Flow Traders N : Earnings Document

Flow Traders Q2 & H1

2021 Results

Friday, 23 July 2021

Transcript produced by Global Lingo

London - 020 7870 7100

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Flow Traders Q2 & H1 2021 Results

Friday, 23rd July 2021

Flow Traders Q2 & H1 2021 Results

Operator: Hello, and welcome to the Flow Traders' Q2 21 Results Call. My name is Molly, and I'll be your coordinator for today's event. Please note that this call is being recorded, and for the duration of the call, your lines will be on listen-only. However, you will have the opportunity to ask questions. This can be done by pressing star one on your telephone keypad to register your question at any time. If you require assistance at any point, please press star zero and you will be connected to an operator.

I will now hand you over to Jonathan Berger to begin today's conference. Thank you.

Jonathan Berger: Thank you. Good morning, everyone, and thank you for joining Flow Traders' second quarter and half year 2021 results call. As you've no doubt already seen we released our results first thing this morning. I'm joined here on the call by Flow Traders' CEO, Dennis Dijkstra, as well as Chief Trading Officer, Folkert Joling, who will run through the results presentation. Afterwards, they will be happy to take any questions that you may have.

Before we begin, let me draw your attention to the disclaimer on page two. 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 Dennis for his opening remarks.

Dennis Dijkstra: Thank you, Jonathan. Good morning, and thank you all for joining this call where we will provide additional colour on our second quarter and half year 2021 results. The first half of 2021 overall saw more normalised levels of market activity when compared to the exceptional market circumstances experienced in 2020. Accordingly, market ETP value traded decreased 14% year-over-year.

The second quarter of 2021 was more subdued than the first, and this was reflected in the ETP market value traded, which decreased by 14% quarter-on-quarter. Our own ETP value traded essentially tracks the broader markets in the second quarter, decreasing by 15%. From a year- on-year perspective, Flow Traders only decreased by 6%, which clearly outperformed the broader market.

Consequently, this market environment, along with Flow Traders' own pricing and hedging capabilities, translated into a net trading income of €94.4 million in the second quarter of 2021 compared to €142.2 million in the first quarter of 2021 and €229.9 million in the second quarter of 2020. This contributed to NTI for the first half as a whole of €236.6 million.

We demonstrated yet again strong margins with the EBITDA margin of 43% in the second quarter of 2021 with an EBITDA of €40.3 million. Overall, in the first half of 2021, our EBITDA was €119.6 million with a margin of 51%. The second quarter 2021 net profit amounted to €28.7 million with a basic earnings per share of €0.66. Ultimately, we reported a net profit for the first half of 2021 of €90.2 million with a basic earnings per share of €2.05.

Taking all of this into account, Flow Traders proposes an interim dividend for 2021 of €1 with an interim dividend pay-out ratio in line with with the prior years. This will be paid on 20th August. We are cautiously monitoring the evolution of the pandemic and our business continuity plan remains active with the health and well-being of our colleagues being of the upmost importance.

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Flow Traders Q2 & H1 2021 Results

Friday, 23rd July 2021

We once again retained a strong focus on implementing our strat egic growth agenda during the second quarter, which is further confirmation of our structural growth. Accordingly, we have worked to enlarge out ETP footprint and have taken first steps in enhancing coverage of fixed income, cryptocurrency and commodity markets. These investments are positively contributing to the top line and we expect even greater contributions going forward.

Now, let's take a closer look at the market developments as well as a deeper dive into Flow Traders' performance and accomplishments. Firstly, we will review recent ETP market dynamics on the next slide. As shown at the top left-hand side of this slide, ETP market value traded declined 14% in the second quarter of 2021 compared to the first quarter as markets further normalised.

Market volumes for the first half of 2021 were also 14% lower compared to the same period in 2020. The implied volatility also trended downwards during the second quarter from the higher levels seen in the first. Accordingly, this reduced market velocity in the second quarter after uptick seen in the first. ETP assets under management surpassed the $7 trillion mark for the first time in the first half year predominantly driven by equity ETFs.

The first half also saw record ESG and crypto inflows. Naturally, as a key part of the ETP ecosystem, Flow Traders facilitated trading across all these ETP asset classes. In summary, it is fair to say that momentum and the outlook in the ETP universe remained extremely positive in the first half.

Now I will hand over to Folkert, who will review Flow Traders' regional performance in greater detail on the next slide.

Folkert Joling: Thank you, Dennis, and good morning, all. On this slide, we present an overview of some of the key performance indicators for the second quarter and for the first half 2021 on a regional basis.

As Dennis mentioned earlier, Q2 was more subdued generally from a market activity standpoint and that is very much reflected in the performance by region. Encouragingly, our own ETP value traded outperformed the market in every region in Q2.

In Europe, we maintained our position as the leading liquidity provider in ETPs both on and off- exchange. The region delivered a robust trading performance in Q2 with contribution from crypto market making activities. And once again, Europe remains the largest NTI contributor and Flow Traders' most important market. In a consistent theme across all of our regions we have sought to deepen and expand our overall footprint.

In Europe, we opened a new office in Paris, partnered with TP ICAP and the launch of new crypto platform and successfully connected to Bloomberg's digital platform.

Moving to the Americas, again, the trading performance reflects lower levels of market activity. The Americas remain a growth region, and accordingly, we continue to expand our Lead Market Maker activities with issuers as evidenced by iShares ESG ETFs. From a footprint perspective, we connected with additional counterparties and our Single Dealer Platform went live and also commenced coverage of Grayscale products and Canadian crypto ETPs.

Lastly, in APAC, we were active in equity exposure trading for counterparties across all major US ETFs on a 24/5 basis. In terms of building out our footprint, and as an example, we acted

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Flow Traders Q2 & H1 2021 Results

Friday, 23rd July 2021

as a Market Maker in a newly launched CNH future on Hong Kong Exchange . And we have submitted our QFII registration for China trading.

I will now hand over to Dennis for the next slide, where we cover the cost base in greater detail.

Dennis Dijkstra: Thanks, Folkert. The main drivers of the 8% year-over-year and 4% quarter- on-quarter increases in fixed expenses relate to new hires and technology investments. We have incurred in the first half of €1.3 million of additional one-off expenses in the first half, which relates primarily to the ongoing COVID-19-related expenses.

Our headcount increased by 2% versus the end of the Q1 quarter with a focus on technology and development hires to support growth in product coverage, asset classes and trading platforms connected to. The business overall continues to demonstrate healthy EBITDA margins. In terms of cost for the full year, we still expect a maximum growth in fixed operating expenses of circa 15% for 2021.

Now we will take a closer look at Flow Traders' capital position on the next slide. We show our required CET1 capital levels on the top left -hand part of the slide. After accounting for the interim dividend, Flow Traders' capital buffers have remained strong and remain comfortably above all requirements under CRR or IFR.

Our own fund requirements increased to €271 million at the end of June from €226 million at the end of March. This reflects the nature of the trading book at that point in time with increased crypto and fixed income trading. We had a total CET1 of €449 million at the end of June 2021. On the top right-hand side of the slide, you can see that our solvency ratio with the Prime Brokers as at 30th June reduced slightly from the end of first quarter, reflecting a reduction accumulated trading capital to €619 million. Again, we are comfortably above our Prime Broker requirements.

The new IFD/IFR prudential regime finally came into force on 26th June 2021. The initial impact has been broadly neutral as lower capital requirements have been partly offset by growth business activities, which are more capital intense. We remain in ongoing discussions with the DNB as to the precise implementation of these new requirements.

Considering all these developments, Flow Traders has set the full year 2021 interim dividend at €1 per share.

Now I will hand over to Folkert again to discuss our strategy in medium term growth focus areas.

Folkert Joling: Thank you, Dennis. This slide will be familiar to all of you. And again, our growth focus areas remain as we outlined previously. Recent developments during the first half of the year have further confirmed our strategy where the structural growth in the business very much confirmed. Seeking to enlarge our global ETP footprint means that we can align ourselves with the structural growth in passive investments, which has continued apace in H1.

ETP assets under management surpassed the $7 trillion mark for the first time in H1. We have also seen record inflows into ESG and crypto which has translated into increased trading activity in those areas. Our goal is to remain market leader in Europe and seek to be top five in the US.

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In terms of enhancing our coverage of fixed income, we want to build on the fact that fixed income continues to be a growing ETP asset class by becoming the global footprint liquidity provider in fixed income ETPs. We will also leverage access to the underlying. This will be done through promoting and driving market electronification, which will create a more level-playing field.

From a currency trading perspective, we are leveraging our global infrastructure to provide liquidity to currency pools and counterparties. Our aim is to be top 15 FX liquidity provider on Euromoney and we want to grow commodities by leveraging our top five rank on ECNs for spot metals.

Lastly, we will further develop our crypto business by unlocking additional liquidity pools and maintaining our number one market maker position in crypto ETPs in Europe. These growth focus areas have the ultimate goal of driving structural NTI growth.

1. will now turn to the final slide of the presentation and review our strategic progress so far in 2021. As Dennis mentioned earlier in the presentation, we once again retained a strong focus on implementing our strategic growth agenda during the second quarter. We are confident of delivering additional progress during the remainder of 2021. In the first half of the year, Flow Traders built on our leading global ETP liquidity provider position and grew our presence in all regions, especially in the US and Asia.

Highlights include acting as a lead market maker on an increasing number of new issuers in the US commencing coverage of Grayscale products and Canadian crypto ETPs and further deepening our ecosystem relationships in APAC. Globally, we now trade around 1,900 institutional counterparties. In the second half, we will focus further on expanding our counterparty base as well as increasing and deepening product coverage connecting with additional venues and following up on our QFII registration.

We have enhanced coverage of fixed income in the first half of the year through expanding our infrastructure and we have retained our number one off-exchange position in fixed income ETFs. Focus for the rest of the year is on further enhancing our pricing capabilities as well as accessing more liquidity and increasing volumes as well.

From a currency and crypto perspective, we are now constantly trading more than $5 billion daily as we build bilateral connectivity and trade processing. During the first half of the year, we had successfully completed our connectivity migration to increase our counterparty reach and partnered with ICAP and the launch of crypto trading platform. Work will continue in the second half and scaling FX bilateral counterparty business and increasing our product coverage.

I will now hand back to Jonathan for the rest of the call.

Jonathan Berger: Thanks, Folkert. This now concludes the formal part of our presentation. We'd now like to open up the floor for any questions you may have. Operator?

Questions and Answers

Operator: Thank you. As a reminder, if you would like to ask a question, please press. Please ensure that your line is unmuted locally. You'll then be advised when to go ahead with your

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