all liquidity restrictions and risk management parameters, we have been able to find opportunities early in the year to increase our returns. Those investments remain and they were benefiting from the actual returns that we would generate. So we benefited in both ways, the higher returns and as a result of short-term rates in all -- in March, the lower cost of actually holding customers' collateral. If we look forward, as I said, we said in our remarks and as we report, collateral balances in April have fallen off what we saw as the absolute levels in March. But they still remain -- just given the way that the risk models work, they still remain at elevated levels, and I would expect those to remain at elevated levels as we move into the second quarter. We also will continue to earn those additional -- we'll also continue to benefit from the return picture that we established as part of the investments that we made earlier in the year. However, as we get into the end of the second quarter, a number of those products will mature and they will reset. And in the current environment, they would reset into lower rates. So it's difficult, I think, to go beyond Q2. But I would say for Q2, we would expect that NTI would remain fairly strong for the reasons that I've just mentioned.
Yes, maybe I'll just take the final part of your question in terms of clearing members, how the overall ecosystem is doing. We are, of course, keeping a close eye on this. We have been monitoring some of the challenges or difficulties that have taken place in other markets. But in terms of our clearing houses, in terms of our members, everything is working well, working smoothly through the period of heightened volumes and heightened volatility, so we are not seeing any particular challenges or issues with specific clearing members and margins also have -- margins are being addressed.
That's clear. Do you think there will be another push for more skin in the game from the CCP?
Not really in a position to speculate right now. I think obviously, there will be lots of considerations about how different parts of the -- to use your word, the ecosystem worked over the period of heightened volatility and perhaps over more to come. I'm not clear that we are through the worst of this yet. But I think we can say with confidence that, so far, our systems have worked very well, have been operationally resilient and have been working the way that they have been intended to. So our margin models did not have to be changed in any way. We did not have any dramatic pro-cyclical impact. And again, the system is working the way it is supposed to be working.
We will now be taking our next question from the line of Arnaud Giblat from Exane.
It's Arnaud Giblat from Exane. Could you perhaps discuss how the current environment may change your view on the revenue outlook and the revenue synergies from Refinitiv? I mean during the financial crisis, for instance, Factset had quite a drop in revenue growth in terms of their terminal sales. So is that something we could expect for 2020 at Refinitiv?
Thanks, Arnaud. Frankly, a little bit early to be speculating on revenue outlook or revenue synergies from Refinitiv. What I would say, the market will hear more from Thomson Reuters when they put their results out, I believe, in early May. But as we announced back in August, and we still have this view, the Refinitiv model and the Refinitiv revenues have a high percentage of recurring nature and a high percentage of it is contractual in nature. We think that is attractive and will continue to be attractive going forward. I think as you have seen in parts of our business where the transaction volumes have gone up in this past period of heightened volumes and heightened volatility, Refinitiv has similar businesses with exposure to transaction volumes. I think Tradeweb just put out their Q1 numbers early today. So you can get a sense of what those look like. And we will continue to work with our partners at Refinitiv on the integration planning as appropriate going forward, but we'll see. I think a little bit early in terms of giving any views on revenue outlook. I don't think, at this point, we have any plans to change anything in terms of our targeted synergies.
Okay. And I had another quick question on the targeting of closing of the deal for H2. I mean the delay in getting that process through the European Commission, is that simply logistical with people working from home? Or is there anything else going on there?
So as you will have seen on March 13, the European Commission put out a -- basically a public request that parties to mergers should not submit their filings. And they indicated that this is related to the difficulties of conducting their processes while everyone is working remotely, working from home. And so that is -- we are, of course, adhering to that. We understand that, we understand why they put that out and we respect that. We continue to engage constructively with the case team at the European Commission. They have been in communication with us. We continue to answer questions. So we feel that we are continuing to make progress. We will not, of course, make the formal filing until the European Commission has decided either through an adjustment of their own working from home arrangements or through a change in the overall situation that they are comfortable taking those filings. So it's really -- as far as we are aware, it is related to their determination that under the lockdown situation, they're not in a position to accept new filings at this point.
We will now be taking our next question from the line of Kyle Voigt from KBW.
Maybe just a follow-up on a prior question from the call. When you say it's going to -- it would likely be a more challenging environment for new business growth at FTSE Russell for the remainder of the year, are you specifically citing the challenges related to COVID-19 with your sales team not being able to face -- to have face-to-face meetings? Or are you citing potential challenges from the equity market environment and pressures that, that's likely putting on some of your asset manager clients? And if you could just speak to that a little bit more, that would be great.
Yes. I mean when I answered the question, Kyle, and I'll ask David if he wants to add some comments to it, I think it is -- with our existing customers, it's just a very challenging environment right now for new business sales. And that's the point that I was trying to make. We're still seeing good demand. We're still seeing good interest from clients. We think there will be some new demand coming out of this crisis. But we sell -- we have customers in Asia. We've been in lockdown pretty much all of the year. So I just think it is the unusual unprecedented circumstances we're doing here -- we have right now is just making it harder and harder to work on new sales and pipeline development. But our confidence in the business remains quite strong. So David, I don't know if there's anything you want to add to that from a more future trend, but I'll leave it to you.
No, I think that captures it.
Okay.
Okay. And then just one more for me. Just around your current expense plan for this year and your trajectory for this year, anything to note in terms of the current operating environment? Are you reevaluating investment spend, Capex, et cetera? Obviously, the environment has changed pretty dramatically since the start of the year when you just had this call last. So just wondering if there's any update there.
Yes. No, we certainly are evaluating -- obviously, we're evaluating our CapEx. A number of what we are doing in CapEx for this year has been in a number of investments we're making in supporting operations, strengthening resiliency, strengthening cyber protection. A lot of the investments we had made in new products and services were investments that we had made in Europe in prior years, and they're installed and delivering revenue. And a number of these projects, Kyle, were started early in the year because they are full year, in some cases, multiyear projects. So we're still continuing with that. We're certainly evaluating and making adjustments on the margins where we need to. In some cases, we prioritized staff to work on resiliency and establishing the technology necessary to have the entire company working remotely. But we continue to monitor. I would not anticipate any big changes in our CapEx spending for the year. There might be some phasing impacts, but I think at this point, most of the projects, we are -- we have initiated and are continuing to work on. I think the broader question you asked me on OpEx is -- certainly, it's -- certainly, we're looking at everything. There's clearly an amount of activity that we're just simply not doing. So there'll be some just natural benefit that will come from that. So I would say it's just -- there are some opportunities. But I do not see -- I guess the way to answer your question is I do not see any increased cost as a result of what we're managing through as in relation to this pandemic.
We will now be taking our next question from the line of Benjamin Goy from Deutsche Bank.
Could you maybe give us an update on your net debt-to-EBITDA ratio as of end Q1? And also in that context, how you're thinking on the roughly 3.5x leverage you are planning with Refinitiv once the deal is closed. Any thoughts on your leverage appetite in this environment?
Well, David, I'm happy to take the first part of that. So we're not disclosing -- on a Q1 announcement, we're not disclosing, but I would comment that our position remains largely unchanged from where we were at our prelims. We've had good internal cash flow generation that with, I think some -- the dividend payment that we expect to make will result in the fact that our prior position has remained largely unchanged, although we're not giving an update on that on today's call. But I think as we said and as David said in his remarks at the beginning, we're still quite confident in our businesses. The cash generation is good. We would expect to generate cash through the year. And directionally, we'd expect our leverage to come down as we get through the end of the year. David, as it relates to the Refinitiv transaction, we don't...
Yes, I'm happy to step on that -- step in there. So as David just mentioned, our business continues to do well, to generate cash, to bring our own leverage down. As we look at the environment, and this goes back to our original planning for the Refinitiv transaction, I think we had talked with a number of you about the fact that when we were running our various scenarios and thinking about taking on this kind of debt as part of the transaction, we ran a number of downside scenarios. And we still have a lot of confidence in the transaction. We have a lot of confidence in the strategic rationale for the transaction. And as I touched on earlier, we are -- we think the recurring nature of a lot of the revenues in Refinitiv's business is also an attractive element and gives them a set -- a certain element of resiliency during an environment like this. So we are committed to the transaction, and we think that the combined business will be able to continue and perform well through an environment like this and we'll be able to handle the leverage. So we'll continue to monitor overall the environment as well as our balance sheet, their balance sheet, the cash flow generation of each, but we remain very committed to the transaction.
We will now be taking our next question from the line of Bruce Hamilton from Morgan Stanley.
Just -- I mean, it seems clear on the Refinitiv transaction you're still expecting closing on the H2 '20 time line. But can you just remind us of any scenarios under which the bank financing terms could change just as we think through the sort of financing costs of the deal? So is there any slippage in time frame that would trigger that? Or just how to think around the funding.
Yes. So the bridge is -- the bridge is funded. It's committed. It's syndicated to about 18 different banks. And the commitment by the banks to perform is quite strong. There are really very few outs in this when we negotiated the bridge. We considered and tested and established for ourselves sufficient headroom so that we would -- so that we would not be in a situation where the banks could step out of their commitment to fund. So the bridge is available. Your question kind of gets at the fact of if it didn't close in 2020. Again, we still are confident that it will. But we would be able to -- the bridge would be able to extend into 2021 and so we've had that ability. And when -- and I believe that say is public as part of the disclosure documents that we put out already. The major covenant that we look at in our stress testing on a fairly frequent basis relates to the leverage. And we just talked about the fact that our anticipated leverage at close is 3.5x. The covenant in the bank documents is 4.5. So there is significant headroom that we've negotiated as part of putting the bridge in place at the beginning, and we constantly test that and we are very, very much within our comfort zone on that covenant.
We will now be taking our next question from the line of Mike Werner from UBS.
Congrats on the results. Just 2 questions related to LCH. One, on SwapClear, we saw a strong pickup in activity in late February and early March. Since then, volumes kind of normalized a little bit quicker than we had expected. In fact, if you look over the past couple of weeks, the average run rate is a little bit below what we saw in January and February. And so I was just wondering, in a world where the secular tailwinds from regulation in terms of the central clearing mandate and the lack of a cyclical driver, which is what we saw throughout much of the first couple of months of 2019 when the Fed was pivoting on their monetary policy, how do you think about the sustainable growth rate for SwapClear going forward? And then second, with regards to ForexClear, is there any concern or risk that some of the phase-ins for the uncleared margin rules could be pushed out and potentially delay the growth of the business there?
Yes. David, we're not in the same room. So do you want to -- I'm happy to talk about ForexClear, but -- I can talk about both, but I'll leave it to you.
Sure. Thanks, Mike. On the -- the growth in SwapClear over -- you could almost say over the last several years, has been in an unusual interest rate environment where we have had central banks trying to act in a coordinated manner to telegraph to the market that they are going to keep rates lower for longer. And in that kind of environment, you could make the argument that, that is not an environment that's particularly conducive to a lot of hedging or swap activity. And yet we have seen the growth of SwapClear exactly during this environment in those past 10 years. So obviously, it has become significantly more extreme over the past few months in reaction to the pandemic, but there is still uncertainty in the market. There's uncertainty as to how long things will last. There's uncertainty as to whether there will be coordinated action, whether there will be different action by different central banks. And so while we are, of course, not in the position to predict how this will play out and don't have any kind of house view on rates, we have still seen, as you are aware, a healthy amount of activity in SwapClear. So we'll see where the growth rates go. Again, a lot of the growth has been driven recently in the past couple of years or past few quarters by growth in client clearing. And we have no reason to expect that, that will change dramatically. So we still have confidence in SwapClear, but we're not really in a position to predict what the growth trajectory will look like going forward. On ForexClear and the phasing on UMR, certainly possible, we obviously saw -- even before the crisis, we saw a stretching out of the timing of the phasing of the next couple of phases of the uncleared margin rules. In a number of other areas in the markets, some regulators have taken actions to push things out a bit. So we'll see what happens there with the uncleared margin rules next couple of tranches. Frankly, our view on ForEx clear is that this is a longer-term opportunity. And if there is a delay in the next phase or 2 of UMR, whether this September or next September, that could potentially slow down the near-term growth trajectory. But we think over the medium and longer term, we think the opportunity for ForexClear is still very interesting. David, anything else you would add to those?
No. It's -- I think the fact that we've also been able to introduce settlement functionality and can now deliver more -- can now clear more deliverable products is also an important step that will broaden the appeal as this product continues to grow.
We will now be taking our final question from the line of Gurjit Kambo from JPMorgan.
It's Gurjit from JPMorgan. Most of my questions are answered. Just one quick follow-up. Just on the Information Services business, within the -- I guess, the non-asset based part of FTSE Russell, when we think about the contract, typically, how long are the contracts? And what's the ability for clients to sort of renegotiate them, I guess, given the current environment?
So the contracts vary by customer. There are some that are multiyear. Some have a lot -- most of them though have annual renewal clauses with notice provisions. So as I said in my comments, where we are now is we're not seeing any increase in cancellations and still seeing sort of good use and good take-up of products under the existing contracts. But the contracts have different opportunities for renewal and cancellations, so it would be very much customer-specific. But that's very much how we're managing our new sort of customer relationship approach anyway.
There is one final question from the line of Johannes Thormann from HSBC.
Johannes Thormann, HSBC. Two follow-ups, please. First of all, on your NTI from CC&G, could you explain, if you have changed the duration of investments which historically has been longer than a day but more weeks or months? Have you made any changes there? And secondly, you said that the bridge for the banks -- from the banks could be extended into 2021. Could this also be the case if you need to do the merger filing with the EU? Could you extend this into 2021? Or is there any hard date where you have to file it in 2020?
Do you want to take the NTI question and I'll...
Yes. There really has been no change in the approach on investments within CC&G.
And then on the question around the European Commission, if that is delayed into 2021, the one -- there's no reason that, that would be problematic in terms of filing with the European Commission. If it were delayed that long, we could, of course, continue to file with the European Commission in 2021. If the -- if there's no change to the Brexit timetable, we would probably then also have to go through a process with the CMA in the U.K. While if we file with the European Commission before the end of this year, then likely that we would not have to go through a process with the CMA. And then the last thing I should just mention is that there is a drop-dead date for the transaction in May 2021, which can be extended by the mutual agreement of both parties. So those are just a few other things to keep in mind.
That was our final question for today. Please go ahead, sir.
Okay. Thank you very much for your questions, everyone. I think we've concluded the call. So we're going to hang up, terminate the call now, but we'll be around to take questions, obviously, for the rest of the day. Thank you very much for your time.
That does conclude our conference for today. Thank you for participating. You may all disconnect.