Euronext N.V. (ENX) Earnings Call Transcript & Summary

Hello, and welcome the Euronext Q4 and Full Year 2019 Results Call. My name is Mahan, and I'll be your coordinator for today's event. [Operator Instructions] I'll now hand over to your host, Stéphane Boujnah, CEO, to begin today's conference. Thank you.

Good morning, everybody, and thank you for joining us this morning for the Euronext's Fourth Quarter and Full Year 2019 Results Conference Call and Webcast. I'm Stéphane Boujnah, CEO and Chairman of the Managing Board of Euronext, and I will start with the highlights of 2019. Giorgio Modica, Euronext's CFO, will then develop the main business and financial highlights for the fourth quarter. We will then open up for questions, together with Anthony Attia, member of the Managing Board of Euronext. 2019 was a major transformation year for Euronext, reaching major milestones: strategic milestones, financial milestones and operating milestones. We released a new strategic plan, Let's Grow Together 2022. We completed our largest acquisition since the IPO in 2000. We achieved the deployment of Optiq to European markets. All in all, Europe -- Euronext entered into its new strategic cycle in 2019. We released this new strategic plan, Let's Grow Together 2022, to set the path for Euronext to achieve its key goal of building the leading pan-European market infrastructure, connecting local economies in Europe to global capital markets. Clearly, innovation and sustainable finance are at the heart of this strategy. Clearly, Euronext will pursue the development of innovation solutions, innovative services to enable the group to capture new opportunities and to proactively address the challenges of the industry. But we will also support and accelerate in a significant way the transition towards the sustainable growth and sustainable finance. We are committing to pursue our growth strategy through high value-added acquisitions aimed at diversifying and strengthening the business profile of the company. . Second, we continued in 2019 to diversify our revenue profile, with a clear success throughout the year. We expanded our federal model and our post-trade franchise with the acquisition of Oslo Børs VPS, our largest acquisition since the IPO. We entered into new asset class with power trading through the acquisition of Nord Pool, also further widening our Nordics footprint. And we also invested in innovation solutions, such as tokenization platforms with Tokeny and fund data with OPCVM360. Lastly, we completed the deployment of the Optiq trading platform, which is a real key milestone in our technology development. Euronext has become a technology leader in our industry. Euronext Dublin cash markets smoothly migrated early 2019 to this platform. Derivatives markets migrated in late 2019, providing our derivative trading's members with tenfold reduction in latency and unlimited overall capacity. And the last milestone will be reached this year with the planned migration of Oslo Børs markets to Optiq. So moving now to Slide 5 on the financial performance. Euronext reported a very strong performance throughout 2019, with double-digit growth in revenue, double-digit growth in EBITDA and double-digit growth in adjusted EPS. Revenues increased in 2019 by EUR 64.1 million, up plus 10.4% to EUR 679.1 million. And this strong performance reflects solid core business dynamics and successful diversification. First, our diversification strategy continued to pay off, with non-volume-related revenue accounting now for 50% of group revenues, thanks to our strengthened custody and settlement business. And now this non-volume-related revenue cover 122% of operating costs. So a fundamental step towards further diversification of our top line have been reached in the course of 2019. Our core business proved also its resilience against declining volume that were partially offset by strong organic performance of our Listing and Advanced Data Services businesses. Also, our Corporate Services businesses reported double-digit growth and the Listing business saw improving market conditions during the second half of the year. The indices part of Advanced Data Services performed well, offsetting a downside trend on core market data. And finally, Oslo Børs VPS contributed EUR 57.1 million for 2019. At the same time, we continued to deliver on cost control as we outperformed on our 2019 cost guidance. We also delivered EUR 7.8 million of run rate cost synergies at the end of the year in Euronext Dublin. So the financial targets for Dublin had been reached much ahead of a initial targets. This overall cost discipline has translated into group EBITDA growing faster than revenue by 12.8% in 2019 to EUR 399.4 million, leading to a combined EBITDA margin of 58.8%, 2.8 points higher than last year. And even on a like-for-like basis, the EBITDA margin reached 60.4%. So overall, this strong operating performance over the year resulted in a 10.9% increase in adjusted EPS at EUR 3.90 per share on a reported basis. 2019 net income was up 2.8% at EUR 222 million. This number was impacted by exceptional items like restructuring costs, the impairments of some revaluations and incremental costs related to buy options and deferred payments related to the overperformance of some businesses affected by earn-out commitments. Lastly, in accordance with the Euronext dividend policy, a dividend of EUR 1.59 per share will be proposed to shareholders. That represents a EUR 0.05 increase from last year, despite various nonrecurring cost this year. So this dividend represents 50% of the reported net income, and as I said, will be proposed to the shareholders' meeting on the 14th of May. Moving to Slide 6. 2020 will be a year of transformation, as Euronext will actively work on achieving its transformation ambitions and progress on the integration of Oslo Børs VPS. So you remember that last year, we expected and we guided the market to a low single-digit growth in operating expenses, excluding D&A. Thanks to our continued disciplined cost, we clearly outperformed on these cost targets released in October last year. So as announced at our Investor Day, we now expect to incur nonrecurring costs related to the integration of Oslo Børs VPS and related to some internal digitalization projects that are very important to build the Euronext of tomorrow. As a result and before the delivery of the first synergies in 2021, we expect operating costs, excluding D&A, to temporarily increase mid-single digit in 2020, compared to the annualized second half 2019 cost base. I now hand over to Giorgio Modica for the detailed presentation of our fourth quarter.

Thank you, Stéphane, and good morning, everyone. First of all, I would like you to remind that for the fourth quarter of 2019, the organic performance of the group excludes Oslo Børs VPS, Commcise and OPCVM360 and any costs incurred by Euronext for their integration. In the fourth quarter of 2019, Euronext's consolidated revenues reached EUR 185.7 million, with an increase of EUR 28.4 million or 18.1%. This result was driven by resiliency of our core business, the continued traction of Corporate Services and the contribution of Oslo Børs VPS for EUR 27.1 million and Commcise for EUR 1.3 million. Now looking at the different business lines. Listing revenue grew 23.7% to EUR 36.5 million, driven by the double-digit growth of corporate service, continued dynamic environment in Listing and the consolidation of Oslo Børs VPS. Trading businesses this quarter were generally characterized by lower volume and stronger yields. Revenue was slightly up 1.4% to EUR 70.8 million, reflecting a strong cash market share above 70%, a stronger yield across all asset classes, partially offsetting softer volumes and the consolidation of Oslo Børs. Advanced Data Services reported a good quarter, up 12.5% to EUR 33.5 million, primarily driven by the integration of Oslo Børs VPS and the good performance of index activity, particularly on ESG products and structured products. Post-trade activity revenue nearly doubled to EUR 33.4 million as a result of the consolidation of VPS, increased activity in both custody and settlement and higher clearing revenues. As Stéphane already mentioned, in the fourth quarter of 2019, non-volume-related revenue accounted for 52% of total group revenue, reflecting notably the increased proportion of services, custody and settlement in our revenue mix. Lastly, this non-volume-related revenue covered 119% of our operating costs, excluding D&A, compared to 101% last year. Moving to Slide 9 for Listing. The growth engine this quarter were corporate service and Oslo Børs. Revenue grew 23.7% to EUR 36.5 million. In particular, corporate service continued to report strong organic growth of more than 45% versus last year, thanks to increased commercial traction. Combined with the activities of Oslo Børs VPS, our Corporate Services franchise reported EUR 7.6 million of revenues this quarter. With regard to equity listing, we saw the continuation of a positive Q3 trend, with 15 new listing and EUR 3.3 billion raised. Euronext welcomed 3 domestic large-cap listing this quarter, notably Française Des Jeux in Paris, the second largest lottery in Europe and the fourth largest worldwide as well as Verallia and the Nordic company, TietoEvry. In addition, we had 12 SME listing this quarter. Thanks to this dynamic quarter for listing, Euronext ranked as the first exchange for listing in Europe in 2019 in terms of number of operations. Activity on the secondary market decreased compared to the fourth quarter of 2018, despite improved market conditions, reflecting lighter M&A activity compared to the record high last year. Our debt franchise reported strong growth, demonstrating our global leadership position in this market. Moving now to our trading business on the next slide, starting with cash trading. Cash trading revenue increased 0.7% to a total of EUR 53.2 million. On an organic basis, revenue decreased 4.5%, despite volume down 7.5%, thanks to improved revenue capture. ADV increased to EUR 8.4 billion, up 3.6%, resulting from the consolidation of Oslo Børs volumes. Combined market share was 70.9%, including Oslo, 4.8% higher than last year and reached 71.2% like-for-like. We continued our active yield management. Revenue capture was up to 0.53 basis points on an organic basis. The combined average fee with Oslo was at 0.49 basis points, slightly diluted by the higher share of reported deals in Oslo. Moving now to derivative trading, derivative revenue was up 3.8% to EUR 11.9 million. Financial derivative volumes declined, impacted by low volatility. Commodities volume increased double digits, reflecting an improved agricultural physical market environment. Average revenue per lot increased 6.1% to EUR 0.30 per lot, reflecting enhanced revenue capture, partially offset by less favorable mix due to the growth of our equity futures. Lastly, on FX trading, revenue was up 4% to EUR 5.8 million, thanks to improved yield management, while average daily volume decreased to EUR 16.5 billion, impacted by the low volatility throughout the quarter. Moving to the next slide for our post-trade businesses. Revenues from post-trade activities increased 76.1% to EUR 33.4 million. Clearing revenue was up 8% to EUR 14.5 million, resulting from higher commodity volumes, higher treasury income offsetting lower overall derivative volumes. Custody and settlement revenues accounted for EUR 18.8 million, resulting from the consolidation of VPS activities for EUR 13.2 million and increased settlement activity at Interbolsa. Moving to Slide 12. Starting with Advanced Data Services, revenue was up 12.5% to EUR 33.5 million in the fourth quarter of last year. Oslo Børs VPS data business contributed EUR 3.8 million. The growth of our indices franchise, notably on ESG product, offset a slight decrease in market data revenues. Proceeding now with investor services. Revenue was EUR 1.6 million, supported by the development of the offering. We also reported a small contribution from Oslo Børs VPS activities for EUR 0.3 million. Lastly, on Technology Solutions, revenue was up 8.4% to EUR 9.9 million as a result of the good performance of safety colocation services and hosted services and the consolidation of Oslo Børs VPS. Now before commenting on EBITDA and net income, I'm on Slide 14, let me start with some consideration on the value of one-off items of this quarter. Since IPO, we remained disciplined on the labeling of nonrecurring items as exceptional. We booked in the line exceptional only items that are clearly measurable income or expense, that relate to clearly identifiable events, transactions or specific projects which are nonrecurring by the size or by their nature. This means that, as discussed several times, all other nonrecurring items are booked above or below EBITDA, depending on where they belong to. Now moving to the nonrecurring items this quarter. Within OpEx, we booked EUR 3.2 million related to the successes for the acquisition of Nord Pool and to share-based payments. Further, as mentioned in November, we start to incur integration cost for Oslo Børs VPS for EUR 1.2 million this quarter. In exceptional items, we usually include cost related to transformational deals. This quarter, we reported EUR 5.8 million related to the integration of Oslo Børs VPS, namely restructuring costs and early termination of contracts and EUR 2.4 million of M&A and other restructuring costs. Moving to financing expense. This quarter, we had EUR 13.3 million of revaluation of buy option and deferred payment for some of our corporate service businesses, reflecting a stronger-than-expected performance. As mentioned by Stéphane earlier, the integration of Oslo Børs VPS and internal digitalization project will generate nonrecurring costs throughout 2020 before delivering synergies in 2021. Moving to the next slide for the highlights of the fourth quarter, starting with the EBITDA bridge. Euronext EBITDA grew faster than revenue, 19.8% to EUR 104.1 million this quarter, driven by the continued cost discipline and the consolidation of our recent acquisition. Overall, EBITDA margin increased to 56% in the fourth quarter of 2019, up 0.8 points. On a like-for-like basis, the EBITDA margin was 57.9% this quarter, up 2.7 points. From a revenue perspective, revenue at constant perimeter remained stable, despite low trading volume compared to last year, while Oslo Børs VPS, Commcise and other nonorganic element contributed EUR 28.4 million. Looking at costs. Organic operating expenses, excluding D&A, decreased EUR 4.2 million. This reflects both the adoption of IFRS 16 from the beginning of 2019 for around EUR 2.7 million and the continued cost optimization for around EUR 1.5 million. With respect to the integration of Euronext Dublin, out of the targeted EUR 8 million of expected run rate synergies, EUR 7.8 million have been already delivered as of December 2019. In addition, we consolidated EUR 15.5 million of operating cost, excluding D&A, from Oslo Børs VPS, Commcise and OPCVM360 and other integration costs this quarter. Moving to the net income bridge. Net income decreased 1.2% to EUR 49 million this quarter, resulting from the following elements. D&A mechanically increased due to the adoption of IFRS 16 and were also impacted by Oslo Børs VPS PPA accounting for EUR 2.8 million. Exceptional items were higher this quarter compared to the fourth quarter of 2018, resulting primarily from restructuring costs at Oslo Børs VPS and advisory costs. Net financing expense increased in this quarter due mainly to the revaluation of buy option and deferred payments related to Corporate Services entities. Lastly, income tax rate increased, reflecting nondeductible expenses related to the recognition of the earn-out liabilities I just mentioned. Going forward, we anticipate that the combined tax rate of the group shall go below 30% in 2020. Adjusted for PPA and exceptional items, the adjusted net income this quarter was up 26.6% to EUR 77.3 million, translating into an adjusted EPS of EUR 1.11 this quarter. To conclude with financial. Over the quarter, 75.7% of EBITDA was converted into net operating cash flow post tax, compared to 63.7% last year. Our net debt stands slightly higher than EUR 1 billion, representing a net leverage of 1.5x pro forma. Looking at the bottom of the slide, as of the end of '19, our liquidity position remains strong, close to EUR 770 million, including the undrawn RCF of EUR 400 million. I'll now hand back the floor to Stéphane Boujnah.

Thank you, Giorgio. And as you have all noticed it, we're reporting -- we reported a strong quarter, and overall, a strong year. This is the result, you have understood, of the consolidation of our last acquisitions, the result also of solid core businesses' dynamics and the result of continued cost management. So we are now available for your questions, with Anthony Attia, Managing Board Member and Giorgio Modica.

[Operator Instructions] So we already have a few questions, the first one being from the line of Kyle Voigt from KBW.

Three questions for me. First is just on the 2020 expense guidance. Can you frame how many nonrecurring costs are with -- are embedded within that guidance? Just trying to get a sense of what the guide would be, excluding those kind of nonrecurring items. Second question, just on the Nord Pool business, I appreciate the revenue disclosure, but is there anything you can share on the profitability or the margin profile of that business? And then the third question is just related to the ESMA consultation with respect to the transparency of equities and the double volume cap that was launched a couple of weeks ago. It seems like the regulators are trying to find a more effective way to push more of that volume on to lit venues. Is -- what is your level of confidence that ESMA will be eventually successful in doing that? And then, I guess, can you try to talk to how big of an opportunity you think that is for Euronext over the coming years?

Okay. I will answer your third question on the ESMA consultation, and Giorgio will answer your first question on expense guidance and your second question on Nord Pool profitability. On the ESMA consultation, we have a very close dialogue and constructive discussions with all the regulatory authorities to make sure that we achieve the collective objective of delivering the initial intent of MiFID II. The MiFID II core objective was to make capital markets more transparent and to migrate more volumes from dark markets to lit markets. For all sort of reasons, this core objective was not achieved because several tools that were conceived and designed initially within the MiFID II architecture as pure buffers, our flexibility arrangements became genuine alternative trading prices and de facto quasi price formation locations. ESMA is looking at the impact of these trends, is looking at ways to bring back the market architecture within the framework intended in -- within MiFID II. So we have a very constructive, transparent dialogue with ESMA in this respect. Over to you, Giorgio, on expense guidance and Nord Pool.

Yes, absolutely. So let me start from the cost target. Let me elaborate a little bit on that. So the starting point is the annualized second half. And this is a good starting point because, as you know, there is a seasonality effect on the cost. So to a certain extent, the one-off in the fourth quarter and the slight seasonality benefit in the third quarter compensates, so this provides a solid base for projection. Then answering directly your question, I would say that pretty much all the increase of the cost we're expecting for next year is nonrecurring. And this ties very well with the guidance we provided during the Investor Day, saying that we would have invested around EUR 12 million in digitalization projects and EUR 18 million for the integration of Oslo Børs VPS. So the plus 5% is the translation into our P&L of that guideline. Answering to your second question, when it comes to Nord Pool, the EBITDA margin that you should take into consideration for your assessment is around 25%.

The next question in the queue comes from the line of Philip Middleton from Bank of America.

Following on from Giorgio's comments on 2020 guidance, where you're saying basically almost all of the uptick, apart from consolidation in Nord Pool, will be one-off. Does that mean that we should effectively start 2021 assuming a similar level as H2 run rate for 2019, i.e., so should we assume all that, what you've now called to be 5%, you previously called mid-single digits, just drops away, and we should just assume a little bit of inflation from then? So in other words, we should assume 2021 cost looks significantly lower than 2020.

So I mean, in this respect, we felt that giving a guidance for 2020 was really important, having in mind that the target for the plan of 2022. Now providing another intermediate point of 2021 cost base is something that we are not ready to do at the moment. So what I can say, a bit repeating myself, is that the increase of cost is temporary, is related to projects that will be closed by the end of next year. Clearly, there is going to be in 2021 another part of integration costs and project costs, but we will start having the benefits of the synergies. I believe that this is what we can say at the moment.

The next question in the queue comes from the line of Arnaud Giblat from Exane.

Yes. I've got 2 questions, please. Could you perhaps provide us an update on BME. We're hearing everything and its opposites in the press. So I'm wondering what your stance is there. What is an acceptable level of return on invested capital? Or maybe what is your view on WACC? I'm just wondering if that may have changed. And secondly, on Nord Pool, as I understand, it does mostly -- it only does spot trading. Is there an opportunity for you to introduce futures on that exchange? And secondly, what sort of profitability could you be aiming for in the long term or post synergies?

So I'll take your question on BME and Giorgio will take your questions on Nord Pool. On BME, the situation is very simple. We are monitoring all the developments around the current BME situation. We are analyzing all the relevant parameters that are driving a possible decision on this asset. And these monitoring efforts and these analyses are going to lead in due course to a decision to make an offer or not to make an offer on BME. Over to you on Nord Pool.

Yes. So when it comes to Nord Pool, a few elements. Clearly, the activity today combines of 2 elements. One is spot trading, and the other one is the market coupling. You are correct. Today, the main activity is the spot trading, and we see a possibility to further develop the activity into the derivatives, which will be part of our plan together with the expansion in Europe of that activity. Having said that, when it comes to longer-term EBITDA target objective, so far, in terms of targets, for you to make your analysis, we believe the 25% is a good percentage.

Can I just follow up quickly on BME? When you're talking about parameters, will you consider revenue synergies as a potential parameter in your financial analysis before making a bid?

We are analyzing all the relevant parameters to make a large investment decision. That includes definitely cost synergies, revenue synergies, cost of capital and all the other circumstances that any investor would analyze, including all the moving pieces that have evolved since the [ six ] offer was announced and all the developments that are relevant in this type of situations, including all sorts of strategic analysis that a company like Euronext has to do, one of them being the best allocation of the capital of our shareholders.

Our next question comes from the line of Ian White from Autonomous.

I just wanted to follow-up, actually, on Arnaud's question around return targets. Previously, I think you've said, in terms of your return on capital employed being in excess of WACC, that the relevant figures for WACC are sort of 8% to 9%. And is that still the correct hurdle for M&A today? I'm conscious that the group's own cost of debt and cost of equity have likely fallen over the last year or so since you sort of gave that 8% to 9% range, I think, sort of early last year. So that's question one, please. And on question two. And we're seeing some commentary from at least one large sell-side dealer suggesting that they are looking to reduce the number of multi-dealer FX platforms, and they are prepared to connect to and just focus on the larger players in the sector. If that were to become a more widespread trend, do you see that as a threat or an opportunity for your own FX business, please?

I'll answer the ForEx business question, and Giorgio will answer the question on possible adjustments to the return on capital employed and self-imposed discipline. On the ForEx front, we are -- after the acquisition of FastMatch, now Euronext ForEx, we have developed an expertise within the Euronext group on the ForEx front. We have very close dialogue with all the players of the value chain in the ForEx trading world. We do know that some of them are considering reorganizing the way they adjust their electronic -- they process their electronic flows. We believe that the solution for growth is in an intimate dialogue in a niche positioning of our offering. We believe that there are opportunities to grow for a player like Euronext in the ForEx market. We are confident that the initiatives we have taken in other geographies, including the launch of our services in Singapore, is going to diversify our revenue mix over there. . And we are absolutely aware that the world of ForEx is changing. We believe that being a cutting-edge technology operator is a key differentiator. It's not the only solution, but it's really a necessary condition to be relevant and to be a strong partner to the relevant players in this industry. So we feel that there are opportunities because, exactly as you say, the sector is moving.

Then coming to your question on WACC. I believe you are spot on in the sense that, clearly, we are -- started an internal thinking to assess whether what seems to be a new normal in terms of cost of debt will translate into a reduction of our threshold. This internal thinking is not over, and it involves ourselves, the Managing Board and the Supervisory Board. What I can tell you at the moment is that the threshold is going to be lower than the 8% to 9%. I am not in a position today to update the target, but clearly, we would need to reflect the reality where, this quarter, we paid for EUR 1 billion of debt, EUR 1.7 million pretax of interest. So in a short sentence, we will remain disciplined. So you should not talk -- expecting the threshold to reduce dramatically. But clearly, a reduction of the target 8% to 9% is something that we are considering.

The next question in queue comes from the line of Mike Werner from UBS.

Three questions, please. First, on the listing fees that we saw in the fourth quarter. We saw quite an uptick in terms of the other listing fees, about EUR 4.3 million. I was just wondering what was reflected there. Second, with regards to the cost guidance for 2020, you indicated that some of the spend in 2020 will lead to cost savings as we look out to 2021. So is this the case where we can actually think potentially, again, excluding other project costs and other integration costs in 2021, that the run rate, the operating cost base, will actually decline in 2021 from 2020, even excluding the nonrecurring expenses in 2020? And then finally, I read an interview yesterday from you, Stéphane, indicating that you were interested in Borsa Italiana should it be put up for sale. I just wanted to kind of confirm that, that was the case and get any thoughts you might have on that.

I'll take your question on Borsa Italiana, and Giorgio will take your question on listing fees and your other question on run rate cost savings. So on Borsa Italiana, I want to be super clear because there are 2 components in my answer and sorry for repeating what was not addressed properly probably in some media. Borsa Italiana is owned by London Stock Exchange Group and is not for sale, and there is no intent whatsoever indicated by the management of the London Stock Exchange Group that they are contemplating any sale. So there is no Borsa Italiana situation for the moment. Number two, if you ask me that in the event, which is not foreseeable for the moment, that this assumption was to change, if there were to be a sale process, an intent to enter into a dialogue for disposal, whatever that would change this assumption, then, for sure, Euronext will analyze carefully the Borsa Italiana situation as such, assuming that it exists, because again, for the moment, it does not exist in any way whatsoever. And then assuming that it exists, we will look at it, because the purpose, the mandate, the DNA of Euronext is to power pan-European capital markets to finance real economy, is to build the leading pan-European market infrastructure and Borsa Italiana is a great company with great teams with great diversified businesses. And if there is one decision, for sure, we believe that we will be one of the options that could make sense for the relevant stakeholders, including the shareholders, because we would have significant synergies and we will know how to accommodate within the Euronext family, within our united in diversity model, such a great asset. But for the moment, and sorry for repeating myself because it seems to be unheard, there is no situation around Borsa Italiana and there is no indication that the London Stock Exchange Group has any intention whatsoever to dispose or to sell this asset. So there is no situation to be commented beyond theoretical speculative comments.

Yes, I will take your question on cost and give the floor to Anthony on the -- on your listing question. So when it comes to cost, I can say a few things. First, cost will go down. This is a fact. This is a part of the targets that we did put out in the market at the Investor Day. Then it is clear as well that the increased cost in 2020 are going to be one-off. Then, unfortunately, today, I'm not in a position to provide an intermediate guideline in between the landing point of cost for 2020 and the objective of having a margin in excess of 20 -- 60% in 2022. However, the message is clear, costs are set to go down and profitability will improve.