Bolsa Mexicana de Valores SAB de CV

BMV:BOLSAA

Earnings Call Transcript 2018-Q3

[Operator]

Welcome to the Third Quarter 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, CFO. Mr. Güémez, you may begin.

[Ramón Sarre, executive]

Thank you, good morning, and welcome to Bolsa Mexicana de Valores Third 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 the individual countries in which Bolsa does business, such as changes in monetary policies and inflation rates, 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 18 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 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 Barrera, SVP of Indeval; Luis Rodriguez Mena, Chief Technology Officer; José Manuel Allende, SVP Strategic Planning and Issuer Services; Alfredo Guillén, COO; José Miguel de Dios, MexDer CEO; Luis René Ramón, Director of Investor Relations; and myself, Ramón Güémez, CFO.

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

[José-Oriol Par, executive]

Thanks, Ramón. Good morning, everyone, and thank you for joining us to discuss Grupo BMV's third quarter 2018 results. Before reviewing our financial results for the quarter, I would like first to comment on the most important developments of the period and share some thoughts going forward.

First of all, we hired the top strategy consultant firm to help us develop the medium and long-term strategy, focus in top line growth and total shareholder return. For the last 3 years, we have been working in improving Bolsa's marketing to become a highly efficient organization. We have made big improvements and will continue working towards achieving that goal.

Regarding competition, Bolsa has been able to retain 97.4% market share in cash equities trading from July 25 to September 30. Currently, we are in the process of reviewing our fixing, trading, listing and maintenance as communicated through our [ Nemesnet ] report in August. On September 20, Fitch Ratings assigned a BBB long-term foreign and local currency rating and AAA next national long-term rating. It is important to point out that the goal of this rating is to communicate the solvency, soundness and financial stability of Bolsa from an expert objective and professional perspective. Grupo BMV does not plan to obtain financing through the debt market in the short or medium term.

Additionally, yesterday, our Board of Directors agreed to prepay the Indeval loan in full during the fourth quarter. Current outstanding balance is MXN 528 million. This will free up MXN 200 million in current loan next year. Regarding the Latin American Exchange Data or LED, we have completed agreements with the Peruvian, Colombian and Chilean stock exchanges, hired afield and have started building relationships up north.

We expect to open this line of business in the third quarter of 2019. Moreover, we're still looking for inorganic growth opportunities in the analytics space to further capitalize on our data and provide different insight and value-added services to our clients.

We will let you know as soon as we have a clear business opportunity. In line with our effort to constantly upgrade our technology, during the third quarter, we continued investing in 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 our technology infrastructure, information security and business continuity.

We will continue investing in this project, another technology initiative for the fourth quarter and throughout 2019. It is also worth mentioning that our IT cash equity trading infrastructure have not had a single glitch in more than 16 months in a row, demonstrating the competitiveness and stability of our in-house developed system.

Let me now review our quarterly financial results.

Our revenue increased by 8% to MXN 872 million with solid growth at Indeval, CCV and Market Data. Our expenses increased 10% because of costs directly linked with revenue. The provision for the purchase of the remaining 20% of the shares of SIF Chile and consulting fees. Operating income, EBITDA and net income increased at 6%, 3% and 10% respectively. The EBITDA margin were registered at 55%. In cash equities trading, revenue were similar to that observed in the third quarter of 2017, registering MXN 71 million. The average daily traded volume were recorded at MXN 13.5 billion, again similar amount to 2017 third quarter. The domestic market decreased by 3%, while the global market, the SIC, increased by 5%.

The market registered less operations and lower volatility due to expectations regarding the new administration and the announcement that the United States, Mexico and Canada has come to an agreement to replace NAFTA with the United States, Mexico, Canada Agreement, now called USMCA. Cash equity clearing increased by 20% to MXN 54 million, as a result of fewer number of cross-traded securities that only need to be registered, but not cleared.

Derivative revenue reached MXN 19 million in MexDer, which resulted MXN 2 million or 11% less than in 3-quarter, 2017.

As for the derivative clearing, Asigna revenues increased by 3% to MXN 31 million due to higher volume in swaps. Additionally, the average margin deposits for the quarter were MXN 37.9 billion, 3% lower than the third quarter of 2017.

SIF Icap's revenue decreased by 5% to MXN 135 million as a result of higher sales in Mexico, up 14%, and lower sales in Chile, down 17%. SIF Icap's revenue in Chile decreased due to investor risk aversion to emerging markets, caused by the rise of interest rates in the United States and the volatility in some commodity prices.

Custody revenue rose by 13% to MXN 220 million, explained by the growth in both national and international assets under custody. The services related to the global market, the SIC, recorded revenues of MXN 51 million, MXN 9 million or 21% above the third quarter 2017. It is important to mention that it has been a year since the SIC business model was changing.

Information services increased by 24% to MXN 136 million, due to extraordinary nonrecurring audit driven revenue for MXN 20 million. Excluding this onetime event, information services increased 6% compared to the third quarter 2017.

Listing and maintenance revenue rose by 6% to MXN 171 million. Listing revenue increased 2% versus third quarter '17, as a result of the listing of FIBRAS storage for MXN 271 million, 4 CERPIs and 3 CKDs. Maintenance revenue increased by 7%, explained by listings in previous year.

We continue with our promotional effort with potential and current issues. In the first 9 months of 2018, 32 new issuers were listed, 10 in the debt market, 10 CKDs, 4 CERPIs, 3 FIBRAS, 3 FIBRAS E, and 1 SPAC and 1 track. The amount placed in the medium- and long-term debt up to September 2018 resulted in a historical record of MXN 224.6 billion issued compared to MXN 203.1 billion in the same period of 2017. The debt instrument that we're maturing in 2019 will offset the growing medium- and long-term listings in 2018.

Expenses for the quarter amounted to MXN 416 million, up 10% or MXN 39 million compared to last year's third quarter, which is explained by the following items.

First, sub-custody presented an increase of MXN 11 million or 57% compared to the third quarter of 2017, and MXN 1 million or 5% compared to the second quarter of the year due to the growth in the number of securities in custody abroad for the global market for the SIC. This concept is directly related to higher income in Indeval, an evaluation of suppliers is being carried out in order to consolidate providers and lower the fee in fourth quarter '18 and during 2019.

Second, personal increased by MXN 10 million or 5% due to corporate restructuring, which will bring savings in the future quarters.

Third, in orders, we increased MXN 10 million or 52% due to the provision for the purchase of the remaining 20% of the shares of SIF Chile. It is important to mentioned that last year, we registered a full annual provision for MXN 24 million in the fourth quarter compared to MXN 6 million every quarter in 2018.

And for depreciation and amortization showed a decrease of MXN 12 million or 37% due to the full amortization of the clearing system in casa de, and the cancellation of the CME deal in 2017.

The revenues and expense results of the quarter led us to an operating margin of 52%, and an EBITDA margin of 55%. The tax rate was off 28% in line with 2017. Net income was registered at MXN 333 million, 10% higher than the figure for the third quarter of 2017, influenced higher financing income and solid performance in BMV's subsidiaries.

For the first 9 months of 2018, BMV reached an operating income of MXN 1.4 billion, and an EBITDA of MXN 1.5 billion, 15% and 14% higher than the same period of 2017. The EBITDA margin was 56%, and the net income was MXN 1 billion, 21% higher.

Let's now turn to cash flow and balance sheet. The cash balance and -- at the end of September 2018 was MXN 2.9 billion, an increase of MXN 134 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 185 million due to the maintenance fee collected in January 2018.

CapEx was MXN 32 million for the quarter, which were mainly invested in technology. So to summarize our commitment to executing on our strategic plan, innovating to serve our customers and generating positive economic value for our shareholders, produced 15% growth in operating income and 21% growth in net income.

With that, I thank you for all 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]

I have 3. The first one is in terms of the revenues, we saw softer trading across trading revenues during the quarter. So I just want to know if this was explained by the business seasonality? And how are you seeing the last quarter? Do you think revenue should improve? What should be the drivers that you are seeing? And my second question is in terms of your guidance. When we analyze the year-to-date net income, we're seeing it's already above the market consensus, above your guidance. I know that you usually don't change the guidance for the year, but what are you thinking for the last quarter? And my last question is on competition. As you mentioned, despite competition has failed to gain any meaningful market share, you are evaluating your prices by the end of the year or early next year. So can you share with us any additional information? How much can prices go down for trading, listings and maintenance fees?

[Ramón Sarre, executive]

Ernesto, good morning. On your first question, the softer trading revenues. Yes, we think this is mostly due to seasonality, compounded with the NAFTA negotiations and with the elections. We -- historically Q4 has been stronger than Q3, especially October, November. December tends to fall for obvious year-end reasons. But yes, seasonally, we do have seasonality for softer Q3 trading. Regarding guidance, how can I say that you answered your own question. We do not update our guidance, and we do not give quarterly guidance. As we've said before, our guidance is our best estimate at one point and we do not update that. So I'm sorry. We do not provide quarterly guidances. On competition, I'll let Oriol take the question.

[José-Oriol Par, executive]

Thanks. Ernesto, as we mentioned, at the end of August, we are currently in the process of reviewing our fees for trading, listing and maintenance. We are still in the process, and we need an internal approval from the board and then any price that we change in any of these topics have to be approved by our regulators. So we cannot give any kind of guidance before it is internally and approved by them -- by our regulators. However, obviously -- and this is the beauty of the competition, we are -- we now have a competitor that already released some pricing lower than our prices. So we have to do something. However, our prices on cash equity are very competitive. We can compare that and it's very easy to compare that with other exchanges in the -- not just in emerging market world, we are very competitive in emerging market changes, and also pretty similar to develop market. However, the listing and maintenance is more unique. So we're looking at that. And definitely, we're going to do something. We do not want to lose market share, despite we have not seen a big impact since BIVA started in July 25. As mentioned, their market sharing Cash Equities has been something like 2.5%. And I've already -- our volume that is coming just for a few trades. But we're not feeling comfortable with this 2.5%. And we know that we have to do something and working on that. So as soon as it is approved, we will release that.

[Operator]

A following question comes from Claudia Benavente from Santander.

[Claudia Benavente, analyst]

I have 3 questions. The first is if you can share with us some color on how is progressing the first stage of LATAM exchange data. You previously mentioned, the first stage would take place on -- in the second half of 2018. Is it already generating revenues? If not, when should we expect to see revenues from it? My second question is, I read today in the newspaper, the agreement with British Telecommunications, on what it consist? How much will you pay for the use of its network? Would this expected contribution you are estimating in terms of revenues? What is the information do you want to distribute? Is it closing prices and/or data from trading operations? And my last question is, if it's possible for a company to lease its equity with Bolsa and its debt would be buffered? Simple.

[José Allende Zubiri, executive]

Good morning, Claudia, this is José Manuel Allende. I will try to address the 3 of them. The last one, a company can do the equity listing on one exchange and do the debt listing on another exchange. Yes, that is possible. That's a possibility. The only issue is that the company will be obliged to do disclosure and provide information into the both exchanges. That will be the -- what they will need to comply in doing that. But that's a possibility. Regarding BT. It's BT Radianz, what we disclosed yesterday in a press release. And that has to do with the market data strategy. For the last couple of years, we work on improving on the technology moving into multicast platform technology, which is the one that most exchanges use around the world. So we move into international standards for this capability. As you may remember, last year, we set up a point of presence in equities facilities in New York. So the idea is that our market data will be placed in this POP in New York, and through the equity facility, we will be able to distribute into the U.S. market and eventually into the European market. After the POP, we have been contacting different networks or providers or redistributors of information in order to expand our distribution capabilities. We did that with a couple of them last year, and now, we just announced that we're getting connection with the BT Radianz network in order to redistribute our feed -- data feed into their facilities. And eventually, many of their clients will be able to receive it directly through these data feeds. And the first one, regarding the LATAM exchanges data, it's not 2018, it's 2019, which we expect the business to start operations and start generating some revenues. So far, we have been just making and working on the arrangement with the other exchanges, Latin American exchanges, and setting up the business case, hiring all the facilities and people that will be responsible for that. The business case has to face 2 stages. The first one is what we call the reference data, which is nonreal-time data. The idea is to integrate and standardize all the information from the LATAM exchanges, starting with the mill exchanges on the first stage. For information and corporate actions, material events and market-filed securities. The second stage will come up to 2020 is -- the idea is to integrate the real-time data. So the full year from now into the third quarter of next year, we will start doing the investments and setting up all the middle infrastructure.

[José-Oriol Par, executive]

And in a recent, Claudia, as already mentioned by José Manuel, we can have one company with equity in one Bolsa and debt in another Bolsa or any kind of combination with different debt issuances in different exchanges. However, and combining that with the question of Ernesto, one of the things that we're looking at, and it's part of the analysis that I already mentioned, we are thinking in a fee for a client, we called it products at the Bolsa, that could be lower than the fee of -- for a client that could have products in different exchanges. So let's say some kind of loyalty program. This is one of the things that we're looking at. And again, it's something that we have not decided and therefore, publicly announced yet.

[Claudia Benavente, analyst]

Perfect, super clear. I'm sorry for repeat questions to that event because I was stopped from the call. So I couldn't listen anything before that. So I had a follow-up question. On BT, can you share with us any idea of what would be the fees or cost involved in this agreement? And if you have any idea of the revenues that you can earn from this?

[Ramón Sarre, executive]

There is not any specific cost for the exchanges. It's more like an agreement in which we said -- and we put all our feeds and information on their platform, and they will redistribute the information for their customers and they will charge some special fees for that connection on to the end user. That's what -- where BT can make the money. And for us, we will be selling our data.

[Operator]

The next question comes from Carlos Flores from Santander. Our next question comes from Gilberto Garcia from Barclays.

[Gilberto Garcia, analyst]

A couple of questions, if I may. Can you provide a color on the timing of the pricing for you -- that you're currently undertaking? And my second question is, could you -- we have seen that you have continued to be active talking to companies about listing. Can you provide any color on your -- on those conversations? What has been the feedback from those companies?

[José-Oriol Par, executive]

Regarding the first question, we have been already working on our side. But it also depends as previously mentioned of the approval of the regulators. Hopefully, this is going to be something pretty fast. So we're expecting to release that in the next weeks. Gilberto, can you repeat the second question, please?

[Gilberto Garcia, analyst]

Sure. So we have seen in the news that you have been -- you haven't stayed active talking to unlisted companies about the advantages of being a public company. So I was wondering if you can provide some color on what the feedback from those conversations has been?

[Ramón Sarre, executive]

Regarding promotion efforts from the exchange, I would say that this is not a new issue for us, since 10 years ago or so. We have set a promotion area with some people that attend potential companies that are willing to explore and listing on the exchange. We have a lot of companies on the contact with them, providing information about the market, assessing them on how to approach the first stage of the market, moving eventually into the debt segment first, and eventually in an IPO. So that takes a lot of time in the promotion, but it's clearly one of the areas that we are focusing and dedicating a lot of resources, because we are certain that any listing on the exchange move-out will -- and provide revenue for all the business change. So we're clearly focused on keeping up with the promotion capabilities that we have on the exchange.

[José-Oriol Par, executive]

And in addition, I would like to add that having participated in some of those promotional activities that we continue to believe that -- and we have seen that for years, that the main challenges that we have at the exchange, I would say that the first one is the lack of financial culture that we have in Mexico. And talking about companies as well as investors, the number of companies as we know is limited, but the number of investors that we have in the exchange compared to other countries is also very low. So we need to work on both sides. We need to work on the -- I would say that the challenges to change and the wrong idea that they have about the exchange, because in some cases, they overestimate the requirements and the cost and underestimate all the advantages and benefits of being a public company. I would say that the corporate governance is another of the main challenges. Another one is the transparency. This is a big problem that we have in Mexico and transparency means a lot of things, including some double accounting and companies that do not want to go public because of that. Another challenge is the lack of growth in the economy. The number of companies that we will have in Mexico, if the economy grows at 5% or 6%, it's going to be very different from the number of companies if we continue to grow at the 2% pace that we have seen for a couple of years. Another one is the competition. I'm not talking about BIVA, talking about the banking sector that is a competitor or other kinds of financing, much less formal than banking or financing through the exchange. So I think that there are lots of things that we can and we should continue to work, and, however, as we always say because of that, we think that the potential that we have in Mexico is huge.

[Operator]

Our following question comes from Mohammed Ahmad from Foyston.

[Mohammed Ahmad, analyst]

Just a couple of quick questions on BIVA. You said 2.5% share. I'm just interesting in knowing if you could give any color on the trends on cash equity share? And then separately on listings and maintenance side, could you give me any color on how much of a discount you are targeting in that side? And that's leading you to perhaps consider price revision for yourself? And any color on that. I mean, in various scenarios, what potentially could we see there?

[José-Oriol Par, executive]

Yes, regarding the trend, it has been pretty stable. And I would say that the volume they have had is pretty low. However, they have had some cross trades and 1 or 2 bps cross trades during the day, and then they go above 5%. If they do not have cross trades, their number is closer or very close to 0. But the average has been that. And we know upward or downward trend. Regarding listing and maintenance -- regarding the fees, and this is not too easy, because there are a couple of -- and depends on the product, depends on the amount, depends on the size. So there are couple of things that -- and this is something that we're working and something that is also important to mention is that by regulation as of October 20, I guess -- 22, 23, we are going to have a new requirement from the regulators for the exchanges. That is the best execution. So as of today, we have not had this best execution in place. Once we have it, I think that these -- and there are 3 different filters: The first one is the best price; the second one is volume; and the third one is the probability of execution. And we believe that once we have the best execution, it's going to be a much more firm field for the competitors. And therefore, this is going to favor Bolsa, not BIVA.

[Mohammed Ahmad, analyst]

All right. Sorry, just a quick question on rent and maintenance Q4 last year versus what we might expect this year? There was a significant increase in Q4 last year. I was just wondering, is that a seasonality thing? Or there was one-offs last Q4 and this year should be more in line?

[Ramón Sarre, executive]

No -- that's a reclash in the income statement, Mohammed. We removed an expense line from other expenses. It's rent and maintenance. It's what we call nonrecurring maintenance expenses within the building. So we reclash that.

[José-Oriol Par, executive]

And regarding the fees, we're looking at the trading, we're looking at the listing and maintenance, but we're also looking at the fees for other clients. As they are pretty important, that our -- the broker-dealer, the casa de bolsa that we have in Mexico. And this is very important because they have been there main negatively impacted by the competition unless the market -- the size of -- by the size of the market growth. Why is that? Because they have fixed cost. So they are paying, let's say as an example, they are paying all the steady broker -- brokerage houses that we have in Mexico. We're paying a fees to the Bolsa, now they are paying 1 fee to the Bolsa, and 1 fee to BIVA. So this is increasing the fixed cost they have. The only way that they are going to be happy is the size of the market growth. That is what BIVA has promised. BIVA has been promising that they are going to grow their traded volume by 50% in the next 2 or 3 years, and that they are going to bring 50% new companies to the market in the same period of time, into the equity market, capital market. So not all the fees are lower. One of the fees that BIVA is above our fees is on the membership that they are charging to the casa de bolsa. Why is that? Because this is something that the casa de bolsa have to pay by regulation. Therefore, they cannot discuss and BIVA now has, so because of that, this kind of fees are higher. So we are -- and we're looking at this combination, and for each of the products, for each of the size, for debt, short term, for long-term for [ cicada fever ], the fee is different. So it's a bit more complex.

[Operator]

Our following question comes from Rafael Frade from Bradesco.

[Rafael Frade, analyst]

I would like to just follow up on the best execution that is being replaced by the end of October. I would like to understand if it will be obliged by all the brokers who provide that? But also we would be obliged by -- I heard that investors would not necessarily be obliged to follow this regulation, if they could choose which exchange they want to trade, how does it work?

[Alfredo R. Lara, executive]

Yes. So the best execution is a rule that we'll apply for the local market. The SIC will not enter into the best execution rules, as already the prices are being -- are more deep in the markets of origin. Nevertheless, you are right, in certain DMA orders, the order that has been sent by the buy side can be extended for the best execution rule, as they comply with their market of origin. If an institution investor in the U.S. sends a DMA order to the Mexican Stock Exchange through a broker, it can ask the broker to jump this regulation, because they comply with their own regulation. So we can say that approximately 30% of the volume in the Mexican Stock Exchange will be subject to best executions. Cross orders, even though they are not subject to best execution, they have to wipe off the orders that are in the book. And certain rules apply for these kinds of trades.

[Operator]

We have no further questions at this time.

[José-Oriol Par, executive]

Okay, thanks to all for attending this conference call, and thanks a lot for your questions. We appreciate it. Have a great day. Bye.

[Operator]

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