Flow Traders N : Earnings Document

Flow Traders Q4 & FY

2021 Results

Thursday, 10th February 2022

Transcript produced by Global Lingo

London - 020 7870 7100

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Flow Traders Q4 & FY 2021 Results

Operator: Hello, and welcome to the Flow Traders' Q4 '21 and Full Year '21 Results. My name is Josh, and I will be your coordinator for today's event. Please note that this conference 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 at the end of the call. This can be done by pressing star one on your telephone keypads to register your question. If you require assistance at any point, please press star zero and you'll be connected to an operator.

I would now hand you over to your host, Jonathan Berger, to begin today's conference. Thank you.

Jonathan Berger: Good morning, and thank you for joining Flow Traders' fourth quarter and full 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, and Chief Financial Officer, Mike Kuehnel, who will run through the results presentation. Afterwards, they'll be happy to take any questions you may have.

Before we begin, let me draw your attention to 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 the results we'll discuss in this presentation are unaudited.

With the formalities out of the way, I'd 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 fourth quarter and full year 2021 results.

2021, as a whole, saw an increase in the levels of market activity when compared to 2020, despite a more normalised volatility environment. Market ETP Value Traded increased 5% year-over-year, as investors continue to absorb the economic and social impacts of the pandemic.

The fourth quarter of 2021 was more active than the third, and this was reflected in the ETP Market Value Traded increasing by 20% quarter-on-quarter. Our own ETP Value Traded also increased both quarter-on-quarter and for the year as a whole. In the fourth quarter, ETP Value Traded increased by 13%, and year-on-year by 2%. 2021 saw record ETP Value Traded versus last year, which in itself was a record for our business as well.

This was also the third consecutive year when our ETP Value Traded surpassed the €1 trillion mark. This is once again a testament to our market presence and leading global footprint.

I would also like to take the opportunity now to pay tribute to the professionalism, resilience and loyalty of all our colleagues globally this past year. Everyone has contributed to the considerable operational and strategic achievements and successes over the past year.

The market environment I just described, along with Flow Traders' own pricing and hedging capabilities, translated into a net trading income of €80.3 million in Q4 2021 compared to €67.1 million in the third quarter of 2021. This contributed to NTI for the full year of €384 million. This was Flow Traders' second most successful year ever from a top line standpoint.

We demonstrated yet again strong margins with a normalised EBITDA margin of 41% in the fourth quarter of 2021, with a normalised EBITDA of €32.6 million. Overall, in 2021, our normalised EBITDA was €175.3 million with a margin of 46%. As of Q3 trading update, we have been focusing on our normalised EBITDA and margin as metrics, which we believe betterdemonstrate underlying quarter-on-quarter performance as they remove the distorting effects of the IFRS treatment of our share-based compensation plans.

Q4 2021 net profit amounted to €16 million with a basic EPS of €0.37. Ultimately, we recorded a net profit for 2021 of €114.9 million with a basic earnings per share of €2.63.

Taking all of this into account, Flow Traders proposes a final dividend for the financial year 2021 of €0.35, implying €1.35 total dividend for the financial year 2021 and a 51% pay-out ratio. This will be paid shortly after our 2022 AGM. We do recognise that this pay-out ratio is lower than the previous years. The decision around the dividend reflects our view and confidence of the trading opportunities ahead, and accordingly the desire to have sufficient training capital retained with the business to capitalise on these accretive opportunities.

As you will see later, our trading capital is highly accretive. We once again retained a strong focus on implementing our strategic growth agenda during 2021. We saw further confirmation of our structural growth. Accordingly, we have worked to enlarge our ETP footprint and have taken further steps in enhancing coverage of fixed income crypto FX and commodity markets. These investments are positively contributing to the top line, and we expect even greater contributions going forward.

Let's now 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 slide four. As shown on the - at the top left-hand side of this slide, ETP Market Value Traded increased significantly in the fourth quarter of 2021 compared to the third quarter. The fourth quarter was the strongest quarter in 2021 from a market volume perspective. Implied volatility also increased as the markets reacted to the emergence of the Omicron variant.

Accordingly, we saw market velocity increasing, driven mainly by the Americas and EMEA. ETP Assets under Management saw considerable growth during the course of 2021, driven predominantly by equities and fixed income. This once again confirms the structural growth evident in the overall ecosystem. It goes without saying that as a key part of the ETP ecosystem, Flow Traders facilitated trading in all these ETP asset classes.

I will now move on to the dynamics within the fixed income and crypto markets, which are becoming increasingly important for Flow Traders as we expand our trading activities in these markets.

As shown on the top left of the slide, it is evident that the investment grade and high-yield bond markets have remained subdued when compared to the levels seen earlier in the year. Given that US is the largest fixed income market in the world, we have used TRACE volumes as compiled by FINRA as a proxy for the dynamics within this section of the fixed income market.

We can also see the credit spreads have narrowed in 2021 when compared to 2020. Moreover, fixed income ETF spreads in EMEA more than halved in 2021 versus the prior year. This reinforces the subdued nature of the bond market.

From a crypto perspective, the trend has been more positive. Crypto ETP Value Traded recovered strongly in the fourth quarter and we have seen price volatility in the underlying coins with Bitcoin receding from historic highs in November.

Now, I will hand over to Folkert, who will brief you Flow Traders' regional performance in greater detail.

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 fourth quarter and for the full year 2021 on a regional basis.

As Dennis mentioned earlier, we have seen stronger performance in Q4 than in Q3. Heightened market activity and disciplined execution resulted in growth in ETP Value Traded and NTI in Q4. In Europe, we maintained our position as the leading liquidity provider in ETPs, both on and off exchange in equity, fixed income and quality ETFs with a strong overall trading performance in Q4.

There was also a further build-out of our single bond market making business with Flow Traders going live on Neptune and MarketAxess, which are both major RfQ platforms. We have also maintained our number one market status in crypto ETPs, with a 45% market share in Q4 and 2021 as a whole. By way of furthering our commitment to the digital assets base, we completed a strategic investment in D2X.

Moving to the Americas. Trading performance was once again affected by similar themes from Q3. Within fixed income, competition remained intense, which was also combined with low volatility and tight spreads. In addition, we continue to invest in our market presence in relation to single bond market making. We became a disclosed market maker on MarketAxess for high yield bonds in Q4 and already achieved the rank of seventh most active bond market maker by ticket count.

This demonstrates that we are gaining traction within this market. There were also positive developments in our lead market maker activities with more listings added from numerous issuers. We continue to be well prepared for the eventual launch of spot crypto ETFs in the US. And from a strategic ecosystem perspective, we also participated in MEMX's second funding round.

Lastly, with respect to APAC, we saw a solid trading performance with elevated volatility levels and increased activity in fixed income driven by the Chinese markets. We also deepened our relationship further with the Hong Kong Stock Exchange and Derivative Exchange by acting as a liquidity provider on the new MCI China A50 connect future.

As in other regional markets, we are driving forward the growth of the digital asset space by assisting ASX with their anticipated forthcoming crypto ETP launches.

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

Mike Kuehnel: Thank you, Folkert. I'm delighted to be participating in my first results call since starting at Flow Traders in August last year. As you can see, there was a 12% increase in fixed operating expenses in 2021, excluding one-off expenses, which is within the 15% guidance we communicated this time last year.

The growth in fixed operating expenses in Q4 was a modest 2%. The main drivers of these increases relates to new hires to support our growth strategy, as well as ongoing technology investments. We have incurred $2.5 million of additional one-off expenses in 2021, which relates to the ongoing activation of the business continuity plan.

Our headcount increased by 11% versus the end of 2020 with a focus on technology and development hires to support growth in product coverage, asset classes and trading platforms. The business overall continues to demonstrate healthy EBITDA margins. And in terms of costs for 2022, we maintain our guidance from last year and expect the maximum growth in fixed operating expenses of approximately 15% as we continue to execute our strategic growth agenda.

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

Our own funds requirement decreased to €243 million at the end of December from €337 million at the end of September. This reflects the nature of the trading book at that point in time. We had total CET1 of €483 million at the end of December 2021 with €240 million excess capital.

As we have mentioned previously, the new IFR/IFD prudential regime came into force in 2021. We remain in ongoing discussions with the DNB as to the precise implementation of these new requirements. On the top right-hand side of the slide, you can see our trading capital position. Trading capital really is the lifeblood of our business and has the ability to generate attractive returns, as shown on the chart.

Our trading capital increased to €611 million at the end of the year and includes the proposed dividend, as well as deferred variable remuneration. It is also worth noting that given our expanded trading activities, there is increased demand for trading capital across the firm. Considering all these developments and the growth opportunities we very much see ahead, Flow Traders have set the full year '21 final dividend at €0.35 per share, implying a €1.35 total dividend for full year '21, implying a 51% dividend pay-out ratio.

Total dividends paid to shareholders since the IPO of Flow Traders now amounts to €14.50, including the full year '21 final dividend.

Now I will hand over to Dennis to discuss market trends and our strategy.

Dennis Dijkstra: Thank you, Mike, and welcome to the team again. On this slide, we have laid out our four key market trends, which we believe are acting as tailwinds to our business and offer an increased opportunity set.

Crucially, these trends all feed into and reinforce each other. Particularly relevant to our core business is the ever-increasing acceptance of ETPs and growth in passive investing. According to BlackRock, ETP AuM is expected to double each year until 2021, which underscores the strength and importance of the ecosystem we are a key part.

Electronification of trading is critical for all of our activities, but in particular, it is within our credit business, where this is a key structural trend in corporate credit and emerging market sovereign bonds. Increasing adoption of electronic trading ties into our core technology-enabled competency set.

We have seen the increasing institutional adoption of digital assets, not only demonstrated by crypto ETP Value Traded, but also by the increasing number of listings. We expect this trend to continue, as well recognising the potential for DeFi to fundamentally revolutionise the financial markets in the coming years.