Bolsa Mexicana de Valores SAB de CV

BMV:BOLSAA

Earnings Call Transcript 2019-Q4

[Operator]

Welcome to the Fourth Quarter 2019 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. Mr. Güémez, you may begin.

[Ramón Sarre, executive]

Thank you. Good morning, and welcome to Bolsa Mexicana de Valores Fourth Quarter 2019 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 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 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 February 20 at Bolsa's corporate website, www.bmv.com.mx. During this call, all figures in -- are in Mexican pesos and compared to fourth quarter 2018, 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, our CEO; José Manuel Allende, SVP Strategic Planning and Business Development; Roberto González, Senior Vice President of Indeval; Gabriel Rodríguez, SIF ICAP CEO; Alfredo Guillén, COO; José Miguel De Dios, MexDer CEO; Luis René, our Investor Relations Director; and myself, Ramón Güémez.

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

[José-Oriol Par, executive]

Thank you, Ramón, and good morning, everyone. Thank you for joining the fourth quarter 2019 earnings conference call. I would like to announce that in spite of a very difficult year, BMV has achieved its EBITDA margin guidance for 2019, which was recorded at 59%. The annual results show BMV as strong and well-diversified business model and highlights the need for continuing executing our medium-term strategy.

Our revenue increased by 1% to MXN 3.6 billion, with solid growth in the Central Securities Depository and Information Services. Our expenses were well under control, decreasing 1% as a result of initiatives to optimize processes and better commercial conditions in sub-custody.

Operating income and EBITDA increased 3% and 8%, respectively. And net income rose by 1% to MXN 1.4 billion for the year, excluding the impairment of Asigna's goodwill. The EBITDA margin was recorded at 59%, close to the top range of BMV's 2019 guidance. Furthermore, I am pleased to communicate that BMV's Board of Directors agreed to recommend to our shareholders assembly a dividend of MXN 1.81 per share, which is equivalent to MXN 1.07 billion, which in turn means an 80% payout ratio. By raising the dividend 2%, BMV's yield remains above 4.8% versus 2018 average stock price.

Let me now review BMV's fourth quarter credit-related business results. In Cash Equities trading and clearing, revenue was registered at MXN 113 million, down 27% compared to the fourth quarter of 2018. The average daily traded value was MXN 12.4 billion, down 28%. However, it is important to state that the ADTV of the last quarter of 2018 was atypical as a result of higher volatility. For the full year, the average traded value was MXN 13.2 billion in the total market, MXN 7.6 billion in the domestic market and MXN 5.6 billion in the SIC.

Regarding the equity clearinghouse, it is relevant to note that CCV provides clearing services for OpEx changes for -- in Mexican equities. In Derivatives trading and clearing, revenue decreased by 11% to MXN 44 million as a result of lower volumes in trading of swaps of TIIE, dollar futures and IPC index future.

Asigna's revenue were impacted by the reduced trading of the U.S. dollar contract as well as the lower margin deposits, which were reported at MXN 32.6 billion, 1% lower when compared to the fourth quarter of 2018.

As we have mentioned in the past, BMV continues working with the Mexican government and financial regulators to incentivize the development of our formal and standardized Mexican derivatives market, including the authorization for more [authorities] or pension funds to trade derivatives.

We have 2 new contracts in the pipeline for 2020: the overnight deal future and the electricity future. The first one is a monthly contract related to the new rate that the Central Bank has started publishing on January 16. This new rate is the equivalent to the secure overnight financing rate, but in Mexican peso. Regarding the electricity future, we have been working with the finance and energy authorities to determine contract specification and risk model.

And SIF ICAP's revenue was up MXN 20 million or 15% to MXN 155 million. SIF ICAP revenues in Chile grew MXN 22 million or 29%, while in Mexico, they decreased MXN 2 million or 4%. The growth in Chilean division is mainly explained by greater volatility in the Chilean market and new offshore customers, which was partly offset by the depreciation of the Chilean peso against the Mexican peso.

Regarding our nontrading businesses results, Information Services increased 17% or MXN 20 million to MXN 135 million. During these periods of time, Valmer recorded nonrecurring revenue of MXN 8 million due to the sale of licenses and implementation of OpenFinance, our portfolio management software. Excluding this nonrecurring revenue, Information Services increased 10% as a result of increasing demand for Mexican data from both existing and new clients.

On the Central Securities Depository, Indeval, revenue was up 9% to -- or MXN 20 million to MXN 250 million, explained by their continuous growth in services related to the global market, the SIC. For the full year, these services represented MXN 316 million or 31% of Indeval's revenue, up MXN 84 million compared to 2018. We expect these services to continue growing above 10%, since investors continued showing a strong interest for the global market, and the volatility in the peso-dollar exchange rate may increase during the U.S. election.

Listing and maintenance revenue decreased by 12% or MXN 22 million to MXN 167 million. The reduced fee schedule had an impact of MXN 22 million, MXN 4 million in listings and MXN 18 million in maintenance. BMV is committed to continue supporting the economic development of the country and encourage the growth of financial markets in Mexico. Excluding their reduced fee schedule, listing was down MXN 6 million due to feeble activity compared to the third quarter of 2018, which was offset by the maintenance revenue from previous year's listings.

During the fourth quarter, Fibra Monterrey issued a follow-on for MXN 3.9 billion, and BlackRock issued a CKD with 7 series for MXN 1.3 billion. As for the debt market, both in short-term and long-term debt, new listings improved by 7% and 44%, respectively.

As mentioned before, Asigna's revenue were impacted by reduced trading in the U.S. dollar contracts as well as lower margin deposits. It was taken into account in BMV's annual goodwill impairment test, and in accordance with our Audit Committee and our external auditor, BMV registered an impairment of Asigna's goodwill for MXN 40 million. This impairment does not affect our cash flow.

Excluding the effect of the goodwill impairment, expenses for the quarter amounted to MXN 402 million, down 12% or MXN 54 million compared to last year's fourth quarter. BMV had nonrecurring items in personnel due to the reversal of a provision for MXN 14 million, and in sub-custody as a result of negotiated discounts with international custodian for MXN 3 million.

Excluding this concept, expenses decreased MXN 37 million or 8% compared to the fourth quarter of 2018, explained by the following items. Personnel expenses increased MXN 6 million due to annual salary increases, new positions in information security and customer relations. Technology was down MXN 39 million in the third quarter. MXN 21 million were reclassified from technology to depreciation as a result of changes in the accounting standard, IFRS 16, and the net result decreased by MXN 18 million, mainly due to finished 2018 initiatives and the optimization of processes.

Depreciation increased by MXN 30 million, MXN 21 million due to the changes to IFRS 16, and MXN 9 million because of projects completed in 2018 and new hardware releases.

Rent and maintenance presented a decrease of MXN 7 million as a result of nonrecurring expense during the fourth quarter of 2018 for the maintenance of BMV's elevators. Sub-custody decreased by MXN 19 million, explained by special commercial terms as a result of the consolidation of international custodians for the global market.

The results of the quarter led to a new record-high in the operating and EBITDA margin registering 15% and 61%, respectively, and the net income of MXN 310 million, not considering the impairment to Asigna's goodwill. Net income would have been MXN 350 million.

Now let me turn to BMV's medium-term strategy and how it is unfolding. BMV's strategic initiatives are focused on: first, further development of post-trade and market data initiatives; second, protection of legacy business by building new added value services; and third, work closer with buy-side clients and regulators.

First, in Indeval, we are currently working on fee structure with the financial authorities to enable access to the local market infrastructure, providing direct costing, corporate actions, market information and tax services, to name a few. Potential clients include foreign financial institutions, such as broker-dealers, banks, fund managers, insurance companies and global custodians. Additionally, we continue implementing RPAs, or robotic process automatization, to perform repetitive business processes and reduce operational risk.

Second, regarding our Latin American Exchange data, or LED venture, I can share with you that the platform is up and running, and we are currently offering trials to potential clients. During this first phase, we are offering end-of-day data, master file, outstanding and corporate events of Mexico, Colombia, Peru and Chile. Additionally, we continue negotiating the business model and redistribution fees with [ B3 ].

Third, we have modified our infrastructure and included fixed income models to our risk management systems in the CCV, the central clearing counterparty. Our goal is to offer clearing services for [indiscernible] in bonds, Mexican sovereign bonds during the second semester of 2020. We are currently working in the approval process with the financial authorities.

Fourth, we are actively evaluating potential Mexican targets to join BMV Group in the analytics and back-office space. I would like to reiterate that BMV will continue investing for growth by expanding its portfolio of products and services and by focusing on top line expansion, while maintaining its cost control culture. Lastly, we are in the final process of hiring a Chief Technology Officer who will be responsible of BMV's technological transformation. In the next conference call, we will have -- elaborate more on this initiative.

Regarding the protection of BMV's legacy businesses, during the second semester of 2019, we released 2 features in BMV's trading engines. First, we increased the functionality to our member, broker and base clients to trade baskets and replicate simultaneously indices and global portfolio optimized strategy. BMV's clients can execute multiple trades in microseconds, minimizing manual entries and price difference in order to deliver the same performance as the global portfolio strategy. Additionally, we released self-trade prevention features to avoid 2 orders from the same organization of member firms, from executing against each other. Furthermore, in listing and maintenance, we released an app to provide issuers with an additional communication channel to consult deadlines, regulations, delivery of information, among other functionalities.

BMV is focused on constantly improving its customer experience through our customer-centric organizational culture. As for getting closer with buy-side clients and regulators, BMV continues working together with the authorities and financial regulator to develop a more liquid, transparent and efficient capital market as well as a Mexican derivatives market.

We expect to lease the overnight deal futures in the first half of 2020 and the electricity futures in the second part of the year.

Over the years, BMV has contributed significantly to the financial development of Mexico, and a strong corporate responsibility has been part of our culture from our foundation. We are aware of the importance that we have as a stock exchange to generate positive changes in the environment, social and corporate governance issues. Therefore, we have created a corporate responsibility and ESG department in order to create a medium-term strategy and address our stakeholders' material issue following the best practices. In the meantime, I'm glad to share with you that in 2019, BMV strengthened the stock market and financial awareness in Mexico through BMV's school offering over 150 courses and trade events for 28,000 people. MUBO, our interactive museum, has received over 100,000 attendees, and numerous experts in their fields have stopped every other week at BMV's auditorium. Moreover, BMV is part of the sustainable stock exchanges' initiative and has an active role in [indiscernible] environmental projects to promote green finance.

MÉXICO2, BMV's carbon exchange, provides an electronic forum for certificate, sponsoring the right to emit 1 tons of carbon at the offset, thereby, attaching a cost to pollution. The sustainability index with 30 constituents was developed since 2011, and BMV is currently part of this index.

Finally, we expect 2020 to continue being a challenging year for our credit-related businesses as well as for listing and maintenance. By BMV's 3-pillar strategy, we are ready to face the risk and create opportunities in order to achieve our 2020 guidance and EBITDA margin of 58% to 61% and the net income of MXN 1.4 billion to MXN 1.6 billion.

With that, I thank you for your time, and together with my colleagues, we will gladly answer any questions you might have. Thanks.

[Operator]

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

[Ernesto María Gabilondo Márquez, analyst]

I remember that in the past conference call, you mentioned that business confidence was more important than lower interest rates to start seeing more debt issuances or equity listings. Well, I think you were right. I think low business confidence has limited the operating and post-trading revenues. On top of that, the discount plan and competition have limited the revenues. However, on the other hand, we saw a fantastic job from you and your management team in maintaining expenses under control, declining for a second year in a row.

So how should we think about the operating income in 2020? Do you agree that the top-down of the country should continue to limit Bolsa's revenues in the short term? And how should we think on expenses, do you think there's still room to reduce them?

[Ramón Sarre, executive]

[Foreign Language]

[José-Oriol Par, executive]

Yes. Thanks a lot, Ernesto, for the -- for your question and for having -- following us. And first, yes, I think that it is important to mention that 2019 was a pretty difficult year. That, as you mentioned, we had no IPOs -- no new IPOs from the equity sides, and this was the second year in a row. In the 2017, we still had 4 new companies listed in the exchange: Cuervo, Bajío, Traxion and Grupo Mexico Transportes was the last one in November 2017. And since then, we had no IPOs.

We had a new listed companies in other products, not in equity, so in all the parts that you know, CKDs, CERPIs, FIBRAS, et cetera. But the number in 2017 was -- in new companies was, including foreign equity, was 38 companies. In 2018, the number with no companies from the equity side, the total number was 40. In 2018, we had more CERPIs, around 10 CERPIs, and then we also have CKDs, FIBRAS, FIBRAS E, so it was still pretty active.

And in 2019, we only had 7 new companies, so 7 compared to 40 companies in 2018 and 38 in 2017. So it wasn't a typical year. In addition to that, the issued amount was lower in all products, mainly in private debt. In Certificados Bursátiles, the number by the end of the year was around 1%, 2% lower in long-term debt. However, I would mention that the trend was not too bad. We have started the first quarter with a number that was like 70%, 7-0 percent lower compared to the first quarter of 2018, and then by the end of the second quarter, we were around 50%. By the end of the third quarter, I think that the number was around 35%, and by the end of the year it was 20%. So the number was not pretty good, but the trend, I think, was improving.

In addition, we lowered fees from the cash equity market. We also lowered it in listing and maintenance. The traded volume, as already mentioned, in government bonds was lower in Mexico, mainly in a one-off as well as in Derivatives because in dollar future contracts, I mean, most of the main contract, the volatility last year was lower than 2018. And therefore, we had lower activity. We also -- in 2019 was the first year that we had a new exchange first full year. As you know, the new exchange had started operations in mid-2018. And as it was expected, they did not bring new companies for the new clients, and the strategy is focused in taking companies and clients from the Bolsa, so we lost some market share. So this was the story of 2019.

I think that it is important to mention that despite all that, we had a year that was similar to the revenues that we had in 2018. So we have to focus on markets that have been successful and that we did believe that had a good potential, as it is the case of the global market that continues to be very successful. We are also working in market data that we continue to believe that we still have a potential to grow. We will continue to work on the Derivatives markets, and we will continue being efficient in cost control. And as previously mentioned, we are now going -- we are -- we already started to work on the new strategy on the technology side. It's something that we are going to work with the new CIO of technology. And so I think that we are going to be planning a new technological transformation after a long time that, as you know, in the Bolsa, we have cut our own technology. And today is -- there are some things that we can change and we can improve. So with -- having said that, I think that the next year 2020 should be a better year. Interest rates that you mentioned just started last year in -- at 8.25%, ended the year 100 basis points lower. And we have had, for the past 5 years since 2015, we had interest rates in Mexico growing in -- from 3% to 8.25%. And now we are seeing -- we started to see last year a change in interest rates. The economic growth, I think that we all believe that there is a very high correlation in the performance of the equity market and the growth of the economy and the number of IPOs. So hopefully this year, the -- and we do not have an economic analyst earlier here at the Bolsa, but we hope that the economic growth for this year is going to be higher, whatever that means, than the previous year. So I think that there are a couple of things that should be better and the trend that I did mention, that some companies, at the end of last year, they started to put some money to work and were requiring financing through Certificados Bursátiles to start to invest in new projects and to take advantage of new opportunities. So we'll see, and hopefully, we'll have a better year and achieve our guidance.

[Ernesto María Gabilondo Márquez, analyst]

And then my second question is related to your strategy of reducing your exposure to market revenues. Do you have a target of how much nonmarket-related revenues should represent of your total revenues this year? And what are you evaluating to achieve this target?

[Ramón Sarre, executive]

Ernesto, we do not -- well, we have not set ourselves to target as to how we would want to balance the revenues between nonmarket and market-related. I think that's the short answer to the question.

[Operator]

Our next question comes from [ Kyle Prado ] from UBS.

[Unknown Analyst]

So I have 2 questions here. So the first is related to trading volumes. So if you guys could share with us the first impact from the new trading tariffs that are in place since November? And if you could see any positive impact coming from that? And what are the expectations for the total volumes in 2020? And the second one is related to Valmer about the revenue arising from Information Services. We saw a sharp increase this year, and you mentioned that new clients and commercialization of new products developed in 2018 had a positive impact during the year. So for 2020, what should be the drivers for those revenues? And if we should see -- should expect similar growth?

[Alfredo R. Lara, executive]

Yes. This is Alfredo Guillén, the CEO of the Cash Market equity trading. I can tell you that we did reduce our tariffs -- our tariff trading, and we expect that these tariffs will boost somewhat our trading revenues for this year. We don't expect to change in the very short term any of our price strategy. Nevertheless, we believe that this year has started to see the potential increase in trading volumes since January. So we are confident that our pricing strategy has started to give some insight of what we will be expecting for the rest of the year. So we basically are expecting that our trading features will start to also give us an advantage and give our clients -- there's opportunity to trade more, basically in the institutional side.

Now we believe that since year 2006, we have been launching every year new trading features to comply with these international standards. That has been our main goal, to keep us competitive and have the same trading features than in other parts of the world. We're extremely confident that this is the case. It is interesting to see how our trading functionality has complied with that market, the markets around the world. So there is -- we are confident that, as Oriol said, once we review new technologies and new ways to deliver lower latencies and faster trading activities, we can comply with the rest of the world. So we are very confident. We believe that last year's trading volumes were partially the result of what you already know in terms of the economic arena. So we will like to see better volumes starting probably half of this year.

[Unknown Analyst]

Okay. And what about the informational services? So if we should see similar growth in 2020?

[Unknown Executive]

Yes. So in Valmer, we had a one-off, we had a sale of OpenFinance, which is the portfolio management system. This represented MXN 16 million in revenues, but it also had a consulting fee expenses, and we're not expecting to repeat this for 2020. So you will see a decrease in both the top line and also in the expense.

[Operator]

Our next question comes from Mohammed Ahmad from Foyston.

[Mohammed Ahmad, analyst]

Just a quick question -- clarification. You said MXN 15 million? Or MXN 5-0 million from that portfolio management software sale in -- sorry, 2019?

[Unknown Executive]

Neither. 1-6. MXN 16 million.

[Mohammed Ahmad, analyst]

1-6?

[Unknown Executive]

Yes.

[Mohammed Ahmad, analyst]

Okay. That's great. Just in weight of that same thought, could you give us any overall number for revenue impact in 2020 from one-off impacts in 2019, just from a basing impact? So clearly, that MXN 16 million won't be repeated. You have the price cut impact come through in 2019. Is it any additional number that is still expected to flow into 2020? And also on the data audit side, the number I have is about MXN 10 million. So if you could give us some color on revenue with regards to what was one-off revenue in 2019 that we should take out from the base for 2020? And then what could be potentially incremental in 2020 from your new initiatives?

[Unknown Executive]

Okay. So the one-offs were in Information Services. We've had a MXN 20 million in market data related to auditing of how our clients are consuming our data. And the other one is the MXN 16 million that we had in Valmer and related to the OpenFinance platform. That would be on the income side.

And on the expenses, it was MXN 14 million in personnel, which we had the reversal on the provision as well as MXN 6 million in sub-custody, because we had discounts or better commercial terms, but those discounts were only for 2019. So they will not be repeating in 2020.

[Mohammed Ahmad, analyst]

Sorry, and MXN 14 million is 1-4, correct?

[Ramón Sarre, executive]

Yes.

[Unknown Executive]

Yes. 1-4, and then MXN 6 million in sub-custody.

[Mohammed Ahmad, analyst]

Okay. So that was a MXN 14 million headwind going into next year?

[Unknown Executive]

Yes. Personnel, yes.

[Operator]

Our next question comes from Carlos Gomez-Lopez from Volta (sic) [ HSBC ].

[Carlos Gomez-Lopez, analyst]

Carlos Gomez from HSBC. I want to ask about your long-term goals. I mean you -- are you pushing your payout to 80%? You are projecting an EBITDA of 58%. Where do you see the company in the next 3 to 5 years? And I understand it depends on the economy. Is this payout sustainable? And can the EBITDA margin be raised even further?

[José-Oriol Par, executive]

Okay. On the -- I think that the -- now that our margin is at 59%, we are close to the -- we think that we are close to the -- to similar exchanges, to the margin of similar exchanges. However, we continue and we will continue to look for -- to increase the margin that we have had.

We still think that we have room to improve on both sides, on the revenue side as well as on the expense side. So we are going to continue to look for new opportunities on the organic and inorganic side. We will be taking advantage of opportunities that we are still -- we're already in, and we believe that we have some potential.

On the expense side, I think that an opportunity that we could have for the next year is the transformation on the technology that we have that I already mentioned that, and it's not the first time that we talked about that. But as you know, the main technology, talking about the trading engine, the technology for our CFD, it's a technology that was developed in-house a couple of years ago. But in technology, a couple of years ago looks like a long time. When the decision was taken at the Bolsa, I think that was the best alternative that we had. But today, it's different. So what we are working and we already started to work, and we'll continue to work with the new CIO on the different business area is to analyze what we have available today in the market, in the world, and to take the best decision.

So I think that on this side, we'll continue to improve in the next 3 years, and I'm expecting a significant change in this -- in the period of time that you mentioned.

[Operator]

And we have our next question from Mohammed Ahmad.

[Mohammed Ahmad, analyst]

Just on your new projects, you've been talking about for the last little while some of the incremental projects you're working on, whether it's with the regulator for some of the new clearing initiatives, whether it's the LatAm Exchange, whether it's some of the custodian services, post-trade services.

Can we get any color on addressable revenue pool that you're targeting so we have sort of a sense of scale of these opportunities? I realize that you can't guide as to when those revenues will be hit or what percentage of that revenue pool you'll be able to address, but just so that we can get a sense of what is the size and scale of revenue opportunities that you are pursuing.

[Ramón Sarre, executive]

Mohammed, no we can't give you those numbers right now. I would point to the fact that in our guidance where we have all our expectations mixed in, our goal is to come close to what we have this year in terms of net income and EBITDA margin. So while we are expecting some headwinds in a difficult year ahead, we are expecting them to offset with new projects and the opportunities we see this year, but we don't -- we're not ready to give the breakdown yet.

[Mohammed Ahmad, analyst]

Okay. I appreciate that. Just one on the new CTO hire, should we be then expecting at some point a significant reinvestment? Maybe not this year, but into next year?

[Ramón Sarre, executive]

Yes. One of his new priorities -- or I'd say his main priority will be, as Oriol said, to redefine our strategy going forward and to rethink our whole technological platform. And at some point, that will require an investment.

[Operator]

[Operator Instructions] We have no further questions. I'll turn the call back to the host for closing remarks.

[Ramón Sarre, executive]

Thank you very much, and we look forward to updating you in a couple of months for our Q1 results. Have a nice day. Thank you.

[José-Oriol Par, executive]

Thank you.

[Operator]

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