Bolsa Mexicana de Valores SAB de CV

BMV:BOLSAA

Earnings Call Transcript 2018-Q4

[Operator]

Welcome to the Fourth Quarter 2018 Bolsa Mexicana de Valores, S.A.B. de C.V. Earnings Conference Call. My name is Sylvia, and I'll 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. Mr. Güémez, you may begin.

[Ramón Sarre, executive]

Thank you, good morning, and welcome to Bolsa Mexicana de Valores Fourth 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 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 and inflation rates, and prices, and 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 February 21 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 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; José Manuel Allende, SVP Strategic Planning and Business Development; Roberto González, SVP of Indeval; Luis Rodriguez, Chief Technology Officer; Gabriel Rodriguez, CEO for Icap; Alfredo Guillén, COO for cash equities trading; José Miguel de Dios, CEO of MexDer; Roberto Gavaldón, Director of Communications; Luis René Ramón, IR Officer; and myself, Ramón Güémez. I would now like to turn the call over to Oriol Bosch, our CEO.

[José-Oriol Par, executive]

Thank you, Ramón. Good morning, everyone, and thank you for joining us on the call. First, I'm going to summarize the financial results for 2018; second, outline the developments for the last quarter of the year; and then share with you our medium-term strategy going forward. The annual result shows continued momentum across the group, reflecting another period of operational execution and investment in the business.

Our revenue increased by 12% to MXN 3.5 billion, with solid growth in cash equities, trading and clearing; Custody; and Information Services. Our expenses increased 9%, mostly because of cost directly linked with revenues and investments in technology projects. Operating income and EBITDA increased 14% and 12%, respectively, and net income rose by 19% to MXN 1.4 billion for the year, exceeding our net income guidance by 6%. The EBITDA margin was recorded at 55%, close to the top range of BMV's 2018 guidance.

During the year, we delivered on several strategic initiatives that we have positioned Grupo BMV in a more efficient, safer, an innovative place, providing additional revenues.

First, BMV reinforced its promotion efforts with potential and current issuers. We were able to bring 40 new issuers to the Mexican financial markets, 5% more than in 2017.

Of the 40 new issuers: 12 were CKDs with the 14 listings; 10 CERPIs with 18 listings, 10 in debt market; 3 FIBRAS E, CFE Capital, Grupo Aeroportuario de la Ciudad de México and Prodemex; 3 FIBRS, Fibra UP, Educa and Storage; and 1 SPAC, Promecap; as well as one TRAC, that was Sherpa Capital. Second, we restructured and automated Indeval's international services division. The reduction of fees related to conversion on Custody, as well as the changes to the global market or SIC business model resulted in more than 50% growth in the value of the assets under Custody. Indeval is the ninth largest CSD in the world in terms of volume, processing more than $250 billion on a daily basis.

In 2018, 430 foreign securities were listed in the global market, which represented an increase of 56% compared to 2017, or new listings were 275. Of the 430 new listed securities, 163 are companies and 267 are ETFs.

Furthermore, these changes in part have increased the global market rate on the average daily trading volume from 36% in 2017 to 42% in 2018.

Third, in line with our efforts to constantly upgrade our financial technology and provide better product and services, BMV invested MXN 95 million, MXN 33 million or 54% more in CapEx than in 2017.

In Information Services, BMV developed new products such as consolidated feed, reference data and statistical analysis as well as implementing new channels of data distribution through multi-tasking. Regarding the Latin America exchange data or LED, we are performing a data gap analysis with the other [indiscernible] exchanges and continue establishing relationships of growth. LED's goal is to distribute the standardized data in a single format directly to the middle and back office of financial institutions.

We expect to start distributing new product -- the new product in the fourth quarter of 2019. In Indeval, we upgraded our messaging platform to AMH by SWIFT to connect with existing local clients, other exchanges and foreign custodians.

Furthermore, BMV focused on strengthening information, security and business continuity through high-availability technology, network encryption, cybersecurity framework and alternative operation centers.

All in all, 2018 was another strong year. Let me review BMV's fourth quarter financial results. In cash equities trading and clearing, revenue was registered at MXN 155 million, 28% more than in the fourth quarter of 2017, due to higher operating volume as a result of the uncertainty generated by the political and economic environment in both domestic and international markets. The average daily trading volume in BMV were recorded at MXN 17.2 billion, up 13% because of higher operating volume in the global market.

Since the other exchange began operations, BMV registered 96% market share of the total value traded, and 99.2% market share of the total number of operations in the period.

It is important to remember that CCV provides clearing services to both exchanges. In derivatives trading and clearing, revenue decreased by 8% to MXN 50 million, as a result of lower volumes in derivatives operations and lower margin deposits.

BMV has been working with the Mexican government and financial regulators to create a plan and develop a Mexican derivatives market. SIF Icap revenue was down 12% to MXN 135 million as a result of lower sales in both Mexico and Chile, explained by fewer operations due to volatile markets and client merchant boost.

Listing and maintenance presented similar numbers to the last quarter of 2017, reporting MXN 189 million. Listing revenue decreased 17% as a result of lower amount placed in short and long-term debt. As I said before, during 2018, BMV was able to bring 40 new issuers. As for maintenance revenue, fourth quarter increased by 7%, driven by listings in previous years. It is important to mention that the authorities approved BMV's discount plan from January 1 to March 31, 2019.

During this period, the BMV will file an extension to the term granted.

Custody revenue was up 15% to MXN 240 million, as a result of higher value of international assets under custody and conversion volume. The services related to the global market recorded revenue of MXN 70 million, 40% above from the year ago quarter, driven by a larger number of conversions due to market volatility.

Information Services increased by 9% to MXN 116 million, explained by higher sales of indices and new international clients.

Expenses for the quarter amounted to MXN 456 million, up 2% or MXN 11 million compared to last year fourth quarter, which is explained by the following items: first, technology increased by MXN 16 million or 19%, mainly due to investments in hardware and software of income generating projects, including the automatization for transmission and reception of information for the global market and the connection with international custodians. Additionally, BMV invested to reinforce information security and business continuity as mentioned before. Second, rent and maintenance were down MXN 11 million or 34%, explained by nonrecurring expenses during 2017, such as the construction of the MUBO Museum and the elevators repair service. Sub-custody was up MXN 7 million or 24% due to the growth in the number and value of securities in custody abroad for the global market. It is to be noted that we finished the evaluation of international custodians and selected CP for North America, and [ Europea ] and BNP Paribas for EMEA. Consulting fees increased by MXN 8 million or 38% as a result of nonrecurring expenses.

BMV hired third-party auditors during 2018 to guarantee the correct use and report of BMV market data. Furthermore, during the last 6 months of the year, BMV elaborated a medium-term plan with the assistance of consultants specialized in corporate strategy.

And last, others were down MXN 7 million or 17% due to the difference in the amount registered for the purchase of the remaining 20% of the shares of SIF Chile, MXN 6 million in fourth quarter 2018, compared to MXN 24 million in fourth quarter '17, payment of our patents in Chile and the new promotional activities for BMV's product and services.

The results of the quarter led us to an operating margin and EBITDA of 50% and 52%, respectively. And the net income of MXN 358 million, 11% higher than the last year, influenced by the solid performance in BMV subsidiaries both consol and higher financing income.

As announced in the third quarter conference call, BMV prepaid in full the outstanding MXN 513 million of the Indeval loan. This is a reflection of the company's solvency, financial stability and a strong balance sheet. As I mentioned in the previous conference call, Fitch Ratings assigned a BBB+ long-term foreign and local currency rating, and a AAA Mexican notional -- national long-term rating.

Additionally, I'm delighted to announce that our Board of Directors agreed to recommend to our shareholders assembly a dividend hike from MXN 895 million to MXN 1.05 billion, which result in MXN 1.78 per share and a 77% payout ratio. By raising the dividend 18% or MXN 0.27, BMV's yield remained above 5% versus 2018 average stock price. Additionally, the Board of Directors agreed to recommend to our shareholders assembly, increasing the buyback shares fund by 24% to MXN 500 million.

Finally, I would like to shed some light about the BMV future's plan. We will double down on Mexico by shifting from margin optimization to investing for growth organically and through M&A, while maintaining our cost control culture. We believe that aligning our products and services to the mix and interest of our clients and partnering with them is essential to fostering long-term value creation, enabling innovation and adopting new products and services faster.

2019 will be a year of investment and transformation, focused on growing and protecting our historical business and building value-added services to develop a competitive [ loan ] in first trade and Information Services, which in turn will drive trading volume.

Furthermore, we'll continue working together with the authorities and financial regulators to develop a more liquid, transparent and efficient capital market, as well as a Mexican derivatives market.

With that, I thank you for the time and together with all my colleagues, we will be gladly answering any questions you might 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 questions. The first one is on your financial income. How much of the loan prepayment helped the financial income during the quarter? Given that you will practically not have the loan more, how much do you expect to be the investment yield of your cash position? My second question is in terms of your 2019 guidance. It was already known since last year, but can you elaborate more on it? I just want to know if you are considering the current average trading volumes or if your budget assumes a rebound of the market? Also, I would like to know if the discount plan is already considered in your guidance? And finally, my last question is on competition. We have seen BIVA improving its market share from 3% last year to 11.5%. So I just want to know how has been working your discount plan? How has been the reception from your clients? And also, if you can provide what could be the impact for Bolsa's revenues this year? And as I mentioned in my previous question, is this already considered in your guidance?

[Ramón Sarre, executive]

Ernesto, let me begin with the first one. Our rents, we have, let's say, a special effect in financing income around, MXN 17 million this quarter because of the way you account for the loans. Let me say, you price the bond for accounting purposes, so when we pay off, we eliminated this provision, and this accounts for roughly MXN 17 million, which we registered in Q4. Going forward, our -- we invest our funds by regulation in short-term government paper, so very close to the Fondeo rate. That's what we expect to gain going forward. On your second question, guidance. We are considering the discounts that were considered at the beginning. And as you know, guidance is EBITDA margin between 53% and 56%, and net income between MXN 1,350,000,000 and MXN 1.5 billion. Precisely, we don't give a strict number in guidance because we consider ranges. So when you say, is the current average trading volume considered? No, it's part of the ranges we considered. And as we've shared many times before, our guidance is the best estimation we have at one point in time. We do not plan to update the guidance or give more detail on it. Regarding BIVA's market share?

[José-Oriol Par, executive]

I can take this one. Well, Hi, Ernesto, thanks for your question. And -- first, from your question, I agree with you that you are basically saying that the market is not going to grow because of having 2 exchanges and we fully agree on that. So having said that, yes, the market is going to continue with the same pace and the market share is going to be spreaded in between 2 exchanges. Now first, if we look at the growth in market for the past 4 years, the market has been growing the average, I think, that is like 6% year-on-year, that's the natural growth that we have seen. And it was not different from 2017 to '18, it was not far away from that. Actually, I think that was like 8%. So market is increasing, and then we are losing some market share. Yes, I agree. But we are seeing now at the 5% that you mentioned, very stable. This is in terms of traded volume, if -- as mentioned before, if we look at the number of trades, the market share we have is 99% compared to 1%. That means that they have few trades but with large amounts. So this is what we are seeing. They have -- during the day, fairly stable and suddenly they have a big trade that, for whatever reason, is executed through BIVA. So this is the pattern that we are seeing. And in addition to that, we have to keep in mind and the economics about the cash equity trading. In cash equity trading, we have been making around MXN 300 million a year, just pure cash equity trading. I'm not considering post-trade. And by the way, remember that the post-trade from BIVA is our business, not their business. So if we take MXN 300 million, and they are having 5% that means that they're going to be making or we are going -- not going to be making MXN 15 million, MXN 1-5 million a year, that's 5% of MXN 300 million. MXN 15 million sounds a lot, but if you look at in dollars, it's $750,000, or in pounds, GBP 600,000. So the number is not too big. This is something that we have to keep in mind. And we are doing our efforts to continue with our market share as high as possible. Because of that, we implemented this discount plan that was authorized by the regulators for a 3-month period of time. And that we are, as was announced, we are planning to extend.

[Operator]

Our following question comes from Carlos Flores from Santander.

[Carlos Batista Flores, analyst]

I have 3 questions, actually. The first one is regarding your OTC business. Well, the figures seem to have been consistently decelerating since the third quarter of '18, after having growing an average like 14% during 2017 and the first half of '18. What are the expectations for 2019? Should we expect to see deceleration to continue? And if you could provide us some indicator that could -- we want to trace OTC performance? The second one is regarding Custody. You have been doing great over the last quarters. Could you give us some color on what strategies are you doing going forward to continue delivering these solid results? And the last one is with the new commission plan, have you observed new clients like government reaching for your services yet?

[José-Oriol Par, executive]

Okay. Regarding the OTC market, last year, we had less volatility, less activity in both, in Mexico and Chile. But we also lost some -- because of M&A of institutions and M&A of some books, we lost some market participants. Now for this year, it's going to depend on the volatility that we are going to see this year. But we do not have a particular expectation of something that we can say that we are going to change our expectations from the -- on the OTC market.

[Luis René Ramón, executive]

Regarding Custody. As Oriol mentioned, we made some changes, we reduced the number of custodians from 9 to 3. We expect to reduce substantially the cost associated for Custody. And in the terms of revenues, we continue seeing growth in the SIC and the trading volumes in SIC, that reflects also on the Custody revenues and also on the conversions revenues that we initiated this new activity. So we're also investing in technology and also working with companies regarding robotics, RPAs to reduce the time and also be much more efficient in the way that we process information for our clients. So yes, we do believe that we will continue performing quite strong during this year. We -- and also it's very well diversified revenues. So we have the custody, we have the conversion and we hold the transaction of volumes -- transactional fees related to transactional volumes. So yes, we do believe that we would continue performing quite strong on Custody side.

[José-Oriol Par, executive]

And can you repeat the third question, please?

[Carlos Batista Flores, analyst]

Sure. It's regarding the new commission plan. Have you observed new clients like the government reaching for your issuer services? Like in the listing side of the business.

[José-Oriol Par, executive]

You mean, regarding the discount plan that we announced?

[Carlos Batista Flores, analyst]

Yes.

[José-Oriol Par, executive]

On listing, maintenance and trading?

[Carlos Batista Flores, analyst]

Exactly.

[Ramón Sarre, executive]

Okay. We are constantly in contact with the government agencies who are active players on the issuer services. Part of the discount are related and focused on government entities. We have met with them. We have announced the new plans. And we are, I would say, we're closely and constantly reaching them in order to be close to them and be aware of what they may need from the exchange not only from the issuers perspective. Hopefully, that will be beneficial on the -- in the medium term for the exchange.

[Operator]

Our following question comes from Mohammed Ahmad from FGP.

[Mohammed Ahmad, analyst]

I have 3 questions. One sort of builds on the last question from the last caller. Just, if we look at the new pricing that you're doing in listing, the new discount plan. Assuming same volumes as last year, 2018, what kind of revenue hit are we talking if the new pricing is adopted or as it flows through your income statement? The second question is on the other cost line, on a year-over-year basis, there was an MXN 18 million tailwind, as you said in your comments, which puts the base at roughly around MXN 21 million and you delivered about MXN 33 million. So I was just wondering what drove that significant cost increase in the other segment year-over-year? And the final question is a bit more long term, like, if you look from a 3- to 5-year view, what can you do to sort of develop the Derivatives franchise of the business in a more consistent manner?

[Ramón Sarre, executive]

Hi, Mohammed, the overall effect of discounts is around 12%. Or that's what we estimate for the listing discounts. And could you please repeat your second question and third one as well?

[Mohammed Ahmad, analyst]

Sure. So just so, if I understand it correctly. So it's essentially 12% revenue hit on same volume for the new pricing?

[José-Oriol Par, executive]

Yes.

[Ramón Sarre, executive]

Yes.

[Mohammed Ahmad, analyst]

Okay, great. The other 2 question were, one was the other cost line, the MXN 33 million in Q4. On a year-over-year compare basis, last year, you had about MXN 40 million in that item and it included MXN 24 million from the SIF Chile transaction, I believe, versus this year, the Q4 only included MXN 6 million, which means...

[Ramón Sarre, executive]

No, no. You're talking on a quarter-over-quarter, or year-over-year?

[Mohammed Ahmad, analyst]

Year-over-year.

[Ramón Sarre, executive]

No, this year, we have the full effect of the Chile -- effect of the Chile cost as well. It's actually a little more than last year. What we had this year or 2018 is that we'd recognized it throughout the year, whereas in 2017, we recognized it all in Q4.

[Mohammed Ahmad, analyst]

No, no, I do realize that, so that's the question I'm asking. So if you look at Q4 '18, other cost item versus Q4 '17. So the 2 numbers are MXN 33 million for Q4 '18, and MXN 40 million for Q4 '17. So if you look at it, there was -- on a year-over-year basis for fourth quarter, there was a tailwind of MXN 18 million. Because last year, fourth quarter was the heaviest quarter in terms of that cost because you recognized it all there. So I'm just wondering why that cost item still increased, if you adjust for that. I could follow up offline as well maybe with a bit more detail with Ramón.

[Luis René Ramón, executive]

Hi, Mohammed, so the tailwind that you mentioned is, we had to pay the patents in Chile for around MXN 4 million. We also had -- we have a sale to market for sustainable rates also in SIF Icap, where we have to also -- it's a revenue line, but we also have expenses, and that's an extra almost MXN 5 million there. And then we have new promotion activities for all of our services. So more events and more promotional activities, and some of the provisions for next year.

[Mohammed Ahmad, analyst]

Yes. That clears it up. That's about the right amount. So it was some promotions. And the final question was on just the Derivatives strategy going forward. I mean, is there anything -- or what would be the strategy, I guess, from a 3- to 5-year view?

[José-Oriol Par, executive]

Yes, thanks. We continue very focused on increasing and developing the Derivatives market in Mexico. Unfortunately, it is not just in our hands. We need to work with financial authorities, with regulators and with participants. And we are doing that. And starting with financial authorities and regulators, we have already been talking about the Derivative market development in Mexico with the new administration, with a new financial authorities and regulators. We are working in a couple of teams. And this year, we had a study in a big detail in -- about other emerging markets that developed a Derivatives market. And there are couple of things that we are trying to adopt in Mexico, and we're working with them. As an example, one of them is to include the participation of Mexican derivatives in local sovereign debt in the favor of the market makers. We're also working on the derivatives loan, that is something that in Mexico we have had a draft -- a couple of drafts for a couple of years. But in Mexico, we are meeting a Derivative low. We need to work on the promotion. I think that probably this is one of the most important. Last year, we hired a derivatives representative, representing MexDer and Asigna that is based in Chicago, covering U.S. clients. Couple of weeks ago, we hired a new Head of Sales for the group of BMV that is also going to be focused on promoting Derivatives. And so we're working on a couple of things. And hopefully, we are going to have more support from this administration than from the past.

[Operator]

Our following question comes from Gilberto Garcia from Barclays.

[Gilberto Garcia, analyst]

What sort of M&A activity are you considering in Mexico?

[José-Oriol Par, executive]

Nothing in particular. But it's something that -- we're open. We're looking at somethings that can be complementing or adding value to the group of BMV. And I think, and as you know, we have a very good diversification of companies and revenues. And we're trying to take advantage of that. And I think that this will be an interesting way to continue to grow our income.

[Operator]

Our following question comes from Domingos Falavina from JP Morgan.

[Domingos Falavina, analyst]

It's actually a short question and I apologize I dialed in a bit late. So if you had mentioned it in fact and you have to repeat that, I apologize for that. My question is just the financial income came in unusually high it was and you were driven by -- you added a note in there, basically the effect of the prepayment of debt. So I'm assuming you basically whenever you prepaid you marked down that. How much in pesos millions were the exact impact of that prepayment? That's my question.

[Ramón Sarre, executive]

The effect of the prepayment is MXN 17 million, Domingos.

[Domingos Falavina, analyst]

And that should not occur in 2019, right?

[Ramón Sarre, executive]

Definitely not.

[Operator]

We have no further questions at this time. I'll now turn the call over to Mr. Oriol Bosch for final remarks.

[José-Oriol Par, executive]

Well, thanks, once again. Thanks a lot to all of you and for your participation and all your questions. Have a great day. Thank you, bye.

[Operator]

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