Bolsa Mexicana de Valores SAB de CV

BMV:BOLSAA

Earnings Call Transcript 2017-Q4

[Operator]

Welcome to the Fourth Quarter 2017 Bolsa Mexicana de Valores, S.A.B. de C.V. Earnings Conference Call. My name is Hilda and I will be your operator for today. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session. [Operator Instructions] Please note that this conference is being recorded.

I would now turn the call over to Ramon Guemez. Mr. Guemez, you may begin.

[Ramón Sarre, executive]

Thank you. Good morning and welcome to Bolsa Mexicana de Valores Fourth Quarter 2017 Earnings Conference Call. Before proceeding, we'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 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 March 1 at Bolsa's corporate website, www.bmv.com.mx.

During this call, all figures are in Mexican pesos and compared to the fourth quarter of 2016 unless stated otherwise. This call is intended for the financial community only, and the floor will be opened at the end to address any questions you may have.

Joining us for today's call are Jose-Oriol Bosch, CEO; Pedro Zorrilla, SVP Corporate Services; Jose Manuel Allende, SVP Strategic Planning and Business Development; Roberto Gonzalez, SVP Post Trade; Luis Rodriguez, Chief Technology Officer; Gabriel Rodriguez, SIF/ICAP CEO; Alfredo Guillen, COO for Cash Equities; Jose Miguel De Dios, MexDer COO; Luis Rene, who is Director of Investor Relations; and myself, Ramon Guemez, CFO.

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

[José-Oriol Par, executive]

Thank you, Ramon. Hello. Good morning, everyone. Thanks for joining us for the fourth quarter earnings conference call. And apologies for the delay. We started the meeting a couple of minutes late.

As you know, we have released our results. We have released strong results this quarter, with good income growth across most of our core businesses as we continued to successfully execute on our strategy for growth and to improve financial performance. I will outline the developments in the quarter and thoughts going forward, but first, let me take you through the key financial results for 2017.

Our revenue increased by 12% to MXN 3.2 billion, with double-digit growth at Indeval, SIF/ICAP, Market Data, and Listings. Underlying costs continue under control, growing 5% when excluding extraordinary items, and a total of 10% during a period where we continued to invest in growth initiatives and technology which will drive future returns.

Operating profit and EBITDA increased 14% and 15% respectively, and net income rose by 20% to MXN 1.2 billion for the year. The EBITDA margin for the year was recorded at 55%, exceeding our guidance in both EBITDA margin and net income.

In 2017, we delivered on several strategic initiatives that have positioned Grupo BMV in a more efficient and innovative place, providing additional revenues. In April, we implemented a point of presence in New York, Equinix Center, to expand our market data offering internationally. And in September, we signed an agreement the facilitator to further increase our global client base.

In June, we implemented improvements in the business model of our global market, the SIC. The figure of the sponsor was eliminated and the savings were transferred to our clients, the brokerage firms. As a result, we transferred a significant reduction in conversion fees and a new structure in operational fees. Moreover, this initiative generated MXN 92 million in revenues in the second semester of 2017. For the following years, we expect to generate MXN 200 million in additional revenue, with MXN 45 million in expenses per year.

In August, BMV canceled and amortized accordingly the routing agreement with CME, and we are currently exploring alternative channels to improve the trading volume in MexDer.

In line with our efforts to constantly upgrade our technology, we invested MXN 22 million in the fourth quarter to automate the transfer of information in the global market, the SIF, and to upgrade BMV's infrastructure with high availability technology.

During 2017, BMV invested in several IT projects, including the upgrade of our trade surveillance software systems, SMARTS; the in-house central engine development in our TCP for booking, position keeping, trading and settlement, the NFCO; and the implementation of a software that automates the process of identifying, analyzing and managing operational risk in a single environment, Open Pages, to name the most significant.

We have continued with our promotion efforts with potential and current issuers. On this topic, we had a new company listed during the fourth quarter, Grupo Mexico Transportes, for MXN 19 billion. During the year, Grupo BMV brought 32 new names to the market, 18 in private debt, 14 [Foreign Language], 5 in equity, and 1 REIT. There were 12 equity listings between IPOs and follow-on offerings reaching MXN 96 billion, which amounts to 74% more than in 2016. Furthermore, long-term debt placement registered a historical high with MXN 296 billion, 87% more than in 2016.

As well as continuing to deliver organic growth, BMV is committed to promoting the Mexican financial market through education. In the last quarter of 2017, Grupo BMV invested in the construction of the Mexican Stock Market Museum, MUBO, which will open its doors in March 2018. 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.

Let me now review our quarterly financial results in more detail. In cash equities trading, revenue decreased by 4% to MXN 74 million. The daily average value traded was lower than -- in the last quarter of 2017, at MXN 15 billion compared to MXN 16.5 billion last year.

On one hand, the U.S. tax reform and uncertainty in NAFTA negotiations impacted the local market. The average traded volume decreased 16% for the quarter and 10% on the year. And on the other, the exchange rate volatility and inflation expectations benefitted the global market. The average daily traded volume increased 10% for the quarter and 21% year-on-year. Additionally, it is important to remember that last year was a quarterly record high in value traded, influenced by high volatility from the U.S. presidential elections.

Derivative revenue decreased by 22% to MXN 21 million, mainly due to reductions in bond futures and TIIE swap trading in minus 36% and 38% respectively, partially offset by equity futures. As for derivatives clearing, Asigna revenues declined by 11% to MXN 32 million due to lower trading volume. Having said that, margin deposits and open interest were similar to last year's fourth quarter at MXN 40 billion and MXN 11 billion respectively.

SIF/ICAP's revenue increased by 14% to MXN 154 million as a result of higher sales in Chile, up 18% or MXN 14 million, and in Mexico, 10% or MXN 5 million. Custody's revenue rose by 49% to MXN 209 million, explained by the improvements made to the global market business model, which generated MXN 50 million in the quarter.

Information services grew 9% to MXN 106 million due to sales of open finance licenses and new global clients.

Listing and maintenance revenue rose by 17% to MXN 190 million. Listing revenue rose 52% versus the fourth quarter of 2016 as a result of the amount placed in the medium and long-term debt. Furthermore, maintenance revenue increased by 5% or MXN 6 million, mainly explained by previous listings.

Expenses for the quarter amounted to MXN 445 million, up 19% or MXN 70 million compared to last year's fourth quarter, of which MXN 32 million are the result of extraordinary items composed of, first, MXN 24 million as a revenue for the purchase of the remaining 20% stake in SIF/ICAP Chile, where our partners had a put option and, second, MXN 8 million in building expenses and the construction of the Mexican Stock Exchange Museum.

Adjusting for the extraordinary expenses mentioned above, there was an increase of MXN 38 million, or 10%, in total expenses, of which MXN 22 million were directed to the automatization of the global market, SIC, and high availability infrastructure, MXN 7 million in new licenses and external services, and MXN 4 million in the variable compensation of SIF/ICAP due to a better performance.

For the full year, we reached an EBITDA of MXN 1.7 billion, up 15%, and a net income of MXN 1.2 billion, up 20% compared to 2016, thanks to the strong financial performance and solid growth in BMV's subsidiaries.

Let's now turn to cash flow and balance sheet. The cash balance at the end of December 2017 was MXN 2.8 billion, an increase of MXN 182 million after taxes, dividends, interest payments, and investment activities. CapEx was MXN 22 million for the quarter and MXN 62 million for the year, which were mainly invested in technology upgrades and new projects.

Short-term liabilities decreased MXN 72 million as a result of the payment of the Indeval loan in the month of May. Regarding the Indeval loan, we still have MXN 640 million outstanding.

Last of all, I am delighted to announce that our Board of Directors agreed to recommend to our shareholders' assembly a dividend hike from MXN 741 million to MXN 895 million, which results in MXN 1.51 per share. By raising the dividend by 21% or MXN 0.26, BMV still remains above 4% and a payout ratio of 77%. Additionally, the Board of Directors agreed to recommend to our shareholders' assembly increasing the buyback share fund by 100% to MXN 402 million.

So all together we had a strong quarter and year. We continue delivering strong growth with good cash generation. We continue focusing on cost control and strengthening our balance sheet. We are executing on our strategy and are focused on achieving our target for stronger shareholder value over the next years.

With this, I conclude my presentation. And together with my colleagues, we will be gladly answering any questions you might have. Thanks a lot.

[Operator]

[Operator instructions] Our first question comes from Gabriel Nobrega from UBS.

[Gabriel da Nóbrega, analyst]

Could you give us a bit more color and recent updates on competition and how you are seeing the implementation of BIVA? Do you think there could be any immediate threats?

And for my second question, in terms of the EBITDA margin, we saw another expansion this year. And I just wanted to understand, where do you think margins could go and what efficiency gains are you factoring into this estimate? Thank you.

[José-Oriol Par, executive]

Yes, okay. Let me take the first one. As you know, we do believe in the potential of the Mexican equities market. We are not sure that the market traded volume is going to increase by 50% and the number of listed companies by 40% just because of the arrival of a new exchange, but we do believe in complying with the regulation. And we have no choice other than working with BIVA, as well as local broker-dealers have no choice other than to connect with both exchanges, taking the hit of duplicating their fixed costs.

So, we have been investing and dedicating a lot of money, time, and resources in BIVA. Actually, we are probably the largest investor that is not a shareholder of BIVA project. And because we have already dedicated a lot of resources on it, we do not want more delays and we want them to make good on their promises. If they do, this will be more business and more revenue for the Bolsa VIVA, our equity CCP, the central counterparty, as well as the cost of the business.

So at the time what I can tell you is that we have been working on that. What we have heard is that they will be starting operations by the end of March, and we hope that the market is going to grow. So this is what we have as of today.

[Gabriel da Nóbrega, analyst]

And on EBITDA.

[José-Oriol Par, executive]

And the EBITDA -- I'm sorry?

[Gabriel da Nóbrega, analyst]

No, just for my second question in terms of the EBITDA margin.

[José-Oriol Par, executive]

Yes, okay. Sure, Ramon, if you can take this one.

[Ramón Sarre, executive]

Yes. Where margins could go, we don't have a specific target as to where we want to take them. But we continue with our focus on cost control. And there are exchanges that have higher margins than us.

So as long as we can -- it's not a question of the margin but of trying to get the most productivity out of the business and keep expenses where they need to be and avoid any unnecessary growth. And that's the focus that we continue to have. We spend what we have to spend to invest and continue to identify superfluous expenditure.

[Operator]

The next question comes from Frederic De Mariz from UBS.

[Frederic De Mariz, analyst]

Just to follow up on the BIVA question, could you just update us with your latest thinking around the potential competition? Are you still seeing a potential threat in the same segments of listing and registration? And then you already mentioned the potential opportunity on the CCP and custody. I just wanted to hear your latest thoughts and if you have any new news or any new numbers around this. And also you mentioned some extra costs and you had to dedicate some resources, obviously, to connect. Can you try to quantify those costs relating to the BIVA connection? That's my first question and then I'll come back for the second question. Thank you.

[José-Oriol Par, executive]

I think that that depends on their strategy, and it's something that we do not know. If their strategy is to grow the market and to bring new companies and to bring more -- an additional traded volume and to bring a value added, I think that it's going to be great. If their strategy is just to cannibalize what we have today, that we know that it's not the market that we should have, then it's going to be a problem. But currently what they have maintained is the first one, and we hope this is going to be the case.

Regarding the extra cost, we do not have a number. And the problem is that we have been working in three different fronts and complying with three different regulations. We have to connect Bolsa with BIVA. We have to connect our CCP, that is Contraparte Central de Valores, with BIVA. And we have to connect our custody deposit in the value with BIVA. So that implies -- and we are still working on that, but I would say that from our side we are in time with the regulator's schedule.

But that has been a lot of work, and I think it is very difficult to monetize and to put a number to that. But what I can tell you is that we have been delaying some projects and things that we had because of that. And it's something that comes from a regulation, and we have to comply. But unfortunately, we do not have a number that we can give you.

[Frederic De Mariz, analyst]

No problem. And my second question has to do more with MexDer. Can you share a bit more of your thoughts on what could happen in derivatives, listed derivatives? You mentioned the end of the agreement which you had anticipated in the previous quarters. So what's the next step? I remember for MexDer there was a lot of talks about regulations and lowering the cost of capital for banks. When you think of that segment, where do you see the opportunity and what can you guys control in that segment?

[José-Oriol Par, executive]

Yes, absolutely. And combining both questions, I think that -- in my personal opinion, I think that it is more a priority for the country to develop a derivatives market than create more exchanges. And I think that if you compare, Mexico needs a developed derivatives market. This is the case in other countries, not just developed countries but also in similar economies. And we all know that most of them have a developed derivatives market, and we do not yet.

And I think that to have that would be a win-win situation for everybody, starting for the government investors in the case of the [spoken in Spanish], for we already have a very liquid market on the cash market side. But it's still a one-way market or a limited two-way market, difficult to take a short position. This is just one of the problems we have. But for the Mexican companies that look to hedge their imports and exports in other currencies, I think that also will be a win-win for the equity market, for all different participants.

So I think that there are a lot of examples. But unfortunately, this has not been a priority for some of the participants. It is a priority for us. We continue to believe that we have a very high potential that eventually we are going to have this developed market. And we need all participants, including financial institutions as well as probably more support from the government, to develop this market. But we are not throwing the towel on this one. We are going to continue to push to develop the MexDer market.

And regarding the CME, we had a routing agreement for around 6 or 7 years that did not work as expected. And this happens in the business environment. If there is a business that is not working after 6, 7 years, where the revenues are much lower than the costs that we are having, then I think that was a good time to take a decision and to move forward.

So within this process, that does not mean that we are not going to look toward -- with someone else, and we are looking for other opportunities. And if there is any other potential partner that is going to work with us that believes in the potential of the market and is going to help, we are pretty open within this process.

[Frederic De Mariz, analyst]

That's great. That's very clear. So would you say that on MexDer the growth of the segment mostly depends upon new regulations, or is there something you can do to create or to attract that liquidity?

[José-Oriol Par, executive]

I would say that -- a bunch of things, not just regulation but also financial education. And as mentioned, this is something that the Bolsa is pretty focused, in growing and developing the financial education for the potential players in the MexDer, including companies that --every time that we have volatility in any asset on the FX side, on interest rates, we have companies that did not catch or did not use MexDer because they were not aware of the benefits of the product that we have. So it's something that -- we have to work all together in creating this financial education and culture regarding derivatives.

[Operator]

The next question comes from Tito Labarta from Deutsche Bank.

[Tito Labarta, analyst]

A couple question also on -- I guess first on your expenses. We did see a bit of an increase in expenses partially related to technology investment and also the rent and maintenance went up. So just to think about it, was this, I don't know, seasonality or one-time, because expenses have been running around MXN 350 million per quarter, now above MXN 400 million. How should we think about this going forward? Is that going to normalize back down, or are these new expenses more on a recurring basis that should continue to grow?

And I guess on the back of that, just following up on the EBITDA margin question, you had previously guided for 53% to 56% margin this year. It was 55% in 2017. And if you strip out the extraordinary items, I calculate it was actually 56%, so that implies no EBITDA margin expansion for this year and probably some contraction. Is that related to these additional costs? Is it more related to the concerns about competition? Just want to understand the guidance and kind of the expenses that we saw this quarter.

[Ramón Sarre, executive]

Tito, thanks for your questions. I think expenses -- the only new expense that we have, and it will be recurring, is this MXN 24 million from SIF Chile. We registered that in Q4, but we will be registering it on a monthly basis going forward, another MXN 24 million in 2018.

The other expenses, it was more of a seasonality thing. And it has to do with -- one is a temporal expense related to the museum, as Oriol said, so that was a one-off. And technology, it had to do with investments in the -- mostly for the SIC project. And that was just the seasonality of how expenses came in. So I would say the only new expense that we have going forward is the SIF Chile. The other one is a seasonality thing.

Regarding guidance, this is a very uncertain year for us, both as a company because of the competition and we're not sure how -- what the impact is going to be on the revenues. And it's also a very uncertain year for Mexico, so we chose to be conservative in our guidance. And that's why, as you rightly point out, without the extraordinary expenses it would seem that we have no margin growth. Could we have an upside? Yes, we could, but we chose to be conservative.

You also have the -- on the expenses, as Oriol said, we seem to be major non-shareholder investors in BIVA. The connectivity costs are increasing. So it has -- a good portion of technology expenses are also related to connectivity to BIVA.

[Tito Labarta, analyst]

Yes, okay. That's very helpful. Just a couple follow-ups if you don't mind. So the MXN 24 million related to SIF Chile, is that a new monthly expense or was that an annual or quarterly? I wasn't clear on the frequency of it.

[Ramón Sarre, executive]

Annual, the MXN 24 million on an annual basis.

[Tito Labarta, analyst]

Okay, perfect. And then the other, on the technology, the SIC project, right, the investments in technology which went up. But that was in line with -- I think you had previously mentioned MXN 200 million in revenues for SIC offset by about MXN 45 million in costs. Is that part of the increase in technology expenses we saw this quarter?

[Ramón Sarre, executive]

Yes, that's correct.

[Operator]

The next question comes from Gustavo Lobo from JP Morgan.

[Gustavo Mendes Lôbo, analyst]

Both of my questions have already been answered, just first a follow up on this MXN 24 million related to SIF Chile. You said that this is on an annual basis. So for 2018 should we see MXN 6 million per quarter or just in the fourth quarter 2018 we'll see additional MXN 24 million, or a different value for that? And then I have a second question.

[Ramón Sarre, executive]

Gustavo, good morning. We will be accruing this on a monthly basis. So you should see roughly MXN 6 million per quarter.

[Gustavo Mendes Lôbo, analyst]

Okay, perfect; understood. And second, sort of a follow up on Fred's question regarding the listing pipeline. What's your scenario for fixed income listings and equities? And after elections, do you see any deceleration or improvement regardless of the outcome? Just wanted to understand what's your view there.

[Unknown Executive]

Hello. Last year was a good year for listings, especially on the debt segments. But we think that by the first half of the year we will still strong listing revenue and pipeline, especially on products like [indiscernible], the FIBRA A, the stacks, and the REIT. All those instruments will have a good pipeline.

Part of it is public, but we also have a good confidential pipeline. And many of those companies or instruments will be willing to be out of the -- in market before election. So regardless of volatility and the election process, the NAFTA and all those issues, what we are having now is the sense that the listing pipeline will be flowing by at least half of the year.

[Operator]

[Operator instructions.] At this moment, we show no further questions. I would like to turn the call back over to you for any final remarks.

[José-Oriol Par, executive]

Okay. Thanks a lot for attending and thanks also for all the questions. And we look forward to being with you in the next quarter. Have a great day. Thank you. Bye.

[Operator]

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