Bolsa Mexicana de Valores SAB de CV

BMV:BOLSAA

Earnings Call Transcript 2019-Q1

[Operator]

Welcome to the First Quarter 2019 Bolsa Mexicana de Valores Earnings Conference Call. My name is Hilda, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded.

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

[Ramón Sarre, executive]

Thank you. Good morning, and welcome to Bolsa Mexicana de Valores First Quarter 2019 Earnings Conference Call. Before proceeding, I would 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 performance -- to risk, uncertainties and assumptions. Many factors could cause the current results, performance or achievements of 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 general, economic, political, governmental and business conditions both in a global scale and in individual countries in which Bolsa does business, such as changes in the monetary policies, in 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 April 25 at the Bolsa's corporate website, www.bmv.com.mx.

During this call, all figures are in Mexican pesos and compared to the first 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, CEO; José Manuel Allende, SVP of Strategic Planning and Business Development; Roberto González, SVP of Indeval; Luis Rodríguez, Chief Technology Officer; Gabriel Rodriguez, CEO for ICAP; Jose Miguel De Dios, CEO for MexDer; Enrique Camacho, our new Director for Commercial Coordination and Client Relations; Luis René Ramón, our Investor Relations Officer; and myself, Ramón Güémez.

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

[José-Oriol Par, executive]

Thank you, Ramón, and good morning, everyone. And thank you for joining us for the first quarter earnings conference call of 2019. First, I'm going to summarize the financial results and then update you on the development of our medium-term strategy.

The first quarter results showed that BMV has a strong and well-diversified business model and highlights the need for the execution of our medium-term strategy. In a quarter, the average daily traded value decreased 9% and the volume of the main IPC traded instruments decreased 35% compared to the same quarter last year. The Group's revenue increased by MXN 3 million. The results were driven by our fee-related businesses, especially Custody and Information Services.

It is important to mention that the Discount Plan for trading, leasing and maintenance had an impact of MXN 18 million in BMV's revenue. On the other hand, our expenses increased only 2% because of our discipline in cost control. The growth is the result of projects that began last year as well as new investments in cybersecurity and in developing the flexible disaster recovery plan, DRP.

Operating income and EBITDA reported minus 1% and 4%, respectively, and net income rose by 3% to MXN 328 million for the year. The EBITDA margin was recorded at 57% considering the 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 we turned on. The adjusted EBITDA for the first quarter of 2018 was 58%, 65 basis points higher than on the first quarter of 2019.

I will now review in detail our traded-related business' results. In Cash Equities trading and screening, revenue was registered at MXN 119 million, 7% less than in the first quarter of 2018. The quarter recorded an average daily traded value of MXN 14 billion, down 9% year-over-year due to uncertainty and weak volumes in January and February. Furthermore, the total average daily traded value for both exchanges was also down 2% versus the first quarter of 2018.

Regarding the average daily traded value market share, during the first quarter of the year, BMV solidified their position with 93% of the value traded in Mexico, maintaining 98% in the local market and 86% in the global market for SIC. It is important to remember that CCV provides clearing services for all Mexican equities.

In Derivatives trading and clearing, revenue decreased by 17% to MXN 42 million as a result of lower volumes in Derivative operations and lower-margin deposits. As we have mentioned in the past, BMV continues working with the Mexican government and financial regulators and market participants to incentivize the development of a formal and a standardized Mexican derivatives market as well as mandate clearing for all standardized products through the potential issuance of a derivatives low.

SIF ICAP revenue was down 12% to MXN 127 million as a result of lower sales in both Mexico and Chile, explained by fewer operations due to lack of volatility in the markets and clients merging in Chile as well as lower volumes in the main instruments traded in Mexico.

Regarding our nontrading business' results, Information services increased 29% or MXN 33 million due to the establishment of new distribution channels and the commercialization of product developed this last year. Additionally, there were MXN 12 million of nonrecurring income in Market Data for back-billing services.

Central securities depository revenue was up 14% or MXN 29 million, explained by the growth in services related to the global market SIC, mainly conversion services, settlements and corporate actions. The best scenario for the SIC is for international markets to continue moving upward and having volatility in the exchange rate of the Mexican pesos to the U.S. dollar.

Listing and maintenance revenue decreased by 12% to MXN 145 million. The result is explained mainly by the Discount Plan applied in the first quarter of 2019 and by lower new listings in medium- and long-term debt, 32% lower versus the first quarter of 2018.

On the other hand, new listings in the short-term debt market grew 37%, and there were 2 new issues of CERPIs, BX Mexico Advisors for MXN 952 million and Spruceview Mexico for MXN 1.2 billion. All in all, the discounts had an impact of MXN 18 million for the quarter. Moreover, BMV is requesting submission to the financial regulators to make the Discount Plan permanent.

Expenses for the quarter amounted to MXN 405 million, up 2% or MXN 9 million compared to last year's first quarter, which is explained by the following items: first, personal expenses increased by MXN 8 million or 4% as a result of salary raises and the opening of the new division for Commercial Coordination and Client Relations partially offset by lower variable compensation in SIF ICAP. Second, technology and depreciation as a result of changes in the accounting standard IFRS 16, MXN 17 million from cargo leases were reclassified from technology to depreciation. Additionally, the remaining difference is the result of projects that began last year, such as high availability technology and the optimization of the global market SIC as well as new investments in cybersecurity and in developing a flexible disaster recovery plan, DRP. Third, rent and maintenance presented an increase of MXN 2 million due to renovations to BMV's buildings and an increment in electric power prices. Five (sic) [ four ], consulting fees were up MXN 4 million related to the flexible DRP project. And finally, sub-custody decreased MXN 5 million explained by the consolidation of international custodians for the global SIC market. This initiative has helped us reduce costs by 18%, minimize operational risk and improve service times.

The results of the quarter led us to an operating and EBITDA margin of 52% and 57%, respectively, and the net income of MXN 328 million, 3% higher for the quarter year-over-year.

Now let me turn to BMV's medium-term strategy and how it is unfolding. We have made great progress in partnering and aligning our products and services to the needs and interest of our clients. In Indeval, the implementation of SWIFT's most robust platform, AMH, the migration of our first-grade IP ecosystem to one faster and more responsive and the consolidation of custodians has helped us comply with international standards when it comes to market infrastructure, security levels and service times.

To give you some examples, we were able to minimize Indeval's average time to settle and credit a delivery versus payment transaction from 2.5 hours to 30 minutes. Today, most of the operations are settled same day versus T plus 1 last year. Clients are able to use funds from sales immediately to cover purchases, and dividends are credit at noon versus 4 p.m. in 2018. These measures have created enormous value to our customers and places our central securities depository in a better position to continue its growth.

In the next month, we will implement robotic process optimization, RPA, or bots to perform repetitive business processes and reduce operational risk by creating value-added services, such as corporate actions, electronic proxy voting and Indeval's data to name a few.

Regarding our Latin American Exchanges Data, or LED venture, I can share with you that preparations from getting the company up and running on the development of data products are on time. LED's goal is to distribute the 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.

I would like to reiterate that BMV will continue investing for growth by expanding its portfolio of products and services and by focusing on top line expansion while maintaining its cost control culture. We will continue working together with the authorities and financial regulators to develop a more liquid, transparent and efficient capital market as well as a Mexican derivatives market.

As well as continuing to deliver growth, BMV is committed to promoting the Mexican financial market through education. A few days ago, Grupo BMV inaugurated with the presence of the Minister of Finance and the President of the CNBV the Mexican Stock Market Museum, the MUBO. Our main goal is to develop financial awareness in Mexico pro bono. And since day 1, the MUBO has received close to 300 visitors per day. Moreover, in April, the Mexican Stock Exchange turned blue in honor of the World Autism Awareness Day. We are proud to be a socially responsible organization that dedicates time and resources to corporate citizenship, and we look forward to continuing to make a difference in Mexico.

Lastly, I would like to remind you that next week, in our sale quarter assembly, investors will vote on a dividend hike from MXN 895 million to MXN 1.05 billion, which results in MXN 1.78 per share and a 77% payout ratio. By raising dividend 18% or MXN 0.27, BMV still remains above 5% versus 2018 our stock price.

With that, I thank you for the time. And together with my colleagues, we will gladly answer any questions you may have. Thank you.

[Operator]

[Operator Instructions] We have a question from Arturo Langa from Itau BBA.

[Arturo Langa, analyst]

My first question would just be just very brief one. But concerning first quarter results, would you be reiterating the guidance as you provided during the previous conference call. And then my second question would be how do you see the second quarter panning out already with respect to market activity? The performance has been much better than what was in January and February, at least from what has been April so far, so just wondering if you could provide some color on that.

[Ramón Sarre, executive]

We will not be updating our guidance. Let me say we don't update it neither up, nor down. We will be having a change in the EBITDA margin because of the new IFRS 16. So we would expect our EBITDA margin to be 300 basis points higher -- or increase the range. But we do not -- our practice is not to update guidance, neither up or down. As we've said before, our guidance is our best estimate at one point in time and we stick to that.

Regarding the second question, our outlook for the second quarter?

[José-Oriol Par, executive]

Thank you, Arturo. Regarding the second part of your question, I think that, well, last year, in the second half of the year, we did see very good activity in the markets, first talking about cash equity markets on the trading side because of higher volatility and some announcements that were made by the new administration that was still going to start on December 1. Now in the first quarter, we have seen, as mentioned, lower activity. But I would say that because of lower volatility, we have not had the surprises that we did have in the second half of the year. So -- but having said that, I think that now trading volumes should come back to normal. And probably, it is something natural to see less activity in the first months of the year, especially when we are having a new administration. And we're also seeing that on the financing side in terms of IPOs in -- we have seen all the businessmen and companies on a wait-and-see mode. Because of that, we did see the -- in particular on the debt side, in the long-term debt, the volumes that were issued last -- first quarter of 2018 compared 2019 are much lower. We are also seeing a very poor pipeline because of the same and also because of valuations. Despite that the market -- Mexico's equity market recovered in the month of March, the valuations are not very attractive for new potential IPOs and -- at the moment. So we are not expecting a lot of activity in the next weeks. But we're expecting at some point all the companies that are on this wait-and-see mode are going to put their money to work, and we are sure that we're going to start to see more activity.

[Operator]

We have a question from Ernesto Gabilondo from Bank of America.

[Ernesto María Gabilondo Márquez, analyst]

I have a couple from my side. On the first one, we have seen in the media that the big FIBRAS E wants to be listed in BIVA. So I just wanted to know how has been your new Discount Plan. I don't know if it's really helping troubled clients to go to the competition or is it helping to attract new clients. Any color on this would be very helpful. And then my second question is what happens if we continue to see low activity in terms of equity and fixed income listings? When do you expect it to become an issue for the maintenance fees?

[José-Oriol Par, executive]

Thanks for your question. I would say that I'm not going to talk about announcements from someone else from another exchange. I would say that honesty is one of our main differentiators, and we do not make promises that we cannot keep. So when we say that we are going to have something, it's because we will. But regarding this announcement on the FIBRAS E, I don't know. They have been saying a lot of things that for a couple of reasons, we are not seeing today. As you can remember, the number of companies that they were going to list and the traded volume that was going to increase and in spite that was going to be listed in the first quarter of this year and now this FIBRAS E. So I think that this is a question for them, not for us.

But regarding the activity, I don't know. I think that -- and again, we do not want to say that we are going to have 50 new companies coming in the next month or so. As I just mentioned, we are -- the pipeline looks very poor today on the cash equity side. I would say that's mainly because of valuation. On the contrary, and this was not different in other countries, but we have seen companies buying back. The latest announcement in the case of Mexico was from Santander Mexico. So valuations today look more attractive for a buyback than for an IPO. So -- but in the month of March, the Mexican Bolsa had a very good recovery. There was a big gap in the first 2 months of the year compared to the main exchanges. I think that this is going to help. And again, last year, yes, we had, in the second half of the year, a lot of volatility and uncertainty because of, as you remember, the announcements on potential changes in the banking fees and on the mining industry and a couple of things that created some volatility. We have not seen that this year. So with this environment, I think that the markets will continue to recover. All the money that is in the sidelines, waiting and seeing more stability at some point are going to continue to invest all the companies in new products and opportunities and in expansion plans. So we hope that we will start to see that in the second quarter, and hopefully, we'll have a better second half of the year. But it is hard to say exactly when are -- we are going to see that.

[Ernesto María Gabilondo Márquez, analyst]

So in the scenario that we have a poor pipeline of new listings, when do you think it could become an issue for the maintenance fees?

[Ramón Sarre, executive]

Ernesto, I think the number we have to keep track of, the most important number would be the medium- and long-term listings. If we have a low number there, that will impact us for next year's maintenance fees. This year, revenues will be somewhat -- I'd say that the better performance in short-term listings will help revenues, but for next year, we might start feeling the impact, and it really depends on the runoff. I would recommend that you look at the last appendix, the last pages we put in our press release. There, you have the total number of instruments listed. And there, you could see the new instruments versus the runoff, and that would be your biggest or most -- your best driver for maintenance fees.

[José-Oriol Par, executive]

And regarding the discounts, I think that it's worth mentioning that we requested those discounts for some particular transactions in cash equities for leasing and maintenance. The regulators gave us the authorization on a temporary basis for the first quarter of this year that ended in the last day of March. And at the end of March, we requested once again and they have been requesting from us more information, the authorization to be permanent. We are in the process of that, and we hope that we are going to have some new news from the regulator's side before the end of this month, so in the next couple of days.

[Ernesto María Gabilondo Márquez, analyst]

Perfect. And how has been the feedback from your clients on this Discount Plan?

[Unknown Executive]

It has been positive, of course. All the customers, issuers and any company that makes plays on the exchange welcomes the reduction of the fee. But we're not just doing the fee reduction, we are taking some other steps aside for the pricing, such as commercial efforts now with the new direction and new area, and some other operative processes with -- that will improve the services for the issuers.

[Operator]

[Operator Instructions] The next question comes from Carlos Gomez from HSBC.

[Carlos Gomez-Lopez, analyst]

The first question refers to your venture regarding data that your second half being -- and thank you for the update, and it will be starting operation in the second half. What is your long-term expectation in terms of order of magnitude of revenues of earnings that people are aspiring to with this joint venture? And kindly remind us what percentage do you intend to own? And second, you also referred to the development of the derivatives market in Mexico. What can you do and what can the regulators do to make that market grow?

[Ramón Sarre, executive]

Yes. For the first part regarding the LED initiative, we are hoping to get LED product, the first product by the end of the year, maybe November of this year. So the income expected for this year will be very low. We expect the -- most of the income once we do the -- all the commercial efforts will be reflected on next year. And we will reflect that at the end of the year in our guidance for 2020.

[José-Oriol Par, executive]

Okay. Thanks, Carlos. And regarding derivatives market, as mentioned, it's one of our main challenges. And also, as mentioned before, we are working with the new financial authorities and regulators in addition to some main market players to develop this market. And I think and we all agree, it will not be good for anyone to let the Mexican derivatives markets fail in Mexico. So we will continue to work on that as we really believe that there is a big potential in this market, and -- as we can see in other developed and -- as well as emerging financial markets. And on this side, some of the things that we have been doing is an analysis of what the other developed and emerging markets have on their derivatives side that we are missing. There are some particular things in Mexico, and I would say that the main one is the lack of financial culture and poor education on this side. But there are a couple of things that we're already working in.

And talking to -- looking at other emerging markets, they all have, as an example, derivatives lows. This is something that we do not have in Mexico. In Mexico for the past years, there have been a couple of projects that did not materialize trying to create derivatives low, that is something that we do not have in Mexico, as well as some kind of incentives that we have seen that have been successful in pushing the development of this market in other countries, so we're working on that. And there are a couple of things. And it's -- I think that is something that we will have to work, so not just Bolsa. We definitely need to include the financial authorities, we need to include the market participants, and there are a couple of structural changes that we have to make in Mexico in order to be successful. But again, it's something that in almost all markets exists, and in Mexico, it's very -- it's still a very underdeveloped product.

[Carlos Gomez-Lopez, analyst]

And if I can follow up, in other markets we have seen that equity of rates and forex are the most developed derivatives. What product in particular are you seeing is more hopeful for you in Mexico?

[José-Oriol Par, executive]

Let's say that rate forex and equities, one of the products that have been pretty successful are the IPC Futures. And this is, by the way, something that -- one of the other things that we have been doing is promoting that in the region. And as an example, IPC Futures, probably a year ago in the rest of the region was almost 0. And today, just from Brazilian players, we have close to 40% of the traded volume is coming from Brazil. So something that we did feel that we have potential if we also promote not just in Mexico but outside of Mexico. And also, I will add some new future contracts. One of them is on the electricity side. This is something that we have been working with financial authorities and regulators for the past months. And it's something that I think that would be a very good opportunity because it's something very local. The electricity future contract, that is something that is not going to be traded out of Mexico in other derivatives exchange, and I think that this is a good opportunity. But again, we have been working on that for months. And to create a new contract in other country takes a few days or a couple of weeks. In Mexico, it takes months. So we also need to be much faster in creating new things in Mexico. So we are working on that with -- in particular with the regulators with the CNBV.

[Operator]

[Operator Instructions] At this moment, we show no further questions. Do you have any final comments?

[Ramón Sarre, executive]

Well, thank you very much, and we look forward to updating you for the next quarter. Have a good day.

[Operator]

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