London Stock Exchange Group plc (LSEG) Earnings Call Transcript & Summary

Okay. Let's get going. Good morning. My name is Benjamin Goy. I'm very happy to host London Stock Exchange Group today. With us is David Schwimmer, Chief Executive Officer of LSEG; and David Warren, Chief Financial Officer of LSEG. So good morning -- good afternoon in your case, gentlemen.

Good afternoon, good morning, Ben. Thanks for having us.

Perfect. And yes, for the audience, I guess, by now, you're quite familiar with the concept. So this will be a fireside chat, meaning you can also submit your questions, and I will get to them, yes, once they pop up.

But we would start right away maybe with some questions on Refinitiv, yes, the significant deal you announced last summer. And 2 weeks ago, I think there was important milestone. You could file the Refinitiv transaction with the European Commission. So maybe you can give us an update, what's the time line from here? And is it kind of fair to say that the European Commission is the last major approval -- regulatory approval outstanding?

Sure. So first, just so everyone has the background, we were actually ready to file with the European Commission a couple of months ago. And then I think it was March 13, they put out a public announcement to all merger parties. So this is not just specific to LSEG and Refinitiv but to all merger parties asking merger parties not to file with them because of the virus situation as they went into lockdown. We continued our engagement with them during the last couple of months, providing additional information, answering questions, et cetera. So it was a relatively constructive use of the time. But as you mentioned, we were able to formally submit our filing with them on May 13. So that kicks off the official clock with the European Commission. And although there are certain set time lines going forward, they really have a lot of flexibility in terms of how much they choose to review and how long they choose to review it. So our expectation is it will take sort of a few to several months from here, and we will continue the constructive engagement that we have had with them thus far. So to your second question as to whether the European Commission is the last major approval outstanding, it is what we think of as the proverbial long pole in the tent. So we expect that it will be the last major approval when we get that approval in, as I said, a few to several months. There are a number of other -- sorry, a number of other approvals that we are in the process of getting around the world. We have gotten approvals in a number of jurisdictions already. We've gotten CFIUS approval out of the U.S. We've got an approval in Japan. Singapore is actively reviewing right now. We've gotten approvals from jurisdictions like Ukraine, Botswana, a few others. And then a number of the European countries are going through it as well. So the approval processes are not just competition approval as with the European Commission; but also in a number of jurisdictions, foreign investment approval; and in a number of jurisdictions, merger approval. So 2 global companies, lots of jurisdictions. We're working through them all. But short answer is, yes, fair to say that we expect the European Commission approval to be the last major one.

Okay. So that gives us some opportunity to turn a bit more to the combined or pro forma business. Refinitiv's growth has been typically below that of LSEG in the past. So just wondering how do you plan to get to the 5% to 7% target range in terms of revenue growth for the first 3 years? And where do you see the most important improvement levers to get there?

So there are a number of different, I'll call them, growth engines within the combined company. LSEG, we will continue to have, we expect, attractive performance from our index business from FTSE Russell. We expect to continue to have attractive performance from our OTC clearing out of LCH. So that will be -- those will be contributors to our growth rates. We also expect to see attractive growth coming from a number of parts of the Refinitiv business: So Tradeweb has had very attractive growth profile; the World-Check business, it's smaller business but really strong growth profile as well; and then FXall, the foreign exchange trading business within Refinitiv, depending on market conditions, can also have very attractive growth. So you put those 5 growth engines together, we think that is a pretty attractive portfolio right there. Then you get to the core data business within Refinitiv, where I think it's well known that, that has not been a growth driver for the business for the last several years, and that is an area that we are very focused on. It's an area that Blackstone has been focusing on. And we think that with our -- with the benefit of our management, our synergies, working closely with the Refinitiv team and with more investment in different parts of the business, we think that we can get that growth level up. We only need to get it up, I would say, a few percentage points to reach that 5% to 7% growth target across the combined company. So it's not as if we have to get that data business growing in the high single digits or the double digits where some of our other businesses do grow. So I think -- and we've talked in the past about some of the areas of opportunity, the areas of investment. And again, this is an area where we are, I think, fully aligned with the approach that Blackstone has taken over the last 1.5 years. Refinitiv right now is in the process of rolling out their, I'll call it, their successor platform to Eikon. It's Refinitiv Workspace, and it's a more modern architecture, a much lighter architecture. And so far, so good in terms of how that's being received with clients, customers out there. But I think a lot of different parts across the business, investing in new capabilities and new data sets, et cetera. So we feel good about the opportunities and are looking forward to delivering on that growth target.

Okay. And also, as regards the transaction, your recurring revenues will significantly increase. How do you view your capital markets trading business in that context going forward?

So you're correct. Pro forma for the combination, our recurring revenues will be around 70% of our revenues. So we think that's a very attractive profile for our revenues and that kind of stickiness and that kind of recurring nature. Having said that, we're also very comfortable with our trading businesses, and part of that is the fact that it does give us exposure to the market environment, both in some up periods and some down periods. And we've certainly seen that in the last quarter or so, particularly with the higher transaction volumes in March. But we also think that there are growth opportunities in the capital markets area. And as I touched on earlier, we've seen that growth in Tradeweb. We can see that growth, depending on market conditions, in some of our execution venues and in the foreign exchange venues within Refinitiv. So we think within the combined company at the level that the capital markets business is as a contributor, that's an attractive business to be in. It is core to our franchise and our brand and core to our relationships with our customers. So even the capital markets business within LSEG today is viewed as lower growth than LCH or than our post-trade business and then our index business. Yet that has, depending on the year, sort of a mid-single-digit growth rate. You compare that to other financial services growth rates, that's a pretty attractive level. So although it looks a little lower than some of the other businesses that we're in and it may not have all of the recurring revenue characteristics that some of the other businesses have, we still think it's a good, attractive business.

Okay. Perfect. And we also get the first question actually on the topic of Refinitiv. Someone you might know quite well talked recently about IT investments at Refinitiv. So just a question, do you agree where and how much investment is needed?

Yes. I have a vague idea of whom you might be referring to. We have always been, I think, really since August 1 of last year when we announced the transaction, we've been very open about the fact that we think one of the opportunities here is to invest in the business of Refinitiv. And we think this is an incredibly sticky business. It is the #2 financial data provider in the world. It gives us great global positioning. It expands our capabilities in Asia, in the Americas, so the largest growth market in the world, the largest capital market in the world as well as other emerging markets. And we think giving us access to multiple asset classes beyond our core equity trading franchise and our relatively small fixed income trading franchise, we think it's a very attractive strategic fit for us. But as I said, from really day 1 and certainly in our due diligence process, we recognized that part of the opportunity here is investing in the capabilities, investing in the systems, investing in the people, frankly. And that's not an unusual task or challenge in -- certainly in market infrastructure in general or in businesses that are enabled by technology. And if you look at our business over the past 20 years, really every 3 to 5 years or so, you have been -- you've seen the sector get transformed either by regulatory change, by macroeconomic change or particularly by technology. So this is something that we are going into eyes wide open. It's something that we certainly were focused on as part of our due diligence, and we see it as part of the opportunity to invest in different parts of the business and to improve the capabilities. And we think that's going to be part of what we bring to the table.

Okay. And then moving -- sorry, sticking with Refinitiv, and I guess this question is much more pronounced now as compared to summer when you announced the transaction. Maybe you can speak a bit about how sensitive the combined group is to an economic recession. You already mentioned Refinitiv has a very sticky revenue base, but maybe you can give us a bit more insights into its contracts, typical duration and stuff like that?

Sure. So we think our business, particularly the combined business, is going to be a pretty robust model and pretty well diversified and well positioned if and as we go into economic recession here. So a couple of thoughts on that. We did, as part of our due diligence, take a look at the Thomson Reuters business and how it performed after the financial crisis 12 years ago. Now of course, that business was very different then, but it gave us a little bit of a sense of how this kind of data business performs through a significant downturn. There is a lot of stickiness. People -- and again, this comes back to sort of our, I'll say, our original strategic rationale for the transaction. We are in a world now where regardless of recession, access to data is just as important an element of financial market infrastructure as is access to a clearing house or to an execution venue or liquidity pool. So as we've gone through the turmoil over the last couple of months -- we've seen this in our business. Refinitiv has seen it in their business. Market participants still want access to liquidity. They still want access to risk management capabilities and clearing, and they certainly still want access to data. So that doesn't mean -- and I'm not saying that either LSEG or Refinitiv are immune from the recession or a recession. And if some of our customers either go out of business or are trying to reduce some of their activity or reduce some of their costs, could we see the impact of that? Potentially, yes. But I would also say Refinitiv's position in the marketplace and the engagement that it has with customers and particularly the approach it's taking with respect to its model going forward is one of flexibility. It is not the highest price in the marketplace. There are others who can claim that mantle. And so as market participants are thinking about where they can reduce their costs, we think that will actually be beneficial a Refinitiv perspective in terms of its interaction with some of its customers. So again, we're not immune to recession, but we're very well diversified; many, many different customers; many, many different geographies; and fortunately, a need for our infrastructure and our capabilities and our services for our market participants.

Understood. And maybe one last one on this topic. And it's about the financing of the transaction and the group's leverage post transaction, your deleveraging efforts and how this generally fits into your policy you have?

So our current policy with respect to leverage is to stick within a range of 1 to 2x net debt to EBITDA. We are on the low end of that range right now. Once we go through with the transaction, we will take on the Refinitiv debt. We'll exchange our equity for the Refinitiv equity, and we will assume the Refinitiv debt. We have an existing bridge facility in place that will allow us to refinance that debt at a significantly lower rate, whether we do it with the bridge facility or with takeout financing after that. And upon closing, we -- our leverage will be roughly 3.5x net debt to EBITDA. I say roughly because it will depend a little bit on exactly when we close and what the combined company performance is up until that point, but it will be roughly in that tone. We have indicated to both the market when we announced the transaction as well as the rating agencies, whom we spent time with before the transaction was announced, that we expect to bring our leverage back down to that 1 to 2x net debt-to-EBITDA range within a period of 24 to 30 months. And as we were doing our due diligence and as we were preparing for the transaction, we did discuss with our Board, in fact, that -- and we ran a bunch of scenarios around the fact that here we were -- so this was last summer, 10-plus years into a bull market. It is certainly possible that we could see a significant downturn in the coming years. So what does that look like if we take on this debt and then hit a very significant market downturn? So I certainly can say that we did not predict any kind of pandemic and associated lockdown leading into recession, but we did consider the fact that there could be a very significant downside scenario. So we ran our numbers according to that downside scenario. If we do have a very significant and extended downturn here, given the items I was talking about before, the diversification of the business, the stickiness of the business, our expectation is that it would take a little bit longer, so a few to several quarters longer than that 24 to 30 months to get us back down to that 1 to 2x net debt-to-EBITDA range. But there's nothing -- no, what I'll call, no existential concerns about the leverage given the nature of this business and the cash that it generates.

Understood. And maybe shifting gears a little here and moving to FTSE Russell. Starting first with the subscription-type business. What do you currently see as the most exciting opportunities on the index side? And also, how do you see the split between equity, your historical strength and fixed income where you made some efforts recently? Yes.

Okay. So FTSE Russell has -- we have a really diverse index offering across geographies, across, as you mentioned, across equity and fixed income with multi-asset and composite indexing. We have some outcome-oriented solutions such as smart beta and factors. And then we have increased focus on sustainable investment, which was, of course, the hot topic before the world learned about COVID-19. We have added to our team. We made an important hire in January to a new role linking our research and our product development capabilities. So we're very focused on supporting our clients further as a leading provider in terms of research, data and content and a focus on research and product development and more investment in that area. That will help us better reflect how the markets are changing and evolving. And the -- there are really -- I think it's fair to say, some complex needs and changes going on in the investment and in the trading community. I would say, just to bring us back to Refinitiv for a moment, Refinitiv has one of the richest ESG data sets out there globally. They have over 400 metrics for almost 70% of global market cap. They have ESG scores for over 7,000 global companies, and their data goes back to 2002. So we are really looking forward to bringing that together with FTSE Russell and strengthening the FTSE Russell ESG offering as well as developing new indices. To your comment on equity and fixed income and the relative interest there, fixed income index products are less penetrated on a global basis compared to equity. And having both fixed income and equity indices for us, we view that as a significant competitive advantage. If you think about who our key competitors are, they tend to be largely equity index providers. And our abilities in both fixed income and equity, again, as I mentioned, we view that as a competitive advantage. It allows us to have discussions with a wider range of -- in particular, asset owners, but also asset managers, about their requirements across their portfolio, really across both asset classes. And that allows us to position ourselves to best capture the future growth that we expect to see in the fixed income space. I should mention a couple of specific things in fixed income, where we are a leader in developing some new products. FTSE Russell was the first to incorporate climate risk considerations into fixed income indices that are based on sovereign debt. So we launched the -- just last year, we launched the Climate WGBI, the Climate World Government Bond Index. And then more recently, I think it was just in January, we launched the Climate EGBI, the European government bond index. So again, it's an ESG or climate risk overlay on sovereign bonds. And related to that, we made an acquisition of a small but really interesting analytics company, Beyond Ratings, middle of last year, which has helped us to develop these indices. So a lot of focus and a lot of interesting areas for us in terms of new capabilities, new product really across the indexes but I think particularly in fixed income.

Okay. Particularly on the ESG side, it sounds all very promising. Just wondering how COVID-19-related lockdowns affect the business in the short term? Maybe you can give us some more color here.

And is that -- well, I'll talk about it in the context of the whole group, but then maybe I'll focus a little bit on the effect on the FTSE Russell business or the index business just so everyone has the overall picture and this is what has allowed LSEG to perform relatively well throughout the past few months. In our business, we have parts of the business that certainly feel the impact of the down drafting markets, and we'll see that in FTSE Russell. And maybe I'll come back to that in a minute and just spend a little bit more talking about the index business. But also, we saw the uptick in transaction volumes, and that is a benefit in our capital markets business and also a modest benefit in our clearing business. And then we also -- because of the incremental volatility, we saw a moderate pickup in the amount of collateral that our customers, client members had to leave with us as margin in the clearinghouses. And on that, we are in a very small amount, but because of the size of those balances that comes in as net treasury and come in pretty significant amounts as well. So you put those different areas together overall in an environment. As we've seen over the past few months, our business does relatively well. So we are certainly aware of a lot of the difficulties and the stress in other industries and in other sectors around us, but that has not had a significant negative impact on LSEG. Just to turn a little bit more to the impact on how that effects LSEG, I would say there are parts of our business -- of course, it's roughly -- in our index business, it's roughly 2/3 subscription revenues and 1/3 basis points on AUM. And so at a very high level when the markets go down and the assets under management go down, we get a lower level of revenue. Just to give you a little bit of incremental color on that because it's not entirely linear, our asset-based revenues overall consist of a combination of ETFs. That's about 50%, and then other passive funds and then derivative contracts, which are traded against FTSE Russell indices. So the margins from our asset-based revenues will fluctuate a little bit depending on the direction of AUM, and we've obviously seen some downs and then ups over the past couple of months. Our contracts with our various customers or providers out there are bespoke, but the typical contract has a mixture of a fixed base fee and then the basis points based on AUM that I referred to earlier. And also, the -- in some of the contracts, the variable basis points also decreases per unit of AUM as the AUM increases above a certain level. So just worth spelling that out a little bit so that people understand it's not totally linear that AUM goes up, revenue goes up or AUM goes down or revenue goes down. The fluctuation is dampened a bit by the fixed fee components. So it is just not so extreme.

This helps a lot. But just -- really just a very short-term question. Do you see any impacts from the interest of clients in -- during this times with lockdowns in terms of new subscription sales? Or can you maybe even report some mandate wins recently?

Yes. So -- well, a couple of thoughts on that. In terms of the market turmoil, this has certainly caused our institutional investors to review asset allocations and their mandates in the coming months. We do -- we're in regular dialogue with a number of them. So we do expect them to embrace more, I'll call it, innovation. And whether that's in the form of some of the climate-related or sustainability-tilted smart beta strategies, we expect to continue to see growth in the sustainable investing area. The other aspect of this, the pandemic will inform the issues that investors really want to focus on. Social considerations in the past have -- the S in ESG, has really gotten less attention than some of the environmental issues, some of the governance issues. But given what's going on in the world right now, that could change. So we do expect to see resilience as a growing concern, and that's only -- again, only natural given what we're all going through. So while historically, it's mostly been about the low carbon transition and climate change issues, we do expect to see this shift towards a broader range of resilience issues. I think it's probably premature to say we can tell you exactly what things are going to look like in the post-COVID economy. But it is clear that investors are really taking a close look at how they expect to generate returns going forward, how they're thinking about smart sustainability strategies. And I think it's something we are staying very close to our customers on. In terms of the last part of your question, any new mandates, I think worth touching on a couple that we announced just before the lockdown where we have -- we launched the FTSE Russell Target Exposure Index series in February. And that's a series that offers exposure to various risk factors, industries, geographies, all along sustainable investment goals. And then we also announced the -- in January, the FTSE TPI Climate Transition Index Series, and that -- it was created in collaboration with The Church of England Pensions Board and the Transition Pathway Initiative, TPI. So you can get the sense pre COVID of where a lot of the investor focus was on these sustainability issues. We are continuing to see that kind of focus through the customer dialogue during the lockdown, and we will see where the focus evolves in the weeks and months to come.

Very clear. Then maybe moving to your second major growth engine within the group right now. LCH continues to grow strongly now for years essentially. So maybe you can speak about where do you see going forward the most opportunities? From incremental clearing obligations, some of them are delayed. Should we see a bit slower growth? Or is there just the client side compensating for all that really? And any additional services you are selling, such as compression, which might also add another -- or continuously add another growth leg here?

Yes. So again, just to give everyone a little bit of context, we have had a 90% plus market share in interest rate swap clearing going back several years now. And yet the growth has continued to be in that double-digit zone. And so it's a little bit hard for us to predict the direction that, that market is -- or that, that product is going in, but the growth has continued to be attractive and robust. A lot of it has come in recent years or recent quarters from, as you mentioned, new clients coming in. So again, just so everyone has -- understands the vocabulary that we use. We have members, which are typically sell-side institutions. And then clients are typically -- not always, but typically buy-side institutions that clear through the member institutions with us. And as we have seen more and more client clearing, the clients tend to pay on a per transaction basis, where the members tend to have a -- an all-you-can-eat fixed fee model. And so as the client clearing picks up, that is higher-margin business for us. We get more per transaction on that than we get from the members. So that has been an important driver of the growth in that part of the business, in SwapClear for the last few years. It has continued to do well. There are other aspects of the business that are also drivers of growth to varying degrees. So we have continued to introduce innovation and new products. So clearing of inflation swaps, clearing of the new -- the various new reference rates. We just announced this past week the clearing of the new Singapore version of LIBOR. It's called SORA, and we clear the other new reference rates as well. So those new areas, the new products, that creates incremental revenue. We also have added over the past year or 2, new currencies in our swap clearing. So a bunch of different areas of potential growth and actual growth as well as the continuing dynamics with the client transaction volumes. I should just -- again to give those on the line here a little bit of broader context. That 90% plus market share in the clearing of interest rate swaps, that applies to swaps -- interest rate swaps that are required to be cleared under the regulatory mandate. And that percentage of the overall swaps market is roughly 75% to 80%. There are certain kinds of swaps, cross-currency swaps, swaptions that are perhaps a little bit more exotic than some of the more plain vanilla swaps, do not need to be cleared. They do not fall under the clearing -- the regulatory clearing mandate. And so there is a substantial pool of uncleared swaps out there. And that is a segment of the market that we are also going after with SwapAgent, which is a different product, and it provides all the services that we provide to our members and clients in SwapClear without the actual clearing intermediation. So we do not step in as the buyer to the seller and the seller to the buyer. But we do all the other things, the processing, some of the margin calculations, et cetera, that we do with SwapClear but without the clearing. That is not something that we built on spec. We did that in close coordination with our member banks, our member institutions who recognize the benefits of that kind of capability for their uncleared swap portfolio. Maybe the last thing I should just mention on SwapAgent is that it also allows compression. And so for institutions to be able to compress their uncleared swaps portfolio as well as compressing their cleared swap portfolio is just another element of capital benefit or capital efficiency that we can provide to them. So SwapAgent, still small, still early days. But in terms of that broader pool of, call it, 20% plus of the overall market of swaps, that's, we think, a pretty interesting area of opportunity as well.

Okay. Very clear and perfectly on time. So thank you very much, David and David, and hope to welcome you next year in person in New York. Thank you.

Thank you.