CME Group Inc. (CME) Earnings Call Transcript & Summary

Welcome to the CME Group Virtual Shareholders Meeting. I would now like to introduce our first speaker, Terry Duffy, Chairman and CEO of CME Group.

Thank you all for joining us this morning. As we continue to navigate the pandemic, we hope you and your families are all healthy and staying safe. And we welcome you to the 2021 CME Group Annual Meeting of Shareholders. As was said, my name is Terry Duffy. I'm the Chairman and Chief Executive Officer of CME Group. In light of COVID-19, we once again made the decision to hold the meeting virtually for health and well-being of our shareholders. Hopefully, this time next year, we will be able to return to an in-person annual meeting. I certainly look forward to being together again. In fact, on that front, we have just begun to bring a smaller group of employees back to our offices around the globe. More will follow in the next several weeks as we are able to accommodate large numbers safely. In the meantime, we thank you for your continued patience and understanding. In order to effectively address any questions from our shareholders during today's Q&A sessions, please submit them now. Please limit yourself to one question. With me today, I have Kathleen Cronin, our General Counsel and Corporate Secretary; John Pietrowicz, our Chief Financial Officer; also, in attendance in listen-only mode are members of the CME Group Board of Directors and my management team. Our representative of Broadridge Financial Solutions, our independent inspector of election, and a representative of our independent registered public accounting firm Ernst & Young are also on the call. You will find your proxy statement, annual report and today's agenda as well as the rules of conduct information regarding our forward-looking statements posted in the bottom right corner of the web portal you are using to access this meeting. As set forth in the agenda, we will conduct 2 separate Q&A sessions. The first covering the official proposals to be voted on today, and the second covering the general business of CME Group. Only validated shareholders, as of the record date, may submit questions in the designated field on the web portal. If you haven't yet submitted your question, please do so now. After the conclusion of today's formal business, we will also have a financial presentation by John Pietrowicz, our CFO. Now Kathleen Cronin, our Corporate Secretary will present. Kathleen?

Thank you, Terry. Shareholders of record at the close of business on March 8, 2021, are entitled to vote at this meeting. Materials relating to the meeting were furnished to all shareholders of record beginning on March 18. A list of registered shareholders entitled to vote at the meeting has been made available upon request for viewing for the past 10 days and is currently available through the web portal. A quorum is present for all proposals, either in person or by proxy, except for proposal 4, relating to the election of the Class B-1 and Class B-3 directors. In the absence of a quorum, no valid election of these Class B directors can take place under our charter and bylaws. As we disclosed in the proxy statement, if we did not achieve a quorum for a proposal, our existing Class B-1 and Class B-3 Directors will become holdovers under Delaware Law and our bylaws and will continue to serve until his or her successor is duly elected at the 2022 annual meeting or earlier resignation or removal.

Based on the secretary's report, I declare that this meeting is duly convened for proposals 1, 2 and 3 and for a portion of proposal 4. The polls for voting on all matters are hereby open. At this time. It is now 10:06, Central Standard Time. If you have previously voted, there is no need to vote today. The polls will close after the proposals have been presented. All votes submitted today during the meeting will be subject to final verification by the inspector of election. The next order of business is the description of the matters to be voted on at today's meeting. Kathleen, if you could present those now.

All proposals being presented today are described in our proxy statement. Proposal 1 is the election of 17 equity directors, as described in the statement. Proposal 2 is the ratification of the appointment of Ernst & Young, as our independent registered public accounting firm for 2021. The third proposal is the approval of an advisory vote on the compensation of our named executive officers. Our fourth proposal is the election of 2 Class B-2 directors as set forth in the proxy statement. The Board has recommended that shareholders vote for Proposals 1, 2 and 3. Terry?

Thanks, Kathleen. Ladies and gentlemen, this concludes the introduction of the proposals to be presented at the meeting. We will now proceed to the Q&A session related only to the proposals being voted on today. Is there any questions or comments on this related to the proposals?

No, Mr. Chairman.

Hearing none from counselor [ right ], I hereby declare the polls closed as of 10:12 a.m. Central Standard Time. Now I'd like to ask Kathleen to present the preliminary unaudited report of the inspector of election.

The inspector of election has tabulated the preliminary voting results relating to Proposals 1, 2 and 3, which show they were approved as recommended by the Board. The preliminary voting results also show that in the election of 2 Class B-2 directors, Michael Dennis and Patrick Maloney have been elected. As previously stated, William Hobert, Patrick Mulchrone and Robert Tierney will continue as the Class B-1 directors and Liz Cook will continue as the Class B-3 director. These results are subject to final verification and will be filed with the SEC.

Thanks, Kathleen. The report of the Corporate Secretary and the preliminary voting results is accepted, and that completes the formal business of the shareholder meeting. I hereby declare the 2021 Annual Meeting of Shareholders adjourned as of 10:10, Central Standard Time. Now I'd like to ask our CFO, John Pietrowicz to provide our financial performance update. John?

Thank you, Terry. Good morning, everyone, and thank you for joining us this morning. Following a solid full year performance during 2020, we've had a good start to the year. First quarter 2021 results were very strong as we helped our global customers manage risk 24 hours a day. CME Group had the third highest quarterly average daily volume of 22 million contracts traded a day. While down from the record 27 million contracts per day average in the first quarter of last year, which reflected unprecedented activity at the start of the pandemic. We did see a 35% sequential growth from Q4 2020. Our average daily volume in the first quarter from clients outside the United States is particularly strong averaging 6.1 million contracts per day, up 16% from full year 2020. Both our European and Asia Pacific regions posted their second highest quarterly ADV and ADV from our agricultural products traded from outside the U.S. grew double digits compared to the first quarter last year. These results illustrated that clients can manage their risk across all products in all time zones. We continue to operate with a very clear focus on our clients, working very closely with them to create operational and capital efficiencies and new opportunities. We introduced over 85 new products last year amid the work-from-home environment. And when looking at new products defined as launched since 2010, the volume from those products generated approximately $385 million of revenue in 2020, which was up 17% from the prior year. Innovation continued in the first quarter of this year with several new products launched or announced, including global emission offsets or GEO futures, ether futures and micro bitcoin futures. First quarter 2021 sales wins were up double digits versus the same time period last year on the back of record 2020 sales activity. The first quarter also marked a record with GME -- CME group's largest campaign slate of 17 unique campaigns completed, including key initiatives like sulfur, G10 FX, copper options and more. First quarter 2021 also marked the completion of our new migration of BrokerTec to the Globex platform, which allowed for new opportunities for market participants such as the new RV curve functionality, a way to easily trade predefined spreads on cash U.S. Treasury benchmarks and a unique value proposition. In addition, global client outreach has continued ahead of the migration of EBS. Turning to our financials briefly, the entire organization managed expenses very carefully throughout 2020 and during the first quarter this year. Our Q1 2021 adjusted expense base was 4% lower compared to Q1 of last year. This resulted in a very strong adjusted operating margin for the quarter of 65%. During the first quarter, CME Group paid out more than $1.2 billion to our shareholders in the form of our 2020 annual variable dividend of $2.50 per share and our regular first quarter dividend of $0.90 per share. We believe our innovative and unique capital return policy continues to serve our investors well. Since we adopted this policy in 2012, we've returned over $15.6 billion. In summary, we are very pleased with the performance of the company. Our employees adapt to the challenges of this environment and worked relentlessly on behalf of market participants. Our global employees, along with the investments we've made in our technology systems and processes, ensure the markets operated well and risk was effectively managed. For more detail on our Q1 results, see the Events page and the materials from our first quarter 2021 earnings conference call on our Investor Relations page. Thank you very much, and I'll turn it back to Terry.

Thanks, John. I appreciate it. We will now proceed to the Q&A session relating to general business of the company. We'll pause for just a few minutes, so we can collect questions being submitted via the meeting portal. So we'll just take a quick pause for a minute or 2. It appears that Counselor right, there are a few questions coming in, so you can go ahead.

Thank you, Mr. Chairman. The first question we have received is from a shareholder asking about their notice of decreases in CME options volume and the potential impact from the closure of the trading floor?

Thank you. Interesting question. We don't believe that any volume that's either increasing or decreasing has had anything to do with trading floors being opened or closed. I will ask John Pietrowicz, who has these numbers backwards and forwards to comment a little bit about the proposed question on the increase or decrease.

Yes. Thank you, Terry. When we take a look at options, we're very pleased with the performance in our options complex. When you look at average daily volumes in terms of options trading, in the first quarter, we had about 3.5 million contracts traded a day in options. When you take a look at our full year 2020, the ADV was about -- our average daily volume was 3.2 million contracts, when you look at 2020's full year ADV. When you look at Q4 of 2019, which is the last full quarter of on-floor trading activity, the ADV was about 3.4 million contracts traded a day. So we've seen an increase since Q4, which is the last full quarter of trading activity on the floor in terms of options at 3.4 million. We're averaging 3.5 million and were also higher than the average for the full year 2020.

So that gives a visual of pre pandemic, post pandemic. Obviously, quarter-to-quarter sequentially or year-over-year, things are always subject to being changed with fundamentals, but we don't believe that has anything to do with the execution platform. So I think that, hopefully, that answers that question. Counselor?

Yes. Next question, Mr. Chairman, how are we currently using B shares to stimulate volume in new contracts?

Well, it's a good question because I think what we look at with B shares, as we do every participant, whether it's a member or a non-member, they provide liquidity and it's part of the ecosystem. So I wouldn't say, we specifically use B shares or a non-member. We look at the whole ecosystem to better -- to grow markets in general, and that's how we approach it. So we don't take a defined look at one particular section of people that would provide liquidity. We count on everybody.

Next question, Mr. Chairman. Are there any plans regarding the future disposition of B shares?

Well, I mean, I've heard this for a long time, and I've been doing this for a long time. We don't -- have not -- my board has not entertained acquiring the B shares. We still believe that having the B shares is a value. And so there's no reason why we would acquire the B shares. So there has been no proposal to entertain acquiring those B shares.

Next question. With the success of micro futures, are there any plans to offer them to additional products? Are there any plans to make contract specifications more universal products on the Globex?

So can you read the second part again, but I think the first part was about micros. And the growth of micros has been really extraordinary, and we're all quite pleased with it. Starting with the equity division of the company, with the micro E-minis and then now going into the micro cryptos space, we did, I believe, 27,000 contracts on day 2 yesterday, which was really amazing for a contract that was launched on Monday with the micro. So we can see that there's a huge appetite for these products. We can attribute it to many factors: One, more people want to participate in the marketplaces that traditionally didn't; two, we've seen a massive appreciation in values in the equity space, meaning the overall value of the indexes has gone up significantly in equities; and then we've seen the great appreciation in the cryptocurrency space. So these smaller contracts seem to appeal to a lot of constituents that maybe they wouldn't appeal to it at a lower value level. So we are continually monitoring the situation, understanding markets go up and down. But right now, they -- the crypto -- the micro products that are here at CME, we're really excited about, and we're keeping our eyes wide open as it relates to other asset classes.

The second part of that question was, are there any plans to make contract specifications for universal floor products on Globex?

Yes, I'm not quite sure what they're referring to. I would say that most of the contracts are Globex acceptable. So if I'm understanding the question correctly, I don't have it in front of me. You're reading it. But I think what they're asking is the contract acceptable to be traded on Globex at the size level it is with the specs. And the answer to that is, yes, we do believe it's very compliant on Globex.

Next question. Given that CME is permanently closing all option pits with the exception of the euro-dollar options pit, why did you not close the euro-dollar options pit?

There is some on the call will remember, there was a demutualization agreement back in 1999 for CME, 2005 for the Chicago Board of Trade, and there was liquidity test associated with those demutualization agreements. And the thresholds were 30 -- roughly 30%, John, I believe what they were set at. And as long as the product had at least 30%, we would -- the market would still continue to have both venues. All the products have gone way below, and we eliminated the futures trading, which was in single digits in 2015, including on the energy complex out of our NYMEX division. And then now with the options and as Mr. Pietrowicz gave you full 2019 is what we measured off of -- those numbers were down in single digits or low double digits, 11% to 14%, respectively, for some of the bigger option products. And that was pre pandemic. So that was the reason why in the euro-dollar options is still in excess of the 30%. So there is a requirement to keep them open, and that is the reason why.

And that's all the questions I have at this time, Mr. Chairman.

Okay. Well, I thank you all for your questions. That now concludes our meeting. A replay of today's meeting will be available on our website within 48 hours, and I thank you all for attending. Stay safe and be healthy. We are adjourned.

The meeting has now concluded. You may now disconnect. .