Intercontinental Exchange, Inc. (ICE) Earnings Call Transcript & Summary

Okay. I think we'll get started here. So good afternoon, everyone, and thanks for joining this session with ICE. I'm once again delighted to have Jeffrey Sprecher, the Founder, Chairman and CEO of ICE. I believe, Jeff, it's been 17 in a row coming to this conference. So we are grateful for your time, and thanks again for participating in the conference.

Thank you. It's an important conference for us. You draw quite a storied crowd. So thank you for continuing to invite us.

Fantastic. Before we get started, as always, you can ask a question through the Pigeonhole system, get it through. And I'll try and get that to Jeff by the end of the -- towards the end of the setting. So let me just start. I just wanted to maybe do this in sort of three paths. Dive into your energy business first, then we'll talk about mortgage and then spend a bit of time on AI and innovation at ICE, given it's a topic you've talked quite a bit about recently.

But let's start with energy and your maybe exchange business, which are still the vast majority of the company today and actually has very good growth, high single digit top line growth. Part of that is driven by your energy business. That business actually seen some acceleration in growth certainly in 2024. But even over time, as I mentioned, it's grown pretty nicely, particularly post-COVID. Maybe talk about what you're seeing in that business over the last 5 years that's driving sort of stronger trends.

Sure. It's funny you should phrase it that way because probably 15 years ago, I and the rest of the management team said, I'm not sure this energy platform can keep growing into perpetuity. So we needed to diversify the firm and find new pathways for growth so that we can layer on top of that. And here, this core franchise, which is the business that we started years ago, continues to just do well. And sitting here today, to specific to your question, I feel like it's got a lot of runway to continue to do well. The globalization of the energy market is relentless, and the demand for people to manage the risk of their energy footprint, including maybe jumping to the last topic you mentioned. Now all of a sudden, we have this new AI thing that's going to create additional energy demands and is causing all kinds of interest in by new kinds of players. I mentioned on a call recently that we have a new platform where we give information to people on the voluntary markets for carbon reduction. And we've signed up like 250 companies in the last 6 or 8 months. And so all new demand. These are people building data centers who have aspirational goals to reduce their carbon footprint. And so the business has just become more global, the energy markets are more complex and the participants on this platform have continued to become more diverse.

Do you think there's any particularly change though post-pandemic? Has the Russia situation changes how energy market? Is it more about U.S. production? There just seems to be a step-function change in your sort of business growth.

Yes, it's exactly that. something coming out of COVID, we all saw how the supply chains for goods changed and were impacted by COVID and then have reestablished and changed post-COVID. And the same thing has happened in the energy business with the complexity of at least two major wars that have strategic implications for either shipping routes or sourcing of energy. And there's been a massive rewiring of the supply chain. In other words, who's buying what kind of energy from who. And the amazing thing really is how quickly it was able -- for such a complex ecosystem, how quickly it was able to reestablish itself. Energy being just like a foundational need for a society. Amazingly, all the parts and pieces sort of have shifted. And as a result, there's just different risks in the world and new people that are facing risks of energy delivery that are using the capital markets to finance and hedge those activities. And it feels like it's permanent and going to continue to grow, partly because some of those supply chains really involve international shipping of energy. And that's -- you're always going to have acts of God in shipping lanes, labor problems, shipping problems, delivery problems, ports, paperwork, customs, everything that goes along with moving by ship that feels like it's going to have to be managed for a long time.

What's particularly interesting, at least to me, is it doesn't feel like the growth is across the industry. If I look at sort of your energy business versus your main competitor, whether it's volume or open interest, you seem to be growing a lot faster. That's CME, by the way, in case you were a little confused. So just curious what you're doing differently or why your business is seeing market share gains, if you want to call it that, relative to your peer?

I think two things. And some of it was the hand that we were dealt. We got into the energy business by buying the International Petroleum Exchange of London. So we started out with a non-U.S. footprint. And that was quite tiny at -- and that was the first acquisition that I did, and it was in the year 2001. And that footprint was tiny relative to the needs and demands and production of the United States, which is where the dominant trading and indices were developed. But what's happened over time is real globalization of energy. Even as we're deglobalizing some goods and services right now, energy just feels like it's become more globalized. There are places that have energy and places that don't. And those places that don't have native energy just seem to be the growth areas of the world right now. And we sort of rode the international globalization of energy. Separately, a lot of what we do is trading and data and information-based on indices, and we've continued to evolve those indices, reconstitute them. And so our product suite has become increasingly more relevant to the demands of the world. Whereas largely the U.S. indices, and we trade those. And the U.S. products, we trade those as well. But they've kind of been the same through the last 20 years. They haven't really -- there hasn't been a lot of change. They haven't really reconstituted. And the U.S. business of both natural gas, oil and gasoline was very much a pipeline business. So it was a business -- it was designed to serve the needs of the U.S. And the growth really is the U.S. helping to provide the needs for the rest of the world, and we're just better positioned for that.

Maybe sticking on this globalization theme and talk through nat gas, which is one where -- it's very obvious, your investments there and how that's grown. I think a decade ago, we had really nothing than a U.S. business, and almost 1/4 of that business today is international, led by the TTF contract. Maybe talk about the investments you're making in that business and continued global expansion. And how should we think about the potential for more international contracts to be as a percentage of total gas revenues? But if I think about Brent, for example, it's bigger than WTI today in terms of volumes. Can Henry Hub also be overtaken by TTF over time?

It's a good question. First of all, the kind of a weird history of TTF was that, when we bought the International Petroleum Exchange of London, they traded U.K. natural gas. And there's a pipeline that goes from the U.K. under the English channel to Continental Europe. And we were sitting around saying we should really try to have our index on the other end of that pipe because while gas flows across that pipe, sometimes it gets constrained and there's a breakage between the price of gas in Continental Europe and the U.K. And so we found this Dutch natural gas company and we worked with them to develop this TTF contract. Then it was this tiny little Dutch Gas. What's happened in Continental Europe, however, is the marginal molecule of gas is shipborne and brought in, in the form of liquefied natural gas. And so that marker is increasingly becoming a shipborne natural gas marker. And to a certain degree, once you have natural gas at sea, it can go many places and trade as a basis differential to TTF. And so what started as something that we wanted at the end of a pipe has evolved over time to really reflect seaborne natural gas. If you just step back logically and look at Europe, there -- we run interest rate contracts for Europe, and you can see that the market is predicting that Europe is going to start cutting interest rates and stimulating growth. At the same time, they're not going to build any coal plants there. They're certainly not going to build any oil-fired generation. It takes a lot of time to build a nuclear plant. And so how are they going to meet their needs? Well, it's very likely, while they're going to do -- try to do renewables, any significant increase in demand is going to be met by seaborne natural gas coming in. So you just kind of see the underpinnings of why that's going to do well. And can it overtake the U.S.? Possibly. The natural gas in the U.S. is increasingly coming from oil that's fracked. That oil is in West Texas. As you may recall, there have been lots of conversations about not building new pipelines in the United States. And so a lot of that gas makes its way down to Houston through the existing pipe system. The oil goes down there and the gas is a byproduct. And so to a certain degree, we're going to -- even in a somewhat constrained drilling environment, the U.S. is producing a lot of natural gas, and we're going to likely be the ones to serve our allies in Europe. So I think that contract is going to do well for quite a while.

Just curious if you ever get any political pushback. You guys essentially almost control the price -- not control, but you have a big say in the price of global oil, now increasingly global gas. A company that -- it's even global domination here. Do you have a get pushback when you speak to regulators in these jurisdictions about ICE's increasing dominant position in energy price bidding?

Yes and no. You'd be -- I realized early on, like when we bought the International Petroleum Exchange of London, that I didn't know anything about London and I didn't know anything about petroleum. And I wasn't particularly -- I grew up in the Midwest, I wasn't very international. So we surrounded that company with a European Board and European management and really try to keep me and other Americans away from us. And so unlike a lot of people that do M&A, I felt like having a local presence was important. We have a business in Amsterdam. We own Amsterdam exchange and clearinghouse, Amsterdam Board, Amsterdam management. And so the kind of day-to-day conversations that we're having are not coming from me. And so think there's a recognition, we're a big U.S.-based Fortune 500 company. But that said, they're working with local people that understand local nuances.

It looks like your playbook now is happening in Asia. This JKM contract, Japan/Korea Marker, seems to be -- we can see like really good volumes at ICE on that contract in nat gas. I guess a couple of questions. Maybe talk about how you think about growth there over time. And then long term, the name is literally Japan/Korea Marker, but I think China is really a bigger player in natural gas. Is there a risk there is a Chinese-based contract over time? And how are you trying to sort of get ahead of that?

I think it's -- yes, and it's kind of -- let me start with the opposite, which is the conversations that are going on that we've been having with very smart and connected people in Washington, D.C. are increasingly concerned about China and the potential conflict in Taiwan. And as a lot of smart people are looking at that, but they're telling us that the U.S. needs to become more dominant in the region. We need to have better relationships with Vietnam, Indonesia, Malaysia and Southeast Asia. Those -- the Belt and Road initiatives have a lot of Chinese influence throughout the Southeast. And boy, why don't we use our energy footprint to build relationships there? We should be providing those emerging economies with the energy they need. And one way to do that is to stage it in Japan and then use that as an offloading point to various Southeast Asian countries. And by the way, that gets a lot of shipping transportation in that area that the U.S. would be right to defend and have a presence there and so on and so forth. So I oddly see the U.S. potentially being a bigger player in Asia with energy, which would continue to drive that JKM trading, continue to create an opportunity for people to manage risk there. The flip side of your question is what about China? China is a net importer of energy. And so to the extent that there is a Chinese contracts, even if they create one, and it's a native contract, it will be a basis trade. It will be a delta shipping price to the world's shipborne price of natural gas, in other words. So it will -- our view is it will ultimately price off of whatever we're doing. It will be a niche contract as opposed to an outright marker. And by the way, we job on that a lot so that we make sure that we create our own destiny in that regard.

Let's go back to oil. Again, we're seeing really strong volume trends in your oil contracts. It seems to be a lot of it is the refined products, maybe the more mature Brent contract. What are you seeing there? What are you hearing from end markets that's driving growth?

Yes. Again, the supply chain where gasoline is refined has changed post-COVID and post-conflict. India is refining Russian oil and those products are making their way into the international market. A lot of the European distillate products were based on Russian oil and the Europeans no longer want any Russian oil and have boycotts plus sanctions on them. And so there's been a kind of a rewiring of where distillates are made and how they're shipped and moved. And again, it it's just brought new players into the market and moved risks into the market that have to be managed. And again, they look like permanent. I'm not sure any of this changes post-conflict or if there's a change of administration in various countries. It just feels like it's a foundational change that's going to continue to compound on itself.

Okay. The Brent contract, again, your foundational contract be more mature, but did have a fundamental change in terms of WTI being added to that index I think about a year ago. Can you speak to how that's changing the oil ecosystem or how is it beneficial?

Yes. It's -- for those who don't follow this, Brent was a oil area in the North Sea between Norway and the U.K. and then the index was created from the trading of that oil. And the Brent -- there's not even any oil derricks in the Brent oilfield anymore so there is no Brent in the Brent index. Over time, we have just reconstituted that index. And if you think about it as being the utopian grade of oil, like what is the -- if you could buy a barrel of oil that exists in the world today, what is the least sulfur, most pure, easiest to refine oil and let's make sure that's the index and then everything else that comes out of a barrel can be traded as a differential to that. And so as Christian mentioned, we added as part of the index WTI, West Texas Intermediate crude oil, and it's a cheapest to deliver contract. So you can basically deliver WTI on a boat somewhere and it's called Brent and it's in the Brent index. And that happens maybe 30% or 40% of the time. It would be U.S. oil would be the driver of that index. And maybe 50%, 60%, 70% of the time, it's other grades. So it's a flexible utopian contract, if you will, and the market has really gravitated to it. It just -- it works for so many people around the world as a way of trying to hedge their shipping, geopolitical and discovery risk. And so it was a long time in coming to put U.S. oil in what used to be the European oil contract. But increasingly, again, if you think about the U.S., where is the next new oil well going to be drilled? It's probably fracking, it's probably West Texas. Those are the cheapest, easiest, fastest wells to put in. And that oil, the easiest place for that oil to flow is down to Houston. And once it's in Houston, it's easy to put it on a boat. So marginal oil production in the U.S. is making its way into that index. It's just been a virtuous reconstitution over 20 years that we've been working on that, and it really feels like, I don't know, it just kind of found the sweet spot. It's grown every year for the entire time we've owned it. But just feels now like it has stature. It feels like suddenly you have the S&P 500 or the FTSE or something. It feels like the index just is the one that everybody feels like, okay, that's representative for my needs.

Maybe try to wrap up the energy conversation around how does it translate financially? We've obviously seen the volumes, so it is translating. But how do you think about maybe capturing more value, right? We've talked about strong secular trends. We're seeing good volumes. There's clearly some sort of worth to your business. How do you think about maybe using pricing or the contract capital more, more value for shareholders.

Yes, use a good word, value. We think about -- and it's really been a more recent thought inside the company, which is have we created the value? And if so, are we proportionately sharing the value with our customers and ourselves? And it's only been in the last few years that we've had that kind of insight and conversations with our customers and selectively have said we really created a lot of value, for example, in that Brent index. And we should -- and people appreciate it, we should change the pricing on that. And so it's kind of a whole -- it's not a formulaic view. It's more of a holistic view of do we feel like we've really done something creative and if we raise prices, it would be accepted? And I will tell you, we raise prices, touch things all the time. Never extreme, always in the mindset of sharing value with our customers. And we've had like no pushback. Which is partly why you and others ask the question, which is, well, maybe you should keep doing more of it until you find the level where there is pushback. And -- but the way we run our business is really just let's compound the growth, let's take a long-term view and let's make sure that we're providing value to our customers. And then we can think about making sure that we participate.

Let's switch over to mortgage. Maybe a tougher backdrop for that one. So I think your mortgage revenue targets are to grow high single digits is kind of what you're trying to get to. Can you talk about how -- again, given the context where we now -- rates are probably higher, going to stay there for a while, we're past the low rate environment. How do you -- what's the algorithm of how you get to high single digits growth?

Yes. The real algorithm is that there's a millennial population that is like massive that is in their prime earning years and is under-housed and creating families and with rising needs. And part of this is just a bet on that demographic for the rest of their lives, that the U.S. house stock and structure of mortgages to support it is got to evolve. And we want to be at the middle of it, and have, to a certain degree, positioned ourselves at the middle of it. The -- and so then it becomes, okay, what is the formula for the timing of how that manifests itself? Right now, with this bad mortgage backdrop, which is probably as bad as it's been in 25 years, we've been surprised that the major market participants in the mortgage space are following our lead to make new investments to prepare for that demographic shift that everybody sees coming. And so we're selling a lot of services and software and infrastructure to the mortgage industry even though volumes are way down. I think there's an appreciation that everybody kind of ate from a fat trough in a low interest rate environment, and you can just throw bodies at the business to get more business. But those -- that headcount is down now. And when and if that demographic is starting to push back and push volume through lenders and the housing stock, technology should be the thing that scales, not humans. And so a long-winded way of saying, we're really selling a lot of new clients on this vision that we have. We signed up 20 in the first quarter, of major lending companies that are not shying away from spending money to position themselves. So the good news is that these people view themselves as having a long-term future in this business and are not retreating and they're investing right now. A lot of our -- the high single-digit growth that you talked about is transaction based. We have subscription-based and transaction-based revenues for that business and the subscriptions are doing phenomenal, the transactions are very low right now. There's almost no refinancing going on. I mean, it's pretty close to 0. So all work in the housing market are just new mortgages that are being put in, most likely of somebody moving. And as you know and you can read about, people are only moving when they need to move for lifestyle purposes. If they can avoid it, they will. So I think the business is spring-loaded for the delivery of more housing stock and any kind of interest rate cut.

But are we confident that, even in a world where there's no refinance, it's all purchase, you can still -- you have enough products to get you to high single digits from...

Yes. Yes. I really do. It's just phenomenal how the industry is rallying around this platform that we've built. Every -- we're probably in conversation with every major player in the industry that is in some way, shape or form, talked to us about how to touch that platform. Or if they are not able to right now, how they can use what we have in relation to what they've already got. And it's amazing because that industry is not shying away from figuring out its next level up. I think there needs to be either -- my own sense, which is just me betting. But I think either an interest rate cut that then demonstrates like the peak may have happened or just we have high interest rates for a long time and people say, "Okay, that's -- I just got to get on with my life. I've avoided too long." And that -- and people of my generation know that interest rates, you can buy houses at high interest rates because people my generation did that.

So you did mention you have a lot of confidence with a lot of companies. There was an interesting stat where you touch 85% of U.S. mortgages.