U.S. Markets open in 5 hrs

Edited Transcript of CMCX.L earnings conference call or presentation 21-Nov-19 10:30am GMT

Half Year 2020 CMC Markets PLC Earnings Call

Nov 30, 2019 (Thomson StreetEvents) -- Edited Transcript of CMC Markets PLC earnings conference call or presentation Thursday, November 21, 2019 at 10:30:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* David Fineberg

CMC Markets Plc - Group Commercial Director, Executive Director & Deputy CEO

* Euan William Marshall

CMC Markets Plc - CFO & Director

* Peter Andrew Cruddas

CMC Markets Plc - Founder, CEO & Executive Director

================================================================================

Conference Call Participants

================================================================================

* Benjamin Edward Bathurst

RBC Capital Markets, Research Division - Research Analyst

* Roberta De-Luca

Goldman Sachs Group Inc., Research Division - Equity Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [1]

--------------------------------------------------------------------------------

Get going. Yes, ready, should take about 30 minutes, and we'll have a Q&A at the end. That's up to you how long that starts. So we'll get going then. Good morning, everybody. Welcome to our first year, I told you so result -- I mean, sorry, welcome to -- sorry, sorry, that was the other print. That was the staff presentation. Sorry. Right, start again. Good morning, everyone. Welcome to our half year results presentations for the 6 months to the 30th of September. I'm Peter Cruddas, Founder and CEO of CMC Markets. And with me today, I have the newly promoted Deputy CEO, David Fineberg, on the left; and also Euan Marshall, who's our new Finance Director.

So welcome, guys. Euan's first presentation, so be gentle with him. And I'll shortly give you a quick overview of the period. Euan, as always, now will cover the financials, and David will then touch on client trading and regulations. And then I'll finish on strategy before taking questions.

So obviously, a very nice day for us today. I'm really pleased with the strong first half performance with a pretax profit of GBP 30 million.

Strong net operating income in the first half, up 45%, and this was driven by growth in our technology B2B business, which we'll talk about later. Really love that side of the business. And improved retention of spreads, financing and commissions paid by clients -- client costs. And we've really benefited from our focus on higher-valued clients and the change in our risk management strategy, which we'll explain in more detail, or David will later, and then you can test us on that at the end with your questions.

More importantly, we are -- today's numbers really are a reflection and a vindication of our strategy over the last 5 years and the diversification and balance that we're delivering through technology. The key highlight is obviously, the ANZ partnership deal delivering a strong first half performance. And on the back of this, we will continue to develop -- to invest here to develop our offering, and we are hopeful of announcing further partnerships in the future. And this is something I'm really excited about as there's so much potential there, and diversity that it brings. It's been a busy year so far, having adapted to and moving forward from the ESMA regulatory changes, which were implemented last year, on the 1st of August. We're really pleased to be moving forward from these changes and taking the learning points from where we've -- taken the learning points from where we can.

This experience has made us responsive to regulatory change going forward. And with the asset regulatory changes approaching, we are well placed to implement these with minimal disruptions. I should say that mentality in this company is we see regulatory changes as a positive, not a negative. The ind, the market, the analysts, the investors sometimes see it as a negative because of the uncertainty, but if you look at the change in our business, and we'll dig into it, you'll see how regulatory changes have really helped us going forward. And we'll drill down that.

Anyway, once the new changes are implemented in Australia, I'm pleased to say that the regulatory uncertainty around our sector will be lifted from all of our main regions. The best bit I've been waiting for, we've announced an interim dividend of 2.85p per share. Being a large shareholder of the company, I'm always pleased to announce strong dividends, which is a payment of GBP 8.2 million in December, and we expect to meet our 50% dividend policy for the full year.

Now I'll hand over to Euan for his first presentation, and he's feeling good, aren't you, Euan? He's had his hair cut for this. So thank you.

--------------------------------------------------------------------------------

Euan William Marshall, CMC Markets Plc - CFO & Director [2]

--------------------------------------------------------------------------------

Thank you, Peter. Good morning to everyone. The first 6 months of the year have seen the company return to strong profitability, driven by 45% increase in net operating income. In light of wanting to illustrate the drivers of the improving revenue performance as transparently as we can, we have reviewed our KPIs, and as a result, have 2 new ones to present to you today. I'll run you through these first.

If you look at the top left, you will see CFD net client revenue. This represents the spreads, commissions and financing that we charge our CFD clients net of rebates. It replaces the value of client trades KPI that we previously disclosed and is a more straightforward way of -- straightforward measure in understanding our success in growing client transaction costs. CFD net client income was only 2% lower than the same period last year at GBP 96 million. It should be noted that the H1 2019 comparative included 4 months of client trading prior to ESMA regulatory change. There was a 14% decline in net client income in our ESMA region. This was nearly completely offset by 17% growth in our APAC and Canada region, which was not affected by regulatory change.

Our second new KPI is client income retention, which represents the proportion of transactional fees charged to our clients which we retain as revenue. We aim to maximize this proportion and in the first half, we retained 82% of gross client income. This was a significant improvement against 2019 and also an improvement on 2018. David will run you through these figures in more detail, including the bridge from gross clients' income to CFD net trading revenue and the drivers behind the improvements to this metric.

Moving on to the second graph. The 82% retention of CFD clients' income resulted in CFD and spread bet net revenue of GBP 85.1 million which was 35% higher than H1 2019. Net operating income, which as well as CFD net trading revenue, includes stockbroking revenue, interest income and other income was GBP 102.3 million, an increase of 45% on prior year.

Moving on to the final graph, on the top -- along the top, you will see the active clients have reduced by 7% to just under 42,000. This is in line with expectations and was largely driven by many retail clients who stopped trading in the ESMA region in H1 last year as a result of the regulatory changes. However, when compared to H2 last year, we see that client numbers stabilized in the ESMA region and continuing to grow in the APAC region. So client numbers were up 3% against H2.

Revenue per active clients improved significantly, up 45% due to the increase in revenue retention. Moving on to profit before tax on the bottom left. PBT increased over 4x to GBP 30.1 million, with the improvement in net operating income demonstrating the operating leverage in the business. Profit after tax was GBP 27.5 million with an effective tax rate of 9% due to more deferred tax assets being recognized than utilized during the period.

Finally, this resulted in earnings per share of 9.5p per share. As Peter has just mentioned, an interim dividend of 2.85p per share has been declared, and the Board's policy of paying a total dividend for the year of 50% of profit after tax is unchanged.

Moving on to the income statement. In line with our previous guidance, CFD and Spreadbet's revenue was GBP 85.1 million, 45% higher than H1 2019, driven mainly by improving client income retention. Stockbroking revenue was 164% higher than H1 2019, at GBP 14.5 million, with most of the revenue increase attributable to the ANZ Bank stockbroking relationship, which went live fully at the end of H1 2019. Our CMC stockbroking business also saw a 15% rise in revenue performance during the period, with market conditions assisting this performance. I'll talk more about operating expenses in a couple of slides. Note that we have also disclosed our PBT for both the CFD and stockbroking businesses. These were GBP 27.5 million and GBP 2.6 million, respectively.

Moving on to institutional and retail revenue. As we have been talking about the strength of our technology and institutional business for some time, we thought it would be good to disclose these figures to you. I'll run you through some of the definitions here first. The B2C revenue items refer to the revenue from individuals, both retail and professional, that have been acquired by CMC directly. The B2B revenue comes from a couple of main sources, retail and professional clients who have been introduced to our technology platform by our other institutions, and institutions who trade with us directly. You can see that there's been healthy growth in both revenue streams in comparison to the prior year, but you can also see that B2B revenue constituted 28% of our net trading revenue in H1 2020.

This shows the strength for our technology and platform, which attracts other institutions. An additional benefit of our B2B business from a cost and client growth perspective is that our existing institutional partners help drive new clients and activity towards us, therefore, we incur no marketing costs to acquire this business. Also any new institutions who wish to use our platform and already have a client base with demand for our products can lead to an immediate increase in clients and revenue. The ANZ Bank deal is a great example of this.

Moving on to operating expenses. Operating expenses before variable remunerates -- shown before variable remuneration. We continue to be focused on costs, where you can see the cost of the CFD business remained flat versus the prior period. These costs included some restructuring where the savings will be reinvested in more personnel to develop our technology.

Stockbroking costs have naturally increased mainly as a result of the prior year comparative including the capitalization of development costs in readiness for ANZ Bank go live. This led to an overall cost increase in operating expenses of GBP 4 million or 7% to GBP 64.8 million. If we move into the line item detail, IT costs increased by 7% as we experienced higher market data costs across the business. Marketing costs were 16% lower than prior year, with testing and optimizing changes to digital spend taking place. Premises costs were down GBP 2 million due to changes in accounting standards, where premises costs have largely shifted to depreciation. You can see this with the increase in depreciation and amortization of just over GBP 2 million.

Regulatory fees increased by GBP 1.5 million, mainly due to a higher year-on-year FSCS levy and an increase in stockbroking regulatory fees. Variable remuneration, which consists of discretionary and contractual bonuses and share-based payments, increased by GBP 4.5 million, following the strong performance in the current period and a particularly weak prior period. As stated in our announcement, we have -- we expect operating expenses in the second half of the year, excluding variable remuneration, to be broadly flat on H1.

Let me now talk you through the liquidity and regulatory capital position as at the 30th of September. The group's balance sheet and overall regulatory capital remains strong, with a capital ratio of 18%. Our core equity Tier 1 capital increased by just over GBP 19 million as a result of the increase in profit after tax and the period -- and -- for the period after dividends.

Our Pillar 1 requirements increased a little due to higher market risk exposure as at the 30th of September versus the 31st of March. Moving on to the bottom left, total available liquidity strengthened during the period to GBP 233 million. Own funds increased by GBP 33 million, mainly driven by profits being largely the same as cash generated during the period. On the bottom right, you can see the reconciliation from total available liquidity to net available liquidity position. Blocked cash increased marginally. This is a liquidity that is required to support both regulatory and operational requirements in our overseas offices.

The broker margin requirement was broadly the same at the 30th of September as it was on the 31st of March, showing we continue to hedge a significant amount of net client risk exposure with our prime brokers. That concludes my review of the financials. I'll hand over to David, who will cover the client trading and regulation.

--------------------------------------------------------------------------------

David Fineberg, CMC Markets Plc - Group Commercial Director, Executive Director & Deputy CEO [3]

--------------------------------------------------------------------------------

Okay. Thank you, Euan. Thank you. So as Euan mentioned earlier, clients pay us spreads, financing and commission to use our platform. Revenue performance is, therefore, influenced by 2 factors: Firstly, the amount of transactional fees we receive from clients; and secondly, how much of these fees we manage to retain as revenue. We measure the efficiency of our risk management strategy by monitoring what percentage of client income we retain, and we obviously strive to make that percentage as high as possible.

As we discussed in the presentation in June, we saw a notable shift in client behavior during FY '19, namely, the clients were trading lower volumes, and they were holding onto the positions for longer. This was both a result of market conditions and due to clients being better funded through higher margins. As a result, we found that the frequency and scale of our hedging strategy meant that our hedging costs remained high, and were no longer aligned to the duration of client positions. This meant that we saw a significant deterioration of the proportion of client income that we were able to retain in FY '19. This led us to revisit our risk management strategy through 3 key areas: one, better analytics and optimizing our internalization, we now only externalize the flow, which yields a low return on capital; two, a better understanding of transactional costs and minimizing the market effect, ensuring a smarter and more efficient execution; and three, sharing our analytics of our institutional accounts to aid their understanding of the flow that they're sending us, ensuring both parties benefit from the collaboration.

All this ultimately assures a more efficient and better informed hedging process. As was the case before the changes, we continue to internalize client trades through the natural offset of client positions, and we still hedge a significant portion of our risk. At all times, we comply with the Board approved market risk limits, which remain the same as under the previous strategy. The next slide helps illustrate why we've made these changes and the effect that they're having upon revenue. The table and chart on this slide show that our net CFD revenue by half year since the start of FY '18. Looking at the table, the top line shows gross CFD income. This is the spreads, financing and commissions that clients pay to trade. As you can see, there's been relatively little movement in the income received from these clients over the past 3 periods, which is pleasing given that H1 2019 contained 4 months before ESMA regulatory change came into effect.

However, now looking at the graph at the bottom left-hand of the slide, what is notable is the decline in the proportion of these fees that we were managing to retain over the same period. The light blue line shows the percentage of client income retained as revenue. This has consistently been around 70% until deterioration that we saw during H1 and H2 last year. Pleasingly, we've seen a significant improvement in the first half of this year, with client income retention up to 82%.

The revised strategy means that hedging performance has improved significantly, and hedging costs are around GBP 1 million per month lower as a result of the data-driven approach I mentioned earlier, and the efficiencies that this brings. Another item I would like to bring to your attention on this slide is the client gains and losses. We're often asked how dependent we are on client performance, and this slide demonstrates that client performance does not have a significant impact upon revenue in comparison to the other elements that make up this figure.

Whilst FY '19 was a disappointing year, we are pleased with how we've tackled the challenges that it's brought us. Our clients have continued to trade on our platform, and we have weathered the changes in client behavior by optimizing our risk strategy. We are now in a stronger position, and we are confident in our ability to manage and respond quickly to any changes to client behavior in Australia that may arise as a result of the incoming regulatory change.

On other regulatory matters. As previously discussed, the Australian regulator, ASIC, has been granted product intervention powers, similar to those held by ESMA, and has announced their intention to use these powers to provide additional protection to retail CFD clients. We participated in the consultation period, which closed at the start of October. And whilst the implementation date for any intervention measures is still unknown, we expect changes to be implemented later in the financial year.

The measures suggested by ASIC are broadly similar to those already in place in U.K. and Europe and include negative balance protection, risk warnings and margin close out rules, all of which we've already successfully integrated into our offering. The proposed leverage limits are largely similar. As a result, we expect Australian clients to react in a similar way to that seen in U.K. and Europe over the past year. That is to say, whilst clients may reduce their trading volumes, we expect them to continue to trade and will retain the high-quality, high-value clients who are most significant to us.

As I said earlier, we are confident in our ability to adapt to these changes in client behavior, and we will use the experience gained from the ESMA changes to help us manage this process and mitigate the impact of any change. We are fully supportive of these proposed changes and believe they'll result in a stronger and better industry. In the first half of the year, Australian retail CFD clients generated 29% of group net client income. Elsewhere in the world, the Monetary Authority of Singapore raised FX margins from retail clients from 2% to 5% at the start of October. Given that Singapore clients were previously used to trading with higher margin requirements, we did not believe that this would have a significant impact upon client behavior. So far, this has held true, and the revenue impact of the change looks to be immaterial for the group as a whole.

Back in the U.K., the FCA continues to consider a ban of the sale of cryptocurrency derivative products to retail clients. Cryptocurrencies remain one of the smaller asset classes, therefore, we do not anticipate a significant impact upon the group should this occur. Finally, regarding Brexit, our German office now has a regulatory license and will become the European hub as such time as when the U.K. leaves the European Union.

I'll now hand you over to Peter, who will give you an update on the strategy and the outlook for the remainder of the financial year.

--------------------------------------------------------------------------------

Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [4]

--------------------------------------------------------------------------------

Thank you, David. Thank you, Euan. I just want to say congratulations to David and to Euan. David's been with the company over 20 years, has managed all aspects of the business, and it's great to see him as Deputy CEO and staff are responding. And Euan's appointment as Finance Director was a pretty easy decision because he'd been running finance here for 7 or 8 years. He knows the business. It's all been very seamless. So really pleased that they're both settled into their new jobs, and it's really good to have them.

Look, I'm going to give you a strategy update now, but I've got to say that we love regulatory changes. If we had sat down and decided to change the industry, we couldn't have done a better job to make it through our business more. We have been targeting tuna clients, high-valued, non-churn, non-retail business since 2013 when we implemented our Project Tuna. And alongside that, to develop that business and to attract higher-valued clients, you have to offer a sophisticated platform. And -- which is what we did. I mean, retail clients don't really care too much about the platform. They just want to buy and sell, but the valuable clients that you want to retain, you have to use technology. And so what we've done is we've leveraged that technology off that technology to attract institutional business.

And today is really the start of a new story about CMC because we have 2 aspects to our business now. You saw on Euan's slide, 28% of our business is coming from B2B. Our B2C business is for the higher end of the industry. And since the regulatory changes, we've seen about a 60% to 70% falloff in our churn business. And when we get onto the risk management side, we'll explain that a little bit more in your Q&As. But effectively, by eliminating churn business from the risk book, it's allowed us to monetize more of the higher-valued business. And so we're pro these changes, but I want to start getting people to start thinking about us as a different type of business.

We are not just a B2C business anymore. And we'll break down the numbers, and we'll talk more about it. So back at the full year results in June, we spent some time running through our 3 core strategic pillars: That's growing in our deep and established core markets, I guess that's B2C; growing our institutional offering, B2B; and optimizing our client journey, which is a combination of both really, onboarding clients, whether for our partners or for us. And this demonstrates -- this slide demonstrates how our proprietary technology underpins each of these pillars. Technology is the key to market share for us, and we provide a market leading product, which we have spent over $100 million in developing. And we developed -- alongside this technology, we develop new products, which our clients want. One example is crypto baskets and currency baskets that Dave's developed this year with the guys. And we adapt to the regulatory curveballs which are thrown at us, and we are continuing to invest to make sure that we don't lose our edge.

Five years ago, when we were basically a B2C business, if we had a really good 6 months, we'd have ramped up marketing. Now we ramp up technology. And that's a reflection of who we are as a company. Technology drives everything we do now. And then moving on to the progress in our strategic initiatives. Firstly, starting with our core markets, our B2C business. We continue to focus on these markets in U.K., Australia and Germany. Here, we have a strong base of client income, making up the most part of our revenue. I believe that since the regulatory changes, around 60% to 70% of churn business has gone from our books. Which is great news. We love regulations, get Brexit done, get regulations. And so having our own proprietary technology, we're able to adapt to changes in the ESMA region. And as the half year results show, we have come out strongly the other side.

I just want to echo David's comments about regulations, we have welcomed the regulatory changes in the U.K. and Europe and support proposals in other regions as we believe it gives us a stronger -- strong business overall. And clients impacted by regulatory changes, but who want to trade, continue to do so. We see the same clients trade in the same product, but they are just holding their positions longer. And guess what, they've given us more money because I have to, by regulations. More money means clients are more valuable. You've seen our revenue per client stats in there or if you haven't, you will do. The Aussie regulatory changes are now approaching, and we can't wait for them. We -- if it's any reflection of what happened in ESMA, you get a little drop off, then business becomes more valuable. Suits our Project Tuna, higher value clients through technology, B2B, B2C, fantastic.

And we believe that these changes are stronger and better for the industry because it sort of -- and vindicates, completely vindicates our strategy of targeting higher value clients through our Project Tuna strategy.

Number 2 on the slide. Moving on to our institutional business. It's clear we are becoming more than a CFD B2C business with material income derived from technology partnerships, Euan showed you a slide that 28% of our business is from institutional business. I hope one day that the B2B exceeds the B2C. And I'm sure it will. I'm not sure quite when, because we could sign a massive deal tomorrow, and it could really go. But that's the objective, that's where we're heading as a business. If you think of the ANZ deal, we get 0.5 million clients -- don't hold me to the numbers. I'm talking about not active clients, I'm talking about database of clients. We get GBP 50 billion worth of Aussie client assets, it might be GBP 45 billion, don't hold me strictly to the number, and we become the #2 stockbroker in Australia. And to acquire those clients basically cost us some investment in technology.

If we go to the B2C business, we probably spend GBP 20 million a year to bring in 30,000 clients. Overnight, we get 0.5 million clients. They're not all trading. But you can see the scale, the technology and becoming a liquidity provider and a technology provider to brokers and banks and institutions delivers for us. And I think the ANZ deal, we talk about it a lot, but we see it as a demonstration of what we can do to be able to do that with our technology. Don't forget, we started life as a CFD Spreadbet company. We're able to go on the other side of the planet and do a deal like that. We have a good pipeline of potential institutional partnerships, both in our CFD and our stockbroking business, which are exciting for us to talk about. But obviously, we can't give you too many details.

They probably are not as big as the ANZ deal, but just as interesting, as we see the benefit of our technology take hold as they integrate. And in the first half of the year, we saw 22 of these smaller deals go live and the combined revenue value of these will start to add up. And I should just say about our partner deals, I mean, when you look at the numbers that Euan's presented, we get -- we don't just sign a deal with a partner and say, "thank you very much", move on to the next one. We keep developing that relationship. They keep asking us for things like mobile trading and more functionality around their platform, how to onboard better. So it's a massively ongoing relationship and we have around 300 institutional clients split, more or less, evenly between stockbroking and CFDs. When we enter discussions with a potential partner, we often find that we are one of a very limited number of companies that has the capability and the technology to deliver what our clients are looking for. So we have quite a good market position advantage. And we think that we've got that advantage.

And we're continuing to invest and spend on developing technology, as this really is our unique selling point. And we have committed to increasing our investment in further developing our technology, both for the remainder of this financial year and next financial year. And finally, the client journey optimization, we have worked hard to simplify our client onboarding journey, which is an area that we had identified for improvement and would allow us to turn more leads into customers, talking about things like facial recognition and biometrics and stuff like that. Makes life a lot easier. And then during the first half of the year, we've made progress in this area with a number of developments, including the completion of a major upgrade of our trading platform with a new look, enhanced features and a guided tour to welcome new traders. We have made significant improvements to the application process to help new users get onto the platform, and we've streamlined our mobile app with improved app navigation to make client trading experience even better. These are just a few examples. And then just to sort of wrap up, and then we'll get you some Q&As.

So I'm really pleased with the strong first half performance, the team has delivered. This time last year, we were in a completely different place with regulatory change overhanging us and the whole sector. A year on, clients have adapted and continue to trade well on our platform and our products. We continue to diversify with material income being derived from technology partnerships, and the ANZ deal is becoming -- has become a great success. This demonstrates why we should be in the technology space.

At CMC, we are positive on the remainder of the year and the future opportunities which lay ahead of us. And we have spoken a lot about investing in technology. This is a springboard to bring us to the level we are capable of reaching. We have market leading technology, which we are confident will win new business and a strong client offering, which will continue to attract and retain higher-valued clients. We gain further confidence as we move further into the new year. As it says on the slide, we have had a strong start to H2 and now expect full year net operating income to be in excess of GBP 180 million. Our cost guidance remains unchanged. And to recap, this was moderately higher year-on-year operating costs, excluding variable remunerations, which is expected to be higher with variable -- I think a bonus [half]. That's right isn't it? Reduces my dividend, but -- and is expecting to be higher following the strong performance. No, no, no. These are -- they're not (expletive), they're nice guys, really. We brought water -- by the way, there's water bottles, if you want to help yourself to 30 years of CMC.

We also expect an increase -- a moderate increase in our effective tax rate. Would have been better, but Euan is just getting -- No. I'm joking, I'm just -- I'm joking, I'm joking. We all get on great actually, by the way. We give each other a lot of banter. Well, they get a lot of banter, I don't get that much do I? Yes, yes, exactly, yes. We're in a really strong position for this stage of the year. And before we go into the questions, I'd just like to take the opportunity to thank everybody and the team for their hard work in delivering this great set of results. Thank you very much.

Right. Q&As, how long did that take? 30 minutes?

--------------------------------------------------------------------------------

David Fineberg, CMC Markets Plc - Group Commercial Director, Executive Director & Deputy CEO [5]

--------------------------------------------------------------------------------

35.

--------------------------------------------------------------------------------

Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [6]

--------------------------------------------------------------------------------

35. A little bit over, but I did get a bit jovial there. Right. You want to go first? Go on then.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Unidentified Analyst, [1]

--------------------------------------------------------------------------------

Client revenue retention is, obviously -- it's a really big deal. That 82% that we got to in this period, is that likely to be the run rate? Is there anything exceptional about that? Do you think with the mix of business you have, that's roughly where it should be?

--------------------------------------------------------------------------------

David Fineberg, CMC Markets Plc - Group Commercial Director, Executive Director & Deputy CEO [2]

--------------------------------------------------------------------------------

As we said, there is significant performance improvement. So for us, we probably expect the 75% to 80% would probably be the area that we're looking at. So north of that is, obviously, is more positive.

--------------------------------------------------------------------------------

Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [3]

--------------------------------------------------------------------------------

But it is higher than previous years. I think the big factor about the way we now manage risk -- and I'm just talking about our B2C side because we have a different mindset now about risk, because there's a lot of a lot of business we do that is risk-free. ANZ deal, their clients go to an exchange, we build the pipe in between the 2. The big factor, I think, we've noticed about our risk book is the less flux and volatility that we used to get from these highly leveraged, long tail type clients. It really has stabilized down, and it means we can give a better service and better execution, and we can manage the flows on our B2C side much more effectively. It's great. It's where we were 10 years ago before the advent of low valued platforms and marketing teams coming in and bringing in lots of low valued clients. CMC's risk book now looks much more like it was 10 years ago, would you say?

--------------------------------------------------------------------------------

David Fineberg, CMC Markets Plc - Group Commercial Director, Executive Director & Deputy CEO [4]

--------------------------------------------------------------------------------

We all looked younger.

--------------------------------------------------------------------------------

Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [5]

--------------------------------------------------------------------------------

We all looked younger. You didn't have gray hair and I had...

--------------------------------------------------------------------------------

David Fineberg, CMC Markets Plc - Group Commercial Director, Executive Director & Deputy CEO [6]

--------------------------------------------------------------------------------

Lots of it.

--------------------------------------------------------------------------------

Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [7]

--------------------------------------------------------------------------------

Yes. Well, 20 years ago, I had hair. 25.

--------------------------------------------------------------------------------

Benjamin Edward Bathurst, RBC Capital Markets, Research Division - Research Analyst [8]

--------------------------------------------------------------------------------

Ben Bathurst from RBC. Just another follow-up question on the new risk management model. I think in the release, you referred to the fact that it was range-bound markets that sort of enabled you to revisit the strategy. Is it the case then, therefore, that if markets were to be less range-bound in the future, you may have to reconsider whether or not it's still a viable new risk management policy?

--------------------------------------------------------------------------------

David Fineberg, CMC Markets Plc - Group Commercial Director, Executive Director & Deputy CEO [9]

--------------------------------------------------------------------------------

So market conditions, obviously -- sorry, client trading behavior is more akin to market conditions. So obviously, it depends on the asset class and it depends in terms of the level of volatility because, obviously, we're the other side. So clients trade with the system, we inherit the actual trades themselves. But the numbers we're talking about here, this is derived through being able to look within and extract more value from what you have.

So a good example of that is that we basically record and compute probably about GBP 6 billion price ticks per day, okay? And that's all recorded. That goes back years. It's available on demand. That's just market price ticks, then you've got all the prime analytics side as well.

Now you can sit there with this huge amount of data, and it's all well and good but it's what you actually do with it. So what we've managed to do this year is look within and extract more value from that data. So we understand now post-ESMA, more about the clients' holding patterns, what they're likely to do. We understand more about when we go to market, how much impact we're having on that market. For example, we offer more liquidity than is available in underlying. So you would assume if a client trades in [new impacts], you're going to be paying more spread to the market. So it's being more intelligent about how you work all this -- the frequency of them, et cetera. So there is a whole raft of things that we've been able to look at, which has basically made us more efficient. And then in terms of market conditions, that's outside of our control. So we've just done what we can control.

--------------------------------------------------------------------------------

Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [10]

--------------------------------------------------------------------------------

But what we are trying to do as a business is neutralize that question over the next 2 to 3 years. You see, often when you're just running a B2C business, which is what most of our competitors do, market volatility affects their income. What we're trying to do is build a parallel income stream through technology, ANZ deal. So the more clients we get paying us attritional income, non-risk managed income, obviously, they're still affected by market volatility because if there's a big event, they're buying physical shares and so on. But we don't want to become so dependent upon B2C business and market volatility. And that's why we're creating this parallel universe of technology and leveraging off of something that we've already paid for. The cost of the technology basically gets written off every year. There's nothing legacy on the balance sheet. So we're leveraging off what we already have.

I think the questions will be different in the next 2 years. There'll be a lot of questions if our B2B business exceeds our B2C business, then it will be a lot more questions around there.

--------------------------------------------------------------------------------

Roberta De-Luca, Goldman Sachs Group Inc., Research Division - Equity Analyst [11]

--------------------------------------------------------------------------------

Roberta De-Luca, Goldman Sachs. Two questions. One, on the stockbroking. Can you give us a sense of kind of the appetite for any new potential partnership, just like the ANZ? And then the second, is there any peculiarity of both your client profile in Australia and the Australian market, per se, that could kind of imply a different reaction to the Australian regulatory changes versus what we've seen from ESMA?

--------------------------------------------------------------------------------

Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [12]

--------------------------------------------------------------------------------

I'll do the stockbroking bits. So per se, we don't want to build an organic stockbroking business. What we want to do -- because as most of you know, there's not a lot of money in stockbroking, unless you've got scale. So we're not going to build a stockbroking business around the world. We're only going to build stockbroking partnerships where there's a requirement. So -- and we'll keep developing the stockbroking. Was that your question? Or did that answer your question? Yes. So it's all about, for us, partnerships, leveraging off the technology.

--------------------------------------------------------------------------------

Euan William Marshall, CMC Markets Plc - CFO & Director [13]

--------------------------------------------------------------------------------

And I suppose on that point as well, it's also like you said earlier, it's leveraging off existing partnerships as well through developing that technology. New offerings, new ways of tracking for them as well.

--------------------------------------------------------------------------------

David Fineberg, CMC Markets Plc - Group Commercial Director, Executive Director & Deputy CEO [14]

--------------------------------------------------------------------------------

And then to your second point. So obviously, you understand the client mentality pre-ESMA. And obviously, we now have got all those -- the data to understand the client mentality post-ESMA. So that puts us in a stronger position to understand what it may look like in Australia. So retail, high net worth, institutional clients, they've all got a similar look, irrespective of geography, but the overriding factor is, obviously, when leverage does change, what that does to the client behavior. So we will leverage off what we know, have an expectation in mind, and then we'll see if it turns into reality. But just as I said in my thing earlier, the consultation period is closed, but in terms of the implementation date, that's still unknown. So it could be late this financial year, we don't know.

--------------------------------------------------------------------------------

Roberta De-Luca, Goldman Sachs Group Inc., Research Division - Equity Analyst [15]

--------------------------------------------------------------------------------

But like for example, the split of retail client versus professional or anything, is there any difference between your Australian type profile and European?

--------------------------------------------------------------------------------

David Fineberg, CMC Markets Plc - Group Commercial Director, Executive Director & Deputy CEO [16]

--------------------------------------------------------------------------------

In terms of the professionals, so that's not been -- there's no advantage to a client being a professional currently in Australia, because they're still protected anyway. There's still -- all their money is segregated.

--------------------------------------------------------------------------------

Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [17]

--------------------------------------------------------------------------------

But I think you mean the opting up, the criteria is different.

--------------------------------------------------------------------------------

David Fineberg, CMC Markets Plc - Group Commercial Director, Executive Director & Deputy CEO [18]

--------------------------------------------------------------------------------

The criteria to opting up?

--------------------------------------------------------------------------------

Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [19]

--------------------------------------------------------------------------------

Yes, criteria to opting up.

--------------------------------------------------------------------------------

David Fineberg, CMC Markets Plc - Group Commercial Director, Executive Director & Deputy CEO [20]

--------------------------------------------------------------------------------

Yes, that is different. Yes, in terms of the wealth test, et cetera?

--------------------------------------------------------------------------------

Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [21]

--------------------------------------------------------------------------------

Well, I think it's easier in Australia because you can take into account your property value.

--------------------------------------------------------------------------------

David Fineberg, CMC Markets Plc - Group Commercial Director, Executive Director & Deputy CEO [22]

--------------------------------------------------------------------------------

Yes, it's in the appendix.

--------------------------------------------------------------------------------

Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [23]

--------------------------------------------------------------------------------

Yes. It's in [My Manage], yes.

--------------------------------------------------------------------------------

Euan William Marshall, CMC Markets Plc - CFO & Director [24]

--------------------------------------------------------------------------------

So if you look in the appendices, we've got the opt up criteria.

--------------------------------------------------------------------------------

Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [25]

--------------------------------------------------------------------------------

But what we found in the ESMA zone is that clients didn't want to opt up until they had to. Then there's a big stampede at the end. And that's what we think affected our financials last year. It took us a long time to filter it all through. Now we're preempting regulatory changes, and we're much more proactive in talking to clients and saying, opt up now and we'll give them incentives, but we still don't know exactly what the criteria will be. But it looks a little bit more relaxed than it was in the ESMA zone. Correct me if I'm wrong but for example, there are -- there is talk that people can use their assets, all of their assets like property to measure their net worth, less their mortgage.

--------------------------------------------------------------------------------

Euan William Marshall, CMC Markets Plc - CFO & Director [26]

--------------------------------------------------------------------------------

But I suppose when you look at the client base as well, you've got a similar level of sophistication in the client base. So ultimately, you'd think you probably get similar levels on our clients.

--------------------------------------------------------------------------------

Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [27]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

David Fineberg, CMC Markets Plc - Group Commercial Director, Executive Director & Deputy CEO [28]

--------------------------------------------------------------------------------

Opting up. Yes, sir?

--------------------------------------------------------------------------------

Unidentified Analyst, [29]

--------------------------------------------------------------------------------

Back to the discussion on the revenue, please. One thing I'm struggling with -- and forgive me if this is a dumb question, but I'd have thought the client P&L and the hedging P&L would be closer together. And it's not, and I just wondered if you could explain that. So clearly, just looking at last year, and particularly, the second half, the actual pain came through the hedging P&L, not the client P&L, we actually made money. And I'm just struggling with that. And then I've got a second question on the same revenue disclosure, but the sort of geographic segmentations that you've given in the press release.

--------------------------------------------------------------------------------

Euan William Marshall, CMC Markets Plc - CFO & Director [30]

--------------------------------------------------------------------------------

Okay. Do you want to take the hedge P&L? And I'll...

--------------------------------------------------------------------------------

David Fineberg, CMC Markets Plc - Group Commercial Director, Executive Director & Deputy CEO [31]

--------------------------------------------------------------------------------

Yes. So obviously, if you only had a single asset -- yes, so if you only had a single asset class, they should pretty much marry up. So if it was just equities you're offering, then you would expect them to be pretty much in parallel. But obviously, we offer indices, foreign exchange, commodities, et cetera. So that's why there's not a perfect correlation for that. So the majority of our equity book is hedged, and it's pretty much one-directional. For indices, obviously, where you get that natural offsetting, there may be a period of time where there may be no hedge. And then as a directional bias change, we'll then put a hedge on. So there will never be a perfect sort of marry up when it comes to the bigger asset classes just because of the general makeup. And you can see that through the turnover, et cetera. Does that help you understand?

--------------------------------------------------------------------------------

Unidentified Analyst, [32]

--------------------------------------------------------------------------------

Yes. I mean, I don't know if you can say. So last year, H1, H2 2019, what exactly was it about the market conditions that made -- there's such a big mismatch between the client P&L and the hedging P&L. So what exactly happened in terms of the market conditions, and therefore, your client behavior?

--------------------------------------------------------------------------------

David Fineberg, CMC Markets Plc - Group Commercial Director, Executive Director & Deputy CEO [33]

--------------------------------------------------------------------------------

So last year, what we did is we were seeing our growing sort of B2B side as well. So -- and then there was efficiencies that we've put in place that are now, that we didn't have back then. So it was causing us to have to put more hedges on a lot sooner and have them on for longer, and general inefficiencies in that because we are seeing this growing business. A good example is on the retail side that we've traded on the platform, be it the mobile tablets, et cetera. And then you go into a B2B space and there, you're talking about API lines, where you're being hit with blind flow, where you don't know who the end user is, and you're having to adapt accordingly. And it is good flow, but you need to be far more astute as to what you're doing.

So from our side, there is a number of measures that we've put in this year that helps protect against some of that flow. So I would say last year was probably inefficiencies in the what and how we were managing it. But again, it's a new category of business. This year, far more efficient.

--------------------------------------------------------------------------------

Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [34]

--------------------------------------------------------------------------------

And that goes back to the point I was trying to make. You can just imagine that if there's a slide or inner [manics], I think our churn type business, which we got, we didn't ask for it, but it comes, that has decreased between -- by, in turnover terms, 60% to 70%. Because the fact of the matter is that if you're inappropriate, you can't leverage up. What that did really, was put a lot of stability around the flows that we were receiving.

So primarily now, the flows that we receive are from professional clients, not in the APAC region because of the regulatory changes. But it meant that we were able to analyze and monetize the flows without all the flats and the noise and the volatility from low-value clients that were just jumping on the back of a gold move with a couple of thousand dollars and leveraging up to $200,000 worth of gold and just distorting the risk book. It's a much more stable environment, and much nicer. And we can extract more value, and the value of the clients has gone up because we have regulatory changes. They leverage less, but they give us more cash, and they become more valuable.

--------------------------------------------------------------------------------

Euan William Marshall, CMC Markets Plc - CFO & Director [35]

--------------------------------------------------------------------------------

So from a geographic perspective, can you just...

--------------------------------------------------------------------------------

Unidentified Analyst, [36]

--------------------------------------------------------------------------------

Yes, so I mean -- I think we sort of touched on it, but obviously in the APAC region, you've still got a lot of those churn clients because of the nature of the regulations there. So I'm just looking at the difference between the sort of client income and the net revenue. Comparing the ESMA to the APAC, sort of half year on half year comparisons. And I guess, what I'm wondering is, presumably, you'll still have that volatility and that churn in the APAC region until the regulation comes through. So how should we think about that in terms of the overall group and client retention?

--------------------------------------------------------------------------------

Euan William Marshall, CMC Markets Plc - CFO & Director [37]

--------------------------------------------------------------------------------

So I think there's 2 parts to this, really. So the first part is you want to look at how much of transaction fees are you generating from those clients. So you'll see that period-on-period, we obviously had regulatory change. So the client income has come down in ESMA region, but it's continued to grow in the APAC region. So that's been a good driver of growth in APAC. You would naturally expect that trading activity to come down a little bit as a result of the regulatory change. As Peter has mentioned, the retail client trading activity could decrease by 60% to 70%, just on the retail side.

Putting that to one side, you then look at the retention measure, and as Dave said, we've now adapted the risk management model such that we're expecting around 75% to 80% retention going forward. So that percentage shouldn't change. And that benefit is a global benefit because we look at trading activity, aggregation, et cetera, on a global basis, all regions will see that. So that would be a way of looking at it.

--------------------------------------------------------------------------------

Unidentified Analyst, [38]

--------------------------------------------------------------------------------

And you'd expect that 75%, 80% retention also in the APAC and Canada regions?

--------------------------------------------------------------------------------

Euan William Marshall, CMC Markets Plc - CFO & Director [39]

--------------------------------------------------------------------------------

So what we're saying is that, that is what we see at a group level because it's all aggregated at a group level, because you manage -- you try and aggregate client flows. So you minimize the amount of hedging required. So yes, it's seen globally.

--------------------------------------------------------------------------------

Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [40]

--------------------------------------------------------------------------------

And a simple answer is, why did we change our hedging? Because we could. We changed it. They're the same clients but we've lost a lot of the flux business out of the book. So much nicer, so much nicer. It was like Black Friday every day under the old system. Now it's like, just a Christmas, Boxing Day is out. Everybody's hungover, they can't go crazy.

--------------------------------------------------------------------------------

David Fineberg, CMC Markets Plc - Group Commercial Director, Executive Director & Deputy CEO [41]

--------------------------------------------------------------------------------

Any other questions?

--------------------------------------------------------------------------------

Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [42]

--------------------------------------------------------------------------------

All done?

--------------------------------------------------------------------------------

David Fineberg, CMC Markets Plc - Group Commercial Director, Executive Director & Deputy CEO [43]

--------------------------------------------------------------------------------

Thank you very much.

--------------------------------------------------------------------------------

Euan William Marshall, CMC Markets Plc - CFO & Director [44]

--------------------------------------------------------------------------------

Okay. Thank you so much.

--------------------------------------------------------------------------------

Peter Andrew Cruddas, CMC Markets Plc - Founder, CEO & Executive Director [45]

--------------------------------------------------------------------------------

Thanks a lot.