Flow Traders Ltd. (FLOW.AS) Q2 FY2025 Earnings Call Transcript & Summary

Hello. Welcome to Flow Traders Second Quarter 2025 Results Conference Call and Audio Webcast hosted by Eric Pan, Head of Investor Relations. [Operator Instructions] I would now like to hand the call over to Eric Tan, Mr. Pan, please go ahead.

Good morning, and thank you for joining us Second Quarter 2025 Results Conference Call. As you have no doubt already seen, we released our trading update first thing this morning along with the leadership update. I am joined here on the call by Full Trader CEO, Mike Kuehnel; as well as our Co-Chief Trading Officer, Alex Keift and Marc Jansen, who will run through this results presentation. We will be happy to take any questions you may have after the presentation. Before we begin, let me draw your attention to the disclaimer on Page 2. Please be advised that if you continue to listen to this presentation, you are bound by this disclaimer. Also, please note that the results we will discuss in this presentation are unaudited. With the formalities out of the way, I would now like to hand over to Mike for his opening remarks.

Thank you very much, Eric. Good morning, everyone, and thank you for dialing in. The second quarter of 2025 as a whole saw elevated activity in market trading environment with volumes and volatility in traditional asset classes, seeing a meaningful step up when compared to the same period a year ago. Flow Traders ETP Value Traded increased by 42% in the quarter compared to the last year and is largely in line with the market's 50% year-over-year increase. Total value traded increased by 14% year-over-year to close to EUR 1.7 trillion, the third highest quarter in company history. We achieved a net trading income of EUR 143.4 million in the quarter, our fourth straight quarter of triple-digit NTI, and the first time in the company's history. It was also the fifth triple-digit NTI in the last 6 quarters, the strong validation of our growth and diversification strategy. The strength in the quarter was driven mostly by a sharp increase in activity in traditional asset classes across Europe and the Americas. The increase occurred mostly in the first half of April following the liberation date tariff announcements from the new U.S. administration. The flurry of activity did not last very long. However, as a force in the implementation of the tariffs was announced only a few days after the initial announcement. Market activity declined gradually from the second half of April into May and June, with volatility in July running below historical averages. The higher-than-average market volatility in traditional asset classes in the early part of the quarter was offset by meaningfully lower volatility within digital assets. Similar to the historical trends, Crypto continues to exhibit countercyclical attributes when compared to traditional asset classes. As a result, we saw meaningfully lower contributions from digital assets in the quarter when compared to the same quarter a year ago, and especially when compared to the first quarter. Total income came in at EUR 143.9 million for the second quarter, which included a EUR 0.5 million gain in other income. As a reminder, other income reflects the unrealized gains and losses of our investment portfolio, which also includes digital asset holdings and can fluctuate from quarter-to-quarter. Fixed operating expenses in the quarter were EUR 49.8 million, an increase of 15% year-over-year and a 2% decrease compared to the first quarter. We continue to plan for a meaningful step-up in fixed OpEx this year to support select hiring of subject matter experts as well as increased technology investments given our growth and diversification strategy. We recorded a EUR 2.5 million reversal of impairments in intangible assets related to our digital asset trading book in the quarter. This is a partial reversal of the EUR 10.5 million impairment we recorded in the first quarter. As a reminder, these below-the-line positions are hedged and the gains or losses of the offsetting trades are recorded in our NTI. Given our relatively fixed cost base and high operating leverage, we generated an EBITDA of EUR 68 million in the quarter, more than triple our results from a year ago at a 47% margin compared to 29% a year ago. As a reminder, our variable employee compensation is set at 32.5% of operating results which aligns employee incentives with those of our shareholders. Net profit for the quarter increased to EUR 51.3 million, almost quadruple the EUR 13 million from the same period a year ago with a basic EPS of EUR 1.18. Despite much of the elevated activity in early April, having dissipated in May and June, and lower contribution from digital assets, the solid results of this quarter serve as continued validation of our growth and diversification strategy. I will now hand it over to Alex for the next few slides.

Thanks, Mike, and good morning, everyone. As shown in the top left-hand side of the slide, market ETP Value Traded increased by 50% in the second quarter compared to the same period a year ago, and by 14% compared to the first quarter. Implied volatility in the quarter, as represented by the fit, increased by 67% year-over-year and by 20% compared to the first quarter. Total ETP assets under management increased by 7% in the first half, and 22% year-over-year to almost EUR 15 trillion given continued record fund inflows into ETPs in the quarter and the strength of the overall market. ETP philosophy increased in the second quarter compared to the first quarter to the highest level seen in more than 2 years. In summary, the secular industry trends across the ETP universe continues to be strong. Market activity in the second quarter was the highest in more than 2 years, but remained well below levels seen in 2022 and 2020. I will now move on to the dynamics within the fixed income and crypto markets. As shown on the top left of the slide, trading volumes in the investment-grade and high-yield boat markets increased in the second quarter compared to last year, but investment grade volumes decreased compared to the first quarter. Volatility, as measured by the MOVE Index, increased slightly, both compared to last year and last quarter. Trading volumes in cryptocurrencies increased in the quarter compared to last year, but declined meaningfully compared to the first quarter. Global crypto ETP market value traded also increased compared to last year, but declined compared to the first quarter. Moving on to the next slide. On Slide 6, we present an overview of some of the key performance indicators for the quarter on a regional basis. As mentioned earlier, market ETP value traded increased substantially in the quarter when compared to the same period a year ago. However, market ETP value traded declines in Europe and Asia in the second quarter when compared to the first. The robust and comprehensive trading capabilities that we have developed over the years across different regions and asset classes, put us in a great position to capture opportunities that arise in different parts of the market through different market environments. In Europe, we maintained our position as a leading liquidity provider in ETPs, amidst increased market activity and volatility in the quarter. We were able to benefit from the sudden but short-lived spike in volatility in April on top of the continued record fund inflows into ETPs. In the Americas, liberation day tariff announcements drove significant increases in market trading volumes and volatility in April, alongside continued record fund inflows into ETPs. However, market activity subsided in June and May, given the quick path in the implementation of the tariffs. In Asia, trading volumes remained elevated in Hong Kong and China, in the quarter when compared to the same period last year, but were lower quarter-on-quarter given the initial tariffs that were already announced in the first quarter. Trading volumes in China has doubled versus a year ago and is now 2x to 3x that of Europe.

Volumes in other regions increased both year-on-year and quarter-on-quarter as a result of the new tariff announcements. As a result, this was the company's best second quarter result in Asia, following a record year last year. Digital Assets, volumes in crypto increased compared to the same period last year, decline compared to the first quarter. Volatility declined meaningfully, both year-on-year and quarter-on-quarter. As a result, we saw much lower contributions from digital assets this quarter when compared to both last year and last quarter. Let's move on to the next slide. Fixed operating expenses in the quarter increased by 15% when compared to last year to EUR 49.8 million due mostly to increased employee and other expenses, but decreased by 2% quarter-over-quarter. We delivered a strong 49% EBITDA margin in the quarter compared to 29% in the same period a year ago. given the high operating leverage inherent in our business. We ended second quarter with 607 FTEs, a decrease from the 619 FTEs at the end of the first quarter. We continue to expect fixed operating expenses for the year to be in the range of EUR 190 million to EUR 210 million, given additional technology investments and targeted additions of subject matter experts in growth areas, partially offset by expected operational efficiency gains. On Slide 8, we take a look at the historical performance of the company in the context of market volatility. The chart on the left shows our company's steady NPI growth since our IPO. This growth is due to investments we've made in trading across regions and asset classes. Our strategy of growth and diversification allows us to seize opportunities wherever possible. As a result, we can deliver strong results even when market activity is low and gained significantly during volatile periods. The chart on the right highlights our consistently strong average EBITDA margins of over 40%. This success comes from the high operating leverage in our business helped by our flexible compensation approach. Our mix of fixed and variable compensation brings employee pay to company profitability. This ensures our employees' interest to align with those of our shareholders. On Slide 9, we highlight the trading capital is essential for any trading firm. And increasing it is a key priority for us. Due to strong fast returns on trading capital, we decided last year to expand our trading capital base further. We did this by suspending the dividend and seeking external debt. Thanks to this decision and strong profits, we have grown up trading capital to record levels, increasing it by 33% year-on-year and 4% since the first quarter. reaching EUR 831 million. Our shareholders' equity also reached record levels, growing by 29% year-on-year to EUR 821 million by the end of the second quarter. This growth matches the increase in trading capital. With increased market activity, we achieved strong returns for the first half of the year, 75% on average trading capital 26% on it. The strong second quarter results confirm the success of our trading capital expenditure plan and our diverse trading strategies. We believe that with more capital, we can continue to achieve significant returns and strengthen our position as a leading global trading firm, providing liquidity and efficiency in many financial markets. Moving to the next slide, I will discuss market trends and our strategy. Slide 10 highlights 4 key management that support our strategy, and they remain strong. These trends shape our market environment, providing many opportunities for us. Importantly, these trends complement and strengthen each other. The key trend for our business is the growing acceptance of exchange-traded products and passive investments. In the second quarter of this year alone, total industry assets under management in ETPs grew by $1.8 trillion. This figure is expected to rise from $17 trillion today to $25 trillion by 2030, showing the strength and importance of the ecosystem we are a key part of. Electronification of trading is crucial for activities, especially in the fixed income asset class -- it's a major trend in corporate credit and emerging market sovereign bonds. Increased use of electronic trading fits well with our tech-driven strength. Fixed income ETF assets are expected to grow from $2.5 trillion now to $6 trillion by 2030. This growth is partially because of the increased electronification with the recent regulatory developments on digital assets, there's more institutional interest globally. We expect continued growth in investor demand for this asset class, which is a long-term growth opportunity for our company. The technology behind it could boost the tokenization of real assets from $260 billion today to $30 trillion by 2030. And finally, regulations benefit our business by ensuring fair execution and transparency, creating a level playing field for all more oversight in digital assets provides industry safeguards and it removes barriers for investors. We are collaborating with global regulators to enhance transparency, efficiency and liquidity across all markets and asset classes. Let's move on to the last slide. On this slide, I will recap the firm's 4 key strategic pillars to grow, strengthen and accelerate the business. First, we are optimizing our core and increasing our capital. We aim to create a strong and efficient business model by improving our trading base. At the same time, we are growing our capital to enhance the value of our trading strategies across different asset classes and regions. The trading capital expansion plan from last year provides the necessary funds for us to continue expanding and diversifying. Second, we are expanding and improving our training skills, by using our in-house infrastructure, capabilities and expertise, we are exploring new products and improving our existing training strategies. Our investment in digital asset trading over the past 8 years shows our commitment to this strategy. Third, we focus on technology and innovation. We plan to use new technologies and data insights to improve our pricing and enhance efficiencies in trading. Finally, we are diversifying our business and revenue streams. We invest in new business ideas and partnerships for connectivity, platforms, data and tokens. But partnering with others, we aim to boost innovation in financial markets and grow our revenue. We are very excited about the launch of AllUnity, our euro-based stablecoin with DWS and Galaxy. It's an instrument that we expect to help bridge the world of traditional finance and digital assets. revolutionizing and bringing new possibilities to traditional finance as we know it. In conclusion, by focusing on our 4 main strategic goals, we believe that success like we've seen this quarter will become standard as we continue to deliver on each of these strategic priorities. I will now hand the call back to Mike for final remarks.

Thanks, Marc. I'm immensely proud of what we have collectively achieved during my tenure here at the company, which has culminated in the company's first fourth consecutive quarter of triple-digit NTI and the fifth in the last 6 quarters. Equally, I take pride in the development and growth of our global leadership team, cultivating and attracting tenants has been a pivotal focus during my 4 years, and I'm thrilled about the current standing of this team. I would like to extend my warmest welcome to my successor Thomas Spitz, as he takes over the mandate to grow and expand the company. I have full confidence in Flow Traders' future and the leadership team in place as well as its ability to grow and become an even more significant force in promoting transparency, efficiency and resilience within global financial markets. I will now hand the call over to Eric for the Q&A.

Thanks, Mike. This concludes the formal part of our presentation. We would now like to open up for any questions you may have. Operator?

[Operator Instructions] And our first question comes from Julian Dobrovolschi from ABN Umbro auto.

I have 3, if I may. So the first one is on the U.S. If you could give us some color on your strong performance in the U.S. I'm just wondering from where does that come from? Also, if you look at the revenue capture, this also increased and usually, I think if you look kind of in the past performance is then this is driven by your copper trading activity, which you also stated was kind of weak in Q2. So I was just kind of wondering from where this booster to the NTI and America comes from? And then I have 2 follow-ups, please.

Yes. Thanks, Julian. Happy to take the question. So what we normally see in our U.S. is that when volatility and market activity increases meaningfully that presents opportunities to us. We've seen that historically as well in volatile times. And then really the size and depth of the market, combined with larger relative opportunities, improve our profitability there just as we saw in, let's say, '22 or 2020. As to crypto, what we also typically see is that in terms of heightened volatility in equities and fixed income, is that people tend to worry more about that part of their portfolio rather than on crypto. So we saw just muted trading activity in general in crypto. We see it a bit as countercyclical and really has diversified away from the rest of our business. So we were able to allocate more capital towards equities and fixed income given the limited amount of opportunities we saw in the crypto market

And then 2 on the stable coins. Obviously, AllUnity, I think this is quite an important project for you. And so far, it doesn't really -- not really reflected in the share price -- generally speaking, if you take a step back, can you speak about kind of remind us again about the whole intention with the project? And maybe also speak about what kind of economics do you expect to drive it customer deposits, AUM growth, distribution, et cetera, et cetera?

Yes. Thanks, Julien. I can take that question. So AllUnity is a tokenization platform that will be launching at MiCAR-Compliant EURO stable coin called EURAU. The launch of that is today actually on a platform called Bullish. AllUnity is backed by FlowTraders, DWS and Galaxy Digital. Flow Traders is a market maker to the EAU stable point. Galaxy Digital supporting with the infrastructure build-out in DWS asset manager department to AllUnity. The economics of the stable coin is similar of those of other stable points on the market. But the difference between our AllUnity and other stablecoins is that our AllUnity is BaFin regulated and is MiCAR-compliant. On the distribution if I Yes, go ahead..

All the bits and pieces Marc shares are very much in the center of our discussions back then. But I think it's also important, just a bit of reflecting on the discussion we had in the past, the sheer utility function of a stable has become very renowned globally as to the ability to connect traditional financial markets with digital assets markets. And we stated in the past and can state it again, it's a quite agnostic perspective but very much wants to embrace the interoperability between both traditional finance and digital assets. So it's more and more demand comes to the market for digital assets. And this might be in the form of parking liquidity in AllUnity -- partner liquidity by investing in tokens in the cryptocurrency remit but down the road also with real-world assets that are tokenized, then the utility of the stable coin is very much important in order to increase efficiency across financial markets. And I think with the stablecoin initiative now, we are very much setting the stage for a European version of liquidity bridge between Tradify and digital assets. And I think that is a very important strategic step we are taking here in order to facilitate that innovation curve.

Yes, understood. Thanks,Mike for the flavor. Also an extension of this. I was just wondering because -- so you spoke about the fact that Flow Traders will be the prime liquidity provider of the stable coin. And I guess we just have to wait and see now what's going to be the uptick of it, but hopefully, it's going to be a decent one. When you start trading the coin, obviously, you'll generate, let's say, spread revenue in a way, so you'll generate money out of it. I guess, you also don't know exactly to which extent, but I was also wondering if you look at the customer deposits of AllUnity? Can you actually use that in some sort as a trading buffer for your trading capital i.e., can you leverage somehow those deposits with the prime brokers to trade other products as well?

Thanks for the question Julien. As AllUnity is pain regulated like the deposits are held on to one. So we are not able to use that. So no, that's not a possibility as RIU is fully backed 1:1 towards the euro. So we cannot use those funds for trading.

We will now go to the written questions. The first one comes from Diogo Pereda says, can you provide a bit more color on capital allocation through 2025?

Yes. Thanks for the question. So we typically can redeploy capital twice on a day-to-day basis where we see opportunities. the market opportunities as presented in to 2025 were pretty dominantly within the equities and fixed income markets. and regionally more in Q1 in APAC and then Q2 just globally. So more was deployed towards equities trading and fixed income and less so towards crypto given the volatility in the market and the opportunities they're presented.

All right. We'll go to the next question from Rick Lucas. He says, is there a difference in opportunities and challenges between the European, American and Asia Pacific segments? And if so, how do you capitalize on these differences?

In Europe, we are a market leader in trading ETPs and our product coverage. We cover pretty much any ETF in Europe. So we are trying -- we will maintain that position and provide liquidity to our counterparties and partner with the issuers. In the Americas, given the size of the market there, what we see is that when volatility increases, we also see a meaningful contribution to our -- and it's still, as the largest capital market represents a meaningful growth opportunity for us, but it is a much more competitive market and you need to excel many from in order really be a key player there. On the our fuel front, we are one of the leaders there. We're in the top 5 typically on providing liquidity on our fuel basis. But on exchange, our market share is still lower. In Asia Pacific, there is also a meaningful growth opportunity for us. The Chinese ETF market alone is now 2x to 3x the size of Europe, and it's opening up to foreign investment firms and to market makers and that presents a meaningful opportunity for us. In general, it's a bit more fragmented the market, and each market has its own nuances. So many more markets in Asia represent an opportunity for us. And our -- we've established ourselves as a global ETF market maker, and we try to be present in every market and provide liquidity to enhance the markets there and also for our own revenue capture.

All right. The next question comes from -- he asks, can you provide more clarity on what drove the operational cost increase of 40%? And also, what does the 8M impairment of intangibles referred to?

Yes. Thank you for the question. So most of the difference in the operational cost increase can be can be explained by an increase in variable comp. Also, the fixed increases of our cost can be explained by additional hires due to our strategy. On the 8M impairment of intangibles I believe that is the difference between -- our Q1 and Q2 posted impairment of intangibles. So as many of you may be can recollect, in Q1, we posted a minus EUR 10 million on impairment and this quarter, we posted a reversal of EUR 2 million. So in total, you get then to EUR 8 million of impairment of intangibles.

And to add, this is part of our trading book. So there's a corresponding positive in -- recorded in NTI, just because of how -- some of these positions have to be recognized under IFRS accounting. And therefore, this line item came below the line as an impairment. But again, there's a -- it is -- we generally apply hedges and there is a corresponding positive in the NPI.

0 The next question is there is a difference in net profit in addition to the trading capital of about EUR 23 million. Can you elaborate on that?

Yes. Our trading capital not increased as much as our net profit due to cash flows we had to pay out in the second quarter. And well, some of these cash flows are for an our annual tax deals.

The next question, again from Rick Lucas asked what qualities will Thomas Spitz as CEO, been to the table and your preliminary judgment and how will he be different from Mike Will we share -- will we share Flow Traders in the new direction? And if so, which one?

Yes, I can take this question. So Boise joined the firm with the business background across trading, sales and research in a very international setting, and it has demonstrated what we drive to identify opportunities to innovate. And in the short term, addressing the question on changes to the strategy, Thomas will continue the execution of the firm's growth and diversification strategy that was laid out at the Capital Markets update in '22 and the trading capital expansion plan as announced in July last year. What Thomas will do is to bring his wealth of experience has just outlined to the table in order to enhance these strategies and drive increased investments in certain areas where you see the biggest opportunities for the firm. And I think the capabilities and his experience will help us to find tangible opportunities to accelerate where possible, building up on the strengths and the profile we have built over the last few years.

Right now, there are currently no questions sent to the operator. Questions that are not and currently might be answered at a later stage. So I would now like to hand the call back to Eric Pan for any closing remarks.

Thank you, operator. We would like to thank all the analysts for participating in today's call as well as the questions that are submitted online. Please note that we will host our next analyst call when we release our third quarter trading update in October. Details and timing for this call will follow in due course. This now ends the call. Thanks again. Have a great day.