Bgc Group Inc (BGC) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the first-quarter 2009 BGC Partners Inc. earnings conference call. My name is Demali and I will be your operator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions) As a reminder this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Mr. Jason McGruder, Head of Investor Relations. Please proceed.

Good morning. Before we begin I want to make sure that you know that our first-quarter 2009 financial results press release was issued last night. It can be found at either the News Center or Investor Relations sections of our website at www.BGCPartners.com. We also have a PowerPoint summarizing these results, which includes our monthly revenue figures going back to January 2007, in the Investor Relations section of our site.

I also refer you to the statement titled 'Discussion of Forward-Looking Statements' contained in our financial results press release. I remind you that the information in the release and on this call contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended.

Such forward-looking statements include statements about the outlook and prospects for BGC Partners and for its industry, as well as statements about our future financial and operating performance. Such statements are based upon current expectations and involve risks and uncertainties. Actual results, performance, or achievements could result differ materially from those contemplated, expressed, or implied because of a number of risks and uncertainties that include, but are not limited to, risks and uncertainties identified in the earnings release and in BGC Partners filings with the US Securities and Exchange Commission.

We believe that all forward-looking statements are based upon reasonable assumptions when made. However, we caution that it is impossible to predict actual results or outcomes or the effects of risks, uncertainties, or other factors on anticipated results or outcomes and that accordingly you should not place undue reliance on these statements.

Forward-looking statements speak only as of the date when made and we undertake no obligation to update these statements in light of subsequent events or developments. Please refer to the complete disclaimer with respect to forward-looking statements set forth in today's earnings release and the risk factors set forth in our public filings, which we incorporate by reference.

I would now like to turn the call over to our host, Howard Lutnick, Chairman and CEO of BGC Partners.

Thank you, Jason, and good morning. Thank you for joining us today on our first quarter of 2009 conference call. With me today is our President, Shaun Lynn, and our Chief Financial Officer, Graham Sadler.

Challenging market conditions and exchange rates impacted BGC in the first quarter of 2009. Our revenues for distributable earnings declined compared with our record first quarter of 2008 due in large part to the strengthening of the US dollar. If exchange rates had remained unchanged, our first-quarter 2009 revenues would have been approximately $24 million higher.

As you know, because of the impact of seasonality, we typically discuss results on a year-over-year basis. However, because of the credit crisis we understand that many of you might find it useful for us to discuss our results on both a year-over-year and a sequential basis. Therefore, we will review comparisons of both the first and the fourth quarters of 2008.

We generated revenue growth sequentially in both rates and overall brokerage revenues and we generated revenue growth sequentially and year-over-year in credit. While our total revenues were roughly flat compared to the fourth quarter of 2008 because of our strong focus on the bottom line non-compensation expenses for distributable earnings were down by over 18% year over year and by more than 13% sequentially. Thus, despite the current market environment, we were able to expand our margins as compared to last quarter and prior quarters with similar revenues.

Our total revenues for distributable earnings were approximately $100 million in January of 2009, $85 million in February, $101 million in March, and $93 million in April. By comparison in 2008 our distributable earnings revenues were $110 million in January, $102 million in February, $126 million in March, and $104 million in April. But for the strength of the dollar our April 2009 revenues would have been about the same as April of 2008 so the change was primarily foreign exchange.

Looking ahead there are a number of encouraging signs that indicate a resumption of revenue and profitability growth later in the year. For example, the continuing growth in US Treasury and corporate issuance, which we expect will help our rates and credit businesses; the sequential growth in our fully electronic US Treasury volumes; the strong year-over-year growth in BGC's fully electronic CDS and FX options business; and the strong first-quarter performance by the trading arms of most of our largest customers.

I am also pleased to report that our Board has declared a dividend of $0.09 a share for the first quarter payable on May 28 to common stockholders of record May 18. I would now like to turn the call over to Shaun Lynn.

Thanks, Howard. Good morning to everyone. Although Graham will provide more detail on our financial performance, I do want to highlight one area which is particularly strong for us and that is our credit business. BGC has generated year-over-year growth in credit revenues every quarter since the first quarter of 2007. Based on publicly available figures and comments made by our competitors, we believe that as of 2009 we have the largest credit business of any inter-dealer broker.

Our foundation is our strong market share in US corporates and Eurobonds along with our strong global credit thrift in business. The increase in credit bond issuance has continued to drive our credit growth as CDS business has been primarily in the broking of credit default swaps used by our clients to hedge their underlying cash securities. And that has been the strongest part of the CDS market.

Finally, we continue to see strong year-on-year growth in fully electronic CDS trading. As central clearing of CDS becomes more widespread, we believe the market will stabilize and grow again. Therefore, we are well-positioned for growth in both voice and electronic trading.

In the first quarter of 2009 BGC generated another significant year-on-year increase in volumes from the fully electronic trading of CDS and FX options. On a combined basis volumes of these new products were up by almost 70% when compared to the first quarter of 2008. This is very positive considering the difficult overall market for CDS and FX options in the first quarter.

While this growth is offset by lower year-over-year volumes related to fully electronic US Treasury trading, we believe the record expected Treasury issuance will eventually provide dramatic growth to our rates business. And in this quarter we saw our fully electronic rates volumes decline by over 20% compared to last quarter.

Overall BGC's first-quarter 2009 revenues related to fully electronic trading was 6.9% of total revenues for distributable earnings compared to 6% in the first quarter of last year. This comparison reflects the absorption by other clients of the businesses of Merrill Lynch, Bear Stearns, and Lehman Brothers; all of which have been large, fixed fee, fully electronic Treasury customers.

Moving on to our brokerage headcount. As of March 31, 2009, BGC had 1,270 brokers compared to 1,289 at the end of December and 1,201 as of March 31, 2008. Broker headcount was up year-over-year but down sequentially due to our normal year-end review process. We currently have a number of new hires with future start dates who are not yet included in this headcount and we continue to actively recruit and hire.

We are not only focusing on brokers, but also experienced traders and salespeople. We therefore expect to continue to profitably increase front office headcount going forward. With that I would like to turn the call over to Graham.

Thank you, Shaun, and good morning. As you know this is my first earnings call with BGC, so I hope you will all be kind to me.

For the first quarter of 2009 BGC Partners generated revenues for distributable earnings of $286.1 million compared with $338.9 million in the first quarter of 2008. Our brokerage revenues were $263.5 million in the first quarter of 2009 versus the $305.9 million recorded in the prior-year period. On a sequential basis brokerage revenues increased 1.5% and overall revenues were roughly flat.

Both our brokerage revenues and our overall revenues for the first quarter of 2009 would have been approximately $24 million higher if not for the increase in the value of the US dollar since the beginning of 2008. For the first quarter of 2009 rates revenues were $123.6 million, credit was $91.3 million, other asset classes was $26.3 million, and foreign exchange was $22.3 million. In comparison for the first quarter of 2008 rates revenues were $152.5 million, credit was $87.2 million, other asset classes was $28.8 million, and foreign exchange was $37.5 million.

Credit revenues increased by 4.7% year-over-year and by 9.7% sequentially. Rates revenues declined year-over-year, primarily due to consolidation among large fixed fee eSpeed fully electronic US Treasury customers and because of lower industrywide US Treasury volumes. On a sequential basis voice-driven rates revenues increased by 7.5%, while overall rates revenues increased by 6.2%.

Foreign exchange revenues decreased by 40.3% year on year and by 27.7% sequentially. This was primarily due to lower emerging markets foreign exchange option volumes industrywide. Revenues related to fees from related parties declined by $6 million or 28.6% when compared to the first quarter of 2008. This decline was due to an equal reduction in our costs of providing services to Cantor in part through a reduction in temporary staff and consulting costs.

Interest income declined by $2.5 million to 65.9% compared to the first quarter of last year due in part to lower market yields on cash and cash equivalents. In the first quarter of 2009 rates represented 43.2% of distributable earnings revenues, credit 31.9%, other asset classes 9.2%, and foreign exchange 7.8%. In the first quarter of 2008 rates represented 45% of distributable earnings revenues, credit 25.7%, foreign exchange 11.1%, and other asset classes 8.5%.

Turning to expenses. Total expenses for distributable earnings decreased by 11.1% year-over-year and by 7.3% sequentially to $256 million in the first quarter of 2009. Compensation and employee benefits represented 60.9% of distributable earnings revenues in the first quarter of 2009 compared with 63.2% in the fourth quarter of 2008 and 55.4% in the first quarter of last year.

The increase in our compensation ratio compared to the first quarter of 2008 was due in part to lower overall revenues and although our broker payouts vary with revenues, our back office expenses are relatively fixed. However, we have taken a number of steps to reduce back office and overall expenses.

For example, we have been replacing some of our vendors and consultants with full-time employees. This has the effect of increasing our compensation ratio whilst contributing to the year-over-year reduction in expenses related to professional and consulting fees. This is more economical for us and reduces overall expense levels.

The compensation ratio also increased because certain related party employees who perform services for BGC and whose compensation had been recorded prior to the merger of BGC and eSpeed as fees to related parties have now been classified as BGC employees. Their compensation is therefore now included as part of compensation and employee benefits; correspondingly expenses for fees to related parties have declined. The net impact is that you should expect our compensation-related expenses to remain around 60% of revenues.

Additionally we continue to focus on controlling our non-compensation expenses. For the first quarter of 2009 non-compensation expenses declined by 18.6% to $81.7 million or 28.6% of distributable earnings revenues. This compares with $100.3 million or 29.6% in the prior-year period. We expect non-compensation expenses to remain around these levels for the second quarter.

In the first quarter of 2009 BGC Partners' pretax distributable earnings were $30.1 million or $0.15 per fully diluted share compared with $50.8 million or $0.27 per fully diluted share in the first quarter of 2008. The Company's pretax distributable earnings margins was 10.5% in the first quarter of 2009 versus 15% in the prior-year period.

BGC Partners recorded post-tax distributable earnings of $22.6 million or $0.11 per fully diluted share in the first quarter of 2009 compared with $39.4 million or $0.21 per fully diluted share in the first quarter of 2008. Our post-tax distributable earnings margin was 7.9% in the first quarter of 2009 versus 11.6% in the prior-year period.

On a sequential basis our pretax distributable earnings were up 165.3%. Our post-tax distributable earnings were up 181%, but our pre- and post-tax margins each expanded by several hundred basis points. Our effective tax rate for distributable earnings was 26.6% in the first quarter of 2009 compared to 21.1% in the prior-year period. We expect our effective tax rate for distributable earnings to be approximately 27% for 2009.

Our fully diluted weighted average share count was 200 million for the first quarter of 2009 compared with 185 million in the year earlier period. From December 31, 2008, through April 30, 2009, the Company repurchased approximately 4 million shares of its Class A common stock for an aggregate purchase price of approximately $7.9 million, as detailed in our financial results press release. As of March 31, 2009, BGC had approximately 197.4 million fully diluted shares outstanding.

Turning to the balance sheet. As of March 31, 2009, the Company's cash position, which we define as cash and cash equivalents, cash segregated under regulatory requirements, and reverse repurchase agreements, was $366.3 million; long-term debt was $150 million; book value per share was $2.40; and total capital, which is comprised of redeemable partnership interest, non-controlling interest in subsidiaries, and total stockholders' equity, was $447.9 million.

In comparison as of December 31, 2008, the Company's cash position was $361.3 million, long-term debt was $150 million, book value per share was $2.31 and its total capital was a $443.8 million. Now I will turn the call back over to Howard.

Thank you, Graham. We expect to generate distributable earnings revenues of between $260 million and $280 million in the second quarter of 2009. This revenue outlook would have been approximately $25 million higher if not for the relative appreciation of the US dollar compared to last year. We expect second-quarter 2009 pretax distributable earnings of between $20 million and $28 million and post-tax distributable earnings of between $14 million and $20 million.

Although these are challenging times for the global capital markets we feel we are well-positioned to capitalize on the coming increase in both the Treasury and corporate bond issuance. And we remain focused on growing our business and maximizing profitability. Operator, we would now like to turn the call over to answering questions.

(Operator Instructions) Daniel Harris, Goldman Sachs.

Good morning. I was wondering if you guys could comment at all within your credit business -- are you using or are you seeing interest in the TCC solution from ICE? And I know that -- I think most of the backloading or most of the loading into the clearinghouse has been backloading of prior contracts, but what is the view going forward from here in terms of contributing contracts to that clearinghouse?

Well, the way it works is that we and the other brokers match banks, participating banks, with each other in the marketplace. So the banks trade with each other and then once the banks take that into their back office they can choose to sell them in the manner that they wish. So it's really the bank which puts the transaction into the clearinghouse, not the broker.

That is the same, by the way, with LCH and their swap clear product, which is the brokers connect banks to each other who wanted to do a swap with each other and then the banks themselves agree after the processing to put that transaction into the clearing corporation. So the fact is it's always an after-the-fact event. We have seen nothing to date that makes it better, worse, or any different with respect to that back office processing.

It really will simplify the process and make it better and easier for us so we are, as you know, great, great proponents of central clearing, which is not exclusionary and inclusive of all participants who are capable of doing the business and who can post the margin. But we have not seen it one way or the other as an impact.

But I think over time as it takes more and more of the business and the backlog and new transactions into it, over time it will generate more volume for the business generally. But, in particular, I don't think it's going to impact our business from the front office perspective, from us, or anybody else in the inter-dealer space for quite, quite some time.

Okay. That is actually helpful, Howard. Thank you. Shifting to one of your product areas, the FX business, the level of revenues obviously were on a year-over-year and I think sequentially as well basis, the most impact -- and you talked a little bit in your prepared remarks about some options in emerging markets, but it seems like that -- it doesn't seem to me like that was the whole story given the size of the decline.

Can you put a little bit more qualitative discussion around what you saw in that quarter, if it was related to just FX rates in general and then how we should think about that going forward?

Well, I think we saw it primarily -- we have a very successful LatAm business, Latin America and Mexico FX options business, and for a variety of reasons that was particularly impacted over the course of the last year. We do not think that that is something that is long-term. Meaning it is just a period of time where both some of the biggest players in the world left the space for a while, there was some turnover in the market place, there was a change in the capital usage by a number of the largest banks, and, basically, we think that it is something that will rebound over the course of the next year.

Now the fact is that these kind of currencies are deeply involved in the credit space. When doing business in these kind of currencies and option base it comes with a big credit and so the -- and those who trade it, just based on the hedge funds who traded it, had to have their plan brokers jacked up the cost and the capital they would have to keep these options open and therefore constrained the volume of the business directly with the credit crisis.

As that eases and as these people, the hedge funds themselves who do business with the banks and the banks themselves who do business with each other, as the credit crisis eases and dissipates you will see that business come roaring back.

We just have, as you have seen now, we have extraordinary franchises in lots of businesses but not all of the businesses. We do not have a substantial equity business yet. We do not have a substantial energy business yet. But the businesses we have, like credit and like an emerging markets, foreign exchange options, are superb. If they are not the best in the world then they are close to the absolute best in the world.

What happens is we are impacted and you can see that visually in us because we are not everywhere. But you can see that when we build a business, we build that business to the best. And so we tend to be more affected when times are bad but, of course, we are dramatically more affected when times are good.

And as you see this business come roaring back to suggest that Latin America and Mexico will not have foreign exchange options business prospectively is the same as saying the US Treasury volumes are down and that the massive issuance that is coming is not going to wildly grow the volume in US Treasuries.

Our franchise is uniquely positioned to benefit as these businesses come back. We have shown that we can grow the good ones and when times are tough in some of the businesses we will pound through them. But when they come back, they will come roaring back.

Okay. Thanks, Howard. Lastly for me, I guess I would remiss if I didn't ask a month and a couple of days ago we had our Analyst Day and you guys talked about your guidance for 2009 with a comp ratio between 55% and 60%. This was post 1Q and a month later now it's closer to 60% or 60%, I guess, as you guys discussed today.

What has changed in the last four weeks that would have upped your number closer or at the high end of that versus where we were at 55% to 60%?

It's pretty simple. It really was from a broker perspective absolutely nothing has changed. But from an overall geography our financial statement what you found is that our back office personnel has been very effective at reducing our professional consulting fees, the temps, all of those expenses that were coming in to us from outside vendors.

The talent that is available in the world today at a reasonable price is so extraordinary that we have been able to hire into the firm at dramatically lower cost than we were paying the outside temps, consultants, and vendors to provide that. And that means that our other expenses have declined.

You can see those other expenses decline significantly as we bring these things in-house. We have had tremendous success in hiring technology people from outside replacing technology vendors; all across the board since we have been hire such great talent. So what you are seeing is those lines are moving into compensation and employee benefits but it's not raising our costs.

So our compensation ratio has not increased, it's simply a geography effect and one that is obviously beneficial to the bottom line, which you saw this quarter. So we do not think it will exceed 60% but it's really just a math issue. It has not really changed at all.

We are not paying our brokers any more money; nothing about that has changed. We have a very stable relationship with our brokers. They make a substantial percentage of the income they bring it, but we are consistent in that effect. Literally, absolutely nothing has changed with respect to our brokers from when we last spoke. It's simply geography.

Okay, thank you.

(Operator Instructions) At this time, you have no further questions. I would like to turn the call back over to Jason McGruder for closing remarks.

I know some of you are interested in ELX. ELX is in the final phases of being granted its final CFTC approval. So we expect -- they have said they plan to open in the month of June, so we do expect -- because ELX has announced they plan to open in June, we expect them to open in June.

That is just upside for the firm. This will be the first time I think the world will actually see the strength and scale of our technology. We operate with such strength that we expect our system to not only be able to stand up a futures exchange to be a direct competitor with the Chicago Mercantile Exchange, the largest exchange in the world, but to do so at speeds probably twice as fast as theirs.

So a system that has right now in our expenses and not yet open, you would think that should have enormous expenses. But you have seen that we own this technology, we have built this technology, and it will now come to our benefit. As it operates, obviously, we will start earning money from that exchange. And by doing so, we only have upside from it.

So it's a tremendous asset for us, and we look forward to starting in the third quarter having the ELX open and we are very, very excited about that.

Operator, I think we have another question, so I would be glad to answer that question.

Christopher Donat, Sandler O'Neill.

Thanks. Good morning, everyone. Howard, just one question related to the Analyst Day with your Brazilian acquisition, Liquidez. Any update on closing on that?

I think we are confident that it's going to be probably the very end of this quarter or next. So it will be done -- in our opinion, we are highly confident it will get done by next quarter, and we are hoping it will be done in this quarter.

It is an interesting thing in Brazil. You need the finance minister of Brazil to literally sign the piece of paper, and then that not being enough, you need the president of the country to sign it. So I can tell you that the finance minister has signed off in it, and we are now on the president of Brazil's desk.

But it is slated to be done. As far as we know, all points have been resolved. It is simply a process point; end of the second quarter or third quarter, highly confident.

Okay. Then we have -- I think, Graham, you have had an easy morning so far. I am not going to push it here, but the fees to related parties line, you talked a little bit about that on the call. But can you remind us what sorts of fees are in there? Compensation is in there, and what else is in there now and what has changed?

The change was related to certain employees that we deemed to be or reclassified as being employed by BGC. So what that did is actually take -- so instead of paying Cantor for the use of those employees through the fees charged to related parties, it shifted that expense up into compensation. But the total cost to the firm didn't change. What it did do is increase our compensation ratio.

Right. And I understand that on a year-on-year basis, that came down. But as I look at the $4.3 million of fees to related parties in the first quarter, that is up from the fourth quarter. I am partly kind of the notion why the increase there, just what sort of fees those are?

Obviously, there are other services that they provide to us -- accounting services and such things, for instance, in New York -- that we have to pay for. So it is a whole [wrath] of sort of shared services.

Okay. And roughly --.

We are just paying them at cost price.

Okay. I'm just trying to -- and then just going back, can you give us an idea of relative to the first quarter of 2008, when it was -- the fees to related parties were $6.5 million, how much of that was compensation that now appears in the comp line?

It was actually $4.9 million.

$4.9 million was compensation that previously was classified?

Yes.

Got it. Okay, I think we are set here then.

All right, Operator, I think now we're done.

Okay.

Everyone, thank you for joining us this morning. We look forward to speaking to you next quarter with both an update on our business and an update on the opening of ELX. So very exciting times for us, and we look forward to speaking to you next quarter. Have a great day today.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.