Bolsa Mexicana de Valores SAB de CV

BMV:BOLSAA

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Greetings, and welcome to Bolsa Mexicana de Valores Second Quarter 2024 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Ramón Güémez. Chief Financial Officer. Thank you, Mr. Güémez, you may begin.

[Ramón Sarre, executive]

Thank you. Good morning, and welcome to Bolsa Mexicana de Valores Second Quarter 2024 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 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 the 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, 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 like to remind participants that today's call is being recorded and a replay of this call will be available online on June 26 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 2023, 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 our new CEO, Jorge Alegría; Claudio Vivian, Chief Information Officer; José Manuel Allende, Chief Capital Information, Markets Information Services Officer, Roberto González, Chief Post-Trade Officer; Jose Miguel de Dios, Managing Director of Derivatives; Luis Rene Ramon, Director of Investor Relations; and myself, Ramon Güémez.

I would now like to turn the call over to our CEO, Jorge Alegría.

[Jorge Alegría Formoso, executive]

Thank you, Ramon, and good morning, everyone. I hope you are all doing well today. As you know, we released our earnings results on slide yesterday evening, which provides comprehensive details on the second quarter 2024 results, which we will be discussing during this call.

As mentioned by Ramon, copies of our press release and the slide deck are available at bmv.com.mx under the Investor Relations stack.

To start, I am thrilled to be back at the BMV Group, to lead the company in the coming years. As you may know, I have over 38 years of experience in financial markets, both in Mexico and internationally, including a decade with this extraordinary institution before that plays a crucial role in Mexico development.

In my most recent position at CME, I witnessed a highly competitive market that rapidly develops new services driven by cutting-edge technology. I expect all these past experiences will accelerate BMV Group to the next level.

I am glad to say that I found a very well-run company financially sound, and I want to highlight the organization's efficient operations, cost control and strategic foresight, which I am planning to maintain. This not only reflects past success but also sets up to successfully land our growth projects pending regulatory authorization and paving the way for future growth and innovation.

From what I have seen so far, my initial priorities will be to position ourselves as leaders in innovation and efficiency within financial markets. Basically by continuing with our technology upgrades, introducing new services in post trade, unify our efforts in market data products and services, broaden our customer base, enhance our communications with financial authorities and analyze the convenience of strategic alliances.

In the coming months, my colleagues and I will develop our strategic plans going forward and presented to the Board of Directors and provide more details in our next call.

As for today's call, I will first go over the financial results and provide comments about the quarter, half year and overall environment as well. After that, I will review the results of each division and finally open the door for questions on the conference call line.

With that in mind, please turn to Slide 5, and let's review the financial highlights. We have a very strong set of numbers, driven by increased activity in financial markets. BMV Group generated MXN 1 billion in revenue, up 6%. EBITDA was registered at MXN 556 million, up 7% as we have managed costs prudently. Earnings per share was MXN 0.68, up 10% from the quarter when compared year-over-year.

On the next slide, we'll go over the results for the first half of the year. And after that, we will do a deep dive into each business line. The results for the first half of the year are partially offset by the first quarter performance which was defined by persistent high interest rates and a strong peso. Revenue was flat year-over-year, generating nearly MXN 2 billion. EBITDA was registered at MXN 1.1 billion down 3%, mainly due to FX and lower trading on the first quarter.

EBITDA margin was registered at 56% for the first 6 months of the year and earnings per share were MXN 1.35 per share, flat year-over-year. However, June has been the strongest month in 2024, and we are optimistic about the second half of the year.

FX had a minor negative impact in EBITDA of just MXN 3 million in the second quarter. However, Q1 the variation was significantly larger and amounting MXN 15 million. As you may recall, our 30% -- about 30% of BMV revenue and expenses are linked to the U.S. dollar. So mainly in Information Services and the Central Securities Depository-Indeval. All in all, the negative impact of -- in EBITDA for the first half of the year was MXN 18 million.

Now please turn to the next slide on revenue by business line. Capital formation for the listing of equity, debt and alternatives as well as annual maintenance contributed this quarter with 13% of BMV Group's revenue. Transactional businesses, which consist of equity trading and clearing derivatives trading and clearing and OTC trading generated 37% of revenue. Information services made up of data, analytics, indices, valuation of financial risk management services have a 18% weight.

The Central Securities Depository-Indeval, which is responsible for the custody settlement and global market services, mainly cross-border transactions, participated with 28% of revenues. The softer performance in information services and OTC trading is in large part, attributed to FX inflations. We have to keep in mind that FX movements affect our top line, but also influences investor behavior, which is evident by the results in equity trading, clearing and settlement in the global market or FIC. Nonetheless, as mentioned before, we anticipate more dynamic market in the second half of the year.

Now please turn to Slide #8 to go over equity trading and clearing. Revenue and cash equities trading and clearing was up 15% when compared to the second quarter of last year. The average daily traded value of BMV was registered at MXN 16 billion, up 12%. Local market was up 20%, while the global market decreased 3%. I would highlight that June was the best month so far with average daily trading volume of over MXN 20 billion. As mentioned before, the investor behavior is influenced by the strength of the peso, leading to a shift in the mix between local and global markets. Furthermore, BMV's market share was registered at 81%, relatively stable versus the previous quarter.

As for CCV, revenue was up 19%, while the total average daily trading volume for both Mexican exchanges was up 50%. This is explained by lower number of cross trades in the quarter.

Let's go to the next slide to review the results. Revenue in derivatives, trading and clearing was up 11% in the quarter, mainly due to higher trading in SWAPS and IPC futures, partially offset by lower trading in dollar futures. The average daily notional value for our dollar futures contracts was $268 million daily, down 18%, while the open interest decreased 16%, during the March rollover, market participants prefer to trade longer-term positions favoring September and September open interest expirations instead of the June 1. Moreover, we are still working approvals with authority to lease the mini-dollar futures.

As for SWAPS, both the average notional value and open interest recorded at the end of June, are now at historical highs at MXN 3.9 billion and MXN 18.5 billion total open contracts in the market. The increase in volatility and uncertainty about interest rates caused by central banks benefit this market.

While in Asigna, the average margin deposits were MXN 43.8 billion for the quarter, showing an increase of 31% and MXN 42.9 billion up to June, and it is up 20%. This is attributed to a record high in the open interest of SWAPS and excess margin deposits.

Let's move to Slide 10 for OTC trading results. In SIF ICAP, OTC trading and value-added services revenues decreased [ MXN 10 million ] or 5%. SIF ICAP Mexico of MXN 3 million, primarily due to lower CO2 emissions compensations via our carbon credits from Mexico CO2. Meanwhile, revenue at SIF ICAP Chile was down MXN 7 million FX inflation.

Let's go to Slide 11, where we have the figures for capital formation. Listings performed strong in the short-term debt market with revenue increasing 7%. In short-term debt, 357 issuance were placed in the second quarter of 2024 when compared to issuance 321 in 2023. While in long-term debt, 16 issuance compared to 25 issuance last year, no equity listings or follow-ons during the second quarter, but it is mentioned that Fibra Prologis and FIBRA MTY conducted primary public and private offerings of certificates during the first quarter of the year for MXN 17.5 billion.

I would also like to mention that the secondary rules to the amendments of the securities market law continues on the review for simplified listings. BMV is carrying on a program called the De Cero a Bolsa, which means from zero to the stock market with the goal of explaining all participants, potential companies, the benefits of issuing debt or equity in the market and process to get there. We will review the small print and work together with financial authorities and intermediaries to make this possible.

Regarding maintenance, the Revenue was up 3%, given that the number of outstanding issuance in 2023, which generated revenue in 2024 was slightly above the 2022 year. Furthermore, as for June 2024, BMV has now 502 outstanding long-term debt issuance when compared to 485 in December '23. So this could materialize in revenue growth for the upcoming years.

Moving to the Central Securities Depository on Slide 12, we can see Indeval, revenue was up 12%, driven by an increase in assets on the custody and a higher number of cross-border transactions in the global market. Total assets under custody increased 12% to MXN 38 trillion. The pension market reform continues to show its effect in the numbers and we foresee a gradual but sustained benefit from this initiative on the next 6 years.

Furthermore, in May, we successfully accelerated the settlement cycles to T+1 in line with the U.S.A. and Canada to better serve market participants by offering a more efficient transactional mitigating settlement risks.

We are also progressing with the implementation of the new platform to modernise Indeval and CCV's infrastructure. This is a 3-year period project that will replace our in-house development with NASDAQ technology and pave the way for future new services.

Finally, on Slide 14, moving to Information Services that are composed of market data and Valmer, reached MXN 186 million in the second quarter of 2024, up 6% or 3% -- sorry, up MXN 6 million or 3%. It is relevant to mention that the appreciation of MXN peso against the U.S. dollar registered a negative impact of MXN 5 million in the second quarter and MXN 25 million year-to-date.

In Valmer, we have decided to stop commercializing open finance a software for portfolio management that in annual terms, the sales from this software represented MXN 16.4 million in revenue, about MXN 15.7 million in expenses in 2023. So under consulting fees. As a result, we foresee no impact at all in operating revenues and bottom line.

As mentioned in previous calls, our focus remains on expanding our presence in North America and strengthening our alliance with Deutsche Börse to distribute our data in Europe. We are also targeting new clients like digital banks and fintech companies, which with our transition to the cloud and new distribution models, as I mentioned initially, will drive future growth.

All in all, our diversified business model has played once again an important role in the results. Going forward, we anticipate a shift in monetary policy trends as mentioned, a more stabilized foreign exchange landscape and increased activity across all financial markets.

Now let's take a look at our operating expenses in Slide 14. Operating expenses in the first 6 months of 2024 were MXN 984 million, up only 3% or MXN 29 million, which are mainly explained by 2 concepts. MXN 30 million, explained by personal expenses or annual wage increase and MXN 11 million in technology and depreciation expenses due to the segregation of our post-trade infrastructure, and the evergreen projects aimed to ensuring all our platforms run smoothly and securely.

And finally, to summarize, please turn to next slide. BMV Group delivered positive recurring results in the second quarter of 2024, mainly due to higher trading and transactional businesses and an increment in the assets under custody. EBITDA margin remained constant at 55% and net income was recorded at MXN 385 million, up 8% compared to the second quarter of 2023. The FX impact in the second quarter was significantly less pronounced compared to the one in the first quarter.

Our capital expenditures in technology during the first semester of 2024 were MXN 104 million, in line with our investment plans. The strategic steps we have taken to accelerate the technological evolution of BMV Group, will enable us to better serve our customers in the future and both NASDAQ for post-trade and evergreen projects, as mentioned, are well on track.

Currently, our primary focus in the rollout of the central counter-party services for fixed income, beginning with cash trading of Mexican government bonds, this project leverages on CCV's financial market infrastructure, which currently only supports equities. It hasn't been authorized in the second quarter as we anticipated, but we remain committed and in close collaboration with financial authority to advance as fast as possible in the approval of these strategic projects.

A key prerequisite for initiating operations is ensuring that trading platforms and clearing members are fully authorized and prepared to settle bonds to our CCV. We maintain our leadership position in capital formation and equity trading due to the trust that customers have in BMV Group.

Thank you for connecting today and listening to my remarks. As mentioned, in the upcoming months, we will be developing our midterm strategy, focusing on new services and market data powered by cutting-edge technology, supported by strengthening communication with authorities and our customer base. Again, I am delightful be part of this remarkable institution and I am looking forward to meeting and working with all of you in the future.

I thank you for your time, and together with my colleagues, we are now gladly addressing any questions you may have. Thank you very much.

[Operator]

[Operator Instructions]. The first question comes from the line of Ernesto Gabilondo with Bank of America.

[Ernesto María Gabilondo Márquez, analyst]

I have 3 questions from my side. The first question will be on Jorge's new vision for Bolsa. José-Oriol did a very good job in maintaining OpEx under control, although I think there were some questions on the revenue side. So I would like to see your initial thoughts on your new strategy at Bolsa. And what will be your strategy to prevent future delistings in the Mexican exchange or to prevent have more listings in the U.S. when compared to Mexico.

For my second question will be to the earnings inflection point that we saw during the quarter. There were like 4 quarters in a row with earnings contraction year-over-year, and we finally saw this inflection point. So just wondering if this could be maintained and what do you think could be the rationale behind it?

And for my last question will be on your new projects and the regulatory framework, you can share with us any color, any update on the time line of the counterpart for the bonds market. And what is the last update on the broker's regulation and things will be very helpful.

[Jorge Alegría Formoso, executive]

Thank you for your question. Let me address the first one, and then I'll pass the word to my colleagues here. I guess I've been 5 weeks in the job again. But so far, I have been quickly adapting having a lot of biddings outside the Bolsa with customers, largest participants and financial authorities, as mentioned during my call. I think we are going to be focusing a little bit more on getting closer to customers that this is not only a broker-dealer community, which are our main sales force to put it that way, but also going a little bit more aggressively internationally after customers, the end users as well as the Mexican investor base.

I firmly believe that having a more comprehensive market data product offering will be key. Taking advantage not only from what we are doing today on market, but also eventually adding fix income information as well. So I think we have a good product to create on the market data strategy going forward. And that's initially and maybe this will answer also part of your last question, which is I firmly believe that the fixed income market is moving to electronic platforms. And we will be working hard in delivering not only the clearing for fixed income products, which are, I would say, well underway. I had meeting already with more relevant authorities to discuss plans. I'm optimistic about the time frame on having central counterparty for bonds as the key element to be able to offer electronic execution as well for fixed income products both for Mexican and international participants. This is initially the decide on the strategic side. We will develop a more detailed plan as well to include derivatives as well.

I will pass the word on the earnings inflection point. I will ask Luis Ramon to go over that. And I don't know if with that, I already answered your last point.

[Ernesto María Gabilondo Márquez, analyst]

Thank you, Jorge. Before going to Ramon and I wish you the best on this new process. Just a follow-up in the last one in terms of the regulatory framework. I don't know if you have any update on the Mexico securities law because we thought it was coming, I think, during this next month. So any update on that will be helpful.

[Jorge Alegría Formoso, executive]

Just last -- well, I would say the first and last meeting I had with the authorities just was 2 weeks ago. It was very positive. They were, I mean, very, very close to move forward on publicizing and publishing the secondary ruling that talks about the more easy access or more friendly access to the more debt and equities, a simplified approach. I mean, they were talking about weeks. Hopefully, that will happen.

And then they want to move forward after that to the hedge funds regulation. But I don't have uptime where they didn't disclose that in more detail. But definitely, my impression is that they were very, very close among the 3 authorities to finalizing details for the simplified approach for listings on debt and equity.

[Luis Rene Ramon, executive]

As for your second question, Ernesto, I think the second quarter means an inflection point. We are happy to be once again on our top line above MXN 1 billion. We are seeing volatility come back to the market. And the second semester, we're going to have, well, the U.S. is going to have elections. We're going to have 1 president that is very positive about infrastructure and knows that we have to take advantage of this near-shoring opportunities. So we expect a more dynamic market and hopefully, this goes also into the value traded at Bolsa. So this is an inflection point. Last 4 quarters, we're below MXN 1 billion, and we're very positive about the second half of the year.

[Ernesto María Gabilondo Márquez, analyst]

Excellent. Perfect. And just last question in terms of guidance during the pandemic both on top providing guidance as well as other Mexican financials that then all of them are already providing guidance in the past, Bolsa was kind of guiding EBITDA margin and a range on the net income growth. Is this something that you can evaluate now for the future to provide again guidance?

[Ramón Sarre, executive]

Ernesto, we'll definitely look at it. But right now, the direction we have is that we do not provide guidance. But we definitely will.

[Operator]

Our next question comes from the line of Edson Murguia with Summa Capital.

[Edson Murguia, analyst]

And happy to work with Jorge and all the team and Mexican stock exchange as a market participant. My first question is relating to the initial strategy priority that Jorge mentioned specifically about the retail market. Because when you analyze the number of accounts with the Bolsa builders has been increasing since 5 years ago. So my question is, do you have a plan in order to achieve more market participant from the retail side of the business?

And my second question is to follow up on what Jose said about the derivatives. Because I'm thinking about new products and what is happening around other markets. So my question is, looking ahead, is there a possibility in the midterm plan that we or you are considering consumer base to exploration options as a new product for the coming years?

[Jorge Alegría Formoso, executive]

Well, thank you, Edson, and nice meeting you. Let me try to be as straight as possible. Yes, when I spoke about the broaden our customer base, it definitely includes retail. We are working on a retail strategy, what we need to do in terms of our product offering to help local participants or international participants to provide access more efficiently to our markets for retail. We are aware of the huge growth of this segment in other emerging markets, even in Mexico, not necessarily in the Mexican market, but even Mexican retail customer base that we want to attract to our exchange. We have several initiatives, no concrete conditions defined yet, but are based on liquidity providers on some of the names for Mexican stocks to enhance our market maker plans, to have more -- a better market and price formation on screen or liquidity development on the both sections on local and international section.

But also looking for incentives for retail customer participants. In terms of economic incentives of a new structure that will allow, let's say, more efficient access in general for retail investors that are trading in very small amounts that may be facing because of that, not so efficient costs of execution. We need to analyze that, and we are analyzing and working with the market on providing that as one of our plans to attract retail participants to our market.

As for the 0-day options, if I understood correctly, here's Jose Miguel to address the question.

[Jose Ramirez Miguel, executive]

Yes, we are analyzing the possibility to list 0-day options. And 0-day options or maybe weekly options. So we are in analyzing the possibility. But it's a very good option.

[Edson Murguia, analyst]

Okay. And my last, if I may, regarding on Valmer, in the press release, you mentioned the revenue were MXN 111 million. And my question is, Valmer Costa Rica, how much represents for that revenue as overall from Valmer?

[Ramón Sarre, executive]

It's about 3%, 1% to 3% of Valmer revenue. So it's really -- don't spill the coffee over it.

[Operator]

Next question comes from the line of Carlos Gomez-Lopez with HSBC.

[Carlos Gomez-Lopez, analyst]

I'll first welcome to Mr. Alegría, and we look forward to meeting you and talking to you in the future and wish you a lot of success.

Our first question coming into the role. I mean you were here next many years ago. How do you find the company coming in compared to what you left? And how do you think it has evolved over the years, that's very generic. I realized, but what's your first impression?

And second, as you review your strategy, do you expect to make any changes to your capital management policy. Right now, you're paying out about 80% in earnings, buying back about 20% of the remaining earnings. Is that something that we should expect to continue? Or it will be under review?

[Jorge Alegría Formoso, executive]

Thank you, Carlos. Let me address the second one. So far, we are not expecting any change on our plans. And what I can tell you on next year side is, I think there are good changes on, especially on the SWAP initiatives. I think we have a good opportunity as the Mexican market is moving to a new rate, kind of the LIBOR to SOFR transition in the U.S. market. Mexico is moving from Tier 28 days to funding Tier. We have an opportunity to position next year there position and to help to develop more liquidity in the local market.

And MexDer and Asigna, together with the clearing members are working on some initiatives to improve collateral management. So I think what I found is a little bit more focused, which I think is the right thing to do on capital, providing capital efficiencies to customers. I think we have -- on the fixed income side, the right mix of products, but we need to leverage our capital efficiencies provided by executing or trading in a regulated venue and clearing on Asigna or the CCP. That's a very general overview of the -- I found the -- not only makes their as a company, but also the local participants interest in Asigna products as very -- I mean to plan for exciting times coming ahead.

[Carlos Gomez-Lopez, analyst]

And on the dividend?

[Ramón Sarre, executive]

There is no changes expected there for the time being, Carlos.

[Operator]

Next question comes from the line of Marlon Medina with JPMorgan.

[Marlon Robles, analyst]

And I have a very quick one on cash flow because we saw operating cash flow declining around 5% year-over-year in the quarter and this caught our attention because earnings actually grew around 8% year-over-year. So can you help us understand what drove the decline in cash flow, please?

[Ramón Sarre, executive]

Marlon, how are you and cash flow generated in the quarter you mean?

[Marlon Robles, analyst]

Yes. I mean operating cash flow, we get like the cash flow in the quarter was like MXN 466 million, and this is like 6% below the second quarter of last year. So we just wanted to understand why the decline when earnings were growing?

[Ramón Sarre, executive]

So we have a couple of things going on. One is the prior earnings were, especially in June, June was a very good month. So you have very good revenues for Indeval and the cash equity trading and CCV, which are built in the last day of the quarter and are collected during the first week or first couple of days. So that's one portion of it. And the other one is you have more annual fees or, let's say, or advanced fees collected for information services. So between those 3 effects explain this increase in our accounts receivable. We are not expecting or we're not seeing any decrease in the actual cash flow or in the cash management of the company. But happy to go over more detail if you want, after the call.

[Operator]

Ladies and gentlemen, we have reached the end of question-and-answer session. I would now like to turn the floor over to Jorge Alegria for closing comments.

[Jorge Alegría Formoso, executive]

Well, Again, I would like to thank you all for attending this call. I think we delivered a strong numbers, strong results, and this has paved the way for an exciting start of my administration, and I look forward again to see you all discussing plans and strategies moving forward. But above all thank you very much, and hope to see you all in the near future.

[Operator]

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.