Bolsa Mexicana de Valores SAB de CV

BMV:BOLSAA

Earnings Call Transcript 2018-Q2

[Operator]

Welcome to the Q2 2018 Bolsa Mexicana de Valores, S.A.B. de C.V. Earnings Conference Call. My name is Sylvia, 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 Ramón Güémez, CEO (sic) [ CFO ]. Mr. Güémez, you may begin.

[Ramón Güémez Sarre, executive]

Thank you. Good morning, and welcome to Bolsa Mexicana de Valores Second Quarter 2018 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 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 the individual countries in which Bolsa does business, such as changes in 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 July 19 at Bolsa's corporate website, www.bmv.com.mx.

During this call, all figures are in Mexican pesos and compared to the second quarter of 2018 (sic) [ 2017 ] 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; Roberto González, SVP of Indeval; Luis Rodriguez, Chief Technology Officer; Catalina Clave; SVP of Clearinghouses; Gabriel Rodriguez, SIF ICAP CEO; Alfredo Guillén, Chief Operating Officer; Jose Miguel De Dios, MexDer CEO; Roberto Gavaldón, Director of Communications; Luis René Ramón, Director of IR; and myself, CFO.

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 to discuss Grupo BMV's second quarter 2018 financial results. I am pleased to report that yesterday, we released very strong results, with good income growth across our core business area.

At the beginning of the year, we laid out 3 execution priorities for 2018, which were: One, to advance our competitive position in our core businesses; second, to reinforce our technology and business continuity strategy; and third, to look for inorganic growth opportunities.

On the first point, our revenue increased by 25% to MXN 918 million with the strong growth at Indeval, cash equities trading and clearing, listings and maintenance, SIF ICAP and market data.

Our expenses were well under control, increasing in 3 main items: First, investments in income-generating technological project, Indeval global market, SIC; second, larger amounts of securities in custody abroad; and third, a provision for the purchase of the remaining 20% of the shares of SIF Chile.

Operating profits and EBITDA increased at 35% and 34%, respectively. And net income rose at 43% to MXN 367 million for the quarter. The EBITDA margin was registered at 57%, which contributed to a year-to-date EBITDA margin of 56%.

Regarding the second item. During this quarter, we invested in technology to enhance our information security and business continuity plan. Additionally, we continued investing in income-generating projects, such as the automatization for the transmission and reception of information from the global market SIC and the connection with the international custodians.

On the last point, we are still looking for inorganic growth opportunities in the analytics space to further capitalize on our data and provide deeper insight and value-added services to our clients. We will let you know as soon as we have a clear business opportunity.

Let me now review our quarterly financial results in more detail.

In cash equities trading, revenue increased by 27% to MXN 85 million as volatility and operating volume improved. The average daily trading volume was recorded at MXN 16.7 billion, 24% higher compared to the second quarter of 2017. The domestic market and global market SIC increased 9% and 53%, respectively, mainly because of uncertainty in the NAFTA negotiations, depreciation of the peso versus the U.S. dollar and the Mexican presidential election. Following the elections, I am glad to say that the operations at the Mexican Stock Exchange were carried out in a regular, orderly manner and within the usual schedule.

Cash equity clearing increased by 32% to MXN 59 million as a result of increasing operating volume and fewer number of cross-traded securities that only need to be registered but not cleared. Derivative revenue reached MXN 21 million in MexDer, which resulted in a similar amount of income to that observed in the second quarter of 2017 as lower trading and higher data sales offset each other.

As for the derivatives clearing, Asigna revenues declined by 14% to MXN 31 million due to lower clearing volume. Additionally, the average margin deposits for the quarter were MXN 37.4 billion, 7% lower than the second quarter of 2017.

SIF ICAP revenue increased by 31% to MXN 170 million as a result of higher sales in Mexico and Chile by 46% and 21%, respectively. In SIF ICAP Mexico, there was a onetime extraordinary income for MXN 12 million due to the resolution of a labor lawsuit.

Custody revenue rose by 59% to MXN 232 million, explained by higher activity in the global market SIC and the improvements to the business model, which generated MXN 58 million in the quarter. As of the next quarter, the growth rate will decrease because the services related to the SIC began in the third quarter of 2017. Since its inception, this business line has grown at MXN 11.4 million per quarter.

Information services increased by 10% to MXN 114 million due to extraordinary nonrecurring audit-driven revenue. Excluding this onetime event, information services increased 3% compared to the second quarter of 2017.

Listing and maintenance revenue rose by 12% to MXN 171 million. Listing revenue increased 26% versus second quarter of 2017 as a result of a greater number of issues in the short-term debt. The listing of 3 CKDs; 1 CERPI; 2 FIBRAS, Fibra Educa for MXN 9,430 million and Fibra Upsite for MXN 555 million; and a FIBRA E, Prodemex, for MXN 6,135 million. Maintenance revenue increased by 10%, explained by listings in previous years.

We continue with our promotion effort with potential and current issues. In the first half of 2018, 24 new issuers were listed, 9 in the debt market, 8 in CKDs, 3 in FIBRAS (sic) [FIBRAS E], 2 in FIBRA E (sic) [FIBRAS], 1 SPAC and 1 CERPI.

The amount placed in medium- and long-term debt during the first semester of 2018 resulted in a historical record of MXN 181.7 billion issued compared to MXN 98.9 billion in the first semester of 2017. These listings will generate maintenance revenues in 2019.

Expense for the quarter amounted to MXN 416 million, up 14% or MXN 51 million compared to last year second quarter, which is explained by 3 items.

First, technology expenses that increased by MXN 20 million or 29% explained by investments in income-generating projects, such as the automatization for transmission and reception of information from the global market SIC and the connection with international custodians as well as investment to reinforce information security and business continuity.

Second, to custody, presented an increase of MXN 11 million or 61% compared to the second quarter of 2017 and MXN 1 million or 5% compared to the first quarter of the year due to the growth in the number of securities in custody abroad for the global market SIC. This concept is directly related to higher income in Indeval, an evaluation of supplier is being carried out in order to consolidate providers and lower the fee in the second half of 2018. Others increased MXN 4 million or 24% due to the provision for the purchase of the remaining 20% of the shares of SIF Chile.

The revenues and expenses result of the quarter led us to a record-high operating margin of 55% and an EBITDA margin of 57%. The tax rate was 29%, in line with 2017. Net income was registered at an all-time high of MXN 367 million, 43% higher than the figure for the second quarter of 2017, also influenced by the strong financial performance and solid growth in BMV's subsidiaries.

For the half year, BMV have reached a record EBITDA of MXN 991 million, 20% higher than the same period of 2017. The EBITDA margin was 56%, 138 basis points are both reported in the first semester of 2017. And the net income was MXN 685 million, 28% higher.

Let's now turn to cash flow and balance sheet. The cash balance at the end of June 2018 was MXN 2.7 billion, a decrease of MXN 172 million as a result of the net effect of dividend payments, maintenance fee collected in advance and the Indeval loan payments. The current liabilities increased against December in MXN 339 million due to the maintenance fee collected in January 2018.

CapEx was MXN 26 million for the quarter, which were mainly invested in technology. Regarding the Indeval loan, we still have MXN 529 million outstanding.

I would also like to comment that on May 11, we paid MXN 1.51 per share dividend to our shareholders. This dividend is equivalent to a 77% payout ratio and a 4.23% dividend yield.

With regards with the venture of the new stock exchange, we expect them to start operations this month. In spite of the difficulty of monetizing the expenses related to the other exchange, we estimate that this quarter, Grupo BMV spent another MXN 25 million. This includes technology expenditures as well as the opportunity cost of time dedicated by Bolsa senior management and employees.

Lastly, I would like to recognize BMV's 10-year IPO anniversary, an important milestone in our 124-year history. We are proud to celebrate this while we look forward to the future. During this period, our stock price performance was 120% with a 4% average dividend yield, which results in more than double the IPC index performance. We are grateful for our customers and employees who have made BMV a catalyst for Mexico's economic progress. We will not be celebrating these achievements without them.

So to summarize, we delivered a strong set of numbers for the first half of the year. Mid-double-digit revenue growth, alongside the strong expense control, produced 20% growth in operating income. And positive comprehensive financial income and dividends from our strategic investments yielded a 28% increase in net income.

Our commitment to executing on our strategic plan, innovating to serve customers and generating positive economic value for our shareholder continues to deliver strong results and profitability records.

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

[Operator]

[Operator Instructions] And our first question comes from Ernesto Gabilondo from Bank of America Merrill Lynch.

[Ernesto María Gabilondo Márquez, analyst]

A couple of questions from my side. When we look to the quarter, the top line was driven by the volatility in the Mexican market due to NAFTA negotiations, the presidential elections and the peso depreciation. So the volumes of the quarter were influenced by those factors. However, with market participants giving the benefit of the doubt to the new government, do you think there's still room to keep seeing higher volumes and new listings? Also, I know that you never change the guidance, but from what we have seen in the first half of the year, are you more comfortable to achieve your full year targets? My second question has to be on competition, given that BIVA is expected to become operational on July 25. So far, I have heard that they are testing a 10% discount to the current trading prices. I believe this is not so aggressive. I think Bolsa's prices are already competitive. I think they are almost the same as the London Stock Exchange and are about 15x lower than the BOVESPA. So besides pricing, have you heard what new products or offering they would like to introduce? I remember the potential block trades, stock pools and anonymity books, but I also think that they can done by Bolsa once they become operational. So just want to know any additional information you may have on competition and if you still think they should not be a major concern for Bolsa.

[Ramón Güémez Sarre, executive]

Ernesto, relating to guidance, we're at the top end of the range that we set out. So I think we're well underway to meet our guidance. I think we had very good revenues for the second quarter. We'll see how the -- see how those continue for the next 6 months. SIF ICAP had very good results. Indeval also had very good results. So I think we're well on our way to meeting our guidance. We're definitely not -- let me say, were not beginning to celebrate that we've already beat the year. I think we still have a lot of work to do. Regarding your other questions, I'll pass it on to Oriol.

[José-Oriol Par, executive]

Yes. Regarding the other questions, yes, Ernesto, it is true we had, had the benefit of higher volatility during the first half of the year, but I think that you have to keep in mind that we have pretty good diversification at the Bolsa in different businesses. So when we have higher volatility, probably, we are going to see the benefit on the trading side. But if we have more stability, we are going to see the benefit on the listing side. So I think that we have -- we are okay and we're also expecting to have a second half of the year, maybe in different business areas than the first half of the year. And this has been the case in other quarters. Regarding the question on BIVA. Yes, as mentioned, apparently, BIVA is going to start in a few days on July 23, 25. But what the local regulation is requesting to all different participants, including us, is to be ready by July 23. From our side, with all different companies, meaning Bolsa, Contraparte Central de Valores and Indeval, we are going to be ready on time as requested. To be honest, by this time, we've already -- we are all tired of meetings, test, paperwork, more meetings and a lot of times and resources dedicated to BIVA, as already mentioned. So if there is no new delay, we'll be very happy coming back to our main business, focusing on developing and growing the Mexican exchange market, providing an efficient market technology, environment for trading, creating new financial product, helping companies to raise money, generating employment and contributing to Mexico's economic growth. So we're ready for the competition. And you were also asking about our pricing. Our pricing, yes, obviously, BIVA is going to differentiate. And the only way as far as we know is via pricing. But as you mentioned, our prices are very competitive. And you cannot compare just the prices. When you are looking for a product or a service, you have to compare a lot of things. So I cannot talk for BIVA, but I can talk for the Bolsa. As you know, we're a public company, so you all know our numbers, you all know of our financial statements. We have a 124-year track record. We have been demonstrating our capabilities, our expertise. We have a great and proven technology. By the way, our technology, we have not had any problems, any halt, for more than 1 year. So there are a lot of things that I think that can explain the difference in pricing. So at the moment, we are just going to waiting and see, but not making any kind of adjustments.

[Operator]

Our next question comes from Gabriel Nóbrega from UBS.

[Gabriel da Nóbrega, analyst]

I remember that in the previous call, you had said that you wanted to keep costs flat for this year. But during the quarter, we actually saw your expenses accelerating and growing around 14% year-over-year. I just want to get more color from you on the main reasons for this and if you still believe the costs could remain on a relatively flat basis. And I'll make a second question after that.

[Ramón Güémez Sarre, executive]

Gabriel, thank you. Our goal was, in effect, to keep costs as flat as possible. Cost have increased in our -- in 3 main areas, as we mentioned. One was sub-custody fees. Let me say this, this cost relates to the amount of international custody we have, and it's a cost that's generating income on the other hand. So if this business grows, if the custody business grows, our cost will grow, so will our revenue. So we're not concerned on that side, I would say. Regarding another cost, which is the SIF ICAP put, that will -- we will see an increase during the year, but that will net out in Q4 because last year, we registered that in Q4, so that growth should be contained. We are growing on personnel. SIF ICAP's stronger-than-expected revenues also bring additional headcount costs because of the compensation scheme. And we do have the expense related to the SIC project of -- in Indeval. So while costs are growing, we're -- Let me say, we're not very concerned because they're growing in very focused areas which are also income-related, which would be: The headcount increase in SIF ICAP, the SIC project in Indeval and the sub-custody fees. The other -- the SIF ICAP put, that will net out at the end of the year. So no -- we will not end flat because of these initiatives, and -- but we're -- as I said, we're not very concerned about this growth.

[Gabriel da Nóbrega, analyst]

All right. And my second question is actually relating to your derivatives business, especially MexDer, which have been lagging behind equities. Is there any action that you plan on doing to actually improve that? Maybe offering new products to be able to develop the derivatives market in Mexico?

[José-Oriol Par, executive]

Yes, Gabriel. Derivative is clearly the business area where we are still lagging, and definitely is a -- and it continues to be one of our priorities. So we are working on developing a plan, even as a request of our board, to grow the market. And this would be a plan that is not just the Bolsa, MexDer, Asigna. We need -- if we want to really develop the derivatives market, we have to work together and teamwork with the financial authorities as well as market participants. But clearly, this is a long-time past due that we have in Mexico.

[Operator]

Our following question comes from Alex Spada from Itaú.

[Alexandre Spada, analyst]

I have a couple of questions. The first one is, you recorded a very strong quarter in the equity division with record-high volumes, particularly in the global market. So my question is to which factors do you attribute the continuous growth in this particular segment, especially when we compare to the local market? And then I'll come back with another question.

[José-Oriol Par, executive]

If we look at the past years, the local market has not been growing significantly, it has been pretty stable, meaning the -- in the past 5 year. And the growth that we have seen is in the SIC, in the global market side. If we take the past 5 year, 5 years ago, we had around 700 listings in the global market, including stocks and ETFs. Today, we have more than 1,500. So we have doubled the amount of stocks and ETFs listed in the SIC in the past 5 year. And in addition, there is some correlation between the peso-dollar volatility and the traded volume at the SIC. When we have more volatility, there is more activity because some investors, such local players, are investing in dollar-denominated values listed in the SIC as a way to take a peso -- or dollar position with some fiscal advantage. That's for -- basically for individuals. So I think that this explained part of that. But probably, and coming back to the first question from Ernesto, if we see lower volatility in the second semester, is this going to be -- have a big impact in the global market? The answer is no because we are going to continue to list more values, more stocks, more ETFs, and this is going to compensate.

[Alexandre Spada, analyst]

Okay. That's clear. And my second question, the listing business had a quite strong first half in 2018. Do you believe it was somehow caused by some anxiety related to the Mexican elections, to the point that now, past the elections, we should see a slowdown in that business? Or the signs or the pipeline that you have points to a solid second half of 2018 as well in the listing business? Of course here, I'm not referring not only due to debt but also to FIBRAS and to other types of securities that you list.

[José-Oriol Par, executive]

Okay, Alex, yes, as you mentioned, we had a pretty good activity in -- on the listing side in the first half of the year, and maybe more than what we were all expecting because of the NAFTA negotiations, the presidential elections. So as mentioned in the call, we had 24 new names coming to the market in those 5, 6 months, including all different products. So the breakdown of those 24 is, 9 new names in debt, 8 in CKDs, 3 in FIBRAS E, 2 in FIBRAS in REITs, 1 SPAC and 1 CERPI. This is -- if we compare that 24 names, this is more than in the first half of last year. During 2017, we brought 38 new names to the market in all different products, so it was good. However, we still have a pretty good pipeline for the second half of the year. We have a couple of names on the debt side. We also have 4 FIBRAS, FIBRAS REITs, that 2 of them could be -- are on the public side and could be coming in the next weeks as it is the case of the FIBRA Stay and FIBRA Storage. We also have 1 FIBRAS E. We have more than 10 CKDs. And we also have more than 10 CERPIs. And I think worth mentioning that we're expecting pretty good activity in CERPIs during this second half of the year because some change in the regulations for the local pension funds for the Afore that are now going to be very interested and looking to invest in CERPIs for the CERPI is similar to the CKDs, but their main difference is that they can be investing in companies and projects out of Mexico. So because of that, I think that the pipeline still looks pretty solid for the second half of the year.

[Operator]

Our following question comes from Mohammed Ahmad from FGP.

[Mohammed Ahmad, analyst]

My question is regarding the technology cost. Coming out of Q1, the expectation was that you were trying to spread it out over the full year. Therefore, the year-over-year number wasn't going to be as high. Can we get more specifics on what is the driver behind the increase in cost there, particularly in Q2? And has anything changed since Q1 with regards to the cost -- sorry, investment in technology? And then I have a follow-up.

[Ramón Güémez Sarre, executive]

Yes. What changed, or let me say, the increase in cost is related to 2 things. A portion is the SIC project and another is cybersecurity-related expenses and the upgrading of technology -- of our technology base in general and security around our network. That what's drove the increase for Q2 versus Q1.

[Mohammed Ahmad, analyst]

So should we expect this as the new sustained level of technology investing? Or is there something sort of like unusual there, and that it can actually go down in the second half, based on the Q2 annualized level?

[Ramón Güémez Sarre, executive]

I would work with the Q2 annualized level.

[Mohammed Ahmad, analyst]

Okay. So it's a sustained increase in that cost.

[Ramón Güémez Sarre, executive]

Yes.

[Mohammed Ahmad, analyst]

Okay. My second question is related to the onetime impact that you sort of talked about. Actually, both those questions are more related to just -- you said in your comments that there was a onetime impact in the info services. Therefore, the actual growth was a bit different. Could you sort of give me the number there again, and the cost number for the BIVA launch, the extraordinary cost there? I was unable to take those down.

[Ramón Güémez Sarre, executive]

The onetime impact for what? Sorry.

[Mohammed Ahmad, analyst]

For the information services. You said the revenue growth was 3%, versus, I see 10%.

[Ramón Güémez Sarre, executive]

It was around MXN 6 million that we have -- MXN 6 million, MXN 7 million that we have of nonrecurring revenues for -- sorry?

[Mohammed Ahmad, analyst]

In Q2, you had nonrecurring. So it wasn't the base effect from previous year. It was this year, you had MXN 6 million in nonrecurring revenue.

[Ramón Güémez Sarre, executive]

Yes, because the result of audits where some customers were reporting less consumption that was actually happening.

[Mohammed Ahmad, analyst]

Okay, I understand. And the cost associated with BIVA launch, the nonrecurring?

[Ramón Güémez Sarre, executive]

That won't be a cost that will disappear once BIVA launches. It's our estimation. As we say, it's part of the technology improvements we have to make and also the opportunity cost in terms of the time we have to dedicate to BIVA-related things. We estimate it's about MXN 25 million.

[Operator]

We have no further questions at this time. Mr. Güémez, any final remarks?

[José-Oriol Par, executive]

Yes. Thanks to all participant. Thanks for your attendance and thanks a lot for your questions. And if there is any other question, please let us know. Thanks, and have a great day.

[Operator]

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

[José-Oriol Par, executive]

Thank you.