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Edited Transcript of BOLSAA.MX earnings conference call or presentation 16-Oct-19 1:00pm GMT

Q3 2019 Bolsa Mexicana de Valores SAB de CV Earnings Call

Oct 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Bolsa Mexicana de Valores SAB de CV earnings conference call or presentation Wednesday, October 16, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* José-Oriol Bosch Par

Bolsa Mexicana de Valores, S.A.B. de C.V. - CEO

* Ramón Güémez Sarre

Bolsa Mexicana de Valores, S.A.B. de C.V. - Director of Administration, Finance & General Services

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Conference Call Participants

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* David Eduardo Soto

Santander Investment Securities Inc., Research Division - Analyst

* Mariana Taddeo

UBS Investment Bank, Research Division - Director and Analyst

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Presentation

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Operator [1]

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Welcome to the Third Quarter 2019 Bolsa Mexicana de Valores Earnings Conference Call. My name is Hilda, and I will be your operator for today. (Operator Instructions) Please note that this conference is being recorded.

I will now like to turn the call over to Mr. Ramón Güémez. Mr. Güémez, you may begin.

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Ramón Güémez Sarre, Bolsa Mexicana de Valores, S.A.B. de C.V. - Director of Administration, Finance & General Services [2]

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Thank you. Good morning, and welcome to Bolsa Mexicana de Valores Third Quarter 2019 Earnings Conference Call. Before proceeding, I'd like to provide a brief safe harbor statement. This presentation contains forward-looking statements and information related to Bolsa that are based on the analysis and expectations of its management as well as assumptions made and information currently available at Bolsa. Such statements reflect the current views of Bolsa related to future events and are subject to risks, uncertainties and assumptions.

Many factors could cause the current results, performance or achievements at Bolsa to be somewhat different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements, including, among others, changes in the general, economic, political, governmental and business conditions both on a global scale and in the individual countries in which Bolsa does business, such as changes in monetary policies, inflation rates, in prices, in business strategy and various other factors. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary considerably from those described herein as anticipated, believed, estimated, expected or targeted. Bolsa does not intend and does not assume any obligation to update these forward-looking statements.

I would also like to remind participants that today's call is being recorded, and a replay of this call will be available online on October 17 at Bolsa's corporate website, www.bmv.com.mx. During this call, all figures are in Mexican pesos and compared to the third quarter of 2018, unless stated otherwise. This call is intended for the financial community only and the floor will be open at the end to address any questions you may have.

Joining us for today's call are José-Oriol Bosch, our CEO; Roberto González, SVP of Indeval; Gabriel Rodríguez, SIF ICAP CEO; José Miguel De Dios, MexDer CEO; Enrique Camacho, Director of Commercial Coordination and Client Relations; Luis René Ramón, Investor Relations; Alfredo Guillén, CEO for Cash Equities; and myself, CFO.

I would now like to turn the call over to our CEO, Oriol Bosch.

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José-Oriol Bosch Par, Bolsa Mexicana de Valores, S.A.B. de C.V. - CEO [3]

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Thank you, Ramón. Hello, good morning, everyone. Thanks for joining us for the third quarter earnings conference call. We have released strong results this quarter with good income growth across several of our core business areas as we continue to successfully execute on our strategy for growth and to improve financial performance. I will outline the developments in the period and thoughts going forward, but first let me take you through the key financial results.

The third quarter 2019 results show that BMV has a strong and well-diversified business model and highlights the need for continued executing our medium-term strategy. Our revenue increased 7% to MXN 934 million with double-digit growth at Indeval, SIF ICAP, Derivatives and Valmer. The reduced fee schedule in listing and maintenance had a negative impact of MXN 23 million this quarter: MXN 5 million in listings; and MXN 18 million in maintenance. Underlying cost were well controlled, rising 4% mainly as a result of business continuity project, such as the Alternate Operation Centre, cyber security initiatives and Flexible Disaster Recovery Plan.

Operating profits and EBITDA increased 10% and 15%, respectively. And net income rose 11% to MXN 369 million for the quarter. The EBITDA margin for the period was 59%, which contributes to year-to-date EBITDA margin of 58%. The EBITDA considered amendments to IFRS 16, which eliminated the dual accounting model for leases that distinguishes between financial lease contracts that are recorded on the balance sheet; and operating leases, which are not. The adjusted EBITDA for the third quarter 2018 was 58%, 120 basis points lower than on the third quarter of 2019. BMV has had a new record high in revenue, EBITDA, and net income, registering the best quarter in the history of the company.

I will now review in detail our trade-related businesses results. In Cash Equities trading and clearing, revenue was registered at MXN 132 million, up 5% compared to 2018. The average traded volume for the third quarter was MXN 13.8 billion, up 2% compared to the third quarter 2018. On one hand, the domestic market registered an ADTV of MXN 8 billion, decreasing 3%, while on the other hand, the international quotation system, or SIC, reported an ADTV of MXN 5.8 billion, increasing 9% versus the same quarter last year.

Regarding the equity clearing house, it is important to note that CCV provides clearing services for all Mexican equities. In derivative trading and clearing, revenue increased by 10% to MXN 55 million as a result of higher volumes in trading of swaps of TIIE and futures of the IPC Index. It is important to mention that the trading in swaps did not increase open interest since the operations were mostly for substitution.

In Asigna, the average margin deposits were MXN 33.1 billion, up 2% quarter-over-quarter, but 12% lower when compared to the third quarter of 2018. As we kept mentioning in the past, BMV continued working with the Mexican financial authorities to incentivate the development of a formal and a standardized Mexican derivatives market, including the authorization for more authorities or pension funds to trade derivatives.

SIF ICAP's revenue was up MXN 21 million or 16% to MXN 156 million. SIF ICAP revenues in Chile grew MXN 20 million or 27%, while in Mexico, they increased MXN 1 million or 2%. The growth in Chile -- Chilean division is mainly explained by the greater volatility in the Chilean market and new offshore customers, which was partly offset by the depreciation of the Chilean peso against the Mexican peso.

Regarding our nontrading business results, Information Services increased 3% or MXN 4 million to MXN 140 million. It is important to mention that there was a nonrecurring revenue in Market Data during the third quarter of 2018 or MXN 20 million due to client audits. Excluding these events, Market Data was up 15% in the third quarter of 2019 as a result of new distribution channel and the commercialization of products developed last year. As for Valmer, revenue increased MXN 13 million or 31% due to new clients and a sale of OpenFinance, a portfolio management software. This sale generated nonrecurring revenues of MXN 10 million.

Information Services increased 12% if excluding nonrecurring revenue reported in the third quarter of 2018 and 2019.

Central Securities Depository, Indeval, revenue was up 19% or MXN 42 million to MXN 262 million at historical record high explained by the growth in services related to the global market, the SIC, which helped to offset the 2% decline in the value of the assets under custody. Listing and maintenance revenue decreased by 10% or MXN 17 million to MXN 154 million. The reduced fee schedule had an impact of MXN 23 million, MXN 5 million in listing and MXN 18 million in maintenance during the third quarter.

BMV is committed to continue supporting the economic development of the country and encourage the growth of financial markets in Mexico. Excluding the reduced fee schedule, listing and maintenance was up MXN 6 million, explained mainly by the follow-on of Vista Oil & Gas for MXN 2.031 billion and O'Donnell Capital Management [CKD] for MXN 255 million as well as improvement in the debt market for both short-term and long-term debt with listings growing by 25% and 44%, respectively.

Expenses for the quarter amounted to MXN 432 million, up 4% or MXN 16 million compared to last year third quarter, which is explained by the following items.

First, personnel expenses increased MXN 8 million due to annual salary increases, new positions in information security and customer relations as well as the variable compensation for a better performance in SIF ICAP.

Second, technology was down MXN 11 million in the third quarter. MXN 22 million were reclassified from technology to depreciation as a result of changes in the accounting standard IFRS 16. And the net result increased by MXN 11 million, mainly due to the flexible disaster recovery plan, DRP; and the network operations center, the NOC.

Third, depreciation, which increased by MXN 28 million: MXN 22 million due to the changes to IFRS 16; and MXN 6 million because of projects completed in 2018 and new hardware leasing.

Fourth, rent and maintenance presented an increase of MXN 1 million as a result of the Alternate Operation Centre.

Fifth, consulting fees was up MXN 6 million related to the flexible disaster recovery plan, DRP, regulatory project. In the third quarter of 2019, BMV had a nonrecurring expenses of MXN 9 million due to the sale of licenses to OpenFinance software. It is important to remember that during the third quarter 2018, BMV also had the nonrecurring expense of MXN 10 million as a result of hiring external auditors in Market Data and consultants specialized in corporate strategy.

And last, sub-custody that decreased by MXN 15 million explained by better commercial terms as a result of the consolidation of international custodians for the global market, the SIC, as well as discounts for MXN 3 million. We have negotiated another MXN 3 million in discounts which will be registered in the last quarter of the year.

The results of the quarter led us to an operating and EBITDA margin of 54% and 59%, respectively, and a net income of MXN 369 million. For the full year, up to September, we reached an EBITDA of MXN 1.5 billion, up 5%; and net income of MXN 1 billion, up 1% from the same period of 2018. As we have stated in the past, we maintain our beginning of the year guidance, and we will work in the last quarter of the year towards achieving it.

Now let me turn to BMV's medium-term strategy and how we are unfolding. BMV's strategic initiatives are focused on, first, further developments of post-trade and Market Data initiatives; second, protection of legacy business by building new added value services; and third, work closer with buy-side clients and regulators.

Regarding the further development of post-trade and Market Data initiatives, we have made great progress in partnering and aligning our products and services to the needs and interest of our clients. First, in Indeval, we continue implementing RPAs, or robotic process automatization, to perform repetitive business processes and reduce operational risk as well as analyzing web platforms to have live communication with clients and improve customer service. Additionally, we are building value-added services, such as corporate actions, cash management through a third-party, tax services and post-trade settlement data to name a few.

The aforementioned actions together with the implementation of swift, most robust platform, AMH, will allow us to connect more efficiently with international custodians and generate additional revenues in Indeval starting next year.

And second, regarding our Latin American Exchanges Data, or LED venture, I can share you with that preparations on developing data products are on time, and we have started promoting products in New York City and Miami. LED's goal is to distribute a standardized data in a single format directly to the middle and back office of financial institutions. We expect to start distributing the new products in the fourth quarter of 2019.

Regarding the protection of BMV's legacy businesses, I am glad to share with you that in August, we released 2 new features in BMV's trading engines. First, we increased the functionality to our member broker and their clients to trade baskets and replicate simultaneously indices and global portfolio optimized strategies. BMV's clients will be able to execute multiple trades in microseconds, minimizing manual entries and price differences in order to deliver the same performance as the global portfolio strategy. Additionally, we have released self-trade prevention features to avoid 2 others from the same organization of member firm from executing against each other.

And for getting closer with buy-side clients and regulators, BMV continues working together with the authorities and financial regulators to develop a more liquid, transparent and efficient capital market as well as Mexican derivatives market. This includes assisting authorities in the process of receiving authorization to trade derivatives.

During the quarter, the third quarter, BMV participated in World Federation of Exchanges Forum and the 10th anniversary of the Sustainable Stock Exchanges initiative, which is a platform for collaboration with investors, regulators and companies to enhance corporate transparency, and ultimately, performance. Moreover, BMV together with RiskMathics organized a fun, finance and running event, which was an 11 and 5.5 kilometer financial industry race in Mexico City as well as several other events with the goal of promoting financial awareness and inclusion.

Furthermore, on October 31, we will be celebrating our 125th anniversary of the Mexican Stock Exchange by ringing the opening bell with the Minister of Finance among other commemoration. With integrity, innovation and transparency, several generation of BMV employees have worked to create a fully integrated exchange group. Here is to the next 125 years.

Finally, I would like to reiterate that 2019 is a transformational year for the company. We are delivering a strong growth with good cash generation. We are focusing on top line expansion and controlling expenses. We are executing on our strategy and are concentrated on achieving our target for a stronger shareholder return over the next 2 years.

With that, I thank you for your time, and together with my colleagues, we will be gladly answering any questions you might have. Thank you very much.

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Questions and Answers

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Operator [1]

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(Operator Instructions) At this moment, we show no questions. My apologies. We have a question from David Soto from Santander.

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David Eduardo Soto, Santander Investment Securities Inc., Research Division - Analyst [2]

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I just wanted to know if you could give us any color related to the LED initiative. If you could tell us if it's going to start operations in the next quarter?

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Ramón Güémez Sarre, Bolsa Mexicana de Valores, S.A.B. de C.V. - Director of Administration, Finance & General Services [3]

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We expect to start operations in Q4 of this year.

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David Eduardo Soto, Santander Investment Securities Inc., Research Division - Analyst [4]

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Okay. So it should reflect -- so it should start reflecting revenues on the first Q of next year, right?

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Ramón Güémez Sarre, Bolsa Mexicana de Valores, S.A.B. de C.V. - Director of Administration, Finance & General Services [5]

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Yes. Starting Q1 -- Q4 this year, we'll start commercializing the product. We expect -- we are having roadshow in New York and we already have the CEO in place in Miami, and we will continue with Connecticut, Chicago, California, and of course, Miami. So we expect Q1 to be more of building relationships and starting to sell the product. And this -- it's important to remember that LED is a JV with we have with the Spanish Stock Exchange and is an initiative that we have to lift the region into selling data into North America and with the hopes of bringing more volume to trading in the whole region, not only in Mexico, but also in other Latin American countries.

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Operator [6]

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The next question comes from Mariana Taddeo from UBS.

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Mariana Taddeo, UBS Investment Bank, Research Division - Director and Analyst [7]

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Just want to discuss a little bit more on competition. With BIVA market share going up recently, do you think this trend should continue? Also in terms of listing, how could you attract more listing to Bolsa? And in terms of the discount plan for trading and listing -- sorry, from listing and maintenance fees, could we expect more discounts moving forward?

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José-Oriol Bosch Par, Bolsa Mexicana de Valores, S.A.B. de C.V. - CEO [8]

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Okay. Regarding the market share, if you're talking about cash equity trading, the information that I have, which is public, is not different in the past weeks or months compared to the -- even to last year when BIVA started operations in July 2015. So let me give you the exact number. If we take since July 25, that is when BIVA started operations, we have a market share of 93% on BIVA and 7% in -- 93% in BMV and 7% in BIVA. And the breakdown of that is, in the local market, we had 98% and BIVA had 2%. This is from July 25 to September 30.

So -- and the market share that BIVA has been gaining is on the SIC. If we only look at the SIC, we have 87% and BIVA has 13%. So I think that is important to differentiate in between the local market and the global market. And the local market is the market that is traded with the firm with the algorithm that is looking for the best execution. So in this market, we are highly competitive and we have 98%.

On the SIC, as the origin market is out of Mexico, there is no best execution. So in this market, they -- either, the broker-dealer by itself or the broker-dealer by a specific instruction of a client that could be an institutional investor, as an example. They can execute -- they can decide if they're executing one or the other exchange. In this one is where we have had 87% and BIVA 13%.

But now let me go to the information just for the first 9 months of the year. And if we look at the first 9 months of this year, once again in the local market, we have exactly the same as they accrued it, since they started operation. So for this year, we have 98%, and BIVA 2%.

If we look at the global market, the SIC, BIVA, they have 15% and we have 85%, so it's a very small difference. And if we look at the accrued, we have 92% and BIVA has 8%. So I think that the difference is not very significant. However, there are some particular days where BIVA, because of a large trade mainly coming my guess is from institutional investor, they have 1 day where they have a very high market share because 1 or 2 particular trades, but the average, that is important, is still below in between both local and global market is below 10%.

And once again, if we do the math and we look at their revenues and rounding numbers, our revenues are MXN 3.5 billion per year. Cash equity trading is 8% of this MXN 3.5 billion, which is like MXN 200 million, a bit less than MXN 300 million, MXN 280 million. So if we are losing 10% of MXN 280 [million], we are talking about that all the impact on cash equity trading from the market share that we are passing from Mexico -- from the Mexican Exchange to BIVA, we will be talking about MXN 28 million per year, which is $1.4 million a year. So that's it.

I think that the main impact is not on this side. I think that the main impact is not for the Mexican Exchange. I think that so far the main impact is for the broker-dealer that are -- that they have had an increase on their fixed cost by having 2 exchanges. And the main concern that we all have in the Mexican market -- exchange market is that now we have 2 exchanges that now, we all, including the Bolsa because all of the expenses that had a significant increase for Bolsa, for Indeval and for our CCP, for the CCV, has increased as well as for the broker-dealers and the market -- the pie of the market, the size of the market has not increased. I think that this is where we are all focused and concerned.

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Ramón Güémez Sarre, Bolsa Mexicana de Valores, S.A.B. de C.V. - Director of Administration, Finance & General Services [9]

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And Mariana, regarding any further price changes, we will obviously be looking closely at what BIVA does. We've -- and if we need to adjust, which we don't foresee at the moment any major price changes, but we'll be looking at what BIVA does and we will not be losing market share for price reasons, especially in listing and maintenance.

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José-Oriol Bosch Par, Bolsa Mexicana de Valores, S.A.B. de C.V. - CEO [10]

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The good news, which is one of the -- as already mentioned, one of our strength is our diversification. So if we have to adjust some prices as we already did it, we will do it, and I think that it is important to highlight that we have had historical record high quarter despite that now we have a new competitor, despite that we had to adjust some prices, despite that they traded volume in Mexico has happened in other exchanges across the world has been going down. Despite that, the traded volumes on the OTC market that had an impact on SIF ICAP has been going down this year. So despite all this environment, we have reached a historical record high in net income this quarter. So I think that this is good news.

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Operator [11]

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The next question comes from (inaudible) from SF Capital.

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Unidentified Analyst [12]

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Congrats for the third quarter results 2019. My question is regarding to this part of these results about acquisition of share, which is related, I think, in Miami. So I was wondering if you can give us more color about that. And why Bolsa Mexicana de Valores are acquiring shares?

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Ramón Güémez Sarre, Bolsa Mexicana de Valores, S.A.B. de C.V. - Director of Administration, Finance & General Services [13]

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We were not acquiring shares. This is a new JV that we're beginning with the Spanish Exchange. And the idea is to sell Latin American data in a unified format into the U.S. and European market, but this is a new company completely, and if I said it's joint venture with the Spanish -- with Bolsas y Mercados Españoles.

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Unidentified Analyst [14]

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Okay. And the second question would be about this revenue, nonrecurring, how did -- that they are referring to MXN 20 million. I was wondering if there's something related about this nonrecurring revenue that you have in this quarter or it's something related to what?

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Ramón Güémez Sarre, Bolsa Mexicana de Valores, S.A.B. de C.V. - Director of Administration, Finance & General Services [15]

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No, this happened last year. Our information revenues are down, and we're stressing that last year we had nonrecurring MXN 20 million and that's the explanation for the variance. What we had is we -- as any data provider, we sometimes audit our customers to see the reporting as to the data that we're consuming was accurate and we find -- found some inconsistencies and we just build the difference, and that's why we have this nonrecurring income last year.

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Operator [16]

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(Operator Instructions) We show no further questions.

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José-Oriol Bosch Par, Bolsa Mexicana de Valores, S.A.B. de C.V. - CEO [17]

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Thank you very much for the -- if there are no further questions, for your assistance for joining us and for all your questions. So have a great weekend. Bye.

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Operator [18]

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Thank you. Ladies and gentlemen, this concludes today's conference. We thank you for participating. You may now disconnect.