Deutsche Boerse AG

XETRA:DB1

Earnings Call Transcript 2019-Q1

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Deutsche Börse AG Analyst and Investor Conference Call regarding Q1 2019 Results. [Operator Instructions]Let me now turn the floor over to Mr. Jan Strecker.

[Jan Strecker, Head of Investor Relations]

Welcome, ladies and gentlemen, and thank you for joining us today to go through our first quarter 2019 results.With me are Theodor Weimer, CEO; and Gregor Pottmeyer, CFO. Theodor and Gregor will take you through the presentation today. After the presentation, we will be happy to take your questions. The presentation materials for this call has been sent out via e-mail and can also be downloaded from the Investor Relations section of our website. As usual, this conference call will be recorded and is available for replay.Let me now hand over to you, Theodor.

[Theodor Weimer, CEO & Chairman of Executive Board]

Thank you, Jan. Welcome, ladies and gentlemen. Let me begin today's presentation with a short summary as usual covering the financial highlights of the first quarter. Gregor will then present the results in detail.In terms of net revenue development in the first quarter, we achieved our target of 5% growth of secular net revenue. This was mainly driven by Eurex, with increases in OTC clearing, new prices and new products. In addition, EEX, our commodity player, achieved significant secular growth and continuously increasing its market share.The weaker equity market environment resulted in cyclical headwinds for index derivatives and cash equities, especially against the very strong first quarter 2018. However, declines in these areas were almost entirely offset by the future increase of the net interest income at Clearstream, and as a result, cyclical net revenue declined slightly by 1%. In total, net revenue in the first quarter improved by 4%, which is a better outcome than what was to be expected in the current market environment. This demonstrates the strength and resilience of our business model with its stronger secular growth drivers and excellent diversification.The implementation of IFRS 16 resulted in a small shift from operating expenses to depreciation from the first quarter onwards. Gregor will explain the details in a moment.Like for like, adjusted operating cost increasing -- increased only slightly. This is mainly the effect of higher investments in organic growth, new technologies and regulations, which was not completely offset by the cost reductions as part of our structural performance improvement program. We deliberately took the decision not to reduce investment spending in the first quarter, in spite of the weaker cyclical environment because this would have come at the expense of future growth.As a result, of the revenue incurred on cost performance, adjusted net profit increased by 8% and adjusted earnings per share by 10% to EUR 1.59. With this, the first quarter is in line with our expectations for the full year 2019 of at least 5% growth of secular net revenues and around 10% growth of adjusted net profit.As part of our external growth ambitions, we announced the Axioma transaction on April 9. It will strengthen our pre-trading offer significantly and will improve access for the buy-side, which is growing in the importance for us. In addition, the smart transaction structure with General Atlantic as equity partner helps to crystallize the value of our index business, ensures value generation and preserves our firepower for further M&A.Last but not least, my colleagues, the executive board and I will give you an update on the progress of the implementation of our strategic Roadmap 2020, at our Investor Day, which will take place on May 22 in London. We're looking forward to seeing many of you there.With this, I would like to hand over to you, Gregor.

[Gregor Pottmeyer, CFO & Member of Executive Board]

Thank you, Theodor. Welcome, ladies and gentlemen. Let me start with the group financials in the first quarter on Page 2 of the presentation. Net revenue increased by 4% to EUR 721 million. And as part of net revenue, net interest income across the group reached EUR 62 million. As Theodor mentioned, the reporting of operating costs, EBITDA and depreciation has been affected by changes as a result of the IFRS 16 introduction. The objective of IFRS 16 is to increase the transparency of lease transactions. To meet that objective, assets and liabilities arising from most leases have now to be recognized on the balance sheet. Exempted are leases with a term of less than 12 months or leases where the underlying asset is of low value. Therefore, the IFRS 16 introduction results in a shift of some operating costs to depreciation and the financial result in our income statement. We have not formally adjusted the previous year's results, but provide you with a non-GAAP, indicative figures for the purpose of comparison.Considering IFRS 16, operating cost would have been lower by around EUR 12.5 million in the first quarter 2018. All growth rates of operating cost and EBITDA in this presentation are based on the non-GAAP indicative numbers. The introduction did not have any impact on net profit and EPS. Operating cost in the first quarter adjusted for exceptional items were, like-for-like, up by 3% to EUR 249 million. Exceptional items were in line with our full year guidance and stood at EUR 24.6 million. This includes mainly provisions for the different restructuring initiatives as part of the Roadmap 2020 and M&A expenses.Adjusted EBITDA increased by 6% to EUR 476 million, and depreciation increased slightly to EUR 53 million. We expect depreciation to sequentially increase as we go through the year. In total, adjusted net profit amounted to EUR 292 million and adjusted EPS increased by 10% to EUR 1.49. I am now turning to the quarterly results of this segment, starting with Eurex on Page 3. The development of Eurex in the first quarter was driven by secular growth in the phase of cyclical headwinds. Positive secular drivers were the further growth in OTC clearing, both against the first quarter and fourth quarter last year. While the annualized OTC clearing net revenue of the first quarter is still below our full year target of around EUR 50 million, the continuous growth is very encouraging. Furthermore, new derivatives product and the increase of the handling fee for cash collaterals in April last year contributed to secular growth. However, the retail equity market environment, especially against a strong first quarter 2018, resulted in a decline of the index and fixed income derivatives net revenue.In total, net revenue in the Eurex segment was flat at EUR 238 million and adjusted EBITDA grew like-for-like by 4% to EUR 176 million.Our commodities business EEX was characterized by favorable net revenue development, primarily in power derivatives. This was driven by electricity price volatility and further increases of market share in Europe and the U.S. In Europe, market share leverage has increased in all markets. In the German market, which is the biggest contributor, they are now solidly above the 40% mark. Our U.S. power exchange Nodal, achieved a market share of around 33% in the first quarter, which is a significant step up even against the end of last year.In total, net revenue increased in the EEX segment to EUR 74 million and adjusted EBITDA amounted to EUR 37 million, both growing in the double digit area.In the FX business, 360T's net revenue grew by 22% against the previous year. The main driver was the consolidation of the GTX ECN. Organically, 360T achieved net revenue growth of around 7%. This is a very good result as the FX market overall was under cyclical pressure in the first quarter. In total, net revenue in the 360T segment stood at EUR 21 million and adjusted EBITDA at EUR 10 million.In our cash market, Xetra, total order book turnover decreased by double digits, primarily because of lower equity market volatility. Net revenue performance was slightly better because of higher average revenue and the one-off effect from the termination of a contracts with the partner exchange.In total, net revenue in the Xetra segment was down by 5% and reached EUR 59 million, while adjusted EBITDA stood at EUR 38 million.Clearstream's development was mainly driven by growth of net interest income, higher average U.S. interest rates and an increase of the U.S. dollar balances resulted in an interest income of EUR 49 million. In total, net revenue in the Clearstream segment reached EUR 189 million and adjusted EBITDA amounted to EUR 127 million.In the Investment Funds Services segment, the retail equity market environment resulted in a small decline of the number of settlement transactions, while assets under custody remain stable. However, because of the consolidation of Swisscanto Funds Centre, net revenue increased to EUR 42 million and adjusted EBITDA reached EUR 21 million.Market conditions in the Global Securities Financing business continued to be challenged by the low interest rates. Therefore, net revenue only grew slightly to reach EUR 19 million, but adjusted EBITDA increased by double digits to EUR 12 million.The index business, STOXX, the impact of the weaker equity market environment was visible in the exchange and ETF licenses line items. This was compensated by higher other license income, which is expected to be sustainable on this level for the remaining quarters in 2019. In total, net revenue amounted to EUR 35 million and adjusted EBITDA stood at EUR 24 million.In the Data business, the number of subscriptions continued to decline year-over-year. This was partly offset by average pricing. As it does in the Xetra segment, the line item other net revenue includes a small one-off effect from the termination of a contract with the partner exchange. In total, net revenue in the Data segment increased to EUR 44 million and adjusted EBITDA grew by 14% to EUR 31 million.On Page 12, we show the reconciliation of net revenue and operating costs compared to the first quarter 2018. With our secular initiatives, we generated around 5% net revenue growth across the group. The main contributors were Eurex, including OTC clearing, new products and pricing as well as the commodity business of EEX.The impact of the weaker equity market environment for Eurex and Xetra was partly offset by growth of net interest income. On balance, cyclical net revenue decreased by around 1%. In addition, the consolidation of GTX in July 2018, Swisscanto Funds Centre in October 2018 and Grexel, the leading provider of energy certificate, were just released in Europe in January 2019, further added around 1% net revenue growth.On a like-for-like basis, adjusted operating cost increased by EUR 7 million to EUR 249 million in the first quarter. As part of that inflationary pressure in staff and other operating expenses, the fully compensated by lower provisions for variable compensation, as a result of lower growth rate in the first quarter. Furthermore, increased investments in growth initiatives, new technology and regulations were largely offset by cost savings from the structural performance improvement program. Lastly, the consolidation effects I just mentioned also resulted in additional operating cost of around EUR 3 million.Before we conclude today's call, let me briefly explain the change to the credit rating indicator we introduced this year on Page 13 of the presentation.Since 2007, our key rating indicators were based on the calculation method used by Standard & Poors. As S&P has adjusted its method for rating market infrastructure providers, we have adopted the new indicators. In order to achieve a minimal financial risk profile, consistent with the AA rating in accordance with the S&P methodology, we aim to achieve the following targets with the new key rating indicators.Our net debt-to-EBITDA ratio of no more than 1.75. Free funds from operations to net debt greater than 50% and an interest coverage ratio of at least 14. When calculating these key rating indicators, we will closely follow the method used by S&P to determine EBITDA. Reported EBITDA is adjusted from the result from strategic investments as well as by expenses for operating leases and unfunded pensions obligations. In order to determine FFO, interest and tax expenses are deducted from EBITDA, applying the respective inputted adjustments for operating leases and unfunded pension obligations.The group's net debt as we conferred by first deducting 50% of the hyper bond as well as the surplus cash, as at the -- at the reporting date from cost debt. Liabilities from operation leases and unfunded pensions obligations are then added. S&P bases the determination of the key raising indicators on the corresponding rated average of the reported or expected results of the previous, current and following reporting periods. To ensure the transparency of the key rating indicators, we report them based on the respective current reporting period.This concludes our presentation. Thank you for your attention. We are now looking forward to your questions.

[Operator]

[Operator Instructions] The first question comes from Kyle Voigt calling from KBW.

[Kyle Kenneth Voigt, Associate]

If I can just ask one question on M&A. Axioma is a deal and a deal structure that may provide a lot of value creation for your shareholders longer term. But obviously, from a short-term standpoint, the deal is not going to be earnings accretive. Going forward, if there's a deal in which you utilize cash and debt financing capacity, and one where you acquire the entirety of an asset, should investors think about a different more near-term financial targets for that type of deal versus Axioma, which is a little more strategic and unique of a deal structure?

[Theodor Weimer, CEO & Chairman of Executive Board]

Yes, Kyle. Indeed, that's true. We have consciously structured the deal around Axioma, with a purpose to create long-term value for our investors and shareholders, and we accept it as a certain minimal dilution on the cash side over time. And we have to be sure that we can dramatically increase the value of our index business to get over the Axioma for the best -- in the best interest of our shareholders. And as we have said on the April 11, for example, we confirmed that we are in negotiations with Refinitiv group concerning a potential purchase of certain FX business units, that is a kind of a deal where we are looking at and where we would say that our criteria which we formulated during our last Capital Markets Day will apply. So we're looking for this kind of deals where the deal is strategically very sensible and where we have a cash accretion within 1, later 3 years' time. So indeed, we are looking predominantly in value-creation deals, of course, whenever we use our debt and cash capabilities.

[Operator]

The next question comes from Benjamin Goy calling from Deutsche Bank.

[Benjamin Goy, Research Analyst]

One question on FX. So it's now for 3 quarters that you consolidate GTX. I think there's a bit of a complementary nature with the original 360T business. So maybe you can comment on the revenue synergies or cost synergies you realized so far? Appreciate it's probably small numbers, so any qualitative color is also appreciated here.

[Gregor Pottmeyer, CFO & Member of Executive Board]

Yes. So, indeed, these are really smaller numbers as we talk about here revenue in a very low double-digit million euro area and cost even obviously below that level. Commenting on the business development on GTX, here you see really some cyclical headwind, what is in here is other FX infrastructure provider, so basically it's the same here. We exit here on the cost side. And so to compensate for that, the markets are compared to our 360T core business, it's really complementary as GTX, it's basically dealer-to-dealer platform, and 360T is focused on corporate customers. So there are not so many cost synergies to achieve. But nevertheless, we are doing what is necessary here to achieve good results.

[Operator]

The next question comes from Johannes Thormann calling from HSBC.

[Johannes Thormann, Global Head of Exchanges and Analyst]

Johannes from HSBC. One follow-up question first of all. Is there any timeline on the FX or talks with Refinitiv? And secondly, thanks for sharing the German market share data on EEX, do you have any data or at least guesstimate for the European market share of EEX nowadays?

[Theodor Weimer, CEO & Chairman of Executive Board]

I'll start with the timeline on FX, Johannes. The negotiations and the assessments of a potential transaction regarding the FX businesses of Refinitv are ongoing and I'll ask you for your understanding -- for your professional understanding that we will not disclose further details. As I said the negotiations are ongoing and more clarity will be disclosed most likely within the next few weeks.

[Gregor Pottmeyer, CFO & Member of Executive Board]

And with regard to the market share, yes, we comment on market share in the EEX business in Germany for more than 40%. And for the EEX group in Europe, it's 38% and that's clearly showing a strong increase overall. As last year, we were slightly above the 30% range, so 38% is really a great achievement here.

[Operator]

The next question comes from Chris Turner calling from Berenberg.

[Christopher Myles Turner, Senior Equity Analyst]

It's Chris Turner from Berenberg. Half of the structural growth you delivered this quarter came from Eurex. If I cast my mind back to your Investor Day last year, you were talking, I think, EUR 60 million to EUR 80 million of revenue growth at Eurex coming from new products specifically. Can you tell us what proportion of that structural growth you've delivered so far? And what new products you have in the pipeline that could drive that structural revenue growth from here?

[Gregor Pottmeyer, CFO & Member of Executive Board]

Yes, Chris, thanks for the question. So overall -- from the structural growth at Eurex in the first quarter, so there was a strong increase in the OTC clearing part for interest rate swap. And we make really good progress here and it's more than EUR 9 million, we achieved. Yes, it's below the run rate for the EUR 50 million we want to achieve, but we really made great progress. And it's also expected that the second half year will be stronger here compared to the first half year, as we are in the process to connect all further pipelines. And it will benefit from that in the second half year. So currently, we have already achieved EUR 15 trillion notional volume and that one played in the market share of 14%. So you see here continued increased market share of what we are able to achieve. So that's first from a structural perspective. Secondly, there are -- there's some positive pricing elements, what I already mentioned. And thirdly, with regards to new products, we made good progress, specifically with regard to MSCI derivatives, where we introduced also MSCI dividend product now, that's good, and we are already in the range of double-digit million euro range for MSCI derivatives. So that is contributing. Dividend derivatives in general are strongly participating to our structural growth here. Total return future is another element. And last but not least, what I would like to mention is the Repo business, where that's also part of our partnership agreement with the banks is also positive. So here you see, there are different elements who really contributed to the structural growth of Eurex.

[Operator]

The next question comes from Arnaud Giblat calling from Exane.

[Arnaud Maurice Andre Giblat, MD & Research Analyst]

Yes, I've got a quick question on the changing credit rating. I was wondering if you could explain the reasons that are behind the change? And if -- like with a previous credit rating, if there was scope in the near-term to go beyond the covenants with a view of going back very quickly. I think you've reached your covenants in the past and then get downgraded, do you see scope for that to happen? Is that something you'd look to do for the right type of deal? Are you envisaging perhaps going beyond for the right kind of deal? And if I could just have a quick follow-up on -- a second question is, when you're talking about FX, you mentioned as a criteria, cash earnings accretion, which should happen if it's finalized in debt for a company that's -- partially in debt for a company that's possible. I'm wondering if your ROIC is greater than WACC over 3 years criteria would apply for FX?

[Gregor Pottmeyer, CFO & Member of Executive Board]

Yes. We're starting with a new rating -- credit rating metrics. So as I mentioned in my speaking notes, so S&P changed the method and we basically adopted. And so -- and the main points are here, it's not gross debt EBITDA, it's now net debt EBITDA, and there's another criteria, free funds from operations. But this change in the method does materially not impact our financial flexibility, what we have. So we said earlier then, when we used our former core credit [ metric ] ratings, or we said it's EUR 1.5 billion additional firepower we have. And the same is true when we use that new methodology. So material yes, the numbers change, but for materiality level, no change. What would be -- would we accept the downgrading for the right deal? So our understanding is that we need the AA rating for the Clearstream business. And we could play around one notch differential on Deutsche Börse group. So we could have here a AA minus rating on Deutsche Börse AG. So that's just a minor impact, what we could create here. A lower rating level of Deutsche Börse AG, we do not claim. With regard to the FX on cash earnings accretive measure as Theodor mentioned, so it's in general our target that the deals are cash earnings accretive. And hopefully, in the first year, but latest in the second or in the third year. That is a criteria what stage would be fulfilled for our M&A target. With regard to Axioma, as it was not fulfilling that criteria, was a different approach because we brought in our asset to a nice valuation. There's a PE guy who joined, so it was a completely different structure for FX. All I would expect, if it would come to a transaction, a more straightforward financing. And the questions with the WACC, obviously that you have to consider, if you do with the discounted cash flow method obviously, we assume the right WACC, what we attribute to Deutsche Börse business and the business we would take over. And obviously, that should be a positive net present value. So overall that assumes that the internal rate of return is higher than the WACC.

[Arnaud Maurice Andre Giblat, MD & Research Analyst]

Just a quick followup. Sir, you mentioned you could accept a AA minus rating, how much extra firepower will that give you?

[Gregor Pottmeyer, CFO & Member of Executive Board]

That's a lower 3 digit million euro, Arnaud.

[Operator]

The next question comes from Joanna Nader, who is calling from RBC.

[Joanna Elizabeth Nader, Analyst]

Just a couple of questions. I was wondering first, if you could elaborate a little bit on sort of where you think EEX can go, the competitive strategy that you are using in Europe, whether it's around the clearing side or the transaction side or pricing? And then also in the U.S., how you're competing so successfully against ICE in terms of taking market share? And then, on STOXX, I just wondered if you could give a little bit of clarity on that other line and the sort of the growth potential. I guess you're probably seeing some growth in the structured products because of the change in the CSD regulation. But also some buy-side growth. I don't know if that's related to benchmark regulation or white labeling or what, so just wondered if you could give a little bit more color.

[Gregor Pottmeyer, CFO & Member of Executive Board]

Okay. So starting with the STOXX question. So yes, the growth rate is another double-digit growth rate, what we guided for and the reason for that is that we have cyclical headwind. So from a structural perspective, it's still okay. So from a structural perspective, we still see the 10% growth. But unfortunately, there is strong cyclical headwind, as we are seeing in our equity index product were down. And we also see currently that there's a reduced asset under management level, so that's 20% reduced compared to the last year. So we see that currently that has a cyclical component. And we do not expect, if we see a longer time horizon of one or two years, that it will continue on that level. So we are unchanged our views. And even if we combine it now with Axioma where we see nice complementary synergies on that business, that we are able over the next years to grow revenues on a double-digit percentage basis. So unchanged our view here. With regards to EEX. So it's really good to see that we increased our market share and we increased our market share basically in all European markets, where we mentioned Germany more than 40%. And overall it's 38%. You see in Italy and in Spain, they are 70%, 80%, 90%. So that's really good to see that we are able here especially to win from the broker side. So that's why our product is best-positioned where we have strong liquidity. We have a settlement guarantee, where we have a clearing advantage what we can offer to our customer. And our focus is really to get additional market share. So it's not pricing. So it's -- we want to achieve additional market share that we have strong liquidity, and that we can make good offers to our customers. So the same is true for Nodal in the U.S. market, where we increased our market share to 33% compared to a 20 percentage level in the first quarter last year. And it's continued already in 2018 and now it continues in 2019. So we are able here, we introduced our new trading platforms here, we can make attractive offers to our market participants. And in the second half year, we want also to expand in the gas market. So far it's purely power market. So it's basically the same strategy in Europe where we're focused to get additional liquidity and the market share.

[Operator]

And the last question for today comes from Mike Werner, who is calling from UBS.

[Michael Joseph Werner, Executive Director and Equity Research Analyst]

Since it's the last question, I may ask 2, if that's all right. One is on pricing. You mentioned that there was some good secular growth in Eurex over the past 12 months helped by pricing. And if I recall, a lot of the pricing changes you make in that division occur on July 1. And I was just wondering if you had any plans and what those plans might be to adjust pricing in the second half of this year or on July 1 this year. And then second, I know the comps are quite challenging in Q1 on a year-on-year basis, but they get notably easier in Q2 and Q3. I was just wondering if you can provide a little bit of color in terms of how Q2 is progressing versus April of last year.

[Gregor Pottmeyer, CFO & Member of Executive Board]

Yes. So starting with the second part of your question. Yes, obviously, as we all know, that there are comps in Q2 are lower than the comps in Q1. And so far, if you follow up our volumes on Eurex, so we are roughly 10% ahead of last year and especially the equity index products are better than last year. So that will help us definitely to have higher growth rates than in the first quarter. Obviously, but we cannot give any guidance with regards to cyclicality. The only thing that we can guide is that we want to achieve the 5% secular growth. You have seen we achieved that in Q1, and we expect to achieve secular growth level in the next quarters. And again, with regards to [ approving ] now the cyclicality, we have tailwinds instead of headwinds at least in April. With regards to the pricing of Eurex, so the main contribution from a pricing perspective in Q1 was the increase of the cash collateral fee in April 2018. So where we have that kind of benefit in the first quarter in 2019. So far, I would not expect comparable high pricing impact from -- in the Eurex segment as our focus is for Eurex to increase market share to gain additional liquidity in the different markets. So for the rest of the year in Eurex, I would not expect bigger pricing impacts.

[Jan Strecker, Head of Investor Relations]

With this, we would like to conclude today's call. Thank you very much for your participation. And have a good day.