Intercontinental Exchange (ICE) Q1 2016 Earnings

Intercontinental Exchange (ICE) CFO Scott Hill said the company achieved record results despite numerous headwinds
 
ICE’s first-quarter 2016 adjusted earnings per share grew 19% to a record $3.68. We achieved these strong results despite a challenging quarter for institutional trading desks, continued regulatory change, and while executing on a range of strategic initiatives.”
Hoping for a better IPO outlook later this year
 
“Listings revenues grew 3% over the prior first quarter, despite a quiet IPO environment. The growth in the first quarter and our confidence in our listings business will continue to grow throughout 2016 is due to our clear leadership and capital raising activity at the NYSE over the last few years. And I’m pleased to say that we’ve already seen a handful of IPOs early in 2Q and our pipeline continues to build.”
Intercontinental Exchange (ICE) CEO Jeff Sprecher said they are dropping their acquisition bid for the London Stock Exchange
 
“This morning we announced our decision to end our current review of a potential offer for the London Stock Exchange Group. The disappointing level of engagement of the LSE ultimately did not allow us to make a complete determination of the integration benefits and their related risks that ICE would require to support a bid.”  
Becoming more and more of a data company
 
Let’s start with data, which is our most recent area of expansion. It’s worth noting that 10 years ago, in 2006, 11% of our consolidated revenues were derived from market data. Today, 41% of our revenues are from our data business, where the breadth of our products and services continue to expand. We’re already seeing the benefits of enhancing the consistency of our revenues with solid margin and growth profile that subscription revenues bring. We’ve long seen the trend of more data and connectivity consumption as markets became more automated, regulated and cleared. And we’ve been an early mover in addressing the rising demand for information and analytics across virtually all asset classes.  We’ve previously discussed the secular drivers of rising data demand, including regulatory reform, automation, unbundling, fragmentation and the move towards passive investing and indexation, just to name a few. These secular trends are also driving growth and the other recent additions to our data business, pricing and analytics, desktops and connectivity.”
Volatility in the oil and commodity markets are driving volumes
 
Hedging is needed regardless of price levels of commodities. Nearly two years ago when oil prices began falling, many suggested that trading and clearing volumes would decline with prices. The reality is just the opposite, because absolute price levels tend not to drive risk management activities, volatility does.”
Intercontinental Exchange (ICE) CEO Jeff Sprecher said they are not focused on market share
 
ICE really doesn’t care about market share. We really want to have people that want to value our services and pay us to provide them. And so that’s the market that we focus on, which is a subset of what you’re talking about, and we’re doing really, really well in the market for people that want to pay for services and that’s why we continue to grow.”

 

JS Notes: CHRW, MHFI, AET, L, SCTY, ICE, CHK, BUD, NOV, MKL

Jeremy S., an investment analyst here in Southern California, has started to contribute to Avondale’s company notes database. Below are quotes from some of the calls that Jeremy has read this week.

 

C.H. Robinson (CHRW) CEO John Wiehoff says the company played a critical role to helping customers ship their goods effectively and efficiently given the West Coast port shutdown 

“Unlike intermodal, we do believe that the port delays on the West Coast probably helped our global forwarding business a little bit. We do know that several of our customers had difficult opportunities that we were able to help them with, and in some cases where customers were unable to get direct access to ocean capacity, we were able to help them with our capacity. So we do know of examples and believe that our global forwarding results probably were helped somewhat by the West Coast port delays.”

C.H. Robinson (CHRW) CEO John Wiehoff says he would like to do an acquisition in the intermodal or contract logistics space, the firm remains disciplined on finding the right candidate

“With all of the services that we offer, our belief is that our long-term competitive advantage is in the quality of our service and the quality of our people. And when we look at the acquisition opportunities, we want to make certain that we’re not disrupting any of that service capability or continuity and that we have the time and focus to make sure that we improve our competitive position in the marketplace while doing it. So while we’ve been looking at opportunities in both intermodal and contract logistics, we haven’t found what we thought was the right blend of value and integration capabilities to really improve our competitive positioning in the marketplace.”

C.H. Robinson (CHRW) CEO John Wiehoff says he still believes firm’s “asset light” business model is a differentiator versus many of its competitors

“In the longer run, we have belief that our third-party model of separating the capacity ownership and the capital investment from the customer service and go-to-market strategies can be a very effective way and the most effective way to serve a large part of the marketplace.”

But he conceeds more competitors have entered the space in the last few years

“As others continue to invest in that business model and more of the marketplace gets served by a third-party or a logistics-type business model, we think that that just reflects some of the secular changes in how we’re all competing. So the market is more competitive, we’re adapting to how things are changing and with regards to the business model that each of our competitors pursues around a blend of capital and logistics type stuff, we’ll just have to factor that in to how we sell and how we grow in the marketplace.”

Their customer base continues to be diversified 

“From an enterprise standpoint, we have a lot of customers that are around the 1% net revenue, and we’ve shared before from an enterprise standpoint that our top 100 customers are around a third of the business and that our top 300 or 400 customers make up around half of the business.  That’s part of that customer diversification that we feel is the strength of our business model.”

 

 

 

 

McGraw Hill Financial (MHFI) CEO Doug Peterson says the firm’s bond rating unit has benefited from a large number of corporations refinancing before the oncoming Federal Reserve rate hike

“If we turn to issuance, the recent trends in US and European issuance did benefit our businesses. First-quarter issuance in the US was quite strong across all sectors. Investment grade increased 24%.  In the US the improvement in corporate issuance was largely due to a 45% increase in industrials issuance.  Large debt financed M&A transactions also contributed to the lift in issuance.  In addition, a continued thirst for yield has enabled corporate issuers across the rating spectrum to tap the capital market, extending maturities at beneficial pricing and terms. High yield increased 39%, public finance was up 61% over an unusually weak first-quarter in 2014.”

Additionally, the firm remains competitively positioned with its S&P ETF business

“If we turn to the key business drivers, the ETF industry experienced record first quarter inflows of $97 billion.  We believe that once investors place funds into passive investment, these funds tend to stay in passive investment and then they shift between various ETFs based on asset allocation models and decisions.  ETF AUMs associated with our indices increased 22% to $810 billion versus the end of first-quarter 2014 with approximately three quarters of this growth coming from inflows.”

The company’s Platts commodity business continued to grow revenue during the quarter even though client interest in commodity investments remains muted

“During the quarter, Platts continued to grow revenue despite low commodity prices. As we have seen in recent quarters the newer areas of metals and agriculture had the highest revenue growth rate.  Global trading services revenue increased primarily due to license revenue from the steel index derivative activity at the Singapore Exchange.”

The firm continues to benefit from some of the large U.S. banks shedding non-core assets

“We are also encouraged by the facts that banks are probably struggling after the LIBOR scandals with their ability to continue to manage benchmarks inside of their businesses. They might be non-core or they might not really be a business that it makes a lot of sense for them to be in.”

 

 

 

 

Aetna (AET) CEO Mark Bertolini says value based medical care reimbursement as opposed to quantity based reimbursement is now a substantial portion of the business

“Value based contracting now represents approximately 30% of Aetna’s medical spend with a goal to achieve 75% by the end of the decade.”

The firm benefitted from having lower medical insurance claims than expected

“Our commercial medical benefit ratio was 77.4% for the quarter, an excellent result that benefited from higher premiums, moderate cost trends and strong prior year’s reserve development.”

 

 

 

 

Loews (L) CEO Jim Tisch says the company is positioned opportunistically to deploy its large cash balance

“I want to start today by looking at Loews $5.5 billion of cash and investments.  As we have said before, money doesn’t burn a hole in our pockets. While we acknowledge that cash can be a drag on Loews short term returns, we feel that having the flexibility to be opportunistic and not rely on financing markets has served our shareholders very well over the long term.”

Loews (L) CEO Jim Tisch says the market is priced for perfection and he is having a hard time finding undervalued assets

“I think that after all these years of low interest rates and quantitative easing, what we have is markets both fixed income and equity markets that are priced for perfection.  So, my guess is that for the time being businesses look like they’re priced too high for us.  Now one of the things that I always remember is that the world is cyclical. And it’s easy to lose sight of that because we’re now in – firmly in year six of an upcycle for equity prices.  But at some point in time something will happen, people will lose all the confidence that they have and my guess is that opportunities will present itself.  I’d rather be patient and get a good business at an attractive price rather than lose patience and buy a business at too higher price.”

Loews (L) CEO Jim Tisch says that one of it’s oil rig subsidiaries, Diamond Offshore, performed poorly during the quarter but still sees further downside for the industry ahead which he hopes will ultimately lead to a buying opportunity

“I think right now the conditions are bad enough for rig valuations to go down. The problem is they haven’t been bad enough for long enough.  In the next two, three or four quarters, I think we could see that some fifth and six generation rig assets become available for sale.

 

 

 

 

Solarcity (SCTY) Chief Technology Officer Peter Rive says solar installation costs are falling at a dramatic pace which is allowing solar energy distribution to be competitive to electric utilities

“On the residential side, our fully installed solar battery system costs are about one-third of what they were a year ago. We expect cost to decline further at manufacturing sales and over the next five to 10 years these costs reductions will make it feasible to deploy the battery by default with all of our solar power systems.”

Solarcity (SCTY) Chief Financial Officer Brad Buss says access to the capital markets for the solar capital markets is gaining momentum as investors becoming increasingly confident in the business model

“Every six months I only see our credit spread shrinking as we continue to perform as the paper continues to perform. So I am very happy where things are going from that perspective and then obviously on a cost spend of it. It is really is the cost of capital and the cost that’s really driving our success and where I think we will continue to outdistance and be cost efficient.”

 

 

 

 

 

Intercontinental Exchange (ICE) Chief Financial Officer Scott Hill says the company has seen increased volume in its oil contracts and is benefitting from increased volatility in the commodity sector

“This was enabled by an 11% increase in commodity revenues on the strength of our global oil markets.  Brent crude contact revenue  grew 51% year-to-year to a record $74 million. Brent continues to expand its lead as the global benchmark for pricing crude and refined oil products, with open interest up 15% from year-end to a record 4.4 million contracts. Notably, Brent open interest is up 49% from last March, with strong growth due to the ongoing shift of Brent in commodity indexes and longer-term secular trends.”

Intercontinental Exchange (ICE) CEO Jeff Sprecher says he expects to see continued growth in their Asian products over the coming years

Similarly, Asia’s markets are expanding due to greater demand for the type of products we currently offer through our Western exchanges and clearinghouses.  Our work there is foundational, and we will launch ICE Futures Singapore and ICE Clear Singapore this year. We’re seeing a good deal of interest in our newly announced Asian market products and for the increased access to central clearing.  The other interesting thing is there’s also a lot of capital moving towards Asia.  You see it in the demand right now for the linkage between the Hong Kong Exchange and the Shanghai Stock Exchange in equities.”

Intercontinental Exchange (ICE) CEO Jeff Sprecher is optimistic about taking over the LIBOR and gold price benchmark administration from what used to be a consortium of banks that set those price levels 

At ICE Benchmark Administration, in March, the ICE Swap Rate replaced the ISDAFIX, and we successfully launched the gold price with record-level participation. We’ve also undertaken market consultations for both LIBOR and the LBMA Gold Prices to evolve the best practices for determining these prices.”

Intercontinental Exchange (ICE) CEO Jeff Sprecher says the New York Stock Exchange continues to be the global leader in IPO’s and capital raising

The New York Stock Exchange continued to lead in global capital raising, with $50 billion in total proceeds raised in the first quarter. This is more than the next 2 largest exchanges combined. And we continue to attract companies of all sectors and market capitalizations because of our unique market model, combined with our unparalleled visibility and service.”

Intercontinental Exchange (ICE) CEO Jeff Sprecher focuses on profit per share of the company rather than market share

We have, in a very disciplined way, decided to not participate in options volume that does not earn a return for the company.  So the fact that we send uncompetitive business to our competitors is to not concern our shareholders.  And let’s let those competitors have the bragging rights if they have a lot of market share, but there isn’t a lot of income to go along with some of that business.”

 

 

 

Chesapeake Energy (CHK) Executive VP Chris Doyle says the firm is using big data techniques to analyze how to drill the most effective well

“The Operational Support Center (OSC) is manned by 100 industry experts, drilling superintendents, geosteerers, geologists, engineers, lease operators and analysts. OSC is Chesapeake’s central command center. It’s like NORAD in Oklahoma City. But more than just monitoring and supporting, the OSC links our teams executing out in the field with real-time data analytics, industrial analytics and tactical performance-enhancing adjustments.  y identifying optimal drilling parameters based on historical drilling data, every single well had a well plan based on what it took to drill the fastest, best, most competitive well. And any and all trouble time was analyzed, evaluated, all events in the past and so the OSC was able to forewarn our drilling organization, including the drillers on the rig floor, when they were either outside the optimal drilling window or they were headed for a potential issue. The result was optimized drilling performance and elimination of downtime events. That’s how you reduce cycle times from 26 days to 12 days.”

Chesapeake Energy (CHK) Chief Financial Officer Domenic Dell’osso stated that the company has reduced it’s rig count dramatically which will likely hurt oil rig manufacturers

“We started 2015 with around 70 rigs running, including a few spud rig, and averaged 54 rigs during the first quarter. Today, we’re running 26 rigs in total and we’re forecasting to drop to 14 rigs during the third quarter.”

 

 

 

 

Anheuser Busch Inbev (BUD) CEO Carlos Brito said that the Bud Light brand continues to struggle in its attempt to resonate with the U.S. consumer

“We estimate the Bud Light brand was down approximately 20 bps in terms of total market share.  We have a long way to go in stabilizing the share of Budweiser.”

Anheuser Busch Inbev (BUD) CEO Carlos Brito said the company continues to gain market share in China and its various brands now represent almost 1/5 of all beer consumed in China

“We estimate our market share in the quarter reached 18.5% when including our recent acquisitions.”

Anheuser Busch Inbev (BUD) CEO Carlos Brito on how he thinks about the craft brewing movement in the U.S.

“We’re adopting the strategy very clearly of having more regional relevant brands. So that’s the case when we joined with Goose Island, Blue Point, 10 Barrel, Elysian, but also developing our own like Shock Top, and also trying to focus in a few that could be nationally expanded.  In other markets, what we’re trying to do is get the U.S. learnings over to other markets and try to be, of course, ahead of the curve, especially markets where we lead, like Brazil.”

Anheuser Busch Inbev (BUD) CEO Carlos Brito on how they are incorporating social media into their marketing

Social media continues to grow within our mix of media spend between social and traditional. We are learning every day by connecting more with consumers and making our contents relevant. Of course, it’s a very fast paced type interaction with consumers, and we don’t intend to get everything right all the time.”

Anheuser Busch Inbev (BUD) CEO Carlos Brito expects the company to compete effectively in the Vietnamese beer market

So in terms of Vietnam, yes, we’re building a brewery there. We expect to ship beer in May. So this month in Vietnam. We’re very excited about Vietnam. It’s a country, again, demographics, weather, beer culture, 90 million people, a very extensive or a very big high-end segment. And that’s where we want to play with Budweiser, Stella and Corona, also Hoegaarden. So very exciting market, we’re very committed to it, and learning from our experience in China to do a lot of what we did with Budweiser in China in Vietnam.”

 

 

 

 

National Oilwell Varco (NOV) CEO Clay Williams says the pace of the decline in the oil rig count is unprecedented in history

The rate of decline of active rigs, most acute across North America is breathtaking and unequaled in prior downturns. NOV saw activities and orders slow in just about all areas of our business and all of our units are experiencing pricing pressure.”

And the company is under serious pricing pressure to reduce their selling price to customers

“We are also under pricing pressure and requests to cancel work, which we are vigorously opposing. We are seeking to structure discounts around volume-related rebates tied to payments and expanded product purchases, in effect picking our points, to try and win greater share, defend volumes, and improve absorption in our plants. We don’t want our customers to get out of the habit of buying from us, to maximize our market position when the inevitable recovery comes.  We closed three facilities within the unit during the first quarter and continued to reduce costs within our supply chain. North America was hit hardest, but the Middle East and other international markets are more stable.”

 

 

 

 

Markel (MKL) CFO Anne Waleski says the firm remains disciplined on price and will not write insurance in which it cannot earn a reasonable rate of return

“Market conditions remain very competitive, consistent with our historical practices we will not rate business when we believe prevailing market rates will not support our underwriting profit targets.”

Marke (MKL) President Rich Crowley says the reinsurance sector remains ultra competitive with capital as a result of low interest rates

“In the reinsurance segment we saw pressure in terms and rates during the January 1 renewal process. As the year moves forward, while still extremely competitive it does appear that the decrease in rates and terms has slowed to some extent.  In summary and we stated it many times, we’re not going to chase premium when we feel the rates are inadequate. We continue to reinforce this message with our underwriting teams as is reflected in our first quarter’s gross premium numbers.”

Markel (MKL) Chief Investment Officer Tom Gaynor says even though they are earning very little on their short duration bond portfolio due to the low interest rate environment, they think today’s economic and financial climate warrants conservatism

“I’m sure that if we were really smart and clever we could find some alternative investment approach that would increase the yield on our short term portfolio from essentially nothing to something more than that. We’re not that clever or smart, so we won’t try to perform that sort of alchemy. We’ve seen enough of those experiments end badly to dissuade us from going down that path.”

JS Notes: BAC, CSX, ICE, JPM, NFLX, WFC

We’re excited to announce that Jeremy S., an investment analyst here in Southern California, has started to contribute to Avondale’s company notes database. Below are quotes from some of the calls that Jeremy has read this week.

 

Netflix CEO Reed Hastings believes the business is significantly under penetrated in international markets

“For most global Internet firms, the U.S. is 20%-35% of usage and revenue; we’re not anywhere close to that yet but we’re continuing to invest in international.” 

Netflix Chief Content Officer Ted Sarandos says the company is seeing the highest returns of its capital in its own original content 

“What we’re seeing is that dollars invested in our original programming are more efficient in that for every dollar spent, we get more bang for the buck in terms of hours viewed. and hours viewed leads to higher retention, more word of mouth, and more brand halo.”

 

 

Bank of America CEO Brian Moynihan says the bank has been laying off employees in various departments to drive efficiencies but the bank has also been adding headcount in sales and relationship-focused bankers

“We continued to reinvest in sales capacity. So just in our consumer business, headcount is down year-over-year but we have a thousand more sales people roughly out there selling. And so the idea is to continue to drive sales people into the businesses.”

 

 

Intercontinental Exchange CEO Jeff Sprecher on how they’ve grown different verticals of the business over the years

“Well, we have our historical data business that we grew organically, which was all commodities data set. And when we acquired the New York Stock Exchange, we acquired along with it obviously the data from trading U.S. equities and equity options. And then we acquired the Liffe Exchange, which gave us really an interest rate data footprint. We’ve built a new company called ICE Benchmark Administration, which is the company that took over the LIBOR administration, the Gold Fix and the ISDAFIX.  So we’ve got this new footprint of what are really regulated benchmarks going forward, very global, very important regulated benchmarks.  But what you’ve seen is the evolution of my company from trading into clearing and now increasingly into data and indices.”

Intercontinental Exchange CEO Jeff Sprecher sees growth in the derivatives business coming from Asia 

“We’re betting that Singapore is that nexus for all of Asia, which would include China, Japan and these growth areas of Malaysia, Indonesia and, Vietnam.”

Intercontinental Exchange CEO Jeff Sprecher sees significant operating leverage inherent in the data intensive business model of the stock listings and benchmark listings business

“There is also a very big footprint in our business that’s no longer volumetric.  Things like over-the-counter clearing where daily volumes are not reported but are growing tremendously, and then we’ve ended up with a very large data and listings business. But basically recurring revenue business that is growing against a relatively fixed cost. So, similar model to when the business went from analog to digital on trading, which the allure of that was this fixed technology cost against growing volumes.”

Intercontinental Exchange CEO Jeff Sprecher on the recurring nature of the NYSE listings business model=

“The listings franchise on the New York Stock Exchanges is a business that has been growing. There’s been a lot of IPOs in the last year or so.  And that is a massively recurring business with at least 2,500 listed companies, lots of ETFs and other things that are providing annuity revenue against a very fixed cost base.  So, you take all that together and about 40% of our business is in a form that is much more recurring than it used to be in the past.”

 

 

Wells Fargo CEO John Stumpf said that physical banking branches will remain a key part of how they intend on serving customers even though consumers are adopting mobile banking on a massive scale

“We’re in the information business as much as on the retail we’re in the financial services business, so this is really about connecting all the channels, not about trying to drive customers into what’s cheaper for us. That’s not how we think about that. We think about what’s best for the customers, and branches still remain an enormously important part in that.”

Wells Fargo CEO on John Stump discussed the firm’s recent bolstering of its investment banking unit

“The way we think about business here is around relationships, relationships with team members. My 11 direct reports have an average of 28 years with the company. We think of relationships with our customers, our communities, our shareholders. Buffett’s been an owner of ours for 25 years. We love long-term things, so as it gets to investment banking activities, we think of that as another solution, another product, another service.  Most of the revenue that comes from that business is from existing customers who have been doing business for a long, long time.  I only care that we do the right thing for customers.”

 

 

JP Morgan CFO Marianne Lake said a number of macroeconomic events occurred which helped JP Morgan’s transactional revenue

“A number of macro events occurred in the quarter including central bank actions, the Swiss Bank decoupling, stronger dollar and oil price volatility which supported market performance broadly and currencies, emerging markets, rates, commodities and equity.”

JP Morgan CFO Marianne Lake said loan performance in the bank’s energy exposure weakened during the quarter as a result of lower oil prices

“This quarter’s reserve build was at downgrade in the E&P portfolio and if the current price environment continues, it’s reasonable to expect some further reserve builds during 2015 but relatively modest.”

 

 

CSX CEO Michael Ward sees a robust pricing environment for transportation companies who are moving large physical goods

“We still see capacity as been very tight.  If you notice our minerals business was I think around 11% or so based on a lot of highway infrastructure, projects going on particularly in the region and country that we serve, so we’re seeing truck capacity staying relatively tight. Coast wise barges have been very strong and strong demand, so we still see capacity fairly tight and we still see a strong need for transportation, pricing does seem to be very robust if you look at the spot truck load market it is remaining fairly strong. So we see that it’s still a very strong, robust pricing environment.”