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Edited Transcript of INTER.AS earnings conference call or presentation 1-Aug-19 8:00am GMT

Half Year 2019 Intertrust NV Earnings Call

AMSTERDAM Aug 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Intertrust NV earnings conference call or presentation Thursday, August 1, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* J. Turkesteen

Intertrust N.V. - CFO & Member of the Management Board

* Stephanie D. Miller

Intertrust N.V. - CEO & Member of the Management Board

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Conference Call Participants

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* Edward Donoghue

* Henk Veerman

Kempen & Co. N.V., Research Division - Research Analyst

* Konrad Zomer

ABN AMRO Bank N.V., Research Division - Equity Research Analyst

* Lucas Ferhani

Deutsche Bank AG, Research Division - Research Analyst

* Oscar Val Mas

JP Morgan Chase & Co, Research Division - Analyst

* Rory Edward McKenzie

UBS Investment Bank, Research Division - European Support Services Analyst

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Presentation

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Operator [1]

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Hello, and welcome to the Intertrust N.V. Q2 2019 Results Call. My name is Val, and I will be your coordinator for today's event. (Operator Instructions) The speakers today are CEO, Stephanie Miller; and CFO, Hans Turkesteen.

I am now handing you over to your host, Stephanie Miller, to begin today's conference. Thank you.

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Stephanie D. Miller, Intertrust N.V. - CEO & Member of the Management Board [2]

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Good morning, everyone. This is Stephanie Miller, CEO of Intertrust. I'm delighted to have you here with us for the Q2 2019 highlights. I'm going to walk through the highlights and the highlights of our results as well as the highlights of our strategy, and then hand over to my CFO, Hans.

So let's start. You all have in front of you the presentation. Page 4 is where I'm looking. The first thing I'd like to highlight is that the 6 months of the year is really defined by our groundbreaking transaction of buying Viteos. The Viteos acquisition was completed on June 17. I have called it in the industry a game changer. It is a thing that delivers to us our tech-enabled platform. It gives us our nearshoring -- or offshoring capabilities as opposed to nearshoring. It gives us a relevance in the U.S. market. It continues our journey to grow and expand our Funds business, and it continues our tech-enabled platform across our Corporate business. For us, this is really a game changer and it's absolutely strategic as to what I highlighted in our Capital Markets Day last year.

The Viteos business is currently focused on the U.S. in Funds, and we plan to extend that across our global book of business. And currently, their book of business is a top line of $52 million in U.S. dollars, so it gives you a sense of size and scale.

In terms of revenue, for Q2, our revenue increased 3.5% on the underlying at EUR 128.2 million. The Viteos contribution was the EUR 1.7 million as of the 13 days in June. Our stand-alone revenue growth is 2.5%. I'm sure you will ask me the question if I'm happy with that. The answer's I'm satisfied. We have slow and steady growth. We have a good visibility into the pipeline. We have a good view, a bottoms-up view of what is coming ahead. We knew that our first and second quarter, by definition, first quarter is always slower. Second quarter for this year does not have all of the regulatory changes that we had in comparison to last year. Last year, there was a strong second quarter because UBO was implemented. This year, that regulation doesn't exist. Our third quarter this year has good visibility. We have good pipeline, and we're confident, and I've reiterated the guidance and I want to continue to reiterate that message that we are comfortable.

Funds and Corporates are the highest-growing segments at 7.8%. I think there is no surprise there. I will give it to Hans later to talk about specifics of the Netherlands, but I'm super proud of our team in the Netherlands. You could see that the Corporate growth was a 4.1%. The stabilization of the Netherlands is a big contribution to that. So we grew where we expected.

At the same time, as we did the M&A, as we looked at our revenue, as we looked at the headwinds and the tailwinds globally, we did a very good job of controlling our expenses. So we've come in above guidance at 36.5%, and that's very much in line with what we expected. We are being thoughtful about our spend and we are very controlled and disciplined.

We did reiterate last quarter the capital allocation. We reiterate that again. The dividend that we've announced is 40% of our adjusted net income and it will be at EUR 0.30 per share, and it will be payable in November on November 29.

On that Page 4 also, we show you the revenue split of Q2 only of the service lines. You could see how our revenue breakdown exists.

I'm turning now to Page 5. Page 5 has the topic, the operational update. You should be very familiar, as we've all spoken before on clients and services, innovation and technology, people and then wrapped in operational excellence. We've wrapped this in operational excellence with the M&A with Viteos. We have gotten 700-plus people in a center -- in 3 Centres of excellence in India. We're going to expand that Centre of Excellence to take on work from Intertrust into India for our offshoring capability. We have identified all of the people internally that are managing this program. We have kicked off this migration plan. We have kicked off an integration plan. Migration being the plan to move work into the Centre of Excellence. Integration to being the integration of the company. So we have wrapped this strategy in operational excellence.

The clients and services part of our strategy. What does the acquisition give us? It gives us access, as I've mentioned, to a new client segment, which is Funds. Shadow administration is the focus of that. So it's really processing, outsourcing bespoke processes on behalf of managers to us, so things like outsourcing reconciliations, outsourcing regulatory reporting, that can happen for hedged funds and other alternative funds. It also completes our life cycle. Intertrust has a full robust capability to create entities in the Funds space and across our 4 service lines. This also gives us the ability to connect with us and provide them additional services. Basically, it's what I would call, cradle to grave.

Our capital marketplace is still pending in America. That approval is expected late this year. The regulator -- there is no issue. The regulator has just been swamped and where they're taking a while. We're going to look at other alternatives, if there are any, and we continue to be bullish on expanding our Delaware office.

We have also expanded our Corporate service offering in Paris, France in Shenzhen, China. Now why is this interesting? I'm sure we're all tired of talking about Brexit, but there are continued moves into Paris and we need to be there. I've spoken to you all about our client-facing strategy. We want to be where our clients are. We want to be the enablers, the gatekeepers at making sure -- and the navigators for our clients, and Paris is a place that they need us to go and we're there. Shenzhen is the new Silicon Valley of China. It is the new way that Funds are investing. It's the new, if you will, up-and-coming star. And as Intertrust, because we are the largest provider globally, we also felt that we should be there as well.

In terms of the second pillar of our strategy, innovation and technology. Our IT road map is still very much on target. It was comprised of infrastructure, cloud, desktop and application rationalization as well as a data strategy. I highlight that we've successfully advanced our IT road map with the NaaS service because it went live. This is a big deal, using network as a service in America is tying our network together, giving us better scale and bandwidth. That is going very well.

As I've said previously also, we will be done with the IT road map, as we called it. It started in late 2017, before I joined. It was in earnest when Hans and I met in early January 2018. It is going to complete its end mostly by this year and with the exception of a little bit in the beginning of 2020, and that is still on track. The last piece, as I've announced, is the last piece that goes to the cloud. So the IT road map advancement in network as a service is very, very positive.

We also want to continue to provide tech-enabled services. We've done that with our PRM, our Performance Reward Management system. That is being spearheaded and led by our Jersey office, also supported by our Dublin office, and we've led our corporate clients who need PRM services with better technology, and we've enhanced their infrastructure.

We continue as -- onto the journey. Earlier this year, we created the IRIS portal. The IRIS portal is our platform, our technology global platform. We continue to do a rollout with our clients, our clients are well-received. In terms of functionality, they give us feedback. We will issue a new release of that functionality October 1, with integration of some of the Viteos platform. It will be the first time we've done that. We expect then to have proof of concepts and demos for fourth quarter this year, with that picking up speed in early 2020.

A part of that rollout of IRIS and a part of the rollout of the Viteos toolkit is the automation of workflows. It includes AML/KYC workflows and it includes new entity creation workflows. That's all a part of the release that we're planning on October 1. We're committed to the core of these tools and committed to the core of our business and delivering quality to our clients. And that's what we're being thoughtful about in terms of doing this release.

Our people. I do want to highlight our people. So there's an online launch of our learning platform. We continue to invest in better tech-enabled tools. I want to remind you that I highlighted the values of our company when I met with you all last year at Capital Markets Day. It's almost a year ago. It's responsive, innovative, connected and excellent. Innovation does not just mean technology, it means delivering things in a thoughtful way. So we've now created online learning, so globally as a standard. So your induction program, your soft skills training, that's really important to our staff. It's really important for our people management. And before you ask, we don't have any turnover issues. We're very satisfied that we are meeting our turnover in all of our jurisdictions.

We've also hired some really good talent. Ian Lynch has joined as our Chief Commercial Officer as of July 1. He's hit the ground running. He's super enthusiastic. He hosted an internal conference between the Viteos team and our team. Our sales people got together, our client-facing people got together. We called it Fusion. You can see it on LinkedIn. We've had a very, very good feedback in terms of getting everyone together and delivering that value proposition that Ian has brought to light. Patrick O'Brien joins us from Citi. He's the Global Head of Funds. He is defining our service line, our products, our global strategy. He is working with Shankar, who is our Chief Solutions Officer. He was the former CEO for Viteos. And he's working with implementing those solutions with Chitra, who is the Head of our Operations and Transformation for the team. And then, again, I just couldn't be proud of our -- of all of the teams that we've got and moving in the right direction of being a tech-enabled corporate services and fund administrative services company.

So with that all being said, I'm going to hand it to my CFO, Hans, to walk you through the numbers. Thank you, Hans.

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J. Turkesteen, Intertrust N.V. - CFO & Member of the Management Board [3]

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Yes. Thanks, Stephanie.

I'm moving towards Page 7, which gives you the highlights of the quarter and also of the first half year. What we have deliberately tried to do here is that we continue to report underlying growth, which we have always done, being acquisitions, consuming them on a pro forma basis. But we also specifically highlight the like-for-like growth of Intertrust excluding Viteos. So I think that's a very important point to note for all of you that we want to be and we continue to be for the rest of this year very transparent in that area, so that you can track also the performance of Intertrust itself towards our initial guidance for this year of 3% to 5% revenue growth and 36% -- at least 36% EBITDA margins.

That being said, for the quarter, you can see that our reported revenue growth is 5.5%. That includes 1.6% of currency, primarily dollar, and 1.4% in relation to Viteos. So excluding Viteos, the revenue growth was 2.5% in the quarter. As Stephanie said, that comp comes to a pretty strong comp in Q2 of last year with where we are today, and I reiterate that also at the end of this page is that we feel very comfortable about the forecast of the year, and that's why we are, again, reiterating the 3% to 5% revenue growth for Intertrust excluding Viteos. I think that's very important to note.

First half year, also underlying revenue growth of 3.5% and excluding Viteos, 2.3%. Stephanie also referred already to the EBITDA margin, which we have been able to maintain at a very healthy level of above 36%. A great accomplishment, and I think a testament to the quality of our business and the efficiency of our processes. Adjusted EPS, up 3.5% in the quarter. Cash flow from operating activities, as you all know, one of the other things that we are extremely proud of, continues to be very strong and at an industry premium level is what I would say.

With that, moving to Page 8, where we have the breakdown of the service lines. As you know, we are reporting these this year for the first time full-fledged. That is how we are defining our go-to-market strategy, and we are very happy that with the arrival of Patrick, we now have also, for the very important Fund space, a very strong and capable leader in place that will grow the business going forward.

As Stephanie was saying, a very good performance in the Corporate space this year. Q2 saw a change of 5.2%. Underlying, 4.1%. And I'll come to the Netherlands' performance on the next page, but they did contribute to that. Funds also continues to be very strong. The 7.8% underlying for the quarter does include Viteos. Excluding Viteos it is 6%, which I think is also a very good number. And for the half year, it's 9.1%. Excluding Viteos, it's 7%.

Capital Markets for the half year, up 4.5%. A bit slow in the quarter, but that was because of a strong performance last year. But overall, we are happy with the performance in the first half year. And we are also happy, despite it was minus 6.4% in Private Wealth, with the way that the loss of customers that we talked about last year is bottoming out, and you'll see that in the Q2 performance, where the actual underlying change is moving towards 0% at 2.4% minus for the quarter.

Overall, I think the 3.5% underlying and 2.3% for the company alone is a good starting point for the rest of the year.

With that, we move towards Page 9, where you have the revenue per segment. There, indeed, we are very happy with the Netherlands, where the revenue in Q2 was in line with last year. It was not only in line but it was growing, and this is the first time that we have seen revenue growth in a quarter in the Netherlands since 2017. So that is a very good performance from the team. The result of very focused market approach and also clearly the result of -- as a result of stricter regulation, clients moving towards quality brands like ourselves, moving away from the lower quality competition that is out there in the market.

A bit of a different story on Luxembourg, where we did see only modest growth in the second quarter, 1.5% only, 3.1% for the half year. And that is primarily the result of clients that insourced part of their business in the early days of this year. That was something that we were aware of. That is something that we anticipated, and that is also something that we did include in our guidance for the rest of the year. And that is why we are, again, comfortable that also for Luxembourg, you will see the business picking up in Q3 and Q4.

Eliminating the impact of those customer losses, and that's also always a bit of an artificial exercise, but I think still good for you to note, is that in H1, they reported 12% underlying revenue growth if you exclude that. So there is plenty of new business coming into the geography and we still expect that growth to continue in the rest of the year. No buts and ifs on the Rest of the World. They have been a strong growth engine over the past 18 months and they continue to do so in the first half of this year, with 7.4% underlying revenue growth in the quarter. The contributors remains the Nordics, Spain and U.K., specifically in the Corporate area. And in the U.K., there, you see the benefit of Brexit, where indeed, people are simply opening double offices to make sure that they are prepared for any instance. So that is definitely something that our U.K. business is benefiting from, and we also continue to see very continued strong growth in the Fund space in Rest of the World, primarily in Asia Pacific and also in Spain, where you know we have a highly successful nonperforming loan practice.

The last geography on this page, the Americas, a bit of a different story. If you eliminate Viteos, we see a decline of 4% in the quarter. That is primarily due to a spike last year where we had underlying ultimate beneficial ownership reporting requirements in the quarter and a shift of similar FATCA-related reporting requirements that were due with the deadline on June 30. But that deadline has been pushed out into the second half of the year. So we did see lower business activity in this quarter, but we do also expect them to pick up towards the end of the year.

With that, I move to Page 10, where we have the EBITDA margin spread for the various jurisdictions and for the quarter and the half year. Clearly, Western Europe remains very strong at extremely healthy margins of 55% or 56% for the half year. At the Rest of the World, you now see operating leverage coming into play as they continue to grow, more of that revenue growth will fall to the bottom line. And margins are also moving into the right direction, up from a couple of quarters ago, high-30s now approaching the mid-40s, and that's the way how we would like to see it. To the contrary, in the Americas, obviously, expenses are in line with what we expect. But they are just having a bit of headwind on the revenue side, and that's where operating leverage is then hitting you straight in the face. But overall, the bottom line margin for the group is 36.5%, with which we are very happy. That also comes after stabilizing and flattening out HQ cost developments and IT cost developments.

The next page, Page 11, gives you the overview of our key performance indicators, and we are very happy today that all of those have been moving in the right direction. FTEs increased, obviously, as a result of the 700-plus people that joined us from Viteos. LTM revenue per billable employee improved. The ratio between billable FTEs and total FTEs improved. HQ and IT costs flattening out as I was just saying, so that's very good. And working capital as a percentage of LTM revenue continues to be on a downward trajectory. So very good performance on all of our key performance indicators.

We then move to Page 12, the balance sheet, which has been very stable in all quarters except for this one. Obviously, the impact of Viteos is notably -- notable from this balance sheet. You see a significant increase in the acquisition-related intangible assets, primarily goodwill, as a result of the transaction of Viteos. You also see an increase in net debt. That also comes as part of the financing that we attracted for the acquisition and the revolver that we drew for that. But you also see that our working capital is down compared to the same period last year, and that is after EUR 7 million of Viteos as positive working capital. So underlying, our performance is minus EUR 25 million in the quarter compared to minus EUR 15 million last year, a very strong performance indeed.

Leverage at 4.0 in the quarter, in line with what we communicated. And as you know, we are focused on reducing leverage towards our midterm target of 3% -- 3x over the quarters and half years to come.

Page 13, a bit of a repetition of what we already touched on. The free cash flow divided between operating cash flow and then interest and some CapEx. Again, I think nothing special to report here. It remains very strong. It remains something that we are well under control and that we are very focused on. So nothing special on this page, as far as I'm concerned.

This brings me to Page 14. Income tax where we do see a bit of an increase in the half year. That is specifically the impact of an IFRS windfall accounting profit that we have to report that relates to the fair market value of our bond or the early redemption option, I should say, in the bond. That's an amount of EUR 20 million, that gets fully -- accounting-wise, taxed in the Netherlands of 25%. So that is a 5% noncash deferred tax charge that is impacting the half year numbers here. If you eliminate that, then our effective tax rate is in line with the guidance of around 19% that we communicated.

With that, I move to Page 15 for the 2019 full year guidance. As we said earlier, revenue growth is confirmed again at between 3% to 5%, excluding Viteos, very important for you all to note. We won't blur our own performance with that of Viteos. So the underlying revenue growth of -- in that we're stand-alone, will be 3% to 5%. The adjusted EBITDA margin will also be at least 36%, as previously communicated. The same relates to the other elements of our guidance with the exception of effective taxes, whereas Viteos starts to become a major contributor for the full half year -- second half year, we upped guidance from 19% to 20% for the full year. And then, as you know, in the mid-term on the back of that, we already communicated that the effective tax rate will be around 21%.

And with that, I hand it over to Stephanie again for key takeaways.

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Stephanie D. Miller, Intertrust N.V. - CEO & Member of the Management Board [4]

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Thank you, Hans.

So I think you could see our excitement with the quarter and good, solid results. Acquisition of Viteos was the biggest of the highlight. It does accelerate our strategy. It really fills in the white spots. It is a game changer for Intertrust. It's allowing us to become the leading tech-enabled corporate and funds solutions provider. It really leverages all of the things that I needed and wanted to do from an M&A. Advancing our automation, so incorporating the Viteos platform into the Intertrust operational schema, if you will, it's the exceptional operational excellence. It's the workflow processes, it's understanding that platform and extending it to all of our service lines, not just Funds. We're extending it to Corporates, Capital Markets and to Private Wealth.

And then as you could see, based on our performance and the visibility of the rest of the year, we do reconfirm the guidance. I do continue to want to highlight, it is slow but steady growth. It's full visibility into our pipeline. It's understanding the regulatory market and where we could help our clients and, obviously, make additional revenue. It's all of the positives that Hans has highlighted. The positives in terms of working capital, even though Viteos did include working capital to the contrary. It's a positive in terms of reconfirming the guidance on our margin. It's a positive, including the EPS. It is all a reasonably good story, and we are really proud of the results. So I am satisfied.

So with that being said, operator, I'm going to hand it over to you to open the lines for questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Rory McKenzie.

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Rory Edward McKenzie, UBS Investment Bank, Research Division - European Support Services Analyst [2]

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Three for me, please. Firstly, it's very helpful growth disclosure ex Viteos, so it's really appreciated. Can you do the same on the margin? Was there a visible drag from Viteos in H1? And what should we expect for H2?

And then secondly, on the like-for-like margins outlook in H2, it sounds like they must be a lot better than H1, given you're saying that Americas should see a big improvement. Luxembourg should improve as well. And you're confident that HQ and IT costs have stabilized. Presumably, the H2 margins just starts to really accelerate above H1.

And then just lastly, any comment on the performance in Jersey and Guernsey would be very helpful?

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J. Turkesteen, Intertrust N.V. - CFO & Member of the Management Board [3]

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All right, I'll take the first 2 questions, Rory, and then hand it to Stephanie to talk about Jersey and Guernsey. As you say, the reported margin for the Q2 has been slightly decreased as a result of the contribution of Viteos. You will recall from our transaction announcement that they are operating at slightly lower EBITDA margins than Intertrust itself. But overall, that has not had any major impact in the quarter. And for the second half of the year, I can only do what we have just done during the call, reiterate the at least 36% margin guidance for the rest of the year, and I'm not going to be more specific at this point.

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Rory Edward McKenzie, UBS Investment Bank, Research Division - European Support Services Analyst [4]

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And unlike your revenue guidance, that margin guidance is for total? So Viteos plus Intertrust basis, right?

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J. Turkesteen, Intertrust N.V. - CFO & Member of the Management Board [5]

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Correct.

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Rory Edward McKenzie, UBS Investment Bank, Research Division - European Support Services Analyst [6]

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All right.

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Stephanie D. Miller, Intertrust N.V. - CEO & Member of the Management Board [7]

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In terms of Jersey and Guernsey, look, I think it's no secret the whole market is having headwinds in Jersey. Our Jersey office has done a good job. We actually have very, very good growth in our Funds business. We have stagnation in the Corporate business. And you could see in the Private Wealth, which is really from those islands because we report the service loan that we did last year, move a large client due to insourcing. That's not a secret. We've stabilized that book, and we're happy with it. So there's not much more to say other than that we've got a solid operator, a solid team, and we're very focused. But again, the funds market globally continues to perform, and Jersey will take part in that.

In terms of Guernsey. Guernsey, we announced last year that we hired a new managing director, and we've also hired some of her new key management team with Marie McNeela. She's done a great job. There's nothing of note to report. The book is stable. It has a slight growth opportunity. But the book is stable, and it's highly focused on Corporate as well as on Private Wealth. But that is that just kind of -- if you will, that's ticking along stable. It's solid and stable and boring, if you will.

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Operator [8]

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The next question comes from the line of Oscar Val from JPMorgan.

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Oscar Val Mas, JP Morgan Chase & Co, Research Division - Analyst [9]

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Two quick questions from us at JPMorgan. The first one, if you look at Americas, it seems it's a 4% decline, excluding Viteos in Q2. I don't know if you can comment on how growth compares between Americas and Cayman.

And then the second question, apologies if you've mentioned this before, but the insourcing in Luxembourg, can you kind of say if it's in Funds or Corporates?

And if you could give some detail on kind of how the insourcing affects Luxembourg in Q3 and Q4?

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Stephanie D. Miller, Intertrust N.V. - CEO & Member of the Management Board [10]

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Sure. Let me take that. Cayman is the primary driver of Americas. We were disappointed with the revenue in Bahamas. They fell behind. There's just an absolute slowdown on that island and that's an industry thing, that's not an Intertrust thing. But Cayman does primarily drive it. I think Hans mentioned it. We did have a very, very good year last year, so the comparison against a slower quarter versus a very good last quarter because of last year, it was UBO. That was a Cayman thing. That's when they adopted the 5th Directive. This year, that legislation doesn't exist. Additionally, Cayman is in a position that Europe was in last year. They very well understand the ATAD regime. They understand what economic substance is. There was an expectation in the Americas to do guidance around what economic substance would mean, and that would mean that we would provide our clients more services for economic substance by second quarter. That was delayed. That delay, with the FATCA delay and just a bit of slowdown, it will move into third quarter, which is why we're comfortable to reiterate guidance. It's timing, quite frankly. We believe all of those compliance things will happen. The regulator will come up with their rules, and we will comply, and we will help our clients comply.

The third thing, I don't think I mentioned explicitly. But you could see in my highlights, we have applied for our Capital Markets license in the Americas. When you do that, you have to build out your team. You have to build out your infrastructure. James Ferguson, who runs that region and his management team has done an excellent job of controlling costs, but there is an investment that runs through our P&L, and the revenue is not able to be taking it until our license is approved.

So those 3 things: the delay of our license in Americas on Capital Markets, the delay of regulation in Cayman and the underperformance of the island in the Bahamas, those are all types of things that drive the 4% down. We're very on top of it. We're looking at it, but there's no constructional cause for concern.

In terms of the third and fourth quarter about insourcing, we knew these, so we analyze our book at a bottom-level up. We were very well aware that our clients very much were looking at insourcing. We've looked at economic substance, obviously, in the Netherlands last year and we've talked about that. Economic substance came later for Luxembourg, the guidance was given later in 2018, so it manifests itself in 2019. That's when the insourcing happened. Because when clients believe that the best way to adjust -- to address the newer legislation under ATAD is to provide -- to pull things in-house to create economic substance, that's when things get insourced. So we knew that was happening. That is really, very much stabilized, that's been done. We've got good line of sight with our clients. And your question was whether or not it was Funds or Corporate. Our book of business in Luxembourg is primarily Funds. So it's the management company over the funds providing guidance for the actual entities in Luxembourg. So it would be a funds-driven thing. We think that it's stabilized and we think we've got good line of sight of Luxembourg for third and fourth quarter. And Hans did mention that if we did not have the insourcing in that situation based on the change, we would have a 12% growth, which is why we're very laser-keen focused on keeping the book in our sights and growing it. So I think that's the overall answer to your 2 questions.

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Operator [11]

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The next question comes from the line of Henk Veerman from Kempen & Co.

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Henk Veerman, Kempen & Co. N.V., Research Division - Research Analyst [12]

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I also have 3. Firstly, on Viteos, could you give some color on what the initial response has been from your existing Intertrust client base with regards to the acquisition, especially with regards to the offshoring of the future work and also the digital platform?

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Stephanie D. Miller, Intertrust N.V. - CEO & Member of the Management Board [13]

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Sure. So for your first question, clients have been overwhelmingly positive. They get it. They see it. Clients understand that we -- Intertrust has been a fantastic company for 66 years, but business models change. We need to have a source, a pool of talent. The folks in our 3 Centres of Excellence are a different pool of talent. It will -- over time, it will reduce our turnover. We will put things in our Centres of Excellence that can be done on off-hours, so our clients get better delivery. We will be able to deliver better tools because they will understand the Corporate Services business. And our clients will get better service because they can have things online when they want them. So overwhelmingly, it's been positive. They get the value chain proposition. They also want it to be an easier touch. Just like you all on the phone work with your iPhone and apps on your iPhone, they want it to be, if you will, an Intertrust app. They want it to be easy. And that's the environment of the platform that we're looking towards. So they see the vision and they get it. So there's overwhelmingly positive results.

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Henk Veerman, Kempen & Co. N.V., Research Division - Research Analyst [14]

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Okay. Second and third question. Firstly, on the Netherlands. To my surprise, the performance was flat this quarter. It seems like you're gaining market share there quite substantially. Would you be able to quantify that?

And third question, on the guidance. You maintained a 3% to 5% range. And just from my understanding, is that to be consistent? Or do you really see some sort of bull case scenario where you would still report towards, let's say, the upper end of the range?

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J. Turkesteen, Intertrust N.V. - CFO & Member of the Management Board [15]

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Henk, if we would see that, then obviously, we would probably tighten the guidance and the report on that. So for now, we are just sticking to the 3% to 5%.

And on your second question, on the Netherlands, you are absolutely right, given that we are growing here. We are not even flat, but we are showing, be it modest, but growth for the first time, as I said, since 2017. Growing in a sharply declining market does indeed mean that we are gaining market share. I don't have any exact numbers about how much, but it definitely must be mid -- somewhere around 5% that we have been gaining.

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Operator [16]

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The next question comes from the line of Konrad Zomer from ABN AMRO.

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Konrad Zomer, ABN AMRO Bank N.V., Research Division - Equity Research Analyst [17]

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Two questions for me, please. The first one is on the Cayman Islands. Do you think that the Viteos acquisition can potentially lead to more business for Cayman Islands as well through the Americas?

And my second question on Luxembourg. Do you think that the required acceleration that you need for the second half will also entail the recruitment of more people, please?

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Stephanie D. Miller, Intertrust N.V. - CEO & Member of the Management Board [18]

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Konrad, those are very 2 good -- very good questions. The first one is, yes. So the Viteos target client is -- the American, if you will, manager, the American managers put things in Cayman, so that is connectivity. Part of the effort is what we're going through now, is doing road shows and meetings with the Viteos clients and with Intertrust clients to show them the value proposition. So not being able to quantify that the answer is yes. The capability is there, the platform is there and the managers tend to go to Cayman. So all of those things are positive in our favor. I can't quantify it until -- look, we're roughly, we're a month in. Until we get a read in the feedback -- but again, it's been well received. So I think that is a positive story.

In terms of Luxembourg?

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J. Turkesteen, Intertrust N.V. - CFO & Member of the Management Board [19]

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Yes, if there is more business, Konrad, there well indeed -- until we have the offshoring behind us, there will indeed be also an increase in people. So that is definitely something that you will see.

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Operator [20]

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The next question comes from the line of Lucas Ferhani from Deutsche Bank.

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Lucas Ferhani, Deutsche Bank AG, Research Division - Research Analyst [21]

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So the first one will be on group costs. So HQ cost was slightly lower than what you had guided before. So do you expect a step-up towards our guidance or even above? Do you feel similarly on the amount on a full year basis?

And also on the IT costs. Kind of, can you give us a better idea on the savings? So with Viteos, do you expect to put in more costs towards IT on a sustained basis? And then probably see that go down given their capability? Or how should we think about kind of IT costs going forward?

And also, maybe if you have already something in mind as both IT and HQ cost is 14% of revenues, kind of, where should that go once Viteos is kind of more?

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J. Turkesteen, Intertrust N.V. - CFO & Member of the Management Board [22]

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The end game of that has been communicated when we announced the acquisition of Viteos. When we said that, over time, we do see EBITDA margin going to north of 40%, and that is then after the whole migration of front and back-office activities into India. So that is the end game. For now, we cannot be very much more specific on '19 -- on '20. That will be part of the guidance that we will put out to the market later this year.

In terms of HQ costs, you do indeed see that there was a pretty low level of cost in the second quarter. That was partly influenced by an LTIP accrual that got adjusted. But we continue to see that run rate that we previously communicated as a guideline for how HQ cost will develop.

IT costs, as we report them currently, will continue to step up a little bit during the remaining quarters of the year as we complete the road map that Stephanie was talking about earlier.

So the end game, when that all gets migrated into India, that will have a positive impact on the margin, as communicated, more than 40%. For '20, we cannot be more specific at this point.

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Stephanie D. Miller, Intertrust N.V. - CEO & Member of the Management Board [23]

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And that 40% is mid-term guidance. So we have communicated that this is a 30-month roadmap. So please keep that in mind. The integration into India will not happen overnight.

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Lucas Ferhani, Deutsche Bank AG, Research Division - Research Analyst [24]

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Absolutely. And the other question was on Cayman. If you can give a bit more detail. So the segment that is probably a bit more affected -- impacted would be the Funds business. And also, is there any issue towards your kind of legacy trust business that has had issues in the past in Cayman?

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Stephanie D. Miller, Intertrust N.V. - CEO & Member of the Management Board [25]

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So I think I mentioned it, right? There is no -- I used the word construction. There is no construction issue. There's no competitive land grab, there's nothing going on. This is more about a cycle and timing. This is really about last year compared to this year. Last year, they had underlying beneficial owner Directive 5. This year, they don't. This year, in the third quarter, we hope to have guidance on economic substance. We will do our normal work. We will work with our clients. None of the service lines in the Cayman -- and we have all of them, by the way, are at risk. None of them see any kind of distress. So I want to reiterate the Cayman business is solid. It's good. And there's nothing more to say other than we have to work with our clients and work with the regulator in terms of implementation and when they change the rules.

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Operator [26]

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The next question comes from the line of Edward Donoghue from One Investments.

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Edward Donoghue, [27]

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A couple of questions from my side. I just want a slightly bigger picture. I mean, just looking across the group, can you sort of give an indication on client retention rates weighted by revenues? I mean, a range is okay. And then, sort of an idea of the historic trend, where we might be now. Any expectations?

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J. Turkesteen, Intertrust N.V. - CFO & Member of the Management Board [28]

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That's information that, unfortunately, we don't have at hand.

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Stephanie D. Miller, Intertrust N.V. - CEO & Member of the Management Board [29]

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I couldn't comment. So we very -- look, the business that we have -- let's just talk and generalize. The business that we have is very, very sticky. In general, we do a very good job, and we published previously our Net Promoter Score. Our clients are happy with us and the services we provide globally. They're happy of the places we've been. We've tried to be thoughtful. So we've extended last year into Australia. We extended last year into Abu Dhabi. This year, we've extended licenses in Ireland and trying to get a license in Delaware. And we've done -- obviously, strengthened in Paris. So we try to be where our clients need us to be. So that there is no, if you will, impetus for them to leave us. We don't track it that way, in general, because we are at those places. We do have a client service program, and we are tracking net inflows.

Now the only thing I would say is when our clients do leave, in general, the big push this year has been because, late last year, ATAD was implemented. So there is a cleanup of legal entities over time because you don't need as many, quite frankly. So things don't renew. So it's not a client exit. It's just a lack of new activity. But that lack of new activity then just manifests itself in other ways, they ask us to do other things. So the answer to your question is just not easy. There's no, by client, by segment, by jurisdiction, exit rate. It just -- we wouldn't have that data. We look at our clients bottom-up. We look at what types of things they do. We do a rolling model review of anything to make sure that we don't have any moments in time that we have any type of event happening, and we don't, we don't see that.

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Edward Donoghue, [30]

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Okay. If you flip it around the other way. And then just to say, if you look at a dashboard, what's your dashboard showing vis-à-vis the last 12 months? And the visibility you've got on that, on the KPIs that you're looking at the moment?

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Stephanie D. Miller, Intertrust N.V. - CEO & Member of the Management Board [31]

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Well, I think that the KPIs that Hans highlighted, that we went through, so we don't disclose any more of the legal entities because our business has moved away from legal entities. Our business is looking at professional services and we are valued as a professional services partner. So it's our revenue by billable FTE, you could see that it's moving up. So basically, the value that each employee brings is increasing because our clients believe that we add value to them. The billable percentage of total, so our deployment of our staff being available to clients, so it's the demand of clients we see increasing. I think those 2 things are indicative of the fact that, directionally, we're in the right places and we're utilized. We don't have an underutilization rate. We don't have a performance issue. And we don't have a direct pressure on fees, which is why you see the revenue by billable FTE increasing. All of those things indicate a healthy -- and when I looked at the dashboard, those are the things that I look at, by office, by jurisdiction, what is the trend and what is the deployment. Further than that, we don't release any of those trends.

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Edward Donoghue, [32]

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Okay. And then another question then. Looking at the architecture that you put in place now or are putting in place for growth, how do you view gross signings trend? And the -- looking at your pipeline, are you seeing an acceleration in that versus an attrition risk?

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Stephanie D. Miller, Intertrust N.V. - CEO & Member of the Management Board [33]

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I'm seeing an acceleration of growth in terms of the funds industry. We've done a very, very good job of Corporates in terms of the shrinking market, because we have -- we announced it last year, we hired specialist sales. Those special sales in America sell into Europe, specifically, and that's why you're seeing that stabilization. So all of those things are positive change in terms of attrition. We've asked our CCO, our new CCO, Ian Lynch, to enhance our relationship management function so that any attrition we have is well seen well in advance, and we're connected to our clients. So we're trying to be disciplined and thoughtful about managing our own pipeline and our own book of business. And I think those are the things that our management is taking very, very seriously.

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Edward Donoghue, [34]

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Okay. And then just the last question on the Netherlands. If you look at that growth in the pipeline, do you see that growth rate being maintained that you're showing at present? Or do you think that could pick up? And again, going back on the earlier points you've made with regard to the quality of the business coming in, are you seeing the return being generated on that business that you would expect?

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Stephanie D. Miller, Intertrust N.V. - CEO & Member of the Management Board [35]

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A good question. I do see the return of the quality of the business that we have. Look, we're in a very fortunate position that, being who we are, we're able to take on only quality business, and that is our book. So the returns are consistent. I think they will remain. We've talked about our clients are not price-sensitive. What they need us to be is highly, highly, highly the gatekeepers, to be the experts in this field, and we are that. I think in terms of Netherlands, I do not want -- look, we have done an excellent job, and I'm super proud of the Netherlands team. However, it is a significantly shrinking market. It is unrealistic to say that I should be able to hold us forever in a consistently shrinking market.

So my best answer to that is we will continue to be laser-focused on it. We will do a very good job of trying to continue to win market share. But I think a realistic expectation is flat to slightly negative, which would mean we're still performing above, but saying that we would grow is unrealistic.

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Operator [36]

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We have no further questions in the queue.

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Stephanie D. Miller, Intertrust N.V. - CEO & Member of the Management Board [37]

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Thank you, operator. I appreciate that. So everyone on the call, thank you for joining us. We appreciate your time, and speak to you next time. Thank you.

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Operator [38]

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Thank you for joining today's call. You may now disconnect your handsets. Hosts, please stay on the line.