All right, everybody, welcome back to the 2024 Piper Sandler Global Exchange and Trading Conference. My name is Patrick Moley. I'm a senior research analyst covering the exchanges, trading companies, and online brokers. Happy to be joined by our last fireside of the morning, CFO Warren Gardiner of Intercontinental Exchange, ICE. ICE is a global exchange and clearinghouse operator. They IPO'd in 2003. They've been the driving force behind electronification of the energy futures market, and more recently, they've made a push into fixed income, in the mortgage industry. So Warren, thanks so much for sitting down with us.
Yeah, thanks, Patrick. Thanks for having me. Thanks, everybody, for joining.
Yeah, so starting off, maybe talk about the environment. Interest rate uncertainties persisted, geopolitical tensions are high. We have a presidential election coming up. How are you thinking about the setup heading into the back half of the year and what it could mean for ICE's business?
Yeah, it's a good place to start. I mean, it sounds like there's a lot of demand for risk management tools, frankly, which is what we do. And so I think as I think about the next, you know, couple of quarters and really into the next couple of years here, I think the setup's nice. I mean, look, we, we've got a business that's very much diverse across different asset classes, from energy to ags to financial products to, as Patrick mentioned, fixed income and mortgages. So we've got a good group of asset classes that we're in that have both cyclical and secular trends that we're well positioned to take advantage of as a company. And so we're excited about those as we move into the next couple of years here.
And so I think about that, coupled with a revenue base that is largely recurring in nature, over 50% recurring in nature, operating margins in the mid-50s to high 50% range, and a free cash flow stream that obviously gives us a lot of opportunity to continue to invest in that business and grow well into the future. It really is a unique competitive advantage in that sense. And so we're excited about as we look forward here. I think if you kind of, you know, zero in to some of the key areas of our business, you know, think about energy, our energy business or energy futures business. Open interest is up 25% year-over-year.
Open interest in our oil contract's up about 20% and more so in gas and global natural gas. Think about our interest rate business, we're up over 30% in terms of our open interest. Fixed income, you know, that's an asset class that obviously went through a challenging couple of years with the move higher in interest rates. But I think, you know, having... I won't say settled, but certainly at a 4.3% 10-year, 4.5% 10-year, it becomes a pretty attractive asset class for people, and we're seeing customers, you know, really reengage with that business and invest in that asset class, which has been good for that business the last couple of quarters as well. And then mortgage, it's, you know, it certainly is a challenging backdrop for the origination side.
But you are seeing supply of new homes on the market increase. You know, we are having purchase volume, which, you know, for mortgages above 6% now, you know, I think almost it's well into the double-digit percentage in terms of number of loans outstanding, that it had a 6% or so plus mortgage. You know, that was maybe a few years ago, around 1% or 2%. So, you know, the backlog of future refinancings is obviously growing, too, as well as we move further and further away from that 3% mortgage.
So, I think if you look across the business and all the different areas that we're in and the setup, you know, to use your words, I think is pretty good, not only again, for the next couple of quarters, but I think the next couple of years here.
Sure. Maybe we'll start off with the mortgage business. Still a difficult environment, like you said, but I think a lot of people are excited to see what you can do with the business, myself included, in a better environment. With Black Knight acquisition closed last year, you're now number one in both originations and servicing market share. Can you talk about, you know, what the overall acquisition of BKI has meant for ICE? And then just talk broadly about, you know, the overall vision for the mortgage business.
Sure. So it's a lot like a lot of the other asset classes that we've been in, obviously, for a longer period of time. I think one of the better examples, honestly, is just the energy business and how we built that platform out. And it started with a handful of contracts within energy today, that still exists today. And through a series of acquisitions and organic growth and new product development, we have a platform today that is, you know, thousands of products and, you know, well over $1 billion in revenue.
So, you know, and we did that, and that's, that's sort of the blueprint we apply, where we create this foundational network, which in that case would have been, you know, a handful of those energy contracts, Brent Crude oil, for instance, and then go build around it. And so that's what we're doing in mortgage, and really through the use of data and technology, bringing additional transparency to that asset class, additional efficiency to that asset class, which again, in the mortgage market, is ripe for opportunity. And then, so anyone that's gone through that process knows that it can take months to get a loan, get a mortgage loan. It can take months to get a refinance—to refinance a mortgage on an existing home that you've been in multiple years.
And so, you know, bringing data technology to that with the existing network that we have and bolting on or creating product organically, it's just gonna be the same blueprint that we've applied to these other asset classes over time. And I think, you know, it is that market share, that foundational network that begins with Black Knight and Ellie Mae, and having that full workflow that really positions us to do that, I think, in a very unique way.
Getting a little more specific on the opportunities that you spoke about, can you kind of walk us through how you think about the potential for a product roadmap in mortgage and the opportunities to sort of offer mortgage-based products in the other businesses, like fixed income in the exchange business? How do you think about that kind of product set?
Yeah, that's one of the unique opportunities that we have, too. And so I think you think about, for instance, on the data side, you know, Black Knight, Ellie Mae before we acquired it, those are unique data sets, raw data. A lot of raw data comes off those platforms, and Black Knight has over 50% of the loans in the United States serviced on that platform. Ellie Mae, and ICE Mortgage Technology, Legacy ICE Mortgage Technology, originated around half of the loans in the United States each year. And so it's a lot of real-time information around the mortgage market that we uniquely have on that platform.
What those platforms didn't have before was the ability to create sort of a product, a data product out of that, and then sell it into other areas of the capital markets like we do. And so that's one of, I think, the key synergies that we're looking forward to, is bringing together the capabilities we have within our fixed income and data services segment, where we have close to 1,000 customers that today consume end-of-day pricing for mortgage-backed securities that I think will have interest in additional data and transparency that we can provide from some of the mortgage products that we have. You know, that exhaust, if you will, that comes off of those platforms.
And so, you know, again, that's unique data with a unique skill set that we have that we can bring together to create something that just doesn't really exist, like it does, that in the world today. So, you know, those are areas that we're very much excited about. We've also launched, you know, a number of quarters ago at this point, but a rate lock futures index. You know, and a rate lock futures product. And that, again, that's data coming off of the mortgage platform. We've leveraged an index business that we have in our fixed income segment to create this index. And then, of course, we have the futures platform to trade that off of. And so that's in the early days, of course, today.
But again, a unique product that we're bringing to the market that I think can bring just additional efficiency and transparency to people's workflows.
So since you closed the acquisition six months ago, you've had a chance to kind of look under the hood, and you talked about the data exhaust coming off. Are there any areas where you've seen, you know, demand for possible productization of that data that you maybe weren't initially thinking was an opportunity that was there, but just kind of presented itself as you've had time to kind of integrate it?
Well, I don't know if there's anything that's necessarily that we've figured out that didn't kinda have a sense of or a blueprint for before. But those are the areas, like I said, on data, that we really do see the opportunity. And again, because of the network we have on both sides of the aisle, if you will, in that sense, to really not only create the product, but distribute the product. And so I think, you know, those are certainly the areas that we're going to focus on to start. We're also very much focused on, you know, modernizing the technology stack, underpinning some of the Black Knight products as well. And that's something that we've gotten off to a very quick start on.
You know, that again, I think will not only over time improve just the user experience, but also improve the opportunity to extract different types of data and, and again, just make it a more efficient and transparent workflow for people over time, too. So, I, I'm certain that, you know, over a longer period of time, to come to your question, that those opportunities will arise. That's really the core of what we do and how we grow these businesses. And again, I come back to the energy business, where, you know, 20 years ago, we didn't have a roadmap for all the thousands of contracts that we have today. But over time, with communication with the customer, and understanding their pain points, you're able to develop these products in a unique way.
And so that's really what we'll be focused on as we kind of move, progress here. And again, that network that we have, both on the servicing side and the origination side and connecting those over time, it really provides us with, again, a very unique opportunity to have that communication and that dialogue and to really understand the workflow and the pain points across that workflow to develop those products.
So when you set out on the mortgage journey, you had the intention of reducing the amount of time it takes to close a loan-
Mm-hmm.
-the costs. So I mean, at the risk of simplifying this too much, how far away do you think we are from the average American going to take out a mortgage, that's maybe done so in the last 5, 10 years, saying to themselves, you know, "Wow, that was a lot less costly and was a lot faster than I've experienced in the past. Thank God for all the great work guys have done?
Yeah. Well, look, I think we're still... They may never know ICE in that process-
Yeah.
but they'll certainly like their originator and their broker, if you will, more. But I think we're still in the early innings of that, but if one were to utilize a lot of the products that exist today, I think you can—you're starting to really get there. I mean, I've experienced this, you know, using an Encompass originator, and I've used a non-Encompass and maybe a, you know, an internal technology originator, if you will, in the past. And there's been a dramatic difference in the time and the ease it is to kind of create those products.
And there's actually been some surveys done on the cost and the efficiency of an Encompass user versus, you know, a non-Encompass user in terms of the time and cost it is to originate a loan. And so we're delivering those efficiencies today, but I do think that you know, there is a tremendous opportunity to make those even better over time. And that's the goal. And I think importantly for us, you know, while we do have, you know, a fairly strong network or market share across these flagship products in Encompass on the origination side and servicing with MSP, there is a tremendous opportunity to cross-sell a lot of different data and analytics products, you know, that those customers aren't consuming. And importantly, they are customers, again, that are on our platform.
So it's a captive customer base that we can really go and sell into, and I think that's a big opportunity that we see, not only with the existing product set, but also others as we kind of progress through this journey.
All right. Moving on to energy mortgage businesses faced headwinds. That hasn't been the case with energy. Coming off your fourth consecutive record quarter with for energy revenues, volumes in the second quarter, tracking up 30% year-over-year. Open interest is up 20% year-over-year. You're taking share in crude oil and nat gas. Can you talk to the strength that you're seeing? How sustainable do you think this is, and what are you kind of doing to continue to drive demand for some of the existing products and I guess, you know, new products as well?
Yeah, I think, well, look, I think there are a couple of different trends that have existed and continue to exist, I think will continue to exist well into the future here, too, to be clear. And we're very well positioned for them with the platform that we have. And we, we've got a platform across a lot of different, if not all sources, of energy, and we have it across the world. And so we're really well positioned to go and chase growth or capture growth wherever it's happening in that particular asset class, that ecosystem. And that's really how we've always approached that platform.
I kind of come back to the earlier question, where we really listened to the customer base, and developed our product suite around where they felt their pain points were going to be or where they thought they were going to be focused in the future. And so, you know, as I think about the trends that are out there, I mean, you have an energy transition occurring, an evolution, probably better said, in energy, that it's gonna be very long-tailed in nature and gonna occur across oil and gas and some of... in our Environmental Products, importantly, as well, where we're a leader, with or you know, you know, and have been for well over a decade at this point.
So, you know, I think as we think about those trends, they'll continue, you know, well into the future. So as long as we're kind of paying attention to that customer base, where those pain points are, you know, those opportunities to create new products and, and drive growth across the platform are gonna continue there. And I think we've got a lot of products, not only that are maybe more mature, that have a lot of runway, but newer ones as well. I mean, when you think about JKM, which is a Japan-Korea marker, that is gonna increasingly be an important one for LNG moving around the world.
TTF is another one, where, again, very much tied to the growth of LNG and the readjustment we've seen in supply chains post-Russia, Ukraine, well, not post, but certainly since Russia and Ukraine, you know, has been an important part of that growth there and getting gas to Europe from other areas around the world. And so, you know, I think, look, as long as you believe that the consumption of energy is gonna continue to grow, the number of sources of energy or will continue to grow, delivery points and emerging economies will continue to grow and develop, then I think we're very, you know, around the world, then we're very well positioned to kind of continue to sustain that growth that you've seen us deliver over the last number of years.
I know this question gets asked quite often, but, you know, you raised pricing in the energy complex this year. Can you talk about, you know, those increases and your kind of thoughts on your ability to take price going forward in energy?
Yeah, look, we've always taken the philosophy across the platform, not just to energy, that where we deliver value or create value for a customer, we'll—we will capture and share in that value. And that's that exists within mortgages, it exists within our approach in fixed income, and then, of course, over in energies and energy futures, and so, and futures overall.
And so one thing more specific to the energy futures and what we did there is, it was a number of years ago, we, you know, last year, I guess it was, you know, these are contracts, big oil benchmarks that we really hadn't touched headline price on for a number of years, but of course, delivered a lot of value to our customer base and felt like that was an opportunity to go capture some of that value. And so we did that, and we didn't, you know, more recently, in this year, we did not touch those contracts, but we did touch a couple of other energy contracts, and we touched some of our data products and some other fees around the clearinghouse as well.
So the point is, we've got a number of different levers, I think, across the platform, where we think we've created value, that we'll go capture that value. I think you'll see us continue to take that approach. I don't think it'll be the same contracts, the same rate every year by any means, but we will pick our spots that way. That's what you've seen us done pretty consistently historically.
All right, moving on to Fixed Income and Data Services. I'll start off with a high-level question.
Mm-hmm.
As rates have risen, demand for fixed income has obviously increased, and a lot of folks are expecting that to continue. Can you talk to how ICE is positioned to benefit from that trend, and maybe speak to the longer-term vision of this business?
Sure. So what we've got there is the core of that, the foundational network, if you will, back to sort of what we're talking about with energy or mortgages, is the Pricing and Reference Data business. And we provide end-of-day fixed income prices to 3 million plus securities around the world, you know, at the same time each day, so that maybe not some of you that aren't probably fixed income managers, but fixed income managers can price their NAVs to calculate performance, charge their fees, things of that nature. And so it's a very mission-critical offering there that we serve to thousands of customers across that asset class. And what we've done, like with other areas of...
or other asset classes that we're in, is take that network and go build around it with new products and new services and try to build out our presence across the workflow. And so I think as fixed income becomes a more efficient and automated asset class, which it, too, seems to be more in the earlier to mid-innings, if you will, like mortgage maybe being more in the earlier innings, you know, we'll have the opportunity to develop those products across the workflow and cross-sell the current product set within the current customer base as well, within the workflow. And so more recently, you know, what we have seen, to your point, is certainly the last couple of years, you know, the sharp move in interest rates definitely had an impact on the customer base.
I think, you know, we saw some continued strong trends in retention, things of that nature. Where we did see some weakness was in our, with our top-line sales. You know, as interest rates have started to, I'll say, stabilize, I don't know if they're gonna necessarily go up or down from here, or to what magnitude, you know, you've seen reinvestment in that asset class and, and re-engagement in that asset class from a lot of those customers. And so that's a lot of why you've seen the ASV in our Fixed Income Data and Analytics business pick up from the low single digits into the mid-single digits more recently. And so it's really just been that re-engagement with an asset class that, at these interest rates, becomes pretty attractive relative to what it was maybe only a few years ago.
So, that's been a positive as we obviously look into the balance of this year and to next year for us.
You mentioned the-
Mm-hmm
... you know, on the transaction side... that softness, largely retail-driven, I think. You've talked about building out institutional connectivity. Can you talk about the things you're doing there, and how important do you think institutional connectivity is to broadening out the product set and kind of getting to where you wanna be longer term?
Yeah. It's an important part of it. And you're right that retail is still a large part of that platform, and I think a good component of that liquidity pool that we certainly wanna maintain and grow. So I don't wanna make it seem as though we're putting that to the side by any means, but certainly something that we can help leverage as we build out that institutional connectivity. And that was a lot of the premise for the acquisitions that we did a number of years ago, was to do that. And we've made some good progress there. You know, we've grown market share within the institutional business, for a couple of reasons.
I mean, we've done a lot of the blocking and tackling on getting new accounts connected to the platform, connected to those liquidity pools. We've also launched new protocols, like our RFQ protocol, that's brought in more institutional liquidity. And then we've also leveraged the presence we have, of course, in the data set to kind of bring more people into those liquidity pools as well. So again, kind of leveraging the full network and the customer base that we the existing customer base that we had on the institutional side to help those liquidity pools, you know, grow from that perspective. And so all of those have kind of combined to, you know, help us make progress in that, on that front, and I think we'll continue to.
you know, in addition to that, you know, we're also well positioned within the municipal bond space, which from an electronification standpoint, is making progress but is still, you know, behind where corporates would be or some other asset classes would be. So that too is another opportunity beyond just institutional to kind of see more electronification with areas such as that.
Sure. And maybe just bringing it all together, you have this all-weather, diversified business, consistently have grown EPS over the years. How do you kind of think about the, the longer term, just growth algorithm or earnings algorithm in sort of a more normalized environment?
So, you know, I think history is probably a pretty good guide ultimately for. And so I, you know, again, we talked a little bit earlier about some of the, you know, current positioning that we have in terms of our—from our energy business with double-digit growth and open interest. You know, we've got a fixed income business that seems to be inflecting from some of the macro pressures that we were under, the past couple of years and getting, and getting better. And then I think it's, you know, you can argue on mortgage, where we are in that cycle, I suppose, but it does feel like we are bottoming and getting some stability.
When that starts to really pick up from a macro perspective, I think is difficult to know with certainty, but certainly, I think we're getting to a point where customers are starting to really reengage and think about the next number of years here, and how they wanna be positioned from a technology standpoint to catch that ultimate, that uptick in volume. So I feel very good about that, kind of heading into the next number of years in terms of how the revenue profile can look. You know, and we'll continue to make the investments that we've communicated and continue to kind of invest in that longer term growth potential.
Okay, I think we have time for one more. On M&A, you know, it's been a difficult environment for M&A, particularly large-scale M&A and getting it through. You guys probably know, you know, as well as anyone, it's been M&A's been an important part of your growth story over the years. So as we look to the upcoming presidential election, it seems like the, you know, we there's a potential we get an administration change. Do you think that would impact your appetite for M&A in any way? And then maybe just broadly, how you're thinking about M&A from here, regardless of who wins the presidency?
No, I... Look, that, I don't think that really changes our approach. You know, we've been able to operate in all different types of environment, whether it's M&A or, or just running the business, and that's part of the all-weather nature to a degree, is we've been able to operate and grow through many different environments. And so I don't think that really necessarily impacts how we're thinking about things. We're really looking, when we do M&A, looking for the best opportunities that are gonna deliver the returns that we've communicated to our shareholders and, and executing on that. And so and that can range from a lot of different asset classes, you know, that, that we're at in today. It's not just gonna mortgage it.
There's opportunities across fixed income and exchange segments as well, particularly, you know, areas like environmentals, for instance. So we're certainly looking at those, and we're always looking at those. That's part of the strategy to grow through bolt-on acquisitions and to develop products organically as well. But I think, look, at the current moment, we're still, you know, coming off of a fairly large transaction. We're 3.9 times gross debt to EBITDA, so we are focused very much on paying down that debt and getting to those leverage targets. You know, not to say that we haven't been able to do bolt-on acquisitions in the past, but certainly, I think the focus at the moment is really to get back to those targets and go from there, so.
All right. Well, I think we're out of time, but thanks so much, Warren, for joining us.
All right. Great. Thank you.
All right.
Thanks for having me.