Feb 18, 2020
Operator
Good afternoon, ladies and gentlemen, and welcome to Deutsche Borse AG Analyst and Investor Conference Call regarding Q4 and Full Year 2019 Results. At this time, all participants have been placed on a listen-only mode, and the floor will be opened for questions following the presentation.
Let me now turn the floor over to Mr. Jan Strecker.
Jan Strecker
Welcome, ladies and gentlemen, and thank you for joining us today to go through our preliminary fourth quarter and full year 2019 results. With me are Theodor Weimer, Chief Executive Officer; and Gregor Pottmeyer, Chief Financial Officer.
Theodor and Gregor will take you through the presentation today. And after the presentation, we will be happy to take your questions.
The presentation materials for this call has been sent out via e-mail and can also be downloaded from the Investor Relations section of our website. As usual, this conference call will be recorded and is also available for replay.
Let me now hand over to you, Theodor.
Theodor Weimer
Thank you, Jan. Welcome ladies and gentlemen.
Let me start today's call with a short summary and afterwards, as always, Gregor will present the results in more detail of the financial year 2019 and Q4 2019. Let me calibrate the results.
After the strong development in 2018, I think it is fair to say that last year, we overall achieved a very solid financial performance. In line with our guidance we continued to deliver 5% secular net revenue growth.
For me it is particularly encouraging to see that Eurex was able to overcompensate the lower market volatility, with secular growth for new products, OTC clearing and pricing measures. It is also very good to see that our growth segments, commodities, foreign exchange, investment fund services, as well as index and analytics, yet again achieved double digit growth in 2019.
While cyclicality across the group was a small headwind last year, it was additional net revenue growth from our M&A activities. In total, this resulted in 10% net profit growth to around €1.1 billion which is also in line with our guidance.
Please bear in mind the year 2018 we achieved €1 billion net income now be had €1.1 billion number, another €100 million more. On this basis we are proposing to increase dividend per share for 2019 by 7% to €2.90, which equals a payout ratio of 48%.
This proposal phase both, a commitment to continue to pay the attractive dividends as well as increasing the free cash available for M&A. Looking back over the last two years, I think we have we are very well on track with the implementation of our growth strategy, our roadmap 2020, which is consistent revenue growth each year, and each quarter since the beginning of 2018.
The average annual net growth over the last two years amount up to 14%. And it's very well in line with our midterm guidance.
The focus on M&A in 2019 has resulted in two attractive and meaningful additions to our business, Axioma and UBS Fondcenter very recently. With the Axioma transactions we have strengthened our pre-trading offering significantly and improved access to the buy side for stocks as well as the entire group.
The acquisition of the majority stake in UBS Fondcenter complements our offering on the fund distribution side. And that strengthens our leading position is investment fund services further.
In terms of outlook for 2020, the last year of our current midterm plan, we continue to expect at least 5% growth of secular net revenue, and then adjusted net profit of around €1.2 billion. So another €100 million compared to very good year 2019.
For the guidance beyond 2020, we are currently working on our next midterm plan, so called compass 2023 which will present at our Investor Day on the 28th London. We're looking forward to see many of you there.
Let me now hand over to Gregor to present the details of our financial results.
Gregor Pottmeyer
Thank you, Theodor. Let me start with group financials in the fourth quarter on Page two.
Net Revenue development was mainly driven by a cyclical volume decline against the very strong fourth quarter 2018. This was partially offset by secular net revenue growth of around 4% and consolidation effect of around 3%.
Operating costs amounted to €347 million. They adjusted for around €33 million, mainly relating to M&A projects and restructuring.
Operating costs was mainly driven by the consolidation of Axioma. The adjusted net profit in Q4 increased by 5% to €242 million.
Let me turn to the quarterly results of the segment. Beginning with Eurex on Page three.
Due to much lower market volatility cyclical net revenue declined by around 13% in the fourth quarter. This was to some extent compensated by group secular net revenue profits, with the main drivers continuing to be product innovation and OTC clearing.
Amongst the new products, we saw a particularly strong performance in MSCI derivatives, total return futures, and ETF derivatives. In total all new products in Eurex generated more than €18 million of net revenue in 2019.
We also made good progress in OTC clearing by connecting more satisfied and buy side clients to our platform. This resulted in strong cause of outstandings in January to around €17 trillion which will present a market share of 18% of all euro denominated interest rate products.
In our commodities business EEX, we continue to see good performance. The first quarter was the strongest quarter in 2018.
Therefore, the net revenue growth rate decelerated somewhat, compared to the previous quarters in 2019. Growth continues to be driven by power developers in particular in US products, which increased by more than 50% in the fourth quarter.
In January 2020 our US subsidiary Nodal achieved its 18th consecutive month of record volumes and the market share of 45% of US power futures. Nodal also recently successfully completed the migration of it power of interest from NASDAQ futures.
Let's turn to Page five and FX business. 360T continue to deliver very good organic growth rates in the fourth quarter, despite relatively low FX volatility.
This was mainly driven by attracting new clients in particular in the US and higher demand for our swap and product offerings. We also made very good progress last year in extending our service and product offerings to FX, futures listed on Eurex and OTC FX clearing service.
This is expected to be an important cost driver for the segment over the next couple of years. Lower market volatility in the fourth quarter also resulted in a decline of cash equity volumes on pre-con [ph].
Some of this cyclicality was compensated by further strengthening our position as a reference market for trading German blue chips, but weekly market shares levels as high as 78% in the fourth quarter. In our post trading segment listing, lower US interest rates were partly compensated by an increase of client cash balances head in U.S.
dollar resulting in only a 3% decline of net interest income. In the court settlement and custody activities, we saw solid cross levels.
This mainly relates to an increased amount of bonds outstanding, a slightly stronger U.S. dollar and higher fixed income market activity.
This is a trend also continuing in January. The investment fund service segment, which you'll find on Page 8, showed a strong increase of net revenue.
Most of the growth was driven by our settlement and custody activities amongst others due to onboarding of new clients and funds. Furthermore, the acquisition of Ausmaq in the third quarter last year ended around €2 million of net revenue.
The growth of net revenue in the collateral management business of the GSF segment was mainly the result of more favorable product mix and growing volumes for instance initial margin segregation product under EMEA. In securities lending, negative interest rates and ample liquidity provided by the ECB put pressure on commission levels resulting in a decline of net revenue despite growing volume.
Slide 10 shows the new Qontigo segment which consists of Axioma analytics business we started to consolidate in September last year and the index business of Deutsche Borse. The around €20 million of analytics net revenue in the fourth quarter is slightly above our expectation.
But due to revenue recognition under IFRS 15 the quarterly numbers can be somewhat volatile. If you reflect the Qontigo segment in your estimates now, please to keep in mind that there are 22% of the net profit that is distributed to the minority shareholder.
In the data segment, we continue to see the trend that individual or a display data subscriptions are declining. From a net revenue point of view, this decline is compensated by higher priced non-display data subscriptions, which are typically used by other trading platforms or quantitative trading systems.
As we got to the full year 2019 development on Page 12, we achieved our targets of at least 5% secular net revenue growth and around 10% growth of the adjusted net profit, the adjusted earnings per share in 2019 increased by 11% to €6 over 3Q. On Slide 13, we provide you with an overview of the three components of net revenue caused in 2019.
Consolidation effects resulted in additional net revenue of €48 million, but the discontinuation of the managed services at [indiscernible] had a net negative effect on net revenue which is amounted to roughly €9 million. Secular growth being the key component of our strategy to increase net revenue has developed as planned.
The increase of around 5% respectively €140 million was mainly driven by Eurex and EEX. But Qontigo, IFRS and 360T are very important contributor as well.
On the cyclical side, lower market volatility affecting mainly the Eurex in cyclical segment was partly offset by the increased net interest income due to higher average U.S. interest rates in 2019.
Adjusted operating cost shown on Page 14 total to €1.13 billion in 2019. Around 3% operating cost was driven by consolidation effect on M&A activities, primary Axioma.
The net consolidation number also includes around €5 million lower costs because of the discontinuation of managed services adjusting. Savings from the structural performance improvement also made an important contribution to fund investments in cross initiatives, new technology and the regulations.
Net investments resulted in another around 3% operating protocol. Net inflation includes inflationary pressure in staff and other operating expenses which was offset by lower provision for variable compensation.
Net inflation that's contributed around 2% operating cost. This brings me to our dividend proposal for 2019 on Page 16.
As part of our long standing distribution policy, we generally aim to distribute 40% to 60% of the adjusted net income to shareholders by other regular dividends. In this range the dividend payout ratio mainly depends on the business development and dividend continuity considerations.
Since the earnings of the group has been growing. The payout ratio has come down over the last couple of years.
For 2019 the proposal of the executive board combined with action of the payout ratio to 48% an increase of the dividend per share by 7% to €2.90. The remaining recurring free cash is planned to be reinvested into the business to support the group M&A strategy.
The last page of today's presentation is the outlook for 2020. We expect at least 5% growth of fictional net revenue also in 2020.
This will mainly be driven by future progress in the OTC clearing business. New Eurex products, the commodity activities of EEX, the expansion of foreign exchange trading and clearing services, growth in investments on services as well as our index and analytics business Qontigo.
On the net profit. We expect growth to a level of around €1.20 billion.
With this we would roughly get to the midpoint of our roadmap, 2020 midterm targets of around 10% to 15% net profit growth per annum between 2017 and 2020. While it's still early in the year we are encouraged by the good start of 2020 during the first six weeks to achieve those goals.
This concludes our presentation. Thank you for your attention.
We are now looking forward to your questions.
Operator
[Operator Instructions] And the first question comes from Benjamin Goy from Deutsche Bank. Your line is open now.
Benjamin Goy
One question please. On your UBS Fondcenter acquisition.
And can you speak on synergies across revenues and costs with your Swisscanto business, but also your more traditional investment funds, those business across custody and settlement? Thank you.
Theodor Weimer
Thanks, Benjamin for the question. It's strategically important acquisition to be made here to strengthen our funds distribution business.
So specifically this Swisscanto, the benefit from that we will make a joint operation center Swisscanto and UBS Fondcenter and obviously, there are good cost synergies, and it's much, much more efficient. And we have now a much more scalable business than before.
With regard to our expectation of what do we get out of that is that we say for '21 - the closing will be into the second half year of 2020. So, we will see the first full year impact and in '21.
And our current expectation as that they get here out of that additional €16 million net revenues, and based on a 70% EBITDA margin.
Benjamin Goy
Okay, thank you.
Operator
And the next question comes from Michael Werner from UBS.
Michael Werner
Thank you. Just two questions, please.
First, on the 7% organic cost growth that we saw in Q4. I was just wondering how much of this was expected to be a run rate going forward.
And maybe there was some additional project costs allocated to Q4. And then secondly, in terms of the €1.2 billion of estimated earnings targeted for 2020, you indicate that it implies secular net revenue growth of at least 5%.
But internally, I was just wondering what type of assumptions you're making for the cyclical revenue growth sector. Thank you.
Theodor Weimer
Yes, starting with the 7% organic growth in Q4. Yes, that's the kind of seasonality what we have seen here.
So, traditionally, Q4 are the highest cost BDC over the full year. So here overall, our cost development was on a constant portfolio basis for 2019 was 5% and 3% of basically consolidation in fact.
And so that that 5% cost increase is a realistic number and you shouldn't overestimate that kind of Q4 effect with regard to a run rate in 2020. The second question the one - our net income guidance €1.2 billion, yes, there is obviously some secular 5% growth in it.
On top of that, you are aware with all the acquisition we already did and ensuring now the full year impact of our Axioma acquisition out of Swisscanto in a certain assumption. But when we will consolidate UBS Fondcenter so that there will be roughly another 2% growth out of that in 2020, purely a consolidation impact.
On top of that, we expect that we do not have cyclical headwind obviously. And when we look with regards to the first six weeks in January, we have seen slightly cyclical tailwind so what obviously would help us to achieve our targets?
Operator
And next up is Kyle Voigt from KBW.
Kyle Voigt
Just maybe me a question on Qontigo. Just given the first full quarter it's been consolidated in your results, can you just provide some update with respect to the organic growth rate ultimately achieved in 2019?
And you mentioned that the revenues in that business due to some revenue recognition can be a bit lumpy. Just wondering if you could help us frame what the right quarterly running right run rate is for that analytics business in Qontigo.
Thank you.
Theodor Weimer
Yes, Kyle. So, the guidance that we give on a quarterly basis for Qontigo is quite challenging.
If there are some accounting impacts, and it's really question what kind of contract you made with this your customer or what is shown is basically a maintenance revenue and one time revenue. So it really depends on the single contract.
But in general, so Axioma grew over the last 10 years by roughly 20% on a net revenue basis. And that's also our expectation for the future that we can show that kind of growth rate.
And that's what the analytics business. And for our index business, we expect that there's a good chance to come back to the roughly 10% secular growth.
Because there is a tendency to passive investments where our efforts will benefit from that. And so overall, let's take the 10% on the stock side, the 20% on the analytics side, it's the blended way of Qontigo is in between.
Operator
And next question comes from Arnaud Giblat from Exane.
Arnaud Giblat
Hi, good afternoon. I've got one question on Qontigo.
So you've been working with General Atlantic with private equity for a few months now. Can you talk a bit about the contributions they might have made especially on the stock side of the business?
I'm wondering if they've come up with new ideas helps you think about new ways of growing that business.
Gregor Pottmeyer
Yeah. Obviously there probably we get good input from our partner here.
So they have a lot of experience, specifically in the U.S. market.
And that's always helpful and when we discuss the strategy for Qontigo. And it's always good to have an external benchmark right.
And, it's good to see that the things we do is also appreciated by that kind of external benchmarks. And then on top also with regard to potential M&A opportunities also GA can give us a good input, because it's our intention to also increase our capabilities in Qontigo.
And therefore we also get valuable input from General Atlantic.
Theodor Weimer
And if I may add, Theodor Weimer speaking. As you can imagine, right before this theme, the General Atlantic is very well aware of the challenges and opportunities in market way beyond the M&A side.
They do challenge us on the cost side. They help us to develop the Qontigo plan going forward.
And we will ask Sebastian, GA CEO of our index business and our [indiscernible] business of Qontigo to show up with the recover market save to present the strategic plan going forward. So really, you will hear more about it.
And it is fun. It is accelerating and enriching.
There is good opportunities and it's important to be there again.
Arnaud Giblat
Right. Thank you very much.
Operator
So, next question comes from Andrew Coombs from Citigroup.
Andrew Coombs
Good afternoon. If I could just ask you a bit more intimately investment initiatives that you outlined.
You mentioned it was crossing number of different areas, Eurex, EEX, analytics and so forth. How do you think about the return on investment and the payback period for that investment?
And what's your current timeframe? Because I know you have obviously not changed your revenue guidance for the next 12 months from a secular perspective.
Yet the investment spends perhaps a little bit higher than me we might have thought. Thank you.
Gregor Pottmeyer
Yeah, Andrew. So in in general, with regard to our - what do we expect from our investments.
So we want to create additional value. And you create additional revenue if you net present value is bigger than zero.
So that means that you achieve a return what is higher than your back. And that's our basic key KPI to create additional value here.
On the other hand side if you have to look on IT investments where you have to do some replacements or you will invest in new technology like blockchain or cloud. So here our expectation is that they should have at least pay back within three to five years.
Theodor Weimer
And then there's one area Andrew, which is our investments on the IT security side. We do not calculate any kind of business plan for this right because we feel as a capital market infrastructure provider, we are heavily dependent on the reliability of our IT systems and the fear as all the financial service industry is fearing, we fear that something might happen.
And therefore, we are encouraged by all our regulators to invest more, to do more on the IT security side. There is the only exception where we invest basically heavily kind of business that.
We do because we cannot calculate any kind of opportunity cost there. But it's massive but we are investing there.
Andrew Coombs
All right. Thank you.
Operator
The next question comes from Johannes Thormann from HSBC.
Johannes Thormann
Good afternoon, everybody Johannes Thormann from HSBC. Two questions please.
First of all, just to confirm the 2% M&A revenue growth is on top of the 5% growth and you still just guide for let's say 8% to 9% adjusted EPS growth or adjusted net profit growth. What would you need for the high end two of your three year plant to grow profit to 1.3 [ph]?
And what would be in the bad case scenario, what would be besides they can tell us when some of the markets the other risk in your view for your guidance?
Theodor Weimer
Yes, I confirm the 2% consolidation of already done M&A for 2020. And also I want to remind you that with regard to this 2% M&A you will also see a 5% cost increase out of this M&A transaction.
So don’t forget that when Q4 and 7% across increase overall, I expect for 2020 out of all of these acquisitions. So again, Ausmaq, Axioma and also UBS Fondcenter they'll have an impact of around 5% additional consolidated costs.
And yes, that is included in our net income prediction and guidance for 2020. So - and I gave you before already answer as I said this regard to cyclicality we do not expect that we have headwind with regard to cyclicality.
And now I don't want to give you more different scenarios what could happen better or what could be curse. So you know all of that.
We manage what we can influence and that's obviously the secular net revenue growth. And here we are unchanged, committed to deliver our 5% secular growth.
We are able to also to increase our products rate by M&A as guided into. And with regard to cyclicality, we cannot give you guidance.
And the only one I can give you is that we have not - that we estimate in our guidance, that we have no cyclical headwind.
Johannes Thormann
Okay. Thank you.
Operator
The next question comes from Bruce Hamilton from Morgan Stanley.
Bruce Hamilton
Hi. Thanks for taking my questions.
Just a couple of clarifying ones actually. On the last question, did you say the consolidation impacts add 2% of revenues for 2020 but 5% to cost just to understand?
And therefore should I assume that the cost normalizes thereafter? Secondly, just on the point that you make around needing robust IT and systems, obviously completely agree with that.
But can you give us a sense of how much of your investment spend is these sort of IT budgets that is not being judged on a whack or so forth. And then finally, just your latest view on whack and where you feel your whack is in terms of what you judge and heard, when you look at the hurdle for new transactions.
Thank you.
Theodor Weimer
Bruce, if I confirm out of consolidation net revenue increased within the range of 2% and cost increase, OpEx increase maybe into a range of 5% in 2020 yes I confirmed that. With regard to our investments, so in principle you can say that roughly 50% out of our investments is in IT.
So that for all the majority of the project that all there's the business component and there is a IT component and regularly it's basically half, half you have to define the business requirements, on the product and management and packaging departments. And then the IT help to implement it and to deliver that.
So roughly you could say it's 50% is an investment in IT and 50% is basically done via our business. With regard to the range, is in the range of 7%.
Bruce Hamilton
Thank you.
Operator
At the moment there seem to be no further questions. [Operator Instructions]
Jan Strecker
Alright, then we would like to conclude to today's call. Thank you very much for your participation and have a good day.
Thank you.
Operator
The conference is no longer being recorded.