Bolsa Mexicana de Valores SAB de CV

BMV:BOLSAA

Earnings Call Transcript 2018-Q1

[Operator]

Welcome to the First Quarter 2018 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. [Operator Instructions] Please note that this conference is being recorded.

I would now turn the call over to Mr. Ramón Güémez Sarre. Sir, you may begin.

[Ramón Sarre, executive]

Thank you. Good morning, and welcome to Bolsa Mexicana de Valores First 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 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 April 19 at the Bolsa's corporate website, www.bmv.com.mx.

During this call, all figures are in Mexican pesos and compared to the first quarter of 2017 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 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, ICAP CEO; Alfredo Guillén, COO; Jose Miguel De Dios, MexDer COO; Roberto Gavaldón, Director of Communications; Luis René, IR Officer; and Ramón Güémez, and myself, CFO.

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

[José-Oriol Par, executive]

Thank you, Ramon. Good morning, everyone, and thanks for joining us for the first quarter earnings conference call. We have released solid results this quarter, with good income growth across our core business areas as we continued to successfully execute on our strategy for growth and to improve financial performance. I will outline the developments in the period and thoughts going forward. But first, let me take you through the key financial results for the first quarter of 2018.

Our revenue increased by 9% to MXN 842 million with a strong growth at Indeval, SIF/Icap and maintenance. Our expenses increased 12% because of cost directly linked with revenue and organizational restructuring, which will generate savings in the future quarters and project timing. Both operating profits and EBITDA increased 7%, and net income rose by 15% to MXN 318 million for the quarter.

The EBITDA margin was registered at 55%, in line with our guidance in both EBITDA margin and net income. We continue to monetize on the improvements implemented in the business model of our global market, the SIC. In the second semester of 2017, this initiative generated MXN 92 million in revenues. And as for the first quarter of 2018, Indeval recorded MXN 53 million in SIC-related revenues and MXN 2.2 million in international tax form management services.

These results go in line with our annual estimate of MXN 200 million in additional revenue with MXN 45 million in expenses per year. We have continued with our promotion efforts with potential and current issuers. On this topic, two FIBRAS E were listed during the quarter. The first in equity, FIBRA E for CFE, [the electricity federal commission (sic) The Federal Electricity Commission], for MXN 16.4 billion and Grupo Aeroportuario de la Ciudad de México for MXN 30 billion as well as one SPAC from Promecap for MXN 5.6 billion. Furthermore, 5 CKDs, certificates of capital development, were listed during the quarter for MXN 2.5 billion.

Listing in short-term and long-term debt growth 21% and 42%, respectively, compared to the first quarter of 2017. Furthermore, the amount placed in long-term debt increased 4x to MXN 83.3 billion versus the same quarter last year. These listings will generate maintenance revenues in 2019. In line with our efforts to constantly upgrade our technology during the first quarter, we continued investing in several projects, including automating, data transfer of information in the global market, SIC and upgrading BMV's infrastructure with high availability technology.

As well as continue 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, which will open doors to the public during the second quarter of 2018. Moreover, in April, the Mexican Stock Exchange turned blue in honor of the World Autism Awareness Day.

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 equity trading, revenue increased by 3% to MXN 77 million. The daily average value traded was recorded at MXN 15.5 billion, 1.5% (sic) [2%] lower compared to the same quarter last year.

It is important to mention that the first quarter of 2018 have 3 business days, or 5% less than the first quarter of 2017. Cash equity clearing shows similar revenues to the first quarter of 2017 at MXN 51 million for the quarter, despite fewer business days. Derivative revenues decreased by 24% to MXN 20 million, mainly due to reductions in bonds and currency futures in minus 36% and 51%, respectively, due to lower volatility and closure of short position by institutional investors.

As for derivatives clearing, Asigna revenues declined by 21% to MXN 31 million due to lower clearing volume. The average margin deposits for the quarter were MXN 38.1 billion, 7% lower than the first quarter of 2017. SIF Icap revenue increased by 9% to MXN 144 million as a result of higher sales in Mexico and Chile by 8% and 11%, respectively.

Custody's revenue rose by 43% to MXN 209 million, explained by the improvements made to the global market business model, which generated MXN 53 million in the quarter. Information services decreased 8% to MXN 114 million due to extraordinary nonrecurring audit-driven revenues in the first quarter of 2017. Having said that, Market Data and Valmer revenues continued growing steadily.

Listing and maintenance revenues rose by 10% to MXN 164 million. Listing revenue rose 5% versus first quarter of 2017 as a result of new listings in short-term and long-term debt. And maintenance revenue increased by 10% or MXN 14 million, mainly explained by listings in previous years.

Expenses for the quarter amounted to MXN 396 million, up 12% or MXN 43 million compared to last year first quarter. This increment is mainly explained by the following items. Personnel expenses increased by MXN 16 million or 9% as a result of salary raises, which overall were below the inflation rate. The variable compensation component in SIF Icap and the restructuring of the organization, this last point will bring savings in the coming quarters.

Technology increased by MXN 11 million explained mostly by the timing in the recognition of project expense. Last year, these expenses increased towards year-end, while in 2018, we are striving for a more linear recognition.

Consulting fees and sub-custody rose MXN 8 million due to higher-than-expected growth in the global market. It is important to mention that sub-custody costs are revenue driven.

Other expenses rose MXN 3 million due to our reserve for the purchase of the remaining 20% stake of SIF Chile for MXN 6 million. Is it is worth remembering that last quarter, we booked a MXN 24 million expense for this country. In 2018, we are booking this item quarterly in a linear basis.

For the full year, we reached an EBITDA of MXN 467 million, up 7%, and a net income of MXN 318 million, up 15% compared to 2017, thanks to the strong financial performance and solid growth in BMV's subsidiaries.

Let's now turn to the cash flow and balance sheet. The cash balance at the end of March 2018 was MXN 3.4 billion, an increase of MXN 589 million because of the maintenance fees which are collected at the beginning of the year. CapEx was MXN 14 million for the quarter, which were mainly invested in technology upgrades. Regarding the Indeval loan, we still have MXN 634 million outstanding.

With regards -- with the venture of the new stock exchange, the authorities have given a new extended deadline for the beginning of their operation. As I have said before, this means that we must continue to invest in this venture. In spite of the difficulty of monetizing the expenses related to the other exchange, we estimate that this quarter Grupo BMV spends around MXN 25 million. This includes technology expenditure as well as the opportunity cost of time dedicated by Bolsa senior management as well as a lot of employees.

Last of all, I'm delighted to announce that next week, our shareholders' assembly will vote on 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 shareholders' assembly will vote on increasing a buyback share fund by 100% to MXN 402 million.

With this, I conclude my presentation. And together with all my colleagues, we are gladly answering any questions you might have.

[Operator]

[Operator Instructions] We have a question from Ernesto Gabilondo from Bank of America.

[Ernesto María Gabilondo Márquez, analyst]

Three questions from my side. First, can you elaborate on the expenses related to the new exchange? I remember that you have been evaluating Bolsa's technology in the past. So I just want to know if those expenses were related to that. Do you know how does Bolsa's technology compare against BIVA, the new exchange, and if we should expect more expenses related to these in the coming quarters?

Secondly, despite these expenses related to the new exchange, I think, the EBITDA margin expanded nicely quarter-over-quarter to 55.5%, which is running in the top of your guidance range of 53% to 56%. So what should we expect for EBITDA margin going forward? Can we expect to remain in these levels?

And finally, can you share with us the pipeline of new listings? And what could be the risk for these new listings, it will be competition, NAFTA or the presidential elections?

[Ramón Sarre, executive]

Ernesto, concerning expenses related to BIVA, this is an estimate -- the number we've given is composed of to its investment in technology projects, basically, connectivity to the different Bolsa companies. The communications infrastructure that we have to set up, and it also includes an estimation of the time dedicated by senior management and other employees. It also includes a portion of lawyer fees and work that we have to do regarding opinion on the regulation. What we would expect in the future? Many of these costs are here to stay, in the sense that the new technologies, the communication infrastructure that we're setting up, it's here to stay. We have not hired anybody new to take care of BIVA or the BIVA connectivity. So people will be dedicated to other things once this is over. But BIVA is also here to stay in many ways or at least, they say so.

Regarding the pipeline...

[José-Oriol Par, executive]

Yes, regarding the pipeline, as mentioned, we have started this year to see some activity in new products, such it were the case of the new FIBRA on the energy side. We also sold a second SPAC, the second special purpose acquisition company. But in recent, we have -- we also have a very good pipeline in these -- in all these products in FIBRA E. As of today, on the public side, we already have 3 FIBRAS E that should be coming in the next weeks or months, we have FIBRAS [Infra-X ] Fast and a new one that was announced yesterday, that is ASA, related to the airport services. On the Fibrum, the real estate FIBRAS, we also have FIBRAS that could also be coming in the next -- in the short term, that is FIBRA [ Op ], FIBRA STAY, and a new FIBRA on the education side that is Fibra Educa. We are also seeing a lot of interest in therapies that was a product that we did not see a lot of activity in the past. But now due to a change in the regulation for -- mainly for pension funds, we are starting to see a lot of interest in this product, and we are seeing a good pipeline that is currently building in potential service. So I think that we have a very good pipeline. That's on the equity side. On the debt side, March was, I think, a record high if not at least a record high in the past 6 years in terms of activity in long-term debt. That was just in the month of March was almost MXN 60 billion, that's twice the amount that we had in the -- in March last year. But we also saw a couple of new names coming to the market. So we feel very comfortable with the pipeline.

[Ramón Sarre, executive]

And regarding guidance, Ernesto, we don't know what the impact of BIVA coming out even though late this could have been. So that's why we gave the guidance or we increased the spreads in our guidance. But as you know, we have no plans to update our expectations. Guidance is the best estimate we had at the beginning or at the end of last year and the beginning of this year. And we make no attempts to update the numbers.

[José-Oriol Par, executive]

And regarding technology, as mentioned, we have been analyzing and looking at other choices for technology, mainly on the equity side. And what I can tell you, so far, is that we feel very comfortable with the cash equity platform we have, mainly looking at our new potential competitor. And we think that we are very competitive. However, having said that, we are expanding our analysis, not just to short term looking at our new competitor, and we are moving and looking in the mid and long term -- with a mid- and long-term view, looking at new technologies that are completely different from, that we and our competitors have.

[Ernesto María Gabilondo Márquez, analyst]

Just a follow-up in terms of the risks for new listings. Just want to know your point of view on what could be that risk competition, NAFTA or presidential elections? And lastly, I'd like to know if you can give some comments about potential alliance that I think you will vote in an extraordinary shareholders' meeting very soon.

[José-Oriol Par, executive]

Well, the risk, I don't know. And we do not have more information beyond what it is public today, but looks like the market is more optimistic than it was regarding the NAFTA negotiation. And we have seen that in the market and in the investors. Regarding the competition, we're working on that. And there is now a new date, but the date, as you know, has been postponed for a couple of times. The date that is not going to change is regarding the elections and no much to comment. What I can tell you is that the Bolsa has a long and a very interesting history. It was founded in 1894 when Porfirio Díaz was President of Mexico, and since then the Bolsa continued operating the next 124 years. And during this period of time in Mexico, we have had more than 25 Presidents and 25 different administrations. And Bolsa has been working with all of them, raising money, buying and selling securities, providing an efficient trading market and according, obviously, to the conditions and capabilities of each period of time. And we're going to -- we're not going to cut this trend. We are going to continue with the new administration, no matter who is going to win the next presidential elections.

[Ernesto María Gabilondo Márquez, analyst]

Perfect. And in this, last question about the potential alliances?

[José-Oriol Par, executive]

This, I have no idea about it. No.

[Operator]

Your next question comes from Gabriel Nóbrega from UBS.

[Gabriel da Nóbrega, analyst]

Most of my questions have already been asked. But just to follow up on BIVA. Could you give us possibly a new timing as you have already said that the regulator has extended the timing for them? So when do you effectively expect BIVA to begin operations? And I'll make a second question after that.

[José-Oriol Par, executive]

I don't know, we have to comply with the date. And it's not just the Bolsa, it's also the casa de bolsa, the local broker-dealers. And we have also been trying to find out how are they and how ready are the broker dealers in Mexico. A few days ago, the senior management of BIVA mentioned that they had -- that there were 28 out of 30 broker dealers already connected to BIVA. Yesterday, in a meeting with 10 broker-dealers, I asked the same question and the question was, "Are you already connected to BIVA?" And the unanimous answer was no. So I was meeting with 10 out of 2 broker dealers that are not connected. So it really sounds like a bit paradoxical, but if really find out if the broker dealers are ready or not from the technology point of view.

[Gabriel da Nóbrega, analyst]

All right. That's very clear. And my second question it's related to your costs. We saw that during the quarter, we continued growing above 10%. And I just want to understand what are your cost contingent strategies for the year?

[Ramón Sarre, executive]

Gabriel, the cost increase is -- let me break this down. One issue that we're seeing is timing. If you remember at the end of last year, we booked a $24 million -- sorry, MXN 24 million expense for the recognition of the put option we have in SIF Chile. This year, we are doing it on a linear basis. So while you see an increment of MXN 6 million for the quarter on a year-over-year basis, it's going to be 0. From the -- we have -- we also have an organizational structure we had, we eliminated 1 SVP position, which will not be replaced. So while we do have a onetime severance payment, this will generate savings in the future. So we do not expect that to have year-over-year impact either. On the technology expense, we do expect an increase. But also we are -- we think there's more of a timing issue. Technology expenses during last year increased overall, they were MXN 69 million, MXN 71 million, MXN 74 million, MXN 88 million. As Oriol mentioned, we are striving to keep those on a more linear basis. So if we achieve that, the overall -- the year-over-year impact will be much less than the impact we have this time. So we are -- we continue to, let's say, analyze our organizational structure to look for the optimal one. We continue to invest in technology. We continue to invest in the SIC project. We continue to invest in BIVA. We are cyber security platforms, we're going to continue to invest in that. And we're keeping cost stable and are limiting growth as much as possible. But we are seeing a bit of a timing issue. We are confident that on a year-over-year basis, this will be much eliminated.

[Operator]

The next question comes from Frederic De Mariz from UBS.

[Frederic De Mariz, analyst]

Just a follow-up on the debt issuance. So we saw, and you mentioned, it was a record high for March. Can you give us a bit of color, why it is happening? Are companies expecting higher rates? Are you doing anything special? Can you give us a bit of flavor just on that issuance and on the pipeline?

[José-Oriol Par, executive]

Yes. Thank you for your question. As mentioned, in -- during the month of March, we had a lot of activity. I was looking at the number. It was a record high since 2012 with more than MXN 58 billion in 22 different issuances that were 213% compared to March 2017. But it was not just in the month of March. If we look at the first quarter of this year, the amount was -- the total amount on debt was MXN 81.3 billion, that's 4x higher than the amount, which is correcting this in the first quarter of 2017. The number in 2017 was almost MXN 20 billion for the quarter. I think that probably there are a couple of things. And maybe, one is that the companies are expecting -- could be expecting a period of volatility, a period of time with higher volatility. And they -- and because of that, we have seen more activity in long-term debt than short-term debt. So this is one. But -- and rate, I think, that is more on this side than rates expectation.

[Frederic De Mariz, analyst]

Got you. And would you say that companies are going to you as opposed to going to the banks, did you see a bit of that trend as well going now?

[José-Oriol Par, executive]

Well, this could be. And we have also seen financial companies using the exchange and the banks as well as -- the commercial as well as development banks using the exchange for short- and long-term financing, which is quite competitive. And I think that there is a very good complement in between Bolsa and the financial banking.

[Operator]

The next question comes from Mohammed Ahmad from FGP.

[Mohammed Ahmad, analyst]

One question just sort of popped up from your point with regards to debt issuance. Could you give me a sense of why the revenue wouldn't have been up more in issuers, given the strong ramp in debt? And I'm assuming it because it's more heavily profitable to do equity? And then the question I have on the recurring expenses. You talked about quite a few expenses that you've called out as being special. I'm just wondering how many of them are just timing issues, as you mentioned with tech and Chile SIF acquisition-related costs? And how many of them are nonrecurring? Like, I mean, can we take any of your cost, and say, okay, this is not going to be on a go-forward basis, not recurring. And how much would be the scale of that?

[José-Oriol Par, executive]

Mohammed, on a -- on the cost, which ones would be recurring and which ones would not be recurring. I would say that with the exceptions of the severance payment that we had, most of the costs that are going to be recurring. We have some costs that are revenue related, such as the sub-custody fees, which increased about MXN 7 million, which have additional compensation, which is related to SIF/Icap's revenue. But the rest of the investment in technology and the Chile -- the SIF Chile those are going to be recurring overall and the salary increase. So for -- if you would want to put a number on this, I would say you have to take out about MXN 6 million -- about MXN 10 million.

[Mohammed Ahmad, analyst]

MXN 10 million that will be nonrecurring?

[José-Oriol Par, executive]

Yes. And could you repeat your first question, please? And on the -- when listing fees are amortized over the calendar year. And remember, they also have a cap. So it's not so much the amount as it is also has to do with the number of listings. And it also depends -- because they are amortized over the year, it depends if you've listed in January or February or March. If you are related to -- if you're listed towards the end of March, you had a very little impact because very few days that were actually included. If you see listing fees throughout the year, you're going to see that they are all -- they always have a seasonality that they increase towards year-end. And this is why that seasonality happens.

[Mohammed Ahmad, analyst]

Okay. Just one follow-up on the information services side. You do mention that there was audit-related extra revenue last Q1 versus this Q1, which made it a tough comp. I'm just wondering was there any currency impact given that some of it is denominated in dollar, I can't recall whether the pesos, on average, stronger or weaker this Q versus last Q1?

[José-Oriol Par, executive]

Yes, most of the impact was due to the audits that we performed on our customers. And we've had some payments that have not been made. And there was some FX impact as well. But the significant part was the extraordinary income from the audits.

[Operator]

The next question comes from Bruno Rocha from Itaú BBA.

[Bruno Gomes Lima da Rocha, analyst]

Could you comment just a bit more on the organizational restructuring, what should we expect in terms of how much could be the savings in the coming quarters and so on?

[Ramón Sarre, executive]

We eliminated one senior management position that will not be replaced. So we are -- and we're continuing to analyze our whole management structure. So we should see, overall, some reduction in the -- in our personnel expenses going forward.

The savings, overall, I think, would be in the range of MXN 6 million for the remainder of the year.

[Bruno Gomes Lima da Rocha, analyst]

Okay. So it's MXN 6 million per quarter or all over the year?

[Ramón Sarre, executive]

No, it's all over the year because it's going to be reduced salaries. So impact, we estimate would be 0 on a year-over-year basis.

[Operator]

[Operator Instructions] We have a question from Carlos Gomez from HSBC.

[Carlos Gomez-Lopez, analyst]

I have a question about the tax rate that you expect for this year and for next year?

[José-Oriol Par, executive]

Our tax rate has been relatively constant around 28%, 29%. We would expect to continue it there.

[Operator]

We have a follow-up question from Mohammed Ahmad from FGP.

[Mohammed Ahmad, analyst]

Considering we have some time, I thought we talk about maybe more strategic direction of the derivatives business. I realize it's been very challenged for the last few years. It had a good year last year, I'm assuming because of the volatility in the market post-Trump election. But could you give us any sense of anything strategically you could do for longer-term purposes in derivatives?

[José-Oriol Par, executive]

Yes, this is something that we are looking at numbers for the first quarter as mentioned. We're not very positive for a couple of reasons, including lower volatility and a stronger peso. So in one of the most active and profitable future contracts we have, that is the peso dollar, we did see because of the peso appreciation from investors reducing the positions they've had. And this was an impact on the trading as well as on the Asigna side on the CCP. But this is short term. Long term, we continue to work with the different participants as well as the financial alternatives. We continue to believe that this is a task -- pending task that we have as an exchange and as a country compared to other countries with more developed financial markets, where the derivatives activity is much higher than it is in the case of Mexico. So we're working on that. We are trying to push the activity, including on the government debt side, which is the M&A bonus with government debt futures and other contracts. We are also analyzing, and we hope to have some new contracts on the commodities side in the next few weeks. So hopefully, we are going to see more activity on this side. But definitely, we're working on that. And it's something that is the one of our priorities as well as one of the biggest potentials that we think we have.

[Operator]

[Operator Instructions] We have no further questions at this time. I would like to turn the call over to Mr. Bosch for any final remarks.

[José-Oriol Par, executive]

Okay. Thanks a lot for participating in this conference call, and as well as all your interesting questions, we really appreciate it. Thank you very much, and have a great day.

[Operator]

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