London Stock Exchange Group PLC

LSE:LSEG

Earnings Call Transcript 2019-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the London Stock Exchange Group Q3 Results 2019 Investor Conference Call. [Operator Instructions] I must also advise you that this conference is being recorded today, Friday, the 18th of October 2019. And I would now like to hand the conference over to your first speaker today, Paul Froud. Thank you. Please go ahead, sir.

[Paul Froud, Head of Investor Relations]

Thank you. Good morning, everyone. Thank you for joining us. On the call this morning, we have CEO, David Schwimmer; and also CFO, David Warren. And in terms of the running order, David Warren will shortly summarize the Q3 performance and then David Schwimmer will give an update on the group strategy and the progress on Refinitiv before we then hand over to questions from you at the end. So with that, let me hand you to David Warren.

[David P. Warren, Group CFO & Executive Director]

Thank you, Paul, and good morning to all of you. As you have seen from this morning's release, we delivered a strong Q3 performance. Let me give you the highlights and then a bit more detail by segment. Q3 income increased 12% year-on-year to GBP 587 million, and for the year-to-date, we are up 9% to GBP 1.73 billion. Gross profit for Q3 is up 14% after cost of sales and up 10% for the 9 months year-to-date. Information Services revenue increased 9% with 10% headline growth at FTSE Russell or 5% growth after adjusting for FX. Subscription revenues grew strongly, up 15%, reflecting new sales across a number of indices. FTSE Russell's asset-based revenues also increased by 3% on a reported basis against a strong comparative period last year that included some catch-up billing. Real Time Data revenues increased 4% despite a reduction in terminal numbers, reflecting enterprise arrangements and growth in direct or nondisplay data feeds. Finally, revenue from other Information Services grew following increases across a number of the products in this line.Turning next to LCH. Total income increased 19% and rose 17% on a like-for-like basis. OTC clearing performed strongly as revenue increased by 22%, with SwapClear growth driven primarily by increases in client clearing. NTI increased 16%, mainly reflecting a 20% year-on-year growth in average cash collateral. We think NTI will stabilize around these levels, all other things being equal. Post Trade Services in Italy saw an 8% increase in total income, with higher clearing revenues following growth in Italian equities and repo volumes, leading to increase in custody and settlement revenues as well. Turning to Capital Markets. Q3 revenue grew 14%. Stripping out the effect of the GBP 8 million sterling IFRS 15 adjustment to last year's Primary Markets figure, Capital Markets revenue would have been 5% higher year-on-year. In Secondary Markets, revenues were 2% lower in equities and up 10% for fixed income, derivatives trading following market volatility in the period. In Technology Services, revenues increased 1% on a like-for-like basis at GBP 16 million. And finally, our financial position remained strong, with a good level of funding flexibility in place. As at the 30th of September, the group had available committed facility headroom of approximately GBP 750 million, and we will repay the 10-year GBP 250 million at 9 1/8% bond that matures today from these existing resources. And now let me hand over to David Schwimmer.

[David A. Schwimmer, Group CEO & Executive Director]

Thanks, David. Let me give you some context on the other items in today's announcement related to the group's strategy, leadership and Refinitiv. First, we are making good progress with Refinitiv. Today, we announced the establishment of an integration management office, bringing together the planning and other work already underway with senior managers from both LSEG and Refinitiv. To lead this team, we have appointed David Shalders as Chief Integration Officer and a member of the LSEG Executive Committee, reporting to me. He joins the group on November 18. David brings over 30 years' experience in integration, technology and operations in the financial services sector. He has successfully led a number of global integration programs most recently at Willis Towers Watson, encompassing the convergence of technology platforms, business operations, front-to-back operations reengineering as well as cultural integration designed to support growth and to drive operational efficiency. Next, we expect to release a circular shortly, ahead of a general meeting for shareholder approval later in November 2019. The process to achieve regulatory approvals has commenced in several jurisdictions, and we remain on target to close the transaction in the second half of 2020.Turning to other matters. As today's results demonstrate, we continue to execute on our business strategy across our core businesses of Information Services, Post Trade and Capital Markets. And we continue to drive group-wide collaboration, which I identified as a priority earlier this year. Today, we have confirmed that the group's Post Trade businesses, which are currently reported separately as LCH and Post Trade Italy, will be aligned into 1 Post Trade division with effect from January 1, 2020. Post Trade division will be led by Daniel Maguire, CEO of LCH Group, and it will include LCH Group; our Italian Post Trade businesses, Monte Titoli and CC&G; and UnaVista, our trade reporting business that currently reports as part of the Information Services division. The new division will ensure greater group-wide collaboration and aim to facilitate coordination amongst these different businesses to develop commercial activities for the benefit of our customers. We will continue to operate all our businesses on an open access basis in partnership with customers and stakeholders. Importantly, all local legal entity governance and regulatory oversight will remain unchanged. This is about enhanced collaboration and benefit for customers. We are not moving businesses. Finally, today, we announced that David Warren, group Chief Financial Officer, has informed the group of his intention to retire from the company and step down from the Board by the end of 2020. David will continue in his current role as Group CFO and a member of the Board through the close of the Refinitiv transaction to ensure a smooth transition to his successor. LSEG will now commence a global search led by the Board's Nomination Committee. David has given the board and me ample time to identify a world-class successor. It's not quite the end of an era yet, but I would like to express my thanks now for David's partnership during my first year at LSEG and for his significant contribution to the group's success. I look forward to continuing to work closely with him to drive our core business and to deliver the Refinitiv transaction in the year ahead. David, do you want to add a word?

[David P. Warren, Group CFO & Executive Director]

Yes. Thanks, David. So not an easy decision to make. I've been very proud to have been a part of the huge transformation that this company has made over the 7 years that I have been here. And David, I am enjoying working closely with you and being a part of your leadership team. I'm also absolutely committed to getting the Refinitiv transaction to completion and working on the preparation for the integration, but there'll be more work to do after that. And David, you and the Board now have ample time to recruit someone to partner with you to continue with the next phase of the group's future development and success, delivering on the synergies and the significant growth opportunities with the Refinitiv transaction. And there will be a very strong and experienced team here to contribute to that effort. But I'm not leaving this afternoon. I'll be around for a while yet, and there's much to do. So more to say later, but thank you very much. And so with that, I will round up and I think we hand back to Paul for start of some Q&A. Thanks.

[Paul Froud, Head of Investor Relations]

Right. Thanks, David. Right, time to turn the lines over to questions. So operator, if you could tee that up, please?

[Operator]

[Operator Instructions] We now have your first question from the line of Haley Tam.

[Haley A. Tam, Research Analyst]

Could I ask 2 questions, please? First one on Post Trade, obviously, another strong result in OTC revenues. Just to help us think about the trends there, could you identify for us how much of the growth did come from SwapClear client trade volumes versus perhaps increases in FX and CDS notional value cleared? And I guess in that spirit as well, just thinking about the likely future impact of introducing us to clearing and further benefit of introduction of FX towards clearing, any thoughts you have there would be very welcome. And then a second question just on net treasury income. Obviously, I hear your guidance you expect it will stabilize around these levels, all other things being equal. I just wondered, is there any particular reason for the increase in average cash collateral balances? And is that something you're asking for? Or is it something the clients themselves are doing?

[David P. Warren, Group CFO & Executive Director]

Yes. I'm happy to start. Look, I think with respect to OTC, obviously, very strong growth there. Most of that, as we've said in the past, is from the SwapClear business, although FX and CDSClear are growing strongly and which we can comment on. And it is largely down to a strong increase in client clearing, those trades being up over 40% for the quarter. So as it relates to ForexClear, again, that's a business that is continuing to develop. We have, I think, been clear that we will expect it to develop over time but are pleased with the progress. As we have said, the mandate for this is not a regulatory mandate, it's more of an economic mandate that's coming from the imposition of the uncleared margin rules and the cost -- the increased cost of holding that additional collateral against the efficiencies of clearing FX contracts centrally. So we are pleased with the further development in FX. And I think we're also quite pleased with the announcement that we made a week or so ago that we are now -- have launched, in partnership with CLS, our first, basically, first physical FX settlement functionality. So we will now be able to clear and have significantly expanded the universe of contracts that we can clear, we will now be able to deliver FX forwards. So it's not just the deliverable options and the NDFs, we are now able to deliver a much wider range of forward contracts. So we think that, that also is a significant development, one that we have been working on for a long time. So all of these things I think will continue to support further growth in ForEx clearing. And on the NTI, look, the increase there is really down to the volatility and the increase in clearing activity and the resulting additional margin that we collect. It is -- NTI is far more dependent on the margin invested than it is on the actual spreads. I think your question was more sort of why do we think that sort of all else equal. I think if we see the same levels of activity that we have seen, we would expect NTI to remain. But obviously, as volatility grows and clearing activity increases, so will collateral balances, and therefore, that will have an upward effect on NTI. So happy to respond to that. David, do you want to add anything.

[David A. Schwimmer, Group CEO & Executive Director]

The only thing I would add, you also asked about after clearing, we've just announced that, so that's not moving the needle at this point, but we have had a healthy trajectory and really positive contribution from selling in SONIA and SOFR swaps in LCH, and we expect a similar contribution in growth rate from after going forward. And I should refer to that as euro STR, I believe, is the terminology.

[Operator]

And your next question is from the line of Chris Turner.

[Christopher Myles Turner, Senior Equity Analyst]

It's Chris Turner from Berenberg. Three quick questions, if I may. Firstly, just to come back to the net treasury income. You spoke a lot about cash balances and how they may move. Can you give us a feel for the treasury margin, how that might be impacted by U.S. rate cuts? Does that have a material impact? Secondly, if we look at the subscription revenues at FTSE Russell, it looks like those grew very strongly this quarter, about 10% in constant currency. I think I'm right in saying that was about 5% constant currency growth the previous quarter, so can you give us some color on why that line and why that growth rate is maybe moving quite as much as it is? I would have expected sort of more gradual evolution given their subscription revenues, so what is it that I'm missing? And then, finally, in today's statement, you talked about the bridge financing you have in place for Refinitiv's debts. There was a press article out there saying that these bridge facilities will be for 3 years in duration and it will cost you something crazy like LIBOR plus 30 bps. Are you able to comment on that at all?

[David P. Warren, Group CFO & Executive Director]

I think David and I can trade on those answers.

[David A. Schwimmer, Group CEO & Executive Director]

Sure. Maybe just on your question on the FTSE subscription revenue, that's really mainly new business, new business with existing clients, largely. And so that is what has driven that. Not much more really behind that. For the -- your question on NTI and bridge financing, I'll turn it over to David.

[David P. Warren, Group CFO & Executive Director]

Yes. Look, I think -- I think that our guidance on NTI is -- you know this, I think in terms of the U.S. market right now in anticipation of what any future Fed actions might be, I think that is largely priced in. And so in terms of how the interest rate works, we really benefit only from capturing the spread between the short -- the secured overnight rate and that unsecured rate that is quite short in maturity. So the actual absolute levels of interest rates, up or down, matter, but they also tend to adjust well in advance of any signaling that the Fed may have done. So for those reasons, I don't really expect there to be too much yield impact in NTI for the balance of the year. But what I also -- so therefore, my comment that it will really be, as it continues, as it largely is all the time, a function of volatility, clearing activity and collateral collected. I think your final question and if I missed it, you can ask me the detail. There was -- I did see the article that you referenced. It is, without going into all the details, it is a standard bridge facility, it is LIBOR-based and it is, as a bridge facility, priced with increasing ratchets as to rate because it's intended to be short-term financing. And so to go back to our plan, as we announced the transaction, we wanted to have a fully committed, and it is fully committed and now syndicated, bridge in place to be able to deal at closing with Refinitiv debt stack. But then our expectation would be following a presentation to the rating agencies and then to the wider market, to replace that bridge with permanent financing, which we would expect to be a mix of fixed and variable-rate financing. But we'll be saying more of that, obviously, closer to the time of closing. Did that cover -- was that the question you're asking on the bridge?

[Christopher Myles Turner, Senior Equity Analyst]

Yes. It is. I will take that. And also just as a final word, I was very sad to hear the news of your retirement. I ran some quick numbers actually using some Refinitiv software and I worked out that the total return on LSE shares since you joined the company has been 800%, so I think that's not a bad time to announce your retirement.

[David P. Warren, Group CFO & Executive Director]

Thank you. I'm delighted to hear the source.

[Operator]

And your next question is from the line of Arnaud Giblat.

[Arnaud Maurice Andre Giblat, MD & Research Analyst]

I've got 3 quick questions, please. Firstly, I was wondering if you could give us an update on the temporary access for LCH clearing that expires in March 2020? What are you hearing about a renewal? Secondly, if I could come back to the 10% growth in subsidies -- in subscription-based revenues, sorry, at FTSE Russell, you mentioned that, that came from new business. Could you give us maybe a bit more color around what that new business is? And my final question is, in the release, there's an indication of a 4% and 7% decline in terminals at LSE and Borsa Italia and despite that, you managed to grow data revenues nonetheless. I'm wondering if some of these dynamics could apply to Refinitiv? Or should we expect a short-term headwind perhaps at Refinitiv before you change the revenue model there?

[David A. Schwimmer, Group CEO & Executive Director]

Great. Arnaud, so on the temporary access, as we have said in the past, we with respect to European market participant's access to LCH Limited, that temporary access currently goes through March of 2020. We expect that, that will be extended. We think that there is a recognition among all the stakeholders in the marketplace about the systemic importance of access to this market. The messaging that we have gotten has been very clear that nothing is likely to be clarified around that until after October 31. But beyond that, we think that the understanding amongst the various stakeholders is this continues to be systematic -- systemically extremely important, and therefore, we expect the same recognition that was granted in December of last year. We expect to have an extension probably in November, but hard to predict the exact timing. And then with respect to the follow-up question around the new business, there's really nothing specific to point out there. It's really across a range of products and a range of products of new business with primarily existing clients. So not much more to report on than that. And then for your third question, I'll turn it over to David.

[David P. Warren, Group CFO & Executive Director]

Yes. Your question on our Real Time Data and the terminals, yes -- no, absolutely. Look, our terminals had been in a steady decline over a period of time, and yet, we've been able to grow the Real Time Data line because we have really been focusing on the enterprise arrangement with each customer and also just increasingly aware of and responding to the fact that customers are increasingly and will increasingly take less of this data over a terminal or over a desktop. It will be coming in through a variety of distribution sources, whether it's just simply feeds or through the cloud, and this is exactly the point that we are making and the opportunity we see with Refinitiv. So it's absolutely the case. Certainly, with respect to any specifics on Refinitiv, which I think part of your question was asking, we will definitely be saying more as part of the circular. But what we have been doing with our Real Time Data business is just a small part of what we see as the much broader opportunity with Refinitiv because we know terminals will continue to be in decline, and we know that our customers will be increasingly taking data and analytics services over a wider range of distribution channels, and that's really what we are able to do with Real Time Data. Customers are taking it more now through nondisplay or through feeds and less through terminals and we can price a license accordingly to that usage.

[Operator]

And your next question is from the line of Ian White.

[Ian White, Research Analyst]

Just 2 from my side, please. First of all, just a follow-up really on the -- on SwapClear. How should we think about growth in SwapClear client clearing during the third quarter? Essentially, is this kind of more secular growth clients clearing more products an increase in the number of client accounts? Or should we be thinking that as purely driven by cyclical factors during the quarter, please? And then the second one, different question. We've seen some commentary in the Italian press this week in relation to MTS. This says essentially the Italian Ministry of Finance might be comfortable with the combination between MTS and Tradeweb if you were to maintain a physical presence in Italy and maintain a Borsa Italiana representative on the group Board. Would you be prepared to comment on that at all? I guess it just strikes me that -- does that broadly reflect where the debate is with regard to antitrust and the combination between MTS and Tradeweb. I guess it just struck me that these conditions aren't -- doesn't seem particularly onerous.

[David A. Schwimmer, Group CEO & Executive Director]

So Ian, I'll comment on your second question then David will address the SwapClear client clearing question. Nothing really to say at this point on -- we've, obviously, seen some of the speculation in the media about the Italian businesses. I would just point to there was also a comment from the Bank of Italy really saying -- basically denying a lot of the speculation in the marketplace. So nothing really to add on that. We're not in a position to comment on anything related to regulatory approval at this point and it's all very, very early. So I'm sure we'll see plenty of speculation in the media going forward, but there's really nothing to add to that at this point and really nothing to that at this point.

[David P. Warren, Group CFO & Executive Director]

I think on the question on SwapClear, obviously, when you clear 90% to 95% of the world's interest rate swaps, you'll, obviously, have all the impacts of rising and declining markets, so we'll be the full beneficiary of that market activity and market volatility. What we are seeing and continue to see with client clearing is more client -- there is a secular growth component to this growth. More clients are connecting through members, increasing the range of products that they clear and there's just generally a good feeling about that activity continuing in the future. It's not one that we have historically broken out and probably won't do. But I just would want to tell you that when we think about the growth of that business, we do see continued increases in client clearing and that's been supported by the results that we've seen today.

[Operator]

And the next question is from the line of Kyle Voigt.

[Kyle Kenneth Voigt, Associate]

Maybe just first one on the asset-based fees within FTSE Russell. Can you help frame the size of the impact due that catch-up in billing in last year's period? I'm just trying to gauge what the kind of true organic pace of growth is there year-over-year.

[David P. Warren, Group CFO & Executive Director]

Yes. That's your only question?

[Kyle Kenneth Voigt, Associate]

Sorry. No. A couple of more so...

[David P. Warren, Group CFO & Executive Director]

I know you did. That's why. You paused there. I didn't believe you were done. Sorry.

[Kyle Kenneth Voigt, Associate]

Yes. Sorry. So the other 2 would just really be any color, maybe for David Schwimmer or David Warren, any color, even qualitatively, on kind of the pace of growth at Refinitiv through the first 9 months of the year? And then also any time line you could give on -- with respect to this -- the global CFO search. Is it 6 months you want to have something close by or any details there?

[David A. Schwimmer, Group CEO & Executive Director]

Sure. I'll take that and then we can go back to your first question. So Thomson Reuters has their Q3 results on October 31 and I think that's probably the best time to wait and get the latest on the performance out of Refinitiv, so nothing really to add on that question. With respect to our time line for the CFO search, as you know, these processes can take, call it, several months. And I think David has put us in a very strong position here with his time frame, and I look forward to working closely with him over the course of next year. We'll manage to be very focused on executing on our core business, executing on the planning for the closing and integration with Refinitiv, and David will be with us through that. And at the same time, the Nomination Committee of the Board will lead the search and we have plenty of time to do that.

[David P. Warren, Group CFO & Executive Director]

Yes. So Kyle, back to your first question, I think that, yes, I mean to help you think about that, it's probably best to think about it when you just look at the sequential numbers. And yes, I think that gives you some sense of sort of what the amount of that catch-up. I would say that if you didn't have it, you would look at -- you would be able to sort of see that sequentially that we were 52, in the second quarter 55, so we would have been down a bit from 59. I won't say much, but it would be more -- a little bit more in line with sequential, maybe a little bit higher than Q4. But that just gives you a sense of the magnitude of those catch-ups, and they will happen occasionally. But I think if that helps to give you some sense of where it is as compared to what we were able to book for Q3 this year.

[David A. Schwimmer, Group CEO & Executive Director]

Okay. Thanks, Kyle.

[Operator]

Your next question is from the line of Gurjit Kambo.

[Gurjit Singh Kambo, Head of Diversified Financials Research]

It's Gurjit, JPMorgan. Just 2 questions. Firstly, just in terms of the ETF AUM within FTSE and Russell, it's about a 5% delta in the growth year-on-year. Is that purely just a foreign exchange impact? Or is there something else within that, i.e., is it more new products coming out of FTSE, et cetera, on the AUM side? So that's the first question. And then second, just quickly on the Primary revenues, if you adjust for IFRS 15, revenues have basically been broadly stable year-on-year, whereas the new issuers and money rates are down quite significantly year-on-year. I just want to understand how you've kept it flat by those key metrics down quite significantly year-on-year?

[David P. Warren, Group CFO & Executive Director]

I want to make sure I understand the question on ETF. Are you talking about ETF volumes?

[Gurjit Singh Kambo, Head of Diversified Financials Research]

No. Just that the ETF AUM that you have in FTSE is up like 7% and then the ETF AUM in Russell is I think up 2%. I just want to understand the difference. Is that just foreign exchange? Or is there something else in that?

[David P. Warren, Group CFO & Executive Director]

No. It's -- I mean I'll look to Paul for that. It is a mix of what we have in ETFs, right?

[Paul Froud, Head of Investor Relations]

Yes. It's not really been driven by the FX per se, Gurjit. It's more about the demand of products out there and the market value, that's what's driving it.

[David P. Warren, Group CFO & Executive Director]

And then on I think the question about IFRS 15 or Capital Markets, I think if you take that effect from last year out, I'll look to Paul on this for some of the detail, but if you take that out, I mean, we are operating under IFRS 15. There was an impact on it last year when we implemented it, but part of IFRS 15 is that you will be recognizing -- you will recognize listing activity over a period of time, so some of which you'll have recognized in every period is some of the recognition of revenue that you've deferred following from the annual listing. We do recognize that now over a 7-year period. So that will give you some -- that will be a bit of a constant in our Primary Market revenue going forward. And that will be the case in both Primary Markets that are going up as well as Primary Markets that maybe are staying flat or going slightly down because you are recognizing -- will recognize over 7 years the amount of an IPO fee.

[Paul Froud, Head of Investor Relations]

Yes. So Gurjit, just to follow up on your question given then, as David said, that once you take out the effects of the IFRS change, then it looks like the revenues are broadly flat. All other metrics in the period are down, so what's driven it. And then as you know, we apply some very low level price increases year-to-year, so you get some benefit from that. That's what you're seeing.

[Operator]

And your next question is from the line of Johannes Thormann.

[Johannes Thormann, Global Head of Exchanges and Analyst]

Johannes, HSBC. One follow -- one question left, actually, regarding your statement about the combination of your Post Trade businesses in one division. So far, you've been very carefully separating LCH and the Italian businesses. Does this change -- do we see a change in legal structure, in collateral pools? Or what has been the driver for this one?

[David A. Schwimmer, Group CEO & Executive Director]

Thanks. No change in legal structure. No change in collateral pools. This is just about basically combining the reporting and having more coordination across businesses that are all in the Post Trade space all generally working with the same customers, generally working in either very similar or adjacent businesses. So we are doing this because we think there's opportunity to have those businesses work more closely together for the benefit of our customers. It's really just as simple as that. There's no change in terms of the regulatory structure, in terms of the governance, in terms of the local reporting lines and we're not moving leadership in any jurisdictions. So it's really as simple as that.

[Operator]

The next question is from the line of Philip Middleton.

[Philip David Middleton, Analyst]

Yes. I haven't got a question. I just wanted to thank David Warren for all he's done and for all his help over the years and to say he looks really young to me. That's not funny.

[Paul Froud, Head of Investor Relations]

I think it's fairly funny, Philip.

[David P. Warren, Group CFO & Executive Director]

Thank you, Philip. Appreciate it. It's been great to work with you.

[Operator]

[Operator Instructions] The next question is from Bruce Hamilton.

[Bruce Allan Hamilton, Equity Analyst]

Most of my questions asked, but just maybe a follow-up on the Post Trade combination point. So it sounds like this is really aimed at enhancing sort of top line rather than driving any sort of cost efficiency benefits. But I guess outside of Post Trade, are there any other sort of areas where perhaps the group looks less integrated than you'd like and there could be further moves to enhance sort of collaboration, cooperation and so forth?

[David A. Schwimmer, Group CEO & Executive Director]

So thanks, Bruce. This is part of an ongoing process that we have been working through. We announced in our March 1 results that we were going to be -- going through a number of areas of greater efficiency and collaboration. We have talked about bringing multiple offices in the same jurisdiction together. We have been doing that in New York just over the past few weeks, moving I think we've got 5 offices consolidated into 1. And so that's an example of that. I think the formation of this Post Trade division is another good example of that. But it's an opportunity to work more closely across the group really for the benefit of our customers and the Post Trade division will do that. These are businesses that have been serving either identical or very similar customers across very similar products, and for a variety of reasons over the years, they have been reported separately. We think it makes sense to report them as part of one division and we think it makes sense to have greater coordination across the leadership of those different businesses. So we'll continue to work for greater collaboration across the group, we'll continue to work for greater efficiency across the group and we think that will enhance the top line, and frankly, the bottom line.

[Operator]

Thank you. There are no further questions at this time, sir.

[Paul Froud, Head of Investor Relations]

Great. Thank you very much for joining us. We're ending the call now. And any more questions, please just call us as usual. Thank you very much.

[Operator]

Thank you, and that does conclude our conference for today. Thank you for participating. You may all disconnect.