Leonteq AG (LEON) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Leonteq Half Year 2022 Results Conference Call and Live Webcast. I'm Moira, the Chorus Call operator. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Dominik Ruggli, Head of Investor Relations Communications and Marketing of Leonteq. Please go ahead, sir.

Good morning, everyone, and welcome to the press conference call of Leonteq's half year '22 results. All presentation materials can be found in the Investor Relations section of our website. We have also provided a comparison of analyst consensus summary versus our actual reported results. You might notice when navigating to this material that our website looks different. We recently launched it on the new contemporary and state-of-the-art design. Our new website includes, among other improvements, and expanded information for investors with a dedicated investment case web page as well as an overall simplified navigation for users that are interested in our services. Here with me today are Chief Executive Officer, Lukas Ruflin; and Deputy CEO and Chief Financial Officer, Marco Amato. We will start the presentation with an overview of the highlights and the business update from the first half of '22. We will then discuss the financial performance of the first half before closing the presentation with a summary and outlook. The presentation will last about 25 minutes, after which we are happy to take questions. We intend to close the conference call at 10:30 a.m. It is now my pleasure to hand over to our CEO, Lukas Ruflin.

Thank you, Dominik. Dear ladies and gentlemen, dear shareholders, analysts and media representatives. I would like to start this presentation by stating that Leonteq generated exceptional growth in terms of revenues and profitability in the first half of 2022. While our performance was particularly driven by elevated market volatility, our results also demonstrate the resilience of our business and the benefits of the continued diversification of our revenue streams over the past years. On Page 4, you can see a few key highlights. Our total operating income grew to CHF 289.2 million from CHF 205.8 million, driven by a very strong net trading result on the back of unprecedented market conditions. Total operating expenses amounted to CHF 143.4 million compared to CHF 125.2 million in the prior year period, which were primarily affected by performance-driven variable costs. The combination of strong top line growth with relative moderate cost growth is reflected on the bottom line. Our profit before taxes increased by 81% to CHF 145.8 million, whilst our group net profit increased by 59% to CHF 118 million, and earnings per share amounted to CHF 6.45. The market environment in the first half was challenging for investors and we are accordingly register subdue client activity during the first 6 months, resulting both in turnover and platform assets to reduce year-over-year. Our client franchise, however, remains strong as evidenced by roughly the same number of clients who entered into transactions with us compared to the same period last year. Our strong capital base is further increased to close to CHF 900 million at the end of June '22, and the annualized return on equity came in at a very strong 29%. Looking at our quarterly economic revenue chart on Page 5. You can see that we have been able to continue on a solid track record of revenue growth since founding the company in 2007. Accordingly, our average quarterly earnings have increased by compound annual growth rate of 25%. Obviously, particularly the first half '22 was very strong on the back of strong net trading results driven by the elevated levels of overall market volatility. On Page 6, I would like to highlight the key initiatives Leonteq has executed this year in line with the 4 dimensions of our growth strategy 2026. Our sustainability efforts have further progressed with now recently the establishment of a sustainability committee on the Executive Committee level. In addition to this, we also published an inaugural sustainability report together with our annual report '21 as well as a code of conduct and basics. We also began working with Great Place to Work with which we carried out an employee survey and expect to receive a respective certification shortly. In Asia, we have strengthened our regional management team. These hires are part of our ambition to further expand our offering to an international client basis. We've also maintained a strong key market position in Switzerland and are growing our footprint in Europe as evidenced by several awards Leonteq has received across Switzerland, Italy and the Netherlands. We continue to additionally invest in digital client solutions, leveraging our scalable technology platform. As part of these efforts, we launched a new range pricing functionality on links, Leonteq's one-stop shop for structural product, which was also awarded best issuance platform by structured retail products. Throughout the first half of '22, we expanded our offering both through new collaborations and additions to our offering universe. Efforts, which continue to be recognized as this year Leonteq receives for the 12th year in a row, the top service award at the Swiss Derivatives Awards. We also maintained our leading position in offering crypto assets in a securitized format, launched our own crypto market index, increased our universe to a total of 30 crypto assets. Through our new collaboration with Ixios Asset Management, we have now added new funds for distribution to our offering universe. And very recently, we hired a team of recognized industry experts to advance our retail flow business initiatives, which we also announced in February this year. Swissquote joined Leonteq’s Multi-issuer platform as a white labeling partner and we started a collaboration with VP Bank and last week announced the launch of our new innovative issuance model and business offering. Let me tell you more about this innovative issuance model on Page 7. Through this new issuance model, private banks, commercial banks and retail banks will be able to quickly transform themselves from an intermediary to a producer of structured products. Based on a simplified corporation design, this new white labeling model allows for a fast time to market, trigging only limited investment costs at the side of potential new corporation partners. Therefore, Banks will be able to create their own customized and tailor-made investment solutions and provide them directly to their clients. New banks joining Leonteq's ecosystem for investment solution as a sponsor, get Ixios of course, to Leonteq state of the art services and digital tools. Leonteq relates initially as the hedging counterparty in the later stage. We also plan to offer base option prices through our balance sheet light business, including ship, our small hedging issuance platform. To bring this new business model to life structuring Hub has been established as a stand-alone CSSF approved and supervised structured entity in Luxemburg independent from Leonteq. It will issue structural products, which will be guaranteed by the sponsors. Leonteq will act as the arranger. If we now go on to Page 8, our ecosystems. As you can see, these efforts have complemented to further expand our ecosystem for investment solutions. From our 15 white label partners on the left side to our 27 third-party issuers just below that. Directly across, we have listed our main client types with whom we interact on a regular basis. On the bottom right, we also have our ship hedging counterparties, which all have now successfully transitioned to the use of the new alternative reference rates. And by now, all of them are contributing quotes and executing transactions on the platform, making it in total late counter parties, including Leonteq. Furthermore, our content, product and technology enhancers are shown on the right-hand side in the middle. Here, we work with different experts from the various industries and disciplines in the persuite of delivering high-quality solutions for our clients. These are then complemented by our digital solutions and connectivity, where we have our award-winning digital marketplace and stock exchanges among others. I now invite Marco to continue with the presentation of Leonteq's financial performance.

Thank you, Lukas. Also good morning, and warm welcome to all participants from my side. I would like to begin by highlighting a few important points. As already mentioned by Lukas, record group net profit of CHF 118 million were achieved as communicated and also in line with our communication beginning of June. The record results demonstrate the resilience of Leonteq's business and the continued diversification efforts of its revenue streams. We remain confident and target record group net profits for the full year 2022. With that in mind, let's move into Leonteq's financial performance for the first half of 2022. This begins then on Page 10. Looking at our financial results, we report a 41% growth in our total operating income to CHF 289.2 million, primarily reflecting the strong performance in our net trading result. Total operating expenses rose CHF 143.4 million compared to CHF 125.2 million in H1 2021. This was due to an increase in planned investments into our strategic initiatives, a performance revenue increase in variable cost and additional provisions for legal cases. And lastly, in line with the guidance that we provided in June, you can see on the right-hand side chart that our group net profit reached a record level of CHF 118 million, which compares to CHF 74.4 million in the prior year period. I will provide an in-depth look at both our top line and cost line development in the next slides, but let me spend now a few words on our tax rate. Leonteq tax income taxes are driven by the amount of profits taxed either in Switzerland at statutory rate of 19.7% or by the group's foreign operations, which are taxed at varying rates. In 2021, a significant portion of profits were subject to income taxes in jurisdictions where Leonteq was able to offset these profits with accumulated tax loss carryforwards. As disclosed in our annual report 2021, we did not have unrecognized tax loss carryforwards anymore at the end of the year 2021. Thus, a significant portion of our profits, which are recorded in jurisdictions where we earn our trading income, our tax in the first half of 2022 at the local tax rate that was above the Swiss statutory tax rate of 19.7%. As a result of these factors, our tax line increased to CHF 28 million from CHF 6 million, and our tax rate increased from 8% to 19% year-on-year. Let's look now in more detail at the drivers of our top line results on Page 11. As previously communicated, the first half of 2022 was characterized by unprecedented market conditions. We registered a high level of volatility, which was driven both by the Ukraine Russia crisis as well as the exceptional share price fluctuation of large-cap companies around the earnings announcement for the fourth quarter of 2021 and first quarter of 2022. On the left-hand side of this graph, you see the S&P 500 move in the last month blocked against the weeks, which is a measure of volatility. As you can see, market volatility in the first half was higher than most periods in the prior year and was significantly above the pre-pandemic average levels recorded in 2018 and 2019. On the back of this very challenging market environment for investors, we adjusted subdued client activity in most of our regions. As shown in the middle graph, our net fee income, therefore, reduced by 32% year-over-year to CHF 115.6 million. Despite these headwinds, let franchise remained strong as evidenced by around the same number of clients that entered into transactions in the first half of 2022. At the same time, we continued to focus on disciplined risk management and recorded a very strong net trading result of CHF 180 million. As you can see on the right-hand side chart, this was driven by both significant contribution from our hedging activities as well as our treasury activities. As mentioned before, our client franchise remained strong, both in terms of engagement with our clients as well as in our diversification efforts, continuing to show measurable results. As you can see on Page 12, revenues from new business initiatives decreased their contribution by 7 percentage points to 53%. The new business part comprises revenues from growth initiatives and activities with low balance sheet intensity, namely the asset management like business, the balance sheet like business, crypto assets, on derivatives, treasury income, and lastly, pension savings. In particular, the latter 2 were the main drivers for this positive development, whilst the asset management like business also demonstrated its resilience. And so revenues only slightly drop as compared to the overall fee income reduction. What you also see on this slide is that we continue to reduce our dependency from our historic partners, both in terms of platform assets as well as turnover, which was 29% of the group's traded volumes in the first half of 2022 as compared to 39% in the same period last year. At the same time, looking at our own issue products, turnover remained relatively stable at CHF 7.1 billion, an increase in relative share from 49% to 59%. This demonstrates investment confidence in Leonteq's investment-grade credit rating as well as our stand-alone position as an established player in the structured products market. Let's now move on to our cost development. On Page 13, you see that we reported total operating expenses of CHF 143 million in the first half of 2022 compared to CHF 125 million in the prior year period. This increase of CHF 18 million was mainly driven by 3 factors: First, on the back of the strong top and bottom line development, we saw a CHF 11 million increase in performance-linked variable costs, in particular for accrued variable computation; second, we recognized an additional amount of CHF 5.9 million for legal cases compared to the previous period; and third, Leonteq continued to significantly invest in growth initiatives in the first half of 2022, where we spent an additional amount of CHF 3.6 million. Our nearshoring initiative in Lisbon remains a success with our fully operational office where 55 employees are now working across the full range of our shared service functions. The benefits of this initiative amounted to CHF 2.3 million, partially compensating the additional growth in investments. Though excluding performance-driven costs and the additional provisions built, our cost base basically remained stable year-on-year. Now moving to the last slide of my section. We illustrate on Page 14, our strong capital position. We define the capital base as the aggregate amount of shareholders' equity and deferred income. Shareholders' equity increased by 3% to CHF 823.2 million as of the end of June 2022 compared to CHF 802.1 million at the end of 2021. This was driven by the strong increase in retained earnings of CHF 118 million, partially offset by the distribution of CHF 55 million to shareholders. In addition, we recorded a net impact of minus CHF 25 million to our OCI driven by 2 factors: the first one, net unrealized losses on our debt instruments measured at fair value to other comprehensive income were recognized on the back of widening credit spreads; second, we saw a positive impact from our structural financing position in U.S. dollars. Together with deferred fee income of CHF 67 million, Leonteq capital base was further strengthened to CHF 819.2 million as of the end of June 2022. Before I finish, let me quickly summarize the highlights. We have achieved record group net profits and demonstrated the resilience of Leonteq business, and we'll continue to focus to execute our 2026 growth strategy. We have a strong balance sheet and demonstrated to be able to generate strong results in a difficult and challenging market environment. We remain confident and target record group net profit for the full year 2022. With that, I hand back over to you, Lukas.

Thank you, Marco. I would like to now move on to summarize the first half of 2022 and provide an outlook for the remainder of the year and beyond on Page 16. Leonteq generated exceptional growth in terms of revenues and profitability in the first half of 2022. While our performance was particularly driven by elevated market volatility. Our results also demonstrate the resilience of our business and the benefits of the continued diversification of our revenue streams over the past years. We have continued to diligently execute on our strategic priorities in the first half of '22 and delivered tangible results across all 4 strategic dimensions I referred to at the beginning of our presentation. Through the investments in our key initiatives over the past years, Leonteq has created a solid and diversified foundation for the company to build on. Our client franchise remained strong in the first half of '22, but heightened invest uncertainty is expected to persist in a market environment characterized by volatile markets, increasing inflationary pressures and rising interest rates. We will continue to maintain a prudent approach to risk management. And our trading result is expected to continue to partially compensating for substitute client demand in periods of higher market volatility. While the market environment is likely to remain unpredictable in the second half of 2022, we are confident to deliver profitable growth for our shareholders. Therefore, the Leonteq targets group net profit for the full year 2022. For your reference here, our previous record result was CHF 155.7 million in the full year '21 million. Equally, if not more important, however, is our focus on the continuous execution of our growth strategy 2026, which we presented to you in February this year with our full year '21 results. So before I close this call, I would like to move to Page 17. As a reminder, we are executing our growth strategy '26 based on 4 dimensions: firstly, we are expanding and diversifying our offering across product, products, asset classes and issuers; secondly, we are investing in our digital client solutions, leveraging on Leonteq scalable technology platform; thirdly, we continue to focus on our strong home market position in Switzerland and will expand our offering across regions to an international client base; and fourthly, sustainability is important, and we are further integrating ESG aspects into our business activities and product offering. With these 4 dimensions, which are closely connected to each other, we have also committed to a set of 2026 targets and then to achieve total operating income of CHF 450 million to CHF 500 million and a return on equity of more than 15% by '26. Thank you very much for your attention.

Thank you, Lukas and Marco for the presentation. Dear, shareholders, analysts and media representative, as most of you know, today is a very busy results announcement day, therefore, and -- in coordination with the IR team from both [ Gambro ] who just had their call ahead of us and EFG International, we agreed on a schedule that allows investors and analyst to dialing in all 3 results call this morning. So therefore, we plan to close our call at 10:30 a.m. sharp. And we have, therefore, 20 minutes left for our Q&A session, which should be enough, I would say. So let's open the call now for questions. I guess, Daniel Regli from Credit Suisse will be the first.

[Operator Instructions] The first question is from Daniel Regli from Credit Suisse.

I have 2 questions, which are probably rather for Marco and then, let's say, more general question for Lukas. And the first, maybe quickly on the treasury result. You obviously have achieved kind of a significant treasury result in H1. Can you maybe explain this a bit to me and particularly in regards on how recurring, I can consider this CHF 26 million. Then secondly, maybe on variable compensation, obviously, we have seen this significant increase in variable compensation. Can you maybe just give me kind of a bit of a feeling how sensitive variable compensation is to trading income versus fee income? And then just more generally and more broadly, obviously, you have given quite an optimistic outlook for the rest of the year saying that you will -- or you aim to beat the record year 2021? And just wondering a bit about the client side, how is the client moved at the moment what this kind of the demand are there certain pockets of products, which still see good demand? Or is this kind of a more subdued demand across the board. And then if you could just paint some scenarios for H2. What you could see happening in H2 regarding trading income and fee income. Obviously, I know you don't have the crystal ball neither do I, but just to have some kind of scenario thinking about H2.

Okay. Thanks, Daniel, for your questions. I guess it's rather 2/4 questions, but I take it 1 -- we'll take one by one. I'll start with the treasury results. Probably on the treasury results, so it's fair to state that also what you see as CHF 25 million treasury sold is what we record through our P&L. I would like to remind you here as well that we have a large part of our bond portfolio, which the credit spreads are recorded to our other comprehensive income. You see that also in the movement of our equity, we have there a negative impact roughly CHF 40 million from our treasury results. So the CHF 25 million positive is only the part which is in essence taken to P&L. And it's on the back out of the move to interest rates. So I appreciate that the CHF 25 million might look very positive. Please take into account that there is also a negative part, which is taken to our OCI equity stake. I'm joined on the variable computation, Lukas, if you want to take that one?

I can cover that because it's a good question. Daniel, but it's a question I can answer very quickly. Look, the firm is focused first on servicing our clients every day. So there are hopefully highest satisfaction. And secondly, of course, having the fiduciary duty to all our stakeholders. We are also looking at running this business in a profitable manner. Incentive structure, we see in our colleagues is such that revenues are revenues. And here we follow IFRS revenues. So we are not differentiating per se compensation items following a certain stream of revenue. So differently put -- it is from an incentive point of view, not per se relevant whether it's fee income of trading income, but please bear in mind that our trading income is the result of hedging results. And therefore, it's not something where anyone had a public view, which then materializes in money. It's really just the result of how we hedged throughout a certain period. And that really brings me to your next question, which is the outlook. We are running hundreds and hundreds of stress tests internally. I can't share those with you. And I will not go on this call on a stress test exercise. But very simply put at a very high level. . You could argue there is 1 scenario where markets are down where investor risk appetite comes back and then we definitely would expect increased client activity. And I would just point to our past results, which gives you an indication for many different market environments. And then, of course, in such an environment, which would also be quantified by this market volatility, you would have less of a trading income. And then, of course, you can take a scenario like the first half where you have very high inordinary moves almost on any asset classes, that increases significantly uncertainty. So client activity goes down, but our hedging results benefit from those moves. Structurally speaking, that's a position we continue to maintain the difficulty in giving you more scenario is you could obviously now craft a lot of different other assumptions. And I will even not go into speculation of WhatsApp and geopolitical risks might mean such as energy cards across the waste on society is possibly in winter But structurally speaking, I think I've answered your question, a good reference point for you is to look at our performance in the past and use these data points to make your own assumptions and projections. We as a management team feel confident with the guidance we have given today. And there is no reason to deviate from the statements we have also made in writing.

Okay. just if I might have a quick follow-up, but it's just really, what would need to happen that you miss the guidance you've just given?

Look, the short answer is, again, please look at our past results. For example, the first half 2020 was all of us at the manifestation of political risks, which had a negative impact on our results. So of course, you could now predict such a scenario and then possibly on take good and hit each targets. So I mean we are clear by saying we have an ambition, and it's a target. We can, as you correctly said before, obviously not guarantee the results. But based as of today, on all the information we have available. It's the base as time of the most likely outcome. But of course, it's linked to uncertainty. And again, look at the past results, please to get an indication of what scenarios could lead to a negative outcome.

[Operator Instructions] There are no more questions at this time.

Very good. Then again, we thank you all for your participation and your interest in Leonteq and wish you all a good day.

Thank you all very much. We'll see you in person soon. Thank you. Goodbye.

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.