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

All right. Good morning, everybody. We'll go ahead and get started. I'm Patrick O'Shaughnessy, the Capital Markets technology analyst here at Raymond James. And up next, we have CME Group. And on their behalf, we have Derek Sammann, Head of Commodities Markets. Great time to have Derek here given what's happening in the commodities markets. Our format is going to be a presentation. If there's time left over, we'll do a short Q&A at the end. Otherwise, there will be a breakout session downstairs afterwards. So with that, Derek, welcome.

Great. Thanks, Patrick. Appreciate it. Thanks for all coming this morning. Probably just want to start the conversation today, the fact that I've been in this industry for 35 years. Gray hair shows it, I think. I've been at CME this year 20 years. And I would say without a doubt, this is probably the most interesting time in my career to be in financial services. And being at CME Group where the crossroads of market structure is unfolding literally before eyes is a pretty exciting place to be. So as we talk through the conversation today, for those of you that don't know the company, hopefully, you understand more about CME Group in 30 minutes from now. And for those that do know us, hopefully, you'll find some insights and if not in our presentation today, in conversation as we go into the rest of the day. So I want to start by just noting the fact that for those that may or may not know us well, we are the world's leading derivatives exchange. And we effectively operate on a dual mandate. On one side, our core responsibility is providing price transparency in markets across the world. That comes in a couple of different ways. We have a group of benchmark products, which you'll see sort of our rate in this circle here on the graph, where we have benchmark products and benchmark liquidity in every single major asset class out there. The 6 that we typically refer to between fixed income, equities and FX on the financial side, and on commodities, we've got our energy business, our metals business, agricultural products business. We also have a crypto business that rolls up on our equities. So no matter what price formation is taking place in any product, we've got standardized listed futures and options that provide lit, transparent markets 23.5 hours a day, 5.5 days a week that global participants access and use to either expose themselves to market risk or mitigate market risk they actually have. So that dual mandate on the price transparency side really comes in two forms. On the one side is our product set. So in every major asset class, we've got benchmark products and fixed income. It's the entire yield curve from overnight Fed funds out to 30-year treasury. In equities, it's the whole span of the primary U.S. indices between Dow Jones, S&P 500, Russell, et cetera, futures and options and all of those. In the foreign exchange market, it's all major G7 players plus a number of nondeliverable forwards or NDFs, which are small regional currencies around the globe. On the energy side of the business, our primary benchmark markets are WTI crude oil, certainly in the news over the last 72 hours at the events of the Middle East. In fact, yesterday, we had another top 5 day in our crude and refined business, not surprisingly, with the uncertainty happening in the globe. When risk hits markets, customers come to CME to manage their risk. On the metal side of the business, our benchmark products are mostly in the precious metals business, gold and copper. Gold, obviously, top of mind also given the rally and the flight to quality, story that we've been seeing unfold for the last year or so, particularly the last few months. We also have a business in battery metals, where we are effectively 100% of the futures market for battery metals globally, whether that's cobalt or lithium, spodumene and a few of the smaller products inside of that. And then our agricultural products, which is mostly grains and oilseeds, which is looking a lot more like an energy business every single day with renewable biodiesel and ethanol crossing over into energy land. The other part of our dual mandate on the price transparency side is what we do on the technology side to deliver our prices to our customers. We use our system called Globex. It is a system that directly distributes liquidity out to 180,000 customers globally. We'll talk about kind of that global dispersion of participation in our markets. And we have also partnered with Google over the last 4 years in a strategic partnership. They took a $1 billion stake in CME Group, where we are building out cloud capabilities, migration and looking at ways to evolve financial services to that next iteration of what this market looks like today. So back to the point I made about being -- it's a very exciting time to be in financial services, particularly at CME Group. The other half of that mandate is risk management. We own our own clearinghouse. So if you -- there's a nuanced difference, but a huge difference between businesses that are regulated by the CFTC derivatives like CME Group and SEC-regulated securities exchanges. In derivatives, we get to own our own clearinghouse. That means we have a vertically integrated clearing house. So all products that trade on CME only get cleared at CME. So that provides very unique, both offensive and defensive nature to our business model means high barriers to growth. It is not a horizontal model where you can put a trade on one clearing house one day and clear that at another clearing house and extinguish that position. All positions have the open and close within CME on our same clearing house. So very high defensive walls around the business. You'll see some of the margin numbers on the following pages very high. That's one of the contributors to that. There are a number of competitive advantages that we have as a result of that, not the least of which are the deep pools of liquidity that we talked about, the benchmark product set that we have. We have an intense customer focus. We'll talk about how we're rate and how that differentiates our service and capabilities versus our peers in the space. And we have an $800 million proprietary data business that grew 13% last year and probably close to 8% or 9% cumulative average growth rate over the last 10 years. So a lot to like about this business, high barriers to entry, defensible business model, a lot of recurring revenue alongside a lot of transactional revenue. Moving on to a very brief overview of our recent performance, as you'd expect, in a market that is replete with examples of uncertainty globally, this is exactly the market that CME is built for. Now that said, while we are thriving in conditions of high degrees of volatility, we've also proven over the last 25 years that we can also grow in 10 years of 0 interest rate policy. So we are built and we continue every day to innovate such that we can grow when we have volatility when it's blowing favorably, but we can also grow when we have headwinds of volatility or regulatory uncertainty. And we'll talk to some of the multiyear growth on a couple of following slides here. So when you look at where we are this year, over the course of the last 12 months, so calendar year 2025, you saw that we were able to grow our volumes at 6% and our revenues at 6%. That's unique. Typically, when you see volumes growing, you would tend to see revenue grow a little bit more slowly than that. But because of a very disciplined pricing power that we exercise across our markets and the ways in which we continue to evolve, our service generate new revenue streams, we can grow our volume and our revenue and locks up with one another. You'll see some of the key highlights on the left side of the slide here, 69.4% adjusted operating margin. That's unheard of in most industries. And that is both a function of the expense discipline that we have, the network-based model that we have and kind of the fixed cost model that we have. So that as we grow our business, we continue to drop more of that marginal dollar right to the bottom line, and that means more capital return to you, our investors. When we look at the volume last year, we averaged that 28.1 million contracts a day. ADV stands for Average Daily Volume. It's the number of contracts that trade on average every single day. The year-on-year growth up 6%. You'll see about $5.3 billion of transactional revenues. We'll talk about the non-transactional revers, which is another $1.7 billion, and that's been a pool of revenue growth for us as well. So 28.1 million contracts a day. That was a record last year. We've set consecutive reverse for multi years in a row. Year-to-date, we are doing 35.5 million contracts a day. So we're building on that record year. That's up 16% year-to-date yesterday. We did 45 million contracts. So -- as you can see, when the market is facing risk, facing uncertainty, the world comes to CME Group, and we see that in the growth across all of these 6 asset classes that we're referring to here today. When we think about who's in our markets and why they're in our markets. We think about our markets being either a risk-on position or a risk-off position. And for the last couple of years, this is very much a risk-on environment for our customers. So despite uncertainty, despite the headwinds of some of the challenges of whether it's global trade tariffs, whether it's disruptions in the Middle East or otherwise, meaning the number of contracts the customers are carrying, meaning carrying more risk and they're trusting CME Group to carry that risk in this market. We're seeing all of our client segments grow, and we'll talk a little bit about that in a moment. We're seeing all of our geographies growing fast. Our non-U.S. business is growing faster than our U.S. business. We're seeing growth across both futures and options. Those are all characteristics of a risk-on environment. So we see healthy growth. We see diversified growth. We see sustainable growth and the investments that we're making in technology, in product development, reaching our customers. Our partnership with Google are always to make sure that we're building on that, expanding our customer base by putting new products out there, accessing new venues to reach those customers and then pushing the technology side in partnership with Google. This is one of those charts that is a fabulous upward to the right graph. It's just -- it's a picture of what I've been talking about, strong multiyear growth. This is a graph on the left-hand side here of our average daily volume, as you can see increasing over the last 10 years, that cumulative average growth rate, 7%, adjusted net income growth, 12% over that same time line. So think expense discipline, think scalable business model, think defensible business model. As we grow and position ourselves competitively, we're doing that in a more profitable way year after year so that you, our investors, can benefit from our capital return policy. We'll talk about that in a moment as well. That single bar right there, just the year-to-date, as I mentioned before. Last year was a record at 28.5 million contracts a day; year-to-date, 33.5 million contracts a day; yesterday, 45 million contracts a day. So in times of stress, the market comes to CME to manage that risk with us. A couple of other stats here that are worth noting. If you look at the number of trading days, we see in excess of 30 million contracts a day you can just see a higher proportion of plus 30 million contracts a day happening every single year over the last 5 years, more than 3/4 of our days last year or this year, year-to-date are above that 30 million contract threshold. So just significant growth, sustainable growth in ways that we continue to invest in our infrastructure to continue to grow this business. Globalization, if you ask me for what the 3 or 4 levers of growth are, and that's one of the first questions we get in almost every investor meeting, this is always within the top 3. Our growth in non-U.S. business, non-U.S. customer growth is a huge part of what we do. I joined CME in 2006. I lived in London and Paris for 13 years as a trader. I never heard of CME. We had 3 people in our London office. I think we had maybe one person at the time in Singapore and almost the entirety of CME Group's resources this before the acquisition of Board of Trade or NYMEX and COMEX, they had salespeople only in Chicago. Fast forward to today, we have the majority of our salespeople in our London office. Our marginal growth is taking place outside the U.S. So as that business continues to grow, as you see these on the bar chart here, that average daily continue to grow, an increasing percent of that continues to take place with our non-U.S. customer base. Now I say our non-U.S. customer base, I mean, the customer base that we're continuing to grow and expand on every single year. So this is a chart that just shows you on a stacked bar chart, the total average daily volume coming in aggregate from non-U.S. broken between Europe, Asia Pacific and LatAm markets. The biggest of that is the dark blue in the European business. We're putting boots on the ground, have for the last 10 years and a client segmented sales force that brings in net new customers, and that also means that we're bringing new product ideas to us as well. So much of our product innovation and technology innovation is us continuing to expand our footprint with our non-U.S. client base. This is not to say that our U.S. client base is static. That's continuing to grow low single digits. We're growing our non-U.S. business, close to 10% -- actually 10% over the last 5 years. So substantial growth there. Why that's important to you as investors? Because this non-U.S. business tends to come in at a higher margin to the company. We've got a rate per contract as the dollar value associated with every contract that trades on the exchange on average. So our non-U.S. business tends to come in at a higher rate per contract, meaning more of that drops to the bottom line for you, the investor. Very quickly on the right-hand side of this chart, when you look at the distribution of non-U.S. participation in our markets just using fourth quarter of last year, as an example, you'll see global products tend to be the products that are most global in our world as well. So you think foreign exchange, you think markets like gold, those are global products that are positioned all over the world. It's not like a U.S. equities benchmark or U.S. fixed income. So you'd expect that a higher proportion of those truly global products trade outside the U.S. and that is true. 47% of both our foreign exchange business as well as our metals business, almost half is kind of from outside the U.S. 3 of the top 4 or the highest percent of non-U.S. businesses are commodities businesses, our metals business, our energy business, and our agricultural products business. Think about the real economy, think about what changed in 2020 when people fundamentally rethought supply chains. We'll talk about commodities in a moment, but just over a preview on that, that's been a substantial structural growth driver for change and an accelerant to the growth in our commodities business where we're the market leader. Retail is obviously something that's on top of mind for a lot of folks, whether it's the recent conversations around things like event markets or event contracts, prediction markets, [indiscernible] market, et cetera. We ourselves have done a strategic partnership with FanDuel and Draftkings. We've listed a number of products there that we think are additive to the overall opportunity set. But really, historically, CME Group has been and at its core will always be an institutional market. Now what we have done, I think, a fantastic job of, so I'm so excited about where we are right now, we have continued to add products and capabilities that are well suited for individual retail traders. Historically, I'd say up until about 2 years ago, our retail and everyone in this room would probably define retail slightly differently, but our retail focus has really been on what we'd consider, we define it in a made-up term that we use called Protail, Professional Retail Trader. Think about it as a very, very small institutional trader or an individual that's really -- that's the primary source of income. So our focal point has really been on a very, very small institutions, folks that come through and interact with brokers or Charles Schwab or a typical kind of broker intermediary. With the growth of a number of what we call new to futures market participants like Tastytrade, like Plus500, Webull, Robinhood, this has opened up a whole new client segment that historically have not focused on futures that those brokers have determined that there is a desire to get access to futures markets if we have the right products to bring them in the door. So we've done a fantastic job of building products. This is the right-hand side of this chart now on building products that are well suited for the smaller retail-oriented individual. This is a graph that shows the aggregate average daily volume of what we call our micro product suite. And micro products are effectively bite-sized versions of our standard contracts. So if our gold contract is 100 ounce, our micro gold is 10 ounce. We now actually have a 1-ounce contract as well based on the significant and record-breaking growth we're seeing in this client segment. In our equities business, we have -- we've got an E-mini and then a micro E-mini, so just much smaller versions of that. As we build out our footprint with this new mass retail segment, this is new found business for CME Group. This doesn't displace, this doesn't self-cannibalize. This is net new. And so as we continue to focus on making sure that we are the primary source and the reference price for every global major asset class, we're also making sure that we're growing with our retail broker partners and being able to develop products and partner with them to equip them to bring their customers into the futures world. This is a big source of revenue growth. If you listen to Robinhood's calls, if you listen to any of those brokers calls, you're going to hear them talk about the growth of futures, the majority of that is happening on our exchange in our product set. So we're excited about what we're seeing in this world. But I'll say again, this mass retail is a net new client base for us to add that next strata layered below our kind of professional retail crowd that sits nestled below our institutional crowd. So interesting part of the business, and we continue to roll out products that suit their needs. For example, our benchmark silver contract is a 5,000-ounce contract. That's a big contract when Silver is trading $100 an ounce. We actually have a $2,500 or 2,500-ounce silver contract that's still -- that's a $250,000 face value contract. So we rolled out a 100-ounce contract, which is significantly smaller and suits the needs. It's $10,000 face contract. We have a 1-ounce gold contract. So you can trade clips of gold in $5,000 as opposed to $500,000. So we just continue to roll products out in partnership with our retail distribution partners. They do the heavy lifting with their end users. We partner with the sellers of our products. We educate the educators. We train the trainers. We sell to the sellers. Our relationship is with the broker, broker relationship with end customer. We get paid to the transactional chain. And one last comment here because I want to take this back to revenue and why this is interesting to you as an investor. This client base, particularly on the commodity side of the business is where we've been able to exercise some very -- I would say, diligent but consistent pricing power. I'll use one example and I'll quickly scoop through so we don't miss any time here. But our main contracting gold is a 100-ounce contract. For a nonmember customer, call it a retail customer, they pay $1.55 a contract. Our micro contract, which is a 10-ounce contract, 1/10 the size, we charge $0.65. So call it 40% of the cost for a contract size at 1/10 size. We rolled out last year, actually at the end of 2024, a 1-ounce gold contract that is 1/100 the size of our main contract, and that's priced at 35% of the main contract. And this business still continues to set records year after year. So there's where we can exercise, I'd say, prudent pricing power in some of the retail segments, particularly on the commodity side, there's a price in elasticity that we made able to take advantage of. So when we talk about the client growth here, which is the chart on the left, that's the number of net new clients to the CME on the retail side, that's coming in at -- on a notionalized basis, a much, much higher margin business to CME. So there's a lot to like in that story and a good chunk of this, and Adam, keep me honest, I think about 45% of our retail business comes from outside the U.S. So it's another story of high-margin business, found clients new to CME, new to futures and they're establishing their futures trading at CME Group. So it's an important part of our ongoing growth story. Physical commodities, I'll try to be brief, but you let me, I'll spend a full hour here. There's so much happening in the commodities world, not just in the last day or week or month. This has been a multiyear growth of our commodities business. We make a little over $1.8 billion a year in transaction fees in our commodity business. That's the aggregate of our energy business. We think about the benchmarks of WTI crude oil and Henry Hub Natural Gas. And we also have kind of the complex around RBOB, which is basically diesel, which is gasoline and then HO, which is diesel. Our agriculture products business, mostly grains and oilseeds, $500 million. We make $650 million in ags, about $500 million of which is corn wheat and beans. We also have the dairy business and a livestock business that makes up the balance of that. And then our metals business, about $350 million a year in revenue, and that's probably 75-25 split between precious metals, gold, silver, platinum, palladium. And then our industrial metals business, which is a combination of kind of your base metals like copper and aluminum and then battery metals, which is a fascinating new evolving part of the market where we are 100% of that market right now. And we do have a Venn diagram here because the reality is the lines of distinction between energy, ags and metals are blurring into one another as we used to see ag customers trade ag products, energy customers trade energy products, metals customers trade metals products. With the evolution of the energy transition that has blurred these lines. We've got our biggest ag customers that would trade soybean and soybean oil, now trade energy because soybean oil is the primary feedstock into renewable biodiesel. Corn traders are now trading a lot more energy because it's correlation because corn is the primary entry point into and the feedstock for ethanol. We have energy traders trading a lot more metals right now because copper, aluminum and battery metals are all components into the EV transition and transmission lines generally solar panels, everything in that complex. So we're seeing these crossover client bases, and this is the benefit of being a multi-asset class exchange, where everything is cleared in the same clearing house. You have a number of correlations between these products because in the same clearing house, we unleash up to $80 billion a day. We'll talk about this in a moment, $80 billion a day in margin offsets that means capital back into our customers' pockets to deploy either into more trading or investing in different parts of their business. That is a huge part of our defensive moat around this business and it makes switching costs very, very high. If customers have more trades that are offset against one another, and they get that benefit in terms of margin return back to them, lower risk as a spread, they get that money back. They get to be more efficient in a non-zero interest rate world, that means we typically see more business from them. It's also offensive in nature, defensive in that it makes that barriers to entry and competition really, really difficult to dislodge us. And it makes switching costs moving from our products to somebody else's very, very high. So we'll have to go in here, but we've got 6 minutes left. So I need to keep ripping, ripping along here. When we talk about the transactional side of the business, we make $5.3 billion, $5.4 billion a year. We generated that in transactional revenue last year. We make another or made another $1.7 billion in non-transactional business, some of which you could think about as recurring revenue as well. Really, these 3 pieces here on the left-hand side is our market data business. That's a business that, over time, I think 10 to 12 years ago, we did not charge for market data. We considered that if you were trading our products, then that was going to be our monetary and financial relationship with you with the rise and value of data. And to be super clear, this market data business that grew 13% this year, generated over $800 million of revenue. This is proprietary CME Group market data. It doesn't exist anywhere else. No one could access it unless we permission and we get paid for it. Typically, we don't do that. We like to monetize this market data ourselves. So this is a business that's been growing 8%, 9% for the last 7 to 10 years, grew 13% last year. Think of that as people buying our real-time data. So if you're in any market, and you didn't know what's going on in the treasury market, the FX market, the equities market, the oil market, the gold market, the ags market, you have to buy our data. So we've been monetizing that, and we've been growing that not only adding subscribers, but also making sure that we're selling them different kinds of even treated data, and that's a business growth opportunity going forward as well. That second bucket there is the revenue that we -- nonoperating income that we get from our partnership with the S&P Dow Jones Indices. We own 27% stake in them. So that business means that -- not only are we making record amounts of revenue in our own S&P futures business on CME Group, as that business grows on a different exchange, we get paid for a part of that because we have a 27% ownership stake in that entity. So whether that business grows on futures or grows on another exchange trading S&P products in the SEC regulated market, we get $0.27 on the dollar back to us on that. So it just allows us to diversified footprint, and that has been just a really, really strong part of our nonoperating income story. The last piece of this is the interest income that we generate on collateral balances that we hold in the clearing house. So as you recall, and I talked at the top of the conversation around the dual mandate of price transparency and risk management. The risk management piece, we actually get paid on because of the collateral balances that we hold, we hold that at the Fed in Chicago. We paid interest on that. We share a portion of that with our customers. We keep a portion of that. So this interest income, which was just through a little short of $600 million last year, is a nice part of that nonoperating kind of below the line additional revenue to the firm. Again, $1.7 billion here. So you've got the $5.3 billion in transactional last year and the $1.7 billion on the other side. So I'll quickly touch on this and try to stick the landing, if I can. The -- I talked about the gross margin and the margin benefits that accrue to our customers. When customers come to CME Group, it's very rare that they trade a single product. If they're trading a single asset class, it's even more rare than just trading futures or just trading options. Almost every one of our customers, and if they're not, we have an extensive cross-sell and upsell program in our sales team to ensure that they do, trades more than one product. When you do, they're typically spreading futures against options, futures against futures, asset class against asset class. Where that happens within our benchmark products at CME Group, because that sits in the same clearing house, you get recognized as a margin offset. Think about a very simple example of a calendar spread. I'm going to buy March and I'm going to sell June. The risk of that spread is much smaller than having just an outright March position and an outright June position. When you have offsetting positions that reduce risk, we return capital back to our customer, lower risk means lower collateral held at the clearinghouse. When you look at that in aggregate across the firm, we continue to grow the ways in which we can offer customers to use CMG Group to be the most capital and operational efficient means to trade and risk and manage their risk. That number of margin offsets is up to $80 billion this year. You can see 40% in the equity complex, 35% in rates. Think about as a SOFR position like the old Ted spread, treasurers against Eurodollar, so front end long end, think about futures versus -- think about swaps against futures against options. And then on the other side, other products, the majority of that other bucket is energy because that's one of our biggest products and margin offsets outside of fixed income and equities. So this matters because this also, as I mentioned, makes competing against CME very, very difficult. The switching cost, if somebody wants to compete with us in the short end of the fixed income curve by offering SOFR futures, someplace else. A customer would need to pull their SOFR futures out of CME, lose all the cross margining in products that are not missing on the competitor exchange, and they're incurring significantly increased cost to manage the same overall risk profile. So it's both offensive and defensive. And as part of the capital and operational efficiency story that makes us so valuable to our global client base. We're continuing to invest and add in that by expanding our participation in partnership with DTCC, which is a current firm for treasuries. Stick the landing here. We have our privileged position and our hard-fought well-earned leadership position in this business, coupled with our growth orientation make CME Group what we think is a very compelling investment. I didn't even get a chance to talk about the capital return policy, but we have not only increased our quarterly dividend every single year. We've also increased our annual variable dividend every year. Our dividend yield, I think, going back here, and I neglected to mentioned this, shame on me, 4.1% dividend yield in a stock that is growing the way we are, set a new all-time high, I believe, yesterday. And at 4.1% is inclusive of the annual variable dividend that we just announced as a $6.15 return to you, our shareholders, on top of which is our recently announced and currently being executed share buyback scheme. So with that, I'm hoping that you'll join us for a breakout session after this. And if we're going to meet with you separately, look forward to following up. But it's a great story, and this is a fabulous time being financial services. Great time to be in CME stock. So thank you. I appreciate your time.