Deutsche Boerse AG

XETRA:DB1

Earnings Call Transcript 2021-Q1

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Deutsche Börse AG Analyst and investor conference call regarding the Q1 2021 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 2021 results. With me are Theodor Weimer, Chief Executive Officer; and Gregor Pottmeyer, Chief Financial Officer. Theodor and Gregor will take you through the presentation today. And afterwards, we will be happy to take your questions. The presentation materials for this call have been sent out by 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. As usual, I will start today's call with my own perspective on the developments in the reporting period Q1. Afterwards, Gregor will present the results in more detail. As you all expected, net revenue in the first quarter declined because of the record activities of last year, beginning of last year, Q1 last year, which were very much driven by the initial COVID-19 outbreak. We were able to mitigate some of those effects. We continued secular net revenue growth and an increasing M&A contribution. Due to the cyclical headwinds, we managed the organic operating costs as prudently as possible, and we were successful. Therefore, the overall operating cost increase in the first quarter on a constant basis was almost entirely driven by consolidation effect and no increase on the consolidation on the CP side. EBITDA in the first quarter amounted to EUR 521 million, normalizing for the strong things last year. This was significantly above the average quarterly level in 2020. On February 25, we successfully closed our ISS transaction ahead of schedule. The performance so far is very much in line with our expectations. But the more we engage with ISS since on a day-to-day basis, the bigger the joint opportunities to address demand for ESG products and services become. Shortly before closing of the ISS transaction, we issued EUR 1 billion bond transaction in 2 tranches to partly finance the acquisition with an average yield of just 0%. They rank at the very top of all historic corporate issues globally. So our strong credit rating clearly also has advantages. With the first quarter results, we are very well on track to deliver on our guidance for 2021, and the development is also fully in line with the expected Compass 2023 growth trajectory. Lastly, let me invite all of you and all investors to participate in this year's Annual General Meeting on May 19. Against the background of the still ongoing COVID-19 pandemic, we have decided to hold it in the virtual format again. But we will try to make it as interactive as possible. The proposed dividend of EUR 3 per share is scheduled to be paid a couple of days after the meeting. With that, let me hand it over to you, Gregor.

[Gregor Pottmeyer, CFO & Member of Executive Board]

Thank you, Theodor. Let me start with the detailed financials in the first quarter on Page 2 of the presentation. Net revenue amounted to EUR 855 million and included, amongst others, the first-time consolidation of ISS as well as an exceptional item of around EUR 17 million related to a reimbursement of legal fees at Clearstream. The operating costs amounted to EUR 347 million, since we have now started to only report all in numbers. The operating costs are not adjusted for exceptional items anymore. As a reference point, what we would consider exceptional in nature in the first quarter is very much in line with the level we saw in the same period last year. The EBITDA includes the result from financial investments of EUR 13 million, which benefited from a positive development of different shareholdings, including, again, Tradegate. Depreciation amounted to EUR 62 million and includes effect of around EUR 19 million related to purchase price allocation of acquired assets in accordance with IFRS. We decided to start to break out this number to make the relevant noncash effect of M&A transparent. On this basis, the cash EPS amounted to EUR 1.81, whereas the normal EPS stood at EUR 1.73.Slide 3 puts the overall Q1 results into perspective with the development since 2019, which is a base case for our Compass 2023 midterm targets. Both in terms of net revenue and EBITDA growth, we are fully in line with the growth trajectory we expect until 2023. Also, if we normalize the exceptionally strong first quarter last year and look at the average quarterly EBITDA in 2020 of around EUR 467 million, the first quarter is fully in line with our growth targets. On Slide 4, we provide an overview of the 3 components of net revenue growth in the first quarter. Again, compared to the same period in 2019, consolidation effects resulted in additional EUR 54 million net revenue or a CAGR of 4%. This was mainly driven by the addition of IFRS, Axioma and Fondcenter. Secular growth being the key component of our strategy to increase net revenue, developed as planned and increased by EUR 87 million or a CAGR of 6%. All segments have to achieve this with Clearstream, Eurex and ISS being the largest contributors. The cyclical growth contribution was slightly negative at minus EUR 6 million or a CAGR of minus 1%. This was mainly driven by the much lower net interest income at Clearstream. Reported operating costs shown on Page 5, totaled EUR 347 million in the first quarter. By far biggest driver for the overall increase of 9% compared to the previous year were consolidation effects. This was mainly driven by the consolidation of ISS, Quantitative Brokers and Fondcenter. Besides that, we managed operating costs very prudently, considering the strong cyclical headwind in the quarter. Inflationary pressures were offset by increase of operating efficiency and variable as well as share-based compensation was broadly flat. Thus, the small organic cost increase resulted from slightly higher investments in growth and techology. I am now turning to the quarterly results of the segment. In our Trading & Clearing segment, we were faced with high levels of activity in the last year's quarter. Eurex, on Page 6, saw the toughest comparables across the group. The key driver for the decline of net revenue and EBITDA was the weaker performance of index derivatives due to much lower equity market volatility levels. Most other products are broadly in line with the previous year's quarter. Other net revenue benefited from the consolidation of Quantitative Brokers at the end of last year, which contributed EUR 5 million in the first quarter. In our commodity business, EEX, shown on Page 7, we saw a slight decline of net revenue against the strong first quarter last year, especially in power derivatives. But it's encouraging to see that the COVID-related headwinds in the second and third quarter last year were only of temporary nature. Let me turn to Page 8 and the FX business. Even though FX market volatility in the first quarter was significantly lower compared to the same period last year, we saw a relatively stable development of activity. This is because the cyclical decline was partly compensated by business generated with new products and clients. I'm now turning to Page 9 with our cash market, Xetra, where we also saw declining activity. Despite much lower equity market volatility in the first quarter, cash market volumes also held up quite nicely, and we are still significantly above the 2019 levels. The result from financial investments in the [indiscernible] segment amounted to EUR 8 million and benefited again from very positive development at Tradegate. In our post-trading segment, Clearstream, shown on Page 10, we still saw a significant decline of the net interest income. This is now normalizing. And from the third quarter onwards comparables will be like-for-like. In addition, net revenue in Clearstream included an exceptional item of around EUR 17 million related to a reimbursement of legal costs. Adjusted for the cyclical net interest income and the exceptional item, Clearstream's net revenue increased by around 5%, which is quite a solid level for a stable, recurring business. The investment fund services segment, which you find on Page 11, continue to show an extremely strong performance. On the one hand, this was driven by secular growth based on the continuous onboarding of new clients and funds. On the other hand, the consolidation of the fund distribution business from UBS in the fourth quarter last year added EUR 17 million of net revenue. Given the scalability of the core business and the high margins in the distribution business, the EBITDA increased significantly. Looking at the valuation of assets and current situations in the investment fund services market, we certainly feel that the value of our fund business is not yet fully appreciated. Slide 12 shows the Qontigo segment, which on the positive side, benefited from ETF and other licensing growth in the first quarter. On the negative side, exchange licensees saw a cyclical decline due to lower level of index derivatives trading activity. Also, analytics came in slightly below the strong level in the first quarter last year. On Slide 13, we show the new reporting segment, it's Institutional Shareholder Services. Given that we started consolidating ISS only on February 25, financials on this page basically refer to 1 month of IFS performance only. On the second quarter onwards, we will be showing a more detailed split of net revenue, but almost 80% of net revenue in the ISS segment is driven by stewardship solutions and ESG analytics. Since we are not adjusting for exceptional items anymore, net revenue and operating costs of ISS included some nonoperating items relating to the transaction and integration efforts. Adjusted for those items, the financial performance is fully in line with our expectations. The last page of today's presentation shows our guidance for 2021, the context of Compass 2023 midterm plan. Despite the headline decline of net revenue in the first quarter, we are fully in line with our guidance for the full year of around EUR 3.5 billion net revenue and around EUR 2.0 billion EBITDA. Hence as mentioned, we are also fully in line with the expected Compass 2023 growth trajectory. 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 Benjamin Goy from Deutsche Bank.

[Benjamin Goy, Research Analyst]

Thank you for providing the cash EPS. I'm just double checking for the 2023 target, which is implicitly EUR 8 per share, that is still based on reported EPS or will you move to cash EPS? And maybe in that context, I would assume PPA is going up from next quarter. Maybe you can give a guidance on the run rate and how this might impact depreciation and amortization going forward?

[Gregor Pottmeyer, CFO & Member of Executive Board]

Okay. Thanks, Benjamin, for that question. So in principle, we did not guide for the EUR 8, what you mentioned. What we said is that our earnings per share would increase by 10% on average from 2019 to 2023. So that's the guidance what we have. And we give you now some guidance what kind of PPA we have included here. And so for Q1, so basically, the number for the full year is in the range of EUR 90 million as a PPA, so that you have as your basis for your model. And the PPA guidance with regard to PPA, that's only a little bit challenging because it really depends on our M&A as reflected here. So far the EUR 90 million are the -- is the number for that year. And most probably, it will increase as we included in our 2023 guidance, additional M&A. So we are still missing roughly EUR 200 million net revenues to conclude from an M&A perspective. So you should expect that the PPA continues to increase for the next year.

[Benjamin Goy, Research Analyst]

Okay. Understood. And it implies that also the D&A is moving up slightly from Q1 levels.

[Gregor Pottmeyer, CFO & Member of Executive Board]

Yes, sure.

[Operator]

And now we're coming to the next question. It comes from Johannes Thormann from HSBC.

[Johannes Thormann, Global Head of Exchanges and Analyst]

Johannes Thormann, HSBC. First of all, on your EEX segment, you explained that the power and gas volume declines in Europe has been driven by the pandemic. But in the U.S., we already saw a recovery in Q1 in the power derivatives business. Do you expect this to happen in the next quarters in Europe as well? Or have there been other drivers? And could you elaborate a bit on the volume trends you're expecting? And then secondly, a follow-up on M&A, please. Probably 2 of the biggest players in the funds business are now slightly out of reach for you guys. What are the alternatives? And would you also be willing to do a joint venture in the funds business where you only own 51% in the long term?

[Gregor Pottmeyer, CFO & Member of Executive Board]

Yes. So starting with the first question around EEX. So the good thing is that we stabilized or even slightly increased our market share, both in the European power derivatives market and in the U.S. market. So in the European power derivatives market, so we are still in the range of roughly 40%. So that's good to see that we are able to stabilize that. And for the next years, we even see a good trend to continue to increase our market share as we have a superior clearing solution here in place, and there is no change from that perspective. In the U.S. market, even good to see that we are slightly above that level. So we have 42% market share in the power market in U.S. and so that's good to see that our entity and [ model ] is winning market share, and it's now a well established partner in the U.S. market. And from a perspective, we see that the structural trends are all in place. So trend to clear solutions. So there's the continued trend to renewable energy is a good topic here. So we expect that our EEX [indiscernible] continue to grow in the comparable side you have seen in the past. Your second question with regard to M&A, all funds impact and so on, at least you were referring to these two, not mentioning them. So we have a clear strategy here. We have, as explained, a 50% cost advantage with regard to our Vestima process IT solution here. And we have a long list of customers who are interested to join forces with Deutsche Börse. And we are open, whether they purely connect to our platform, whether they want to do an outsourcing or whether they want to sell businesses. And we have a very long and strong customer pipeline. So -- and you see this extraordinary growth, we are able to deliver from organic, but also from an inorganic perspective, and you should expect that, that kind of growth level will continue in all of these 3 formats connectivity, outsourcing and that they want to sell business to us. In principle, I also do not want to rule out joint venture types. So we are open for any format what is appreciated by the customers. But obviously, our target to consolidate the assets. So below 50% is not of interest for Deutsche Börse.

[Operator]

And the next question comes from Bruce Hamilton from Morgan Stanley.

[Bruce Allan Hamilton, Equity Analyst]

Just 2 quick ones. On -- I mean obviously, there's a lot of good going on. But in Qontigo, I guess the Axioma business still feels like it's not showing very much growth at all. Is there something that kind of needs fixing there? Or how would you sort of view that business has progressed since you've acquired it? And then secondly, on the -- I guess, the weaker volumes were pretty expected, but I guess revenue margins also looked to be under pressure across index, across rates and single stock options. So the revenues are weaker than the volumes. Is that simply mix effects? Or is there anything else going on?

[Gregor Pottmeyer, CFO & Member of Executive Board]

Yes. So for second question is the answer, yes, it's product mix. So no change here. First question around Qontigo, Axioma. Yes, there's still some negative impact out of the COVID-19 situation in the U.S. market. Q1 was a very strong -- Q1 2020 was a very strong quarter. Also in our risk analytics area at Axioma. So that's the comparison is quite tough here. In principle, it's our clear understanding that all the secular growth drivers like trend from passive -- from active to passive investment increased demand of buy side to superior risk management, analytics solution, ESG, et cetera. They are all intact and so our basic understanding is independent from potentially quarterly developments and comparison topics that we are able to show double-digit top line growth in Axioma in stocks and also in Qontigo overall. So that is our expectation also for the next year, and that's included in our Compass 2023 strategy. And no reason to see a change here.

[Operator]

And the next question is coming from Tobias Lukesch from Kepler Cheuvreux.

[Tobias Lukesch, Equity Research Analyst]

Quickly on regulation on Brexit, is there any update, anything that potentially looks a bit more positive with regards to Deutsche Börse's business case. And potentially, secondly, on the April volumes, we just discussed the slight change in product mix. So volumes, revenues were not that collated as before. How is April looking like? And especially also with regards to EEX 360T business and so on.

[Gregor Pottmeyer, CFO & Member of Executive Board]

Yes. Starting with the first question around Brexit. So the main topic for Brexit is for Deutsche Börse, basically the topic around our Eurex Clearing activity. And so that's basically an upside potential, obviously. I think you are aware of the discussion that European regulators and politicians forced banks to do with the euro businesses in the EU. And so not in London anymore. So our view here is that we are really focused on a market-led solution here. So we are in an intensive dialogue with all our customers to fulfill all the regulatory requirements. And therefore, we have a very good dialogue. We have now more than 500 customers onboarded, not all of these. So roughly 50% is excess. So the other 50% is clearly connected. So good is -- a very good chance for us to win additional business. And therefore, that should have a positive dimension for Deutsche Börse. With regard to the April volumes, I think you are aware as we publish this number and made it available even on a daily basis. So in Europe, specifically in the equity index sales, there's still low volatility. So between 15%, 16% are the volatility levels. So it's very low. So therefore, equity index product is clearly in April below previous year level. On the other hand side, on the fixed income side, we see some positive elements as there's a discussion around reinflation and market participants consider to do some hedging here. So and for EEX and 360T, I think we should start to show here growth as the comps we have seen in Q1 and in Q2, not on that high level. So we expect to see here for EEX and 360T growth.

[Operator]

And the next question comes from Kyle Voigt from KBW.

[Kyle Kenneth Voigt, Associate]

So the Tradegate business, the retail business continues to grow quite nicely in the equity line -- equity investment's line. I think you have a 20% stake there. Just given that the value of that stake is likely increased significantly. Just wondering whether you consider monetizing that at some point? Or whether that's a strategic stake for your core business?

[Gregor Pottmeyer, CFO & Member of Executive Board]

Yes. Obviously, we are also happy to be that kind of development. And indeed, so Tradegate already more than doubled their volumes, and it looks like that in '21 it continues to be very successful here. And obviously that Tradegate is an opposite to our platforms, focusing on the retail business. And so we have now seen a big uptick in the retail business. And we are also currently considering how can we benefit from that kind of development. And so we are in the process to think about how do we want to position ourselves also in the retail business. But decisions are not done. And also no intention to monetize our stake at Tradegate.

[Kyle Kenneth Voigt, Associate]

Just a follow-up on that a little bit. So is that mostly you're thinking about how you can launch new retail-oriented products within Eurex? Or is there something else there that we should be thinking about?

[Gregor Pottmeyer, CFO & Member of Executive Board]

Yes, that is one. And what could be offered to the retail customers. So there are obviously opportunities also for Deutsche Börse, as you see that Tradegate is very successful here. So we are open from that perspective. But what can be offered to the markets for retail customers and of retail products.

[Kyle Kenneth Voigt, Associate]

Understood. The other thing I want to touch on was, was really just cryptocurrency that the industry continues to go grow strongly. I think you listed some exchange-traded notes that are crypto related. But if we take a step back and look at blockchain tech more holistically, I guess, there is a potential use case for settlement in kind of regulated infrastructure. I'm just curious have you considered this in context of the Clearstream business. I think you've made some investments there. I have been doing interesting stuff there. So just curious on what the developments have been with using blockchain technology in kind of the -- either the settlement infrastructure that you own, or in the business at large.

[Gregor Pottmeyer, CFO & Member of Executive Board]

Yes. Obviously, blockchain is an interesting technology for us. And so far, we made really good progress with regard to our use case at Clearstream and the use cases around collateral management. So -- and there's a high demand in the market. And basically, all of the big players, all the global ones and also the regional ones connect to our platforms or even have some shareholdings in our platform. Here, it's HQLA, high-quality liquid assets. So what is a legal entity and what is Luxembourg based. And together with our technology provider, R3, so we develop here a solution, and that's now live. And so far, we will see in '21, how strong is the port. But the demand is very strong. It's of high interest to digitize all your collaterals so that you can mobilize all your collaterals on a global basis and to allocate it to a transaction, sometimes you need low-quality of collateral, sometimes high quality. And if we have everything digitized, if you have a tokenized, then it's obviously a very efficient process for the market participants and also for us as Clearstream as a service provider. And the same is also true from a collateral management perspective in our clearinghouse. So in this area, and if we see that this is successful, what is our expectation that it will be successful, then we could consider also in a second step to use that kind of blockchain technology in our settlement processes. So settlement process today is T plus 2, so you have 48 hours time. And so that is from a technology perspective, it could be also interesting for us to introduce blockchain into settlement activity. What is also just to say very clear for the next years, we don't see a use case in the trading and clearing space because here, we don't talk about ours here, we talk about seconds, microseconds, even nanoseconds. And therefore, the blockchain technology where blockchain will be replaced every 10 minutes is not able to deliver on that side. So for trading and clearing, so for the next years, we are not optimistic here. But for collateral management and potentially also settlement, we see a good chance to use that kind of technology.

[Theodor Weimer, CEO & Chairman of Executive Board]

In addition to what you've said, Gregor, allow me to add the following, Kyle, the -- we truly believe that the tokenization, right, of asset losses will become a very valid and very interesting asset loss expansion, which we want to tap, point number one. Point number two, it is necessary that we do more than one use cases and more than 1 investment in this area. He was referring to HQLAX, right, on the high-value collateralized side. From a technological perspective, we do many other use cases. A very famous one is the so-called blockbuster use case. It's a use case together with large banks and the German, Bundesbank -- Deutsche Bundesbank, right, because we think it's not only for crypto topic. It's also a topic for the digital euro, right? And you need to understand that all cryptocurrency or crypto assets are assets based within a circle of computers, right, and use the blockchain. But the trick is, you need to be in a position that you can create an exchange between a blockchain-based circle and get it out in the normal payment systems. And that's the background where we have done a very successful blockbuster project with Deutsche Bundesbank, and we have demonstrated a live that you can get and trigger solution out of the crypto space, out of the blockchain space into normal payment and settlement space. And that's what we have done on the bond side very successfully, which was a big effort and a big success over the last couple of weeks. And you should expect more to come in this area.

[Operator]

And the next question comes from Gurjit Kambo from JPMorgan.

[Gurjit Singh Kambo, Head of Diversified Financials Research]

Just a couple of questions. Firstly, in terms of the sort of headroom that you have for M&A, could you just give us an indication of how we should think about that? So I'm thinking about headroom from cash and debt rather than sort of equity at this point. And then secondly, inflation of this strong revenue growth in the settlement business, which obviously was driven by higher settlement transactions. But just I'm trying to understand what's driven that sort of 26% growth in settlement transactions?

[Gregor Pottmeyer, CFO & Member of Executive Board]

Yes. Thanks, Kambo, for the question. So with regard to headroom M&A, so just to remind all of us, it's EUR 1.5 billion, what we have a very little until end of this year. So again, we are able to do M&A on that cash debt level. And you are aware that on top, we have the AGM authorization to increase also our equity. And thirdly, in that context, I would like to mention, we could also consider to do a joint venture or that we bring in some assets where we would not need cash as we did with the Axioma transaction, where we hadn't to pay anything that we bought in our stock index business with EUR 2.6 billion. And included basically [ GAA ], our PE partner who at the end of the day paid for that. So we have different formats and enough opportunities to continue to do M&A, so I can just confirm that. With regard to your second question, Clearstream increased settlement activity. The main reason for that increased settlement activity is also is the retail area where we see an increased activity. We also talked about it just a minute ago on our cash equity business that there has increased retail activity, and that's obviously good. But we see that also from a Germany perspective, where the equity culture was not as exciting compare to other countries. So we see here that retail customers are interested together with some new new forecast to do activity here. And so we benefit also from that trend here in the settlement area activity.

[Operator]

Now we're coming to the next question. It is Mike Werner from UBS.

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

Over to you. Two quick questions, please. First, on the over-the-counter clearing business. We saw a little bit of a slowdown in revenue growth. This is the weakest, I think, quarter in the past 4. I was just wondering if there's any one-offs or anything to explain that? And then second, my understanding is that open access comes online on July 1 this year. If that's the case, how do you expect -- or how do you think that will impact your exchange-traded derivative business?

[Gregor Pottmeyer, CFO & Member of Executive Board]

Yes. Thanks, Mike, for the question. So as I also refer to the Brexit question from to be some questions ago. So the main driver here is around Brexit, right. And so far, this open access and topic, it's just a challenge for regulators to judge on the topic is first what is the political agreement and if politicians would agree to define the rules how to do business together. Then obviously, it would be much easier for regulators to think about open access. As long there is no clarity, it's obviously not so easy to decide upon this open access rule. And so far, from our perspective, it's still open. What happens here. But we see a tendency, as I mentioned earlier, that European regulators and politicians would like to see the European business is handled within Europe. And that obviously would play in our hands. But our focus is, again, so it doesn't make sense if there are forced to do, so it would be much better if they do it on a voluntary basis because they are convinced that they get a good solution here. And I think we have a lot of reason to think so in that rate. With regard to the revenue development in compared to previous year. So we are very much interested to increase our liquidity. So it's good to see that our market share is 20%. And so it continues to increase. And all our efforts is to convince market participants to join our platform. So I talked about 250 customers are not connected, but they are not active on our platforms. And that's why we also give some incentives to move to our platform. And so that's due to that kind of insinuation, that's the reason that you see not the same increase in our revenue basis from that compared to our volumes.

[Operator]

And the next question comes from Andrew Coombs from Citigroup.

[Andrew Philip Coombs, Director]

If I could just follow-up on one of the previous questions, notably on the settlement activity, clearly, strong. The revenue per transaction also elevated. And I think you alluded to the fact that, that was prudent because of the spike in the retail client base. So would it be fair to look at Tradegate as a proxy but also the settlement activity that's coming through at that higher margin. And can you give us an idea roughly of how the margin would spread between your standard client base and that retail segment for the settlement revenues?

[Theodor Weimer, CEO & Chairman of Executive Board]

Yes, Andrew, that's only partly the case because Tradegate has also -- there's a brokerage component. So they're making markets. They're taking the spread in order to generate revenues and profits. So that's a little bit of a different model. And it also developed nicely because they've taken market share. So another component. But generally, if retail trading activity, especially in foreign products. So U.S. tax stocks, for instance, is growing then Clearstream is benefiting because also those foreign equity transactions originating in Germany are processed through our Clearstream systems. So that's definitely a good driver here.

[Andrew Philip Coombs, Director]

Okay. I guess, I'll word in another way. If I look at your your Clearstream banking fee schedule, it doesn't look like there's been any material changes of late. So the pickup there is entirely due to the volume mix. Is that fair?

[Theodor Weimer, CEO & Chairman of Executive Board]

Not entirely just to volume, but foreign equity transactions are typically higher-priced compared to domestic transactions. So there is a fee differential, which is why we saw this over-proportional growth in the revenue versus the volume. So a more favorable product mix. All right. This concludes our call today. Thank you very much for your participation, and have a good day.