Bgc Group Inc (BGC) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2011 BGC Partners Inc. earnings conference call. My name is Marissa and I will be your coordinator for today.

At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today's call, Mr. Jason McGruder, the Head of IR. Please go ahead.

Good morning. Today we issued a press release announcing our intention to commence an offering subject to market conditions and other factors of $125 million aggregate principal amount of convertible senior notes. The notes are expected to be offered solely to qualify institutional buyers pursuant to Rule 144a under the Securities and Exchange Act of 1933 as amended.

Our second-quarter 2011 financial results press release was also issued this morning. Both documents can be found in either the News Center or Investor Relations section of our IR website at BGCPartners.com. During this call we will also be referring to a presentation [that comprises our] results, but which includes other useful information. This, too, can be found in the Investor Relations section of our site.

Throughout today's call we will be referring mainly to our quarterly results on a distributable earnings basis. Please see today's earnings press release for GAAP results. Please also see the section of today's earnings press release titled Distributable Earnings, Distributable Earnings Results Compared with GAAP Results, and The Reconciliation of GAAP Impact to Distributable Earnings for a definition of this term and how and why the management uses it.

Unless otherwise stated, whenever we refer to income statement items such as revenues, expenses, pretax earnings, or post-tax earnings, we are doing so only on a distributable earnings basis. I also remind you that the information on the 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 and its industry, as well as statements about our financial performance and operating performance. Such statements are based upon current expectations and involve risks and uncertainties. Actual results, performance, or achievements could differ materially from those contemplated, expressed, or implied because of a number of risks and uncertainties that include, but are not limit to, the risks and uncertainties identified with BGC's 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's impossible to predict accurate 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. Of course, the 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 get the complete disclaimer with respect to forward-looking statements and risk factors set forth in our public filings on Form 8-K, 10-K, and/or 10-Q, which we incorporate today by reference.

I am happy today to turn the call over to Howard Lutnik, Chairman and CEO of BGC Partners.

Thank you, Jason. Well, good morning, everyone and thank you for joining us today for our second-quarter conference call. With me today are BGC's President Shaun Lynn, our Chief Operating Officer Sean Windeatt, and our Chief Financial Officer Graham Sadler.

We are pleased to inform you that we are in the market, as Jason mentioned, with a convertible offering and that is why we have moved our earnings release and call to today. Because we announced the convertible this morning, we will have a shorter call than normal. We have also been advised to limit our discussion to our historic results and may provide third-quarter outlook at a later date.

I am pleased to report that BGC outperformed our previous expectations, both with revenues and earnings, in the second quarter. This strength was driven by solid year-over-year revenue growth in equities, foreign exchange, and rates, as well as in overall fully electronic trading. Our quarterly revenues related to fully electronic trading grew by 28.4% to $40.5 million or 11.1% of total revenues as compared to $31.6 million or 9.4% of total revenues a year earlier.

We also continued to attract experienced brokers to the Company. As of June 30, 2011, BGC's front office headcount was up by 10.4% year over year to 1,780 brokers and salespeople. As we continue to add experienced brokers and benefit from our world-class technology platform and partnership structure, BGC's earnings have continued to improve dramatically.

Pretax earnings grew by 34.3% to $62.4 million or $0.25 per fully diluted share in the quarter, while post-tax earnings were up by 33.9% to $52 million or $0.21 per fully diluted share. Before I turn the call over to Graham, I am also pleased to announce that BGC's Board has declared a quarterly dividend of $0.17 per share, an increase of 21.4% compared to last year. We expect to maintain this consistent dividend over the remainder of 2011.

I am now happy to turn the call over to Graham.

Thank you, Howard, and good morning, everyone. Unless otherwise stated, all the comparisons I am making compare the second quarter of 2011 to the second quarter of 2010.

BGC generated revenues of $364.8 million, up 8.5% compared with $336.3 million. Brokerage revenues were $341.1 million, up 8.8% versus $313.5 million.

Our revenues from Europe, Middle East, and Africa increased by 12.6%, Asia-Pacific revenues increased by 16.8%, while the Americas were down by 2.4%. Europe represented 55.1% of revenues, the Americas 28.3%, and Asia 16.6%. A year ago Europe represented 53.1% of revenues, the Americas 31.4%, and Asia 15.5%.

In terms of monthly revenues, April 2011 was down approximately 5% to $107 million, May was up approximately 8% to $129 million, and June was up approximately 23% to $129 million.

As for revenues by product, BGC's rates revenues increased by 4.6% to $145.7 million compared to $139.3 million. Credit was up 1.3% to $78.1 million versus $77.1 million, equities and other asset classes increase by 22.7% to $61.7 million dollars versus $50.3 million, and foreign exchange rose by 18.9% to $55.6 million compared with $46.8 million. Rates represented 39.9% of revenues compared to 41.4%, credit represented 21.4% versus 22.9%, equities and other represented 16.9% increasing from 14.9%, and foreign exchange represented 15.2% increasing from 13.9%.

Turning to expenses, total expenses were $302.4 million versus $289.8 million last year, lower by approximately 330 basis points as a percentage of revenue.

Compensation and employee benefits were $194.9 million or 53.4% of revenues. This compares with $184.3 million or 54.8% of revenues, an improvement of approximately 140 basis points. This margin expansion was driven by our growing fully electronic revenues and ongoing partnership enhancement program.

Non-compensation expenses were $107.6 million or 29.5% of revenues. This compares with $105.5 million or 31.4% of revenues. While non-compensation expenses were lower as a percentage of revenues, they increased in absolute terms both sequentially and year over year. These increases were driven by a number of line items associated with the opening of five additional offices and hiring 168 new brokers over the past year.

In addition, certain items, like commissions of floor brokerage and T&E, tend to move in tandem with brokerage revenues. We also incurred increased professional expenses associated with FSA compliance.

BGC's pretax earnings were up 34.3% to $62.4 million or $0.25 per fully diluted share, compared with $46.5 million or $0.20. Our pretax distributable earnings margin was 17.1% versus 13.8%, an improvement of about 330 basis points.

BGC's post-tax distributable earnings grew by 33.9% to $52 million or $0.21 per fully diluted share compared with $38.9 million or $0.17. Our effective tax rate for earnings was 15% in the second quarter of 2011 compared with 15.2% a year earlier. Our post-tax earnings margin was 14.3% compared with 11.6% or about 270 basis points better.

Our fully-diluted weighted average share count was 266.1 million for the second quarter of 2011 compared to 248 million in the second quarter of 2010. At the end of the second quarter our fully diluted share count for earnings was 268.8 million, including the 22.1 million shares underlying the convertible senior notes issued in April of 2010.

Regarding the balance sheet, as of June 30, 2011, the Company's cash position, which we defined as cash and cash equivalents and cash segregated under regulatory requirement, was $289.8 million. Notes payable and collateralized borrowings were $186.5 million. Book value per common share was $2.31 and total capital, which we defined as redeemable partnership interest, Cantor's non-controlling interest in subsidiaries, and total stockholders' equity, was $451.9 million.

In comparison, as of December 31, 2010, the Company's cash position was $366.5 million, those payable and collateralized borrowings were $189.3 million, book value per common share was $2.47, and total capital was $425 million.

The decrease in cash from year-end 2010 was due primarily to the timing of both the securities clearance process and the settlement of receivables and payables, as well as tax used with respect to acquisitions, disposition, and/or resolutions of litigation, and for the redemption of units. These items were partially offset by an option exercised by Howard for cash and proceeds from the issuance of Class A common stock as part of BGC's controlled equity offering.

With respect to our dividend and taxes, we continue to expect that at least 50% of dividends paid for full-year 2011 will be treated as a non-taxable return to capital for common stockholders. This will be a significant improvement from 18% in 2010. The remainder will be treated as a qualified dividend.

Based upon an annualized dividend of $0.68 per share and Friday's closing stock price of $8.43, BGC's pretax dividend yield is 8.1%. For a New York City resident in the 35% federal tax bracket and the 12.85% state and local tax bracket, the current taxable equivalent yield will be 12.6% when compared to a distribution, dividend, or interest payment that is fully taxable at ordinary rates and 9.3% when compared to a fully-taxable qualified dividend.

With that I am happy to turn the call back over to Howard.

Thank you, Graham. Our revenues for the first 14 trading days of July 2011 were up by approximately 24% to $81 million, as compared with the first 14 trading days of July last year 2010. As a reminder, with respect to last year's third quarter, our financial results included two items that were not part of our ordinary operating business.

The last year first; in August of last year we received $11.6 million in other revenues from a favorable FINRA arbitration ruling pertaining to Refco Securities. And also we incurred other expenses that were not part of our ordinary operating business.

I would also like to mention that we remain very excited about our planned acquisition of Newmark. We expect this acquisition to close later this year and to be immediately accretive to BGC's earnings per share, and I look forward to discussing Newmark in more detail after the close.

As I said earlier, because of the convertible offering, we have been advised to only discuss historical results today. Because the convertible is a 144a transaction, it would not be appropriate for us to have Q&A regarding the proposed offering on this call.

Operator, we would now like to turn the call over to questions.

(Operator Instructions) Richard Repetto, Sandler O'Neill.

Good morning, Howard.

Good morning.

I am not sure whether this is in the realm of appropriate question, but I will ask anyway. Can you give us an update on the regulatory review going on in London and where that stands?

Well, I don't -- it's not my practice to comment on regulatory issues. However, I think our disclosure was pretty complete and we are working closely with the FSA and take their concerns very seriously. And as I said, I think our disclosures were complete and we continue to move forward.

But the expense of these events are in our numbers. They had obviously started much of this work in the second quarter and obviously our expenses increased because of that. But otherwise we expect to take it very seriously and we are working closely with them.

Okay. And then one other, and I jumped on a little bit late; you may have mentioned this. But I am just trying to see -- revenues were pretty flat with the prior quarter so the seasonal pattern of it little bit of downturn in the second quarter didn't happen.

Can you give us a feel for how the European -- like what was the biggest driver that jumped out? Was it more the European issues with sovereign debt or -- what do you see as the impact? Or even the debt crisis here or the debt debate here?

Richard, it's [Shaun] here. One of the main drivers, yes, was sovereign [CDS] as well as our acquisition of Mint really starting to come on line in the latter part of the second quarter. Just in general, everything started to work with regards to Mint, the sovereign CDS, electronic platform in general; obviously governments were a driver as well in the European sector along with interest rate swaps.

Okay. Thank you very much, guys.

Daniel Harris, Goldman Sachs.

Good morning, guys. How are you?

Good morning.

So one of the things I would like to get your view on is the share count does keep trickling up here a little bit. And I know you guys have had a number of events that have led to that and obviously you have this issuance coming up. But in terms of how we should be thinking about the growth going forward, offset by any desire you guys might have to do some turn return via share repurchase, I would love to get your views on that.

Well, we have [had a] relatively consistent growth in our share count. And that has come from, as we have discussed, the continuing process of hiring and acquiring accretively. So you see our earnings per share up so much, well over 30%, so you have got great earnings per share, which is what we focus on.

So I would expect we have that sort of -- $5 million is sort of the number quarterly that has been growing, historically. I mean it is what it is. We are going to continue to hire and acquire; obviously we have Newmark out there.

So we expect to continue to grow our share count, but along with growing our share count we would expect our earnings per share to continue to grow. And that is what accretive acquisitions do.

So I think we are much more focused on our earnings per share rather than the number of shares we have. Whenever we can hire accretively or acquire accretively I think it's something that we plan to do.

So we are less concerned with the number than what are the results of the number and I think that is -- as an example of that new market that we expect to be immediately accretive. So, of course, we will have an increase in share count and that will also come with an increase in earnings.

So that is sort of how we look at it. And we are consistently out there trying to hire and acquire attractive profits.

Completely agree, Howard. I am just wondering going forward if, excluding acquisitions because clearly that is accretive when you use it with shares, are you -- if we didn't do any more acquisitions from here, should we expect that share count to creep up with just RSUs vesting over time?

Yes, I think you will see -- as I said, since we are always hiring, we do re-sign our staff as well, and obviously our cup ratio continues to be held very -- at an attractive level as compared to ours peers so that the model of the partnership has worked very well. But we do see that our share count will continue to creep up. Of course, it's gradual, but it will creep up.

We do not view that as anything concerning because we do expect our earnings per share to not creep up and to continue to grow pretty dramatically.

Okay. Shifting over to the fully electronic volume statistics that you guys put out there, the percentage of total volume has been actually falling a little bit recently, around 27% now; been in that range for the last six or eight quarters. Do we -- do you expect that to move higher in the short term or is that going to be a longer-term growth rate once we actually get Dodd-Frank behind us and we start actually implementing those initiatives?

I think what is happening is that we are growing our fully-electronic revenue numbers much faster than we are growing our overall revenue growth rate. So it is dramatic -- it's a dramatic improvement and in an area of great opportunity for us.

I would expect over time that that rate of growth will accelerate. I think Dodd-Frank discussions have really focused our global client based on how and which products and when they will move things electronic that fall under those areas of concern. So I would expect fully electronic trading to ramp up more quickly.

But in the meantime it is going very -- at a very, very healthy clip that we are very happy with. But I think the outlier is that I do not expect it to slow down going forward. I expect at some point that it will speed up.

But I don't know if that necessarily is right around the corner, but I do expect that over time with the movement of Dodd-Frank it will speed up the movement towards electronic trading. Of course, as you know, as things go electronic our margins expand. Obviously, having bigger revenues and larger percentages for fully electronic trading has all of course added to the big jump in our earnings per share.

Okay. Last question from me just regarding your discussion around the July numbers. How much of that year-over-year growth do you think goes to some of the global sporting events from last summer that were a little bit more active?

Well, I -- you know, look, you are right, last summer the numbers were -- they were tougher numbers, meaning that just maybe an easy comparison. But the fact is that our numbers are performing very, very well.

We had a 2% quarter as compared to those peers of ours who have reported. We are obviously gaining market share and I think we are performing very well. So the easiest way for me to let you know how we are doing is to literally tell you our revenues and where they are.

So I think the world is in a strange place now. There is talk -- Greece, all of Europe, the euro, the US -- I mean all of this talk is really, as it turns out, good for our business because there is a lot to talk about, a lot to trade, a lot to do. And I think it's just good for our business.

I think we are in a good place. We have got a great rates franchise and we are doing very well, and so I think the world out there is okay for us. It may be difficult for others, but it's certainly okay for us.

Okay, Howard, thanks a lot.

(Operator Instructions) Rob Rutschow, CLSA.

Good morning, everybody. Just a couple housekeeping items. You had a pretty big sequential increase in the other category; I am wondering if you can just give us a little more color there. In terms of brokerage fees, sorry.

Oh, in terms of brokerage fees?

Right.

[Those as well]. Generally the other category it obviously grows to a degree in line with the increase in the growth of our business, so where that is a significant number of growth over the year.

Okay. I may be mistaken but I think it was up 25% from last quarter; is that the right number?

Yes, it's in the other -- its equities and other category. And the equities and other category, obviously we were doing very well in our equity business in London, our equity derivatives business globally. I mean these are all numbers that have been -- grow.

Okay. Another question was just in terms of the distributable number it looked like you excluded maybe $10 million in non-comp. Were there special charges related to the pending acquisition or something else there?

Hang on one sec, let me take a look.

We had a charge, a $23 million charge for exchangability.

Okay.

And then sundry expenses relating to acquisitions, which is the $1 million.

Okay. And then last question, and I kind of did this quickly, but it looks like the tax rate was I guess maybe a little bit higher on a GAAP basis and a little bit lower on a distributable basis relative to where you have been historically. Is that right, and were there any things to sort of mentioned there in terms of tax rate?

No, I don't think so, no. I mean the tax rate for distributable earnings is stable at 15%. Yes, you are going to get small movements quarter to quarter, but there is nothing of any significance.

And I guess for the GAAP tax, would we look for that to sort of trend down if there is a differential between distributable earnings and GAAP earnings? Or should that be stable as well?

I would say that should be reasonably stable.

Okay, thanks a lot.

(Operator Instructions) I show no more questions at this time so I would like to turn it back to the Chairman and CEO for closing remarks.

Thank you for joining us today. Obviously the Company is doing very well and we continue to focus on growing our businesses, adding our headcount, and the markets out there are good for us. So we appreciate the time spent with us today and we look forward to speaking to you again next quarter.

So thanks everyone for the short notice and we look forward to speaking to you again soon. Thank you very much and have a great day today.

Ladies and gentlemen, that concludes today's presentation. Thank you for your participation. You may now disconnect. Have a great day.