Deutsche Boerse AG

XETRA:DB1

Earnings Call Transcript 2020-Q3

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Deutsche Börse AG Analyst and Investor Conference Call regarding the Q3 2020 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 third quarter 2020 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 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]

Welcome, ladies and gentlemen. Good afternoon. Before we discuss the details of the third quarter results, let me begin with some comments on the overall COVID-19 situation and its implications for Deutsche Börse. While markets have recovered significantly and the COVID-19 pandemic improved somewhat over the summer months, we all knew that this crisis is far from over. More recently, the uncertainty around COVID has increased further. Right now, the question is not if there is a second wave, but how exactly it will look like and what implications will be. Even so extensive lockdowns are currently not anticipated, the pandemic will increasingly impact public life and the economy again. At Deutsche Börse, we continue to operate as normally as possible with up to 50% of our staff working from the offices of our core European locations. However, It is very clear that the situation has implications for all capital market participants, while volatility in the third quarter was still well above the previous year's level. This did not translate, unfortunately, into growth in all areas of our business. Therefore, the third quarter did not develop as you would have expected. Especially Eurex saw a decline of activity across all asset classes, arguably against a relatively strong third quarter last year, but we also believe that this is a result of COVID-related factors like the remote work situation and temporary deleveraging of some trading desks and buy-side firms.Also, EEX and Qontigo are still seeing temporary headwinds resulting from the COVID situation. Despite those conditions, we managed to deliver 4% secular net revenue growth in the third quarter across the group, together with the inorganic growth, this at least helped to offset some of the cyclical headwinds. More encouraging was the cost development in the third quarter. Despite a weaker market environment, we continued carrying out the key investment in growth, technology and regulation, but we also decided to minimize the organic operating cost growth in the third quarter to 0 by means of several different measures. And we wanted to demonstrate to you that we are able to contain our costs, if necessary. With this, the adjusted EBITDA decreased to EUR 431 million and the adjusted earnings per share stood at EUR 1.38 in the quarter.For the first 9 months in 2020, we still reached net revenue growth of 10% to a level of EUR 2.4 billion. The adjusted net profit amounted to EUR 928 million, an increase of 8%. This is broadly in line with our growth expectation for the full year. And despite a weaker development in the third quarter, our guidance for adjusted net profit in 2020 remained unchanged at around EUR 1.2 billion, but COVID continues to be an uncertainty. And among other factors, the guidance is subject to some pickup of market activity in the full quarter.As for the outlook for the next couple of years, We continue to be convinced that we can deliver very solid levels of secular growth and that the importance of M&A is increasing for us, but more about that during our Investor Day, which will take place on Wednesday, November 18 at 2:00 p.m. CET. Against the background of the COVID situation, it will be possible to participate in the event in a fully virtual environment including the Q&A session. But we are also planning to have a few on-site spaces available for local participants. Let me now hand on over to you, Gregor, and talk about the results in more detail.

[Gregor Pottmeyer, CFO & Member of Executive Board]

Yes. Thank you, Theodor, and welcome, ladies and gentlemen. Let me start with the group financials in the third quarter on Page 2 of the presentation. The 4% secular net revenue growth in the quarter was primarily driven by Eurex with additional net revenue from product innovation, pricing and growth of OTC clearing. But the Clearstream and the IFS segment achieved solid secular growth as well, mainly through their well-performing custody services. In contrast to the secular growth, we saw a 9% decline of cyclical net revenue. This resulted from lower trading activity in index and fixed income derivatives at Eurex, a COVID-related decline of power derivatives trading and the interest-related decrease of net interest income at Clearstream.Inorganic initiatives added another 2% net revenue growth, primarily contributed by the Axioma acquisition. Operating costs amounted to EUR 288 million. It is adjusted for around EUR 32 million exceptional items, which were mainly driven by M&A integration and restructuring charges out of our structural performance improvement program. Without the consolidation effects, operating costs were flat compared to the previous year. The equity valuation of in the Xetra segment, which delivered a very strong business performance in 2020 resulted in a positive effect on income from strategic investments, which increased to EUR 12 million. I'm now turning to the quarterly results of the segment, starting with Eurex on Page 3. While the total number of derivatives contract traded was down compared to the previous year, we saw a continuously high level of margin fees. They were driven by still higher levels of collateral held in our clearinghouse throughout the quarter, even though equity market volatility declined compared to the peak we saw in March. In addition, net revenue growth resulted from the growing outstandings and market share in euro-denominated interest rate swaps. In our commodity business, EEX, shown on Page 4, we saw continued COVID-related headwinds in power and gas products because of lower energy consumption and less hedging need.Let me turn to Page 5, and the FX business. Whilst the FX market volatility came down compared to the first quarter, was able to maintain broadly stable volumes because of business generated from new clients. I'm now turning to Page 6 and our cash market, Xetra, where we continue to see growing activity and an increase in net revenue. Most of this was driven by equity market volatility, but there was also a continuing sizable secular contribution from a further increase in market share. In addition, the strong growth in equity-change-traded fund activity related to the trend around passive investments, partly fueled the performance of the segment. EBITDA in the Xetra segment benefited from the higher equity valuation of Tradegate I mentioned earlier. The EUR 13 million we booked in the third quarter were respectively booked for the first 9 months of 2020, but we also expect an ongoing higher contribution for coming quarters. As you can see on Page 7, in our post-trading segment, Clearstream, we saw continued solid growth of custody net revenue. This is mainly driven by growing outstandings in fixed income securities due to higher debt financing needs across the board. Settlement activity was again mainly driven by the cyclical increase of trading activity in fixed income markets, but higher outstandings are also resulting in a sustainable increase of activity. With cash balances seasonally weaker in the third quarter, particular in August, net interest income stood at the lower end of the EUR 15 million to EUR 20 million quarterly guidance we gave earlier this year.The Investment fund services segment, which you can find on Page 8, continued to show a strong double-digit performance. This was driven by both cyclical and secular factors. Settlement mainly benefited from higher market activity, like custody and other revenue were driven by onboarding new clients by the good performance of our distribution services and by Ausmaq in Australia, which we acquired last year. On September 30, we closed the UBS Fondcenter acquisition we announced early in the year. As guided previously, for 2021, we are expecting Fondcenter net revenue of around EUR 60 million, which includes some revenue synergies from cross-selling. UBS will retain a stake of 49% in this business. This stake will not be shown as minority stake, but as financial liability. As the sale of this stake is already agreed, as a consequence, we will show 100% of this business in our income statement.Slide 9 shows the Qontigo segment, which consists of the Axioma analytics business we started to consolidate in September last year and the STOXX index business. While our acquisition has substantially strengthened this segment, its organic growth was rather muted in the past quarter. After the analytics net revenue had been above our expectation in the fourth quarter last year and first quarter this year, the EUR 50 million in the third quarter continued to reflect the temporary impact COVID-19 had on our sales and marketing activities.We see some improvement of this situation, which will likely be reflected in the fourth quarter. But some clients still have different priorities in the current market environment. ETF license net revenue continued to be somewhat under pressure from the flow situation in European product, but this was overcompensated by growth of other license net revenue. Let us now come back to our group financials on Page 10. With the exceptional development in the first quarter, a solid second quarter performance and cyclical headwinds now in the third quarter, we still achieved double-digit net revenue growth in the first 9 months of 2020. Due to the less favorable market environment and stronger year-over-year comparison, the earnings growth rate for the first 9 months is now broadly in line with our expectations for the full year.On Slide 11, we provide an overview of the 3 components of net revenue growth in the first 9 months. Consolidation effects resulted in additional net revenue of 2% or EUR 48 million. This was mainly driven by the inclusion of Axioma in September last year. Secular growth being the key component of our strategy to increase net revenue developed as planned and increased by 6% or EUR 134 million. All segments helped to achieve this, with Eurex being the largest absolute contributor and 360T, IFS and Qontigo showing the highest secular growth rates. Due to the COVID-related headwinds since the second quarter, the cyclical growth contribution decreased significantly, but still amounted to 2% or EUR 38 million. Adjusted operating costs, shown on Page 12 totaled EUR 879 million in the first 9 months. Operating cost growth of around 6% was a result of consolidation effects from M&A activities, primarily Axioma. Investments increased by 6% or EUR 47 million. This is primarily driven by the planned investments in growth and technology, an increase in personnel to support cost and by the cost to implement regulatory requirements such as CSDR. Furthermore, the exceptional COVID situation also required some extra spending on IT operations and security earlier in the year. Net inflation was flat as inflationary pressure in staff and other operating expenses was offset by savings from the structural performance improvement program.Due to the business and share price performance, variable and share-based compensation is almost flat as per the first 9 months. Because of the weaker market environment since the third quarter, we decided to minimize the organic operating cost growth by means of several different measures, but without cutting the key investments in cost.With the last page of today's presentation, we would like to reiterate the outlook for 2020. We continue to expect at least 5% growth of secular net revenues in 2020. This will mainly be driven by further progress in the OTC clearing business, new Eurex products, the commodities activity of EEX, the expansion of foreign exchange trading and clearing service, growth in Investment fund service as well as our index and analytics business, Qontigo. Despite the weaker development in the third quarter, our adjusted net profit guidance for 2020 remains unchanged at around EUR 1.20 billion adjusted net profit. Amongst other factors, this is, however, subject to an increase of market activity in the fourth quarter. Furthermore, we still see additional net revenues from the sale of the regulatory reporting up in the fourth quarter. And there is also some flexibility in the cost base in the fourth quarter due to the relatively high level at the end of last year.This concludes our presentation. Thank you for your attention. We are now looking forward to your questions.

[Operator]

[Operator Instructions] And the first question comes from Johannes Thormann from HSBC.

[Johannes Thormann, Global Head of Exchanges and Analyst]

One question and a follow-up, please. First of all, on the UBS Fondcenter deal, you said you will book no minorities. And then in the press release, you've linked to your presentation, there is no detail on the sales price for the remaining 48.8%. Could you provide some more details on this, please, how and when this will happen? And secondly, the exceptional cost guidance for this year, what should we expect? And what should we expect next year?

[Gregor Pottmeyer, CFO & Member of Executive Board]

Yes. Thank you, Johannes, for the question. With regard to the UBS Fondcenter acquisition, so as the pricing for the second tranche is already fixed, so that's the reason why we already consolidate 100% and do not show that as a minority. So we show that as a financial liability. And the valuation of the financial liability depends basically on the EBITDA development in '21. So we have defined a multiple on that basis, and we will see what is the final result of the EBITDA in '21. And then we would -- based on that, we would execute beginning of 2020.

[Theodor Weimer, CEO & Chairman of Executive Board]

2022.

[Gregor Pottmeyer, CFO & Member of Executive Board]

2022 -- sorry, 2022. The second question, exceptional costs, yes, I would expect that for this year, it would be slightly above previous year level, and for the next year in a comparable dimension. But overall, it's difficult to judge because these are exceptional items in principle. And it really depends when we deliver successful M&A transaction, just to give you that kind of example. And obviously, M&A is strongly part of our situation, of our strategy. Therefore, it would be even good if we would be -- would show successful M&A. So that's obviously one angle in the exceptional cost. And the other, the litigation and the restructuring cost. So obviously, the restructuring cost should go down. The litigation topics we have here, you are aware of our topic. You are aware of our U.S. litigation topic. So -- and this, we currently show as exceptional items, and that's really difficult to judge and difficult to plan. Therefore, that's the reason why we usually give no guidance on that side.

[Operator]

The next question comes from Mike Werner from UBS.

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

I guess looking at the past quarter, we certainly saw headwinds on the cyclical perspective, while secular growth held up. I guess, going forward, you have a number of businesses, where you operate very strong franchises, which we would argue, do have very strong pricing power. What's your view towards implementing some of that pricing power over the next couple of quarters, should the cyclical revenues remain a headwind for you?

[Gregor Pottmeyer, CFO & Member of Executive Board]

Yes, Mike. I think you are aware that in principle, our basic strategy is to increase our liquidity pools. So going for growth on that side. So it's basically not our growth strategy to use pricing power here. But in principle, you also are aware that we do what makes sense. And overall, so in -- over the past years, and it's comparable also this year, that we have an opportunity to have roughly 1% out of our net revenue growth coming from price increases. So overall, if you say, we want to grow more by 5% on a secular net revenue basis. So roughly 1% comes out of that. So 20% and 80% is focus on getting more liquidity, more customers. So that's our basic strategy.

[Operator]

The next question comes from Benjamin Goy from Deutsche Bank.

[Benjamin Goy, Research Analyst]

One question, please, on IFS and the UBS Fondcenter deal. Now given you're a much bigger player with the new Clearstream, Fondcenter, I just wanted to get some more color on the qualitative benefits or maybe also quantitative benefits of being a one-stop shop on the IFS side going forward.

[Gregor Pottmeyer, CFO & Member of Executive Board]

Yes. Obviously, you see that Investment fund service is still in that difficult market and while growing on a double-digit basis and that even organically and on top M&A activity. I think we have a very strong position here now gained over the last year. So all of the 3 acquisitions we did, so Swisscanto from Zürcher Kantonalbank, Ausmaq in Australia and just recently UBS Fondcenter. So that's part of our strategy. And obviously, the more we get, the stronger is our position. And the principle logic behind that is that we have now a big cost efficiency advantage compared to the back-office processes in the bank. So it's more than 50% as we have more trade-through processing with our Vestima platform and customers really appreciate that. And cost is obviously very important topic for all the bank-office processes. So that in principle, gives us good opportunity to further strengthen our opportunity via organic, but also via inorganic ways.

[Benjamin Goy, Research Analyst]

Early days. But do you already see it from Vestima clients' interest also in the new front office solution, so to say?

[Gregor Pottmeyer, CFO & Member of Executive Board]

Yes, sure. That is part of the strategy as it's with the UBS Fondcenter. We increased the value chain going now more in our funds distribution, and that's obviously part of our business strategy and our synergy cases that we have more customer access and that we can increase revenue synergies in that area. Yes, that's part of our business strategy.

[Operator]

And next up is Bruce Hamilton from Morgan Stanley.

[Bruce Allan Hamilton, Equity Analyst]

Just a question on the secular growth. I guess looking at the year so far, you started in the first quarter with about 8% growth or EUR 60 million, which slowed a bit in Q2. And then in Q3, it looks like there's been sort of EUR 27 million of incremental secular revenue or about sort of 3.5% growth. Can you give us a bit more color on why that's slowing? Is that to do with work from home? And if so, does that pose any risk to the sort of 5-ish percent as we cast into next year? And on the EUR 134 million of secular revenue growth year-to-date, can you give broad percentages in terms of how much -- I mean it sounds like Eurex is the biggest bit, but sort of Eurex versus IFS and others?

[Gregor Pottmeyer, CFO & Member of Executive Board]

Yes, Bruce, thanks for the question. So overall, you see some fluctuation over the quarters, but really our focus is on the year-to-date or the full year number. And therefore, the 6% secular growth we show here is a reasonable number and shows that we are able to deliver on the far majority of our growth initiatives. With regards to the contribution of the different business segments, so Eurex obviously is above currently that 6% level overall. Investment fund services has a higher growth rate here. So these are the 2 elements who contributed the most. And -- but in principle, all of these segments contribute in a different way. So even our Clearstream core business in the range of 3% to 5% to deliver here on the growth rate. So overall, clear message, all the segments deliver to the secular growth element. And I think we will also give you a little bit more guidance on the different business segments on our Capital Market Day, when we do an outlook for the next 3 years.

[Operator]

The next question comes from Ian White from Autonomous Research.

[Ian White, Research Analyst]

Just one question from me, please. Basically, I just wondered how confident can we be that the decline in Clearstream cash balances is not a structural response to the increase in cash collateral fees that was introduced earlier this year. I'm just conscious of the cash balance has fallen quite sharply despite settlement activity having remained relatively high. I just wondered if there was any feedback from users that you might share with us regarding the fee change, please.

[Gregor Pottmeyer, CFO & Member of Executive Board]

Yes. And so with regard to the cash balances, so there are high dependencies on the settlement activities in principles. And yes, with regard to the settlement activities, we had also some cyclical element in it. But our view is unchanged here. So in principle, when the settlement activity increased and also the cash balances will increase. But it's also very clear that there's a higher cyclical component here. And that's when you see our guidance with regard to the NII of where we say, EUR 15 million to EUR 20 million, So that depends really on the cash balances volumes. And so in Q3, it was below EUR 13 billion. That's why it was closer to the EUR 15 million. But if it's in EUR 1 billion higher and then we would see on a yearly basis, EUR 3 million more as we get the 30 basis points on U.S. dollar and euro. So there is some fluctuation here depending on the settlement activities and the cash balances. But there is no structural change here in it. So the customer accepted our 30 basis points cash handling fees for euro and for U.S. dollar. So that's not an issue.

[Theodor Weimer, CEO & Chairman of Executive Board]

If I may add to this, Ian, the price elasticity on the handling fee, we do not -- we have not seen any kind of price elasticity on the handling fee, right? Exactly what Gregor said. And also, the clients didn't argue in this way.

[Operator]

And next up is Arnaud Giblat from Exane.

[Arnaud Maurice Andre Giblat, MD & Research Analyst]

One question on cost then. The -- just 3 months ago, you were guiding for 10% to 14% growth for Q3, 0% for Q4. And at the current run rate of revenues in October, if you don't see the activity pickup that you're hoping for, in order to achieve your EUR 1.2 billion guidance, it looks like you're going to have to bring down cost mid-single digits in Q4. Over the presentation, you said you've got some flexibility. Can you please explain what sort of investments you're delaying and what sort of flexibility you have? If I think longer term, I think out to 2021, what sort of flexibility again do you have on costs?

[Gregor Pottmeyer, CFO & Member of Executive Board]

Yes. So as I mentioned in my speech, so we did -- we do not cut strategic initiatives. So as this is obviously important for sustainable mid- to long-term growth. So we do not do that. But nevertheless, there are operational topics, where you can decide on a tactical basis. And we also obviously look and have a high cost discipline. And when we see that the revenues are going not in the right direction because we have cyclical headwinds, obviously we have some flexibility to react. And yes, your math is right. If the trading activity does not increase in Q4, obviously we should be able to compensate partly that with regard to our cost development. Therefore, my expectation is that the Q4 costs are below previous year level. So we will have some tailwind here for the Q4 and development. In principle, looking forward for '21 and the following years, so in principle, we think, if we want to continue with our secular growth of at least 5%, so we need some comparable roughly 5% increase of investments or investing in people or investing in processes and systems to ensure that we have also that 5% secular growth in the future.

[Operator]

And the next question comes from Martin Price from Jefferies.

[Martin Gerald Price, Equity Analyst]

Just had a quick question on Axioma. I was just wondering if COVID-related headwinds have changed your expectations regarding the size or the timing, the synergies that you announced at the time of the acquisition and, I guess, are expected to flow through next year?

[Gregor Pottmeyer, CFO & Member of Executive Board]

Yes, you're right. It's a question of timing. So our view is unchanged. We will -- all the secular trends are here intact in that and area of data analytics, portfolio analytics, portfolio compensation, and so on. And from a 3-year perspective or medium-term perspective, there's no reason to believe why we shouldn't come back to the growth rates we have seen in the past. And you are aware that this was in the range of 20% growth over the last 10 years. So this year is definitely much more challenging. We see some growth, but obviously, by far, not that growth what we have seen in the past. And that is definitely COVID-related. And it's difficult for our marketing and sales teams to get access to the customer to get the higher priority. But that -- overall, the secular trend, we do not see changes here, and are convinced after we are through that COVID crisis, it's clear that we will grow through and that we will increase revenues also on the Axioma side.

[Theodor Weimer, CEO & Chairman of Executive Board]

All right. We don't have any further questions in the pipeline, so we would like to conclude today's call. Thank you very much for your participation, and have a good day.