CME Group Inc. (CME) Q4 2020 Earnings Call Transcript

CME Group Inc. (NASDAQ: CME) Q4 2020 earnings call dated Feb. 10, 2021

Presentation:

Operator

Good day, and welcome to the CME Group Fourth Quarter and Full Year 2020 Earnings Call. [Operator Instructions]

At this time, I would like to turn the conference over to Mr. John Peschier. Please go ahead.

John Peschier — Managing Director of Investor Relations

Good morning, and thank you all for joining us. I’m going to start with the Safe Harbor language, and I’ll turn it over to Terry and John for brief remarks, followed by your questions. Other members of our management team will also participate in the Q&A session.

Statements made on this call and in the other reference documents on our website that are not historical facts are forward-looking statements. These statements are not guarantees of future performance. They involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any statement. Detailed information about factors that may affect our performance can be found in the filings with the SEC, which are on our website. Lastly, on the final page of the earnings release, you will see a reconciliation between GAAP and non-GAAP measures.

With that, I would like to turn the call over to Terry.

Terrence A. Duffy — Chairman and Chief Executive Officer

Thank you, John, and thank you all for joining us this morning. Our comments will be brief, as John said, so we can direct your questions. I hope you and your families are all staying safe and healthy. We released our executive summary this morning, which provides extensive details on the fourth quarter and 2020. As John said, I have John, Sean, Derek, Sunil and Julie Winkler with me this morning, and we look forward to addressing any questions that you may have.

2020 was a challenge with low volatility in several asset classes, including the front end of the rates curve and in our WTI contract for much of the year. We did see some very encouraging signs with some of our higher rate per contract products. Also during 2020, metals had its fifth consecutive year of record annual volume and is off to a strong start in 2021. We saw very strong activity in our agricultural commodities in the fourth quarter, and they continue to rise in the first month of this year, up 36% versus last year. Soybean futures had its second highest quarterly ADV, including record volume on both Europe and Asia.

After the extreme volatility on the first quarter of 2020 as the pandemic began, the volume — the total volume came in at 15.6 million contracts per day in the third quarter and jumped to 16.2 million contracts per day in Q4. During this entire time, we have remained heavily engaged with our global customers. During 2020, our volume from clients outside the United States grew by 7%, reflecting the global relevance of our markets. I am encouraged by the January 2021 volume, which came in at more than 19 million contracts per day.

We are very pleased with the progress we’ve made integrating the NEX business during 2020, including back-up as migrations to support finance and HR systems and the building of an integrated global sales team. Last week, we announced that BrokerTec has migrated to U.S. Treasury benchmarks trading and EU government bond and repo markets on to Globex. With BrokerTec’s dealer-to-dealer platform now fully integrated part of CME Globex, clients have an enhanced suite of government bond trading offerings across listed derivatives, cash and repo markets on a common platform, allowing greater operational and technological efficiencies while managing our risk across cash and futures. We remain excited about the mitigation — or I should say migration, excuse me, of EBS on to Globex by year end and the ability to provide further efficiencies to our global customers in the FX market.

During 2020, in the first quarter of this year, we have continued to innovate with several new products. We will begin trading Global Emission Offset contracts referred to as GEO futures on March 1. And we just launched our new Ether futures earlier as weak. We continue to work closely with our global customer base on solutions to help them manage their risks. These new products, build out globally relevant products we have delivered recently, including SOFR futures, E-mini S&P ESG futures, a South American soybean Cobalt futures, options on our popular Bitcoin futures and the popular Micro products across several of our asset classes.

With that, let me turn it over to John who will discuss the financial results. John?

John W. Pietrowicz — Chief Financial Officer

Thanks, Terry. Throughout 2020, we navigated the difficult operating environment, executed on the integration with NEX, launched new and innovative products and actively managed our expenses. For the year, we delivered $4.9 billion in revenue, up slightly from the prior year. And with a strong focus on expenses, we achieved $6.72 in adjusted diluted EPS.

During the year, we announced our annual variable dividend of $2.50 per share. And we recently announced a regular dividend of $0.90 per share for the first quarter of 2021, a 6% increase compared to the first quarter last year. In terms of fourth quarter revenue, our average rate per contract across the product areas were fairly stable with our micro contracts continuing to perform well across several asset classes. Market data revenue was very strong with an all-time quarterly high of $140 million and was up over 7% compared to Q4 last year.

We were intensely focused on expense management throughout the year. At the beginning of 2020, we provided guidance for adjusted operating expenses, excluding license fees, of between $1.64 billion and $1.65 billion. For the year, we came in approximately $90 million below the midpoint of that range and $80 million below 2019 levels at $1.557 billion.

In terms of synergies, we had initially targeted $110 million in run rate synergies by the end of 2020 related to the NEX acquisition. By year end, we have exceeded that target and achieved a total of $140 million in synergies. This was net of the additional costs that we are carrying to run parallel infrastructures as we continue to work on the migrations to Globex. We remain committed to our target of $200 million of annual run rate synergies by the end of 2021.

Turning to guidance. For 2021, we currently expect full year adjusted operating expenses excluding license fees to increase slightly from the already low 2020 levels to $1.575 billion. For capital expenditures excluding one-time integration costs and net of leasehold improvement allowances, we expect to be in the range of $180 million to $190 million. In addition, we expect our 2021 adjusted effective tax rate to be between 23.2% and 24.2%.

Finally, we are very excited about the recently announced joint venture with IHS Markit and the opportunities that it will provide our clients and our shareholders. The JV will be a leader in trade processing and risk mitigation services and offers the combined clients complementary services across the global OTC marketplace in interest rate, FX, equity and credit asset classes. We don’t anticipate any material change to earnings as a result of the JV. We will provide more information when the transaction closes.

With that short summary, we’d like to open up the call for your questions. Based on the number of analysts covering us, please limit yourself to one question and then feel free to jump back into the queue. Thank you.

We are still processing the Q&A portion of the conference call. We will be updating it as soon as we analyze and process the con call. Stay tuned here for more updates.

Credit: AlphaStreet

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