Bgc Group Inc (BGC) 2014 Q3 法說會逐字稿

Welcome to the Q3 2014 BGC Partners, Inc. earnings conference call. My name is Angela and I will be your operator for today's call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Jason McGruder. Jason, you may begin.

Thank you. I'm Head of Investor Relations.

Our third-quarter 2014 financial results press release was issued this morning. This can be found in either the news center or investor relations section of our website at BGCPartners.com. During this call we will also be referring to a presentation summarizing our results and 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 to our results only on a distributable earnings basis. Please see today's press release for GAAP results. Please also see the section of today's press release entitled distributable earnings results compared to GAAP results, reconciliation of revenues under GAAP and distributable earnings, and reconciliation of GAAP income to distributable earnings, for a definition of these terms and how, when, and why management uses them.

Unless otherwise stated, whenever we refer to the income statement items such as revenues, expenses, pretax earnings, and post-tax earnings, we're doing so only on a distributable earnings basis. Unless otherwise stated, all results provided in this conference call compare the third quarter of 2014 with the year-earlier period.

In addition, certain revenue items and nonfinancial metrics have been adjusted for prior periods to conform to current reporting methodology. Any such adjustments would have had no impact on overall revenues or earnings for either GAAP or distributable earnings.

On June 28, 2013, BGC sold its fully electronic trading platform for benchmark US treasuries and notes and bonds to NASDAQ OMX Group, Inc. For purposes of today's call the assets sold are referred to as eSpeed and the businesses remaining with BGC that are not part of eSpeed are referred to as retained. Also Newmark Grubb Knight Frank is synonymous with NGKF or our real estate services segment.

I also remind you that information on this call regarding our business that are not historical facts are 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 statements involve risks and uncertainties. Except as required by law, BGC undertakes no obligation to produce any revisions to forward-looking statements.

For discussion of additional risks and uncertainties which could cause actual results to differ from those contained in forward-looking statements, see BGC's securities and exchange filings, including but not limited to the risk factors set forth in our public filings including our most recent form 10-K and any updates to such risk factors contained in subsequent Form 10-Q or Form 8-K filings. Please also refer to the section of today's press release titled Important Additional Information for disclosure regarding our recently launched tender offer for GFI Group.

I am happy to turn the call over to our host, Howard Lutnick, Chairman and CEO of BGC Partners.

Thank you, Jason. Good morning and thank you everyone for joining our third-quarter 2014 conference call. With me today are BGC's President, Shaun Lynn; our Chief Operating Officer, Sean Windeatt; and our Chief Financial Officer, Graham Sadler.

BGC's post-tax earnings increased by more than 80% year over year to $56 million, which was a record for the Company. These record results reflect pretax earnings growing by 54% for our real estate services business and by 74% for our fully electronic businesses.

Newmark Grubb Knight Frank continued to benefit from positive real estate industry trends and the successful addition of Cornish & Carey. Financial market volatility improved in September and picked up nicely in October. Within financial services, we continue to convert our voice and hybrid desks to more profitable fully electronic trading. We expect the combination of positive industry dynamics and our operational outperformance across both our businesses to lead to strong growth in the fourth quarter. We anticipate BGC's fourth-quarter pretax earnings to increase by between 50% and 72% year over year, generating between $69 million and $79 million, and we expect our tax rate to remain about the same.

This means that we not only expect to increase our revenues and earnings sequentially over the second half of the year, which is virtually unheard of among our financial services peers, but we also expect to have two quarters in a row of record post-tax earnings.

Our liquidity is approximately $625 million. We still expect to receive about $550 million in the NASDAQ OMX stock, which provides us with more than $1.1 billion to fuel BGC's growth. We anticipate using some of these funds to continue making accretive acquisitions across both real estate and financial services, an excellent example of which is -- an excellent example of such an acquisition is our tender offer for the shares of GFI Group.

We have commenced our fully financed, all cash tender offer which provides GFI shareholders the opportunity to receive 15% more than the $4.55 per-share all-stock transaction announced by the CME and GFI on July 30, 2014. In addition, we believe the CME transaction would deprive GFI shareholders of the value of their investment because it allows GFI management to purchase their brokerage business from CME at a discount. We already own approximately 13.5% of outstanding common shares of GFI. We have secured committed financing from Morgan Stanley Senior Funding Inc. and our offer has no financing conditions. In addition, BGC received early termination of the waiting period under the Hart-Scott-Rodino Antitrust Act.

Our proposed transaction would provide substantial benefits to GFI brokers and other employees as they would become a part of a larger, faster-growing, better-capitalized and more diversified company. We expect to deliver increased productivity per front office employee, meaningful synergies, considerable earnings accretion, stronger cash flow, shareholder value for the investors of both companies, and superior service to our customers.

I'm happy to report that our Board declared a $0.12 qualified dividend for the second quarter, which at yesterday's closing stock price translates into a 6% annualized yield.

With that, I will turn the call over to Shaun.

Good morning, everyone. Our financial services business increased its pretax earnings by 85.4% to $55 million, while revenues were up by 1.8% to $261.2 million. We were able to achieve this by more than 950 basis point expansion in pretax margins, due in large part to the significant growth of our higher-margin fully electronic business.

Revenues for our e-businesses rose by 40% to $25 million or their pretax earnings increased by 74% to $14 million. As we continue to convert our voice and hybrid desks to fully electronic and substantially increase revenues from market data and software solutions, we have already succeeded in creating e-businesses with quarterly revenues and profits similar to those of eSpeed before it was sold. We have a pipeline of over $900 million of annual voice and hybrid financial services brokerage revenue, a large portion of which can be converted to fully electronic brokerage and/or generate valuable market data.

Revenues for our e-businesses were up by approximately 75% year on year over the first 20 trading days of October and their pretax earnings margins averaged 53% over the past four quarters. We expect these businesses to be substantially larger than eSpeed going forward.

Looking at our overall financial services results by asset class, our revenues from our fully electronic rates products were up by approximately 15% and our overall rates revenues were down by 14.3% in the quarter to $93.5 million. In comparison, interest-rate volumes were down by 32% and ICE and 5% at Eurex, while Federal Reserve U.S. Treasury volumes were down by 7%. BGC's fully electronic foreign-exchange revenues, including both spot and derivatives, were up by approximately 40% while our overall FX business increased by 18.7% to $56.2 million.

The overall market benefited from better FX volatility in the quarter and our results outpaced the industry. For instance, FX volumes were up by between 1% and 10% at CLS, the CME, and EVS. While we generated an over 80% increase in revenues from our fully electronic credit desks, overall credit revenues declined by 1.6% to $53.5 million. These results compare favorably to industry statistics. For example, the daily average prime e-dealer volumes for corporate bonds were down by approximately 10% year over year, according to the Federal Reserve, while dealer gross notional credit derivatives outstanding were down by approximately 27%, according to SIFMA.

BGC's revenues from our energy and commodity desks increased by over 78%, while our overall revenues from equities and other asset classes, which includes these desks, increased by 24.6% to $43.4 million. This improvement surpassed relevant industry volumes. Equity derivative volumes are flat to up by 14% according to Eurex, ICE, and the OCC. Energy volumes and ICE and the CME were flat to down by 5% and their combined commodity volumes were up by only 3%.

Moving on to real estate services, the combination of low interest rates and steadily growing US economy continues to create positive market conditions for NGKF. According to CoStar, combined net absorption for US office, industrial, and retail property was up by 12% year over year for the 12 months ended September 30. This signals continued improvement within the overall leasing market.

In real estate capital markets, US CMBS issuance increased by over 6% year on year for the trailing 12 months according to the Commercial Mortgage Alert, while quarterly US sales volumes were up by 11%, according to Real Capital Analytics. While we benefited from these positive industry trends, we believe that NGKF continues to gain market share.

Our real estate brokerage revenues improved by 28.8% to $138.5 million. Management services and other revenues were up slightly at $40.6 million. And overall revenues improved by 21% to $179.1 million. NGKF's pretax earnings increased by 53.9% to $23.9 million. Our outperformance in real estate services were driven by a combination of double-digit organic growth through investment sales and capital markets brokerage. The addition of Cornish & Carey improved organic revenues from leasing advisory, global corporate services, and better operating efficiency resulting from the successful integration of previous acquisitions.

Looking to headcount, we had 1,135 real estate brokers and salespeople as of the quarter end, up 28% compared to 887 year earlier, while average revenue per real estate broker increased by 19% to $143,000. We finished September with 1,620 financial services brokers and salespeople, up 5% from 1,545 a year earlier. Our average revenue per financial services broker-salesperson increased by 1% to $160,000. Companywide, our front office headcount was up by 13% to 2,755 and productivity increased by 8% to $156,000 per broker-salesperson. Sorry, 6%. I apologize, sorry. So our productivity increased by 6% to $153,000 (inaudible).

The increase in the Company's revenues and dramatic growth of its pretax earnings during the quarter were due largely to the rise in front office headcount and solid improvements in front office productivity. The productivity increase was driven by substantial growth of [BGC's] fully electronic businesses, the addition of higher performing brokers across both segments, strong commercial real estate industry dynamics, and higher global volumes in equity derivatives and FX.

With that, I would now like to turn the call over to Graham.

Thank you, Shaun, and good morning, everyone. BGC generated revenues of $449.8 million, up 8.5% compared with $414.4 million. Our revenues from the Americas were up approximately 16%. Revenues from Europe, Middle East, and Africa were down by 1%, and Asia-Pacific revenues decreased by 9%.

Turning to consolidated expenses, compensation and employee benefits were up by 5.8% but represented only 60.4% of revenues, which was an improvement of 160 basis points despite a larger proportion of revenues coming from real estate. Non-compensation expenses were down by $7.8 million or 6.5% and were 24.9% of revenues compared with 29%. This significant improvement was driven by lower costs across most line items as we completed our previously stated goal of reducing overall expenses by $100 million annualized by the end of 2014 compared to the second-half 2012 run rate.

This goal excluded the impact of any acquisitions closed in 2014. I am happy to report that we have achieved this target ahead of schedule. In the third quarter of 2014, our compensation ratio improved by approximately 300 basis points compared with the second half of 2012, which lowered our annualized compensation expenses by $45 million. In addition, our annualized non-compensation expenses were reduced by more than $55 million in the third quarter of 2014 compared with the second half of 2012. Taken together, our full-year expense run rate was reduced by more than $100 million. Our improved compensation ratio along with a lower non-compensation cost base significantly improves our earnings leverage. This enables us to be much more profitable, particularly as financial services industry volumes return.

Our pretax earnings before noncontrolling interests in subsidiaries and taxes were $65.8 million dollars, up by 75.8% when compared with $37.4 million. Our pretax margin this quarter expanded by around 560 basis points to 14.6% compared with 9% a year ago. BGC's effective tax rate for distributable earnings was 15% versus 14.5%.

Our post-tax earnings were up by 80.5% to $56 million compared to $31 million, which is the highest in BGC's history. Our post-tax earnings margin improved by nearly 500 basis points to 12.4% compared with 7.5%, while our post-tax earnings per share were up by 70% to $0.17.

BGC had a fully diluted weighted average share count for distributable earnings of 371.4 million in the third quarter of 2014 and 331.2 million under GAAP. The GAAP share count was lower because it excluded certain share equivalents to avoid anti-dilution. A year-earlier our fully diluted weighted average share count was 355.2 million for both distributable our earnings and GAAP.

As of September 30, 2014, our fully diluted share count was 371.7 million, assuming conversion of the convertible senior notes into 40.2 million shares. The year-over-year increase in fully diluted weighted average share count for distributable earnings was due mainly to issuances related to the acquisitions of Cornish & Carey, Remate, and HEAT as well as compensation-related issuance. This is partially offset by redemptions and repurchases totaling 19.3 million shares and units over the past 12 months at a cost to BGC of $131.9 million.

As of September 30, 2014, BGC's liquidity, which we define as cash and cash equivalents, marketable securities, and unencumbered securities owned held for liquidity purposes, were $624.7 million. Notes payable and collateralized borrowings and notes payable to related parties were $410.3 million. Book value per common share was $1.95. And total capital, which we define as redeemable partnership interest, noncontrolling interests in subsidiaries, and total stockholders' equity, was $700.5 million.

In comparison, as of December 31, 2013, our liquidity was $795 million. Notes payable and collateralized borrowings and notes payable to related parties were $408.4 million. Book value per common share was $2.15. And total capital was $769.7 million. The uses of BGC's liquidity since year-end were primarily due to cash used to pay taxes, $111.4 million of cash used to reduce fully diluted share count by 15.3 million over the first nine months of the year and cash used for the Cornish & Carey, HEAT and Remate acquisitions.

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

Thank you, Graham. Our guidance for the fourth quarter is as follows. We expect revenues to be between $475 million and $510 million, an increase of 10% to 18% as compared with $432.9 million last year. We anticipate pretax earnings to be between $69 million and $79 million, an increase of between 50% and 72% as compared to $46 million last year. We expect our effective tax rate to remain at approximately 15%. This compares with 14.5% last year. We intend to update our fourth-quarter outlook toward the end of the third week of December.

With respect to GFI, I know there are a lot of questions that you might want to ask. But we have a live tender offer out there and the only thing I'm going to say today is that we are very much interested in buying the company and our offer is very much for real, very.

So operator, we would now like to open the call for questions.

(Operator Instructions) Patrick O'Shaughnessy from Raymond James Financial.

So, Howard, when we were on hold waiting for this call to start that Happy song was on a loop. I was wondering if that was your choice. (laughter)

Sorry, I don't get involved in the music selection.

So my first real question -- obviously, really good success so far from Cornish & Carey and the commercial real estate group. As you think about that business long term, what sort of steady-state margins do you think that commercial real estate business can achieve?

Well, there are multiple businesses in that business. So the brokerage business should get to margins that you'd well understand, like the financial services business. Their payouts are little higher, but the amount of technological services that are needed to be provided are a little lower. So the math should the long-term steady-state. With scale, you can get up to 20%. But that's just a matter of scale.

The capital markets business -- the selling of buildings produces higher margin per broker-salesperson. They just -- higher revenue per head and higher revenue per head, as you know, drives productivity up higher and turns profitability higher. So as you grow your capital markets business, you can see margins crossing the 30% line in that category. And you will see us -- we are relatively undersized in that space now. And as you've seen in the energy space in financial services, when we are undersized, to us at this Company, that is a great opportunity. We view that as an opportunity to hire and acquire and grow higher margins. So, I would suggest that business can get in steady-state in the 30s.

And then you have the management business -- property management, facilities management. Those businesses have lower margin but more scale. And so, there's pass-through revenues associated with that. But they have -- they are just bigger scale with them, and there's good leverage, and they have long-term contracts. But the margins tend to be more consistent with the other businesses, which mean you can get them in the 15% range. And I would think that's the steady-state. And with, obviously, bigger scale, you do a little better. So I think that's how we look at the business now and that's how we understand it.

Got you. And then I guess to follow-up on that point -- so now that Cornish & Carey is done, how do you look at the M&A landscape right now in that commercial real estate business in terms of the amount of firms that are out there that are interesting to your right now?

I think it's rich. I think it's rich and I think it's deep. And the combination of our strength in the big marketplaces, coupled with the clear successes we are getting in the market and our growth in the market, has made us a very hot brand. And when you are a hot brand you both landmark clients, clients invite you to more pitches, and brokers want to come work for you. And so we are hot brand in the market. We win big assignments and big mandates all the time. And I think that is very attractive to people.

So I think both -- and that includes companies that want to just join us and be part of the mix. Cornish & Carey was very well-known. It's the number-one brand and the number-one company in the Bay area of Silicon Valley, I mean it's the opposite of the secret. There were plenty of other companies who wanted to buy them. And they wanted to be part of our brand because they knew their productivity per broker would go up by being part of us. And that is a very exciting part of the business; if you can drive productivity up for the employees, you just make it a more valuable enterprise.

And you know, as anybody knows who has worked with us, that the value of the Company is our employees. And having world-class, talented employees who are becoming more productive -- just look at our productivity per head as compared to others. We have a higher productivity per head, and we work to drive productivity per head. So, I think it's a rich landscape. There are lots of things we're talking about now and that we are thinking about, and I think we can put our money to work very, very accretively; very, very productively; and really building great brand in NGKF.

Got it, thanks. And then last one from me -- just on the fully electronic brokerage revenues that you guys have talked about, and certainly we are seeing some nice traction there, can you maybe just go into a little bit more detail on some of the particular electronic products that you are having a lot of success with these days?

Yes. Mainly most of the success is in the credit area, FX spots, FX options. But we are seeing success across the whole landscape for us globally. We are seeing -- Volume Match as product for us been very successful. And the market has taken to it. And we are continuing to enhance our electronic offering globally and seeing traction not just on those two specific areas but across government areas, in Europe, and across more traditional areas such as repo and other sectors.

For us it's a continual growth strategy. We've invested way over $1 billion in our technology and we started seeing fruits of it. I think the market itself with regards to Dodd-Frank, when that was brought into the marketplace, that held us back in some way because we had to rearrange, change, and develop our systems to accommodate. And now you are starting to see new product come out from us. So, we're going to continue to grow into the fourth quarter and into 2015.

Great, thank you.

Rich Repetto from Sandler O'Neill.

Maybe you said this and I didn't get it. But I'm just trying to get the contribution from Cornish & Carey in the quarter -- revenue, distributable revenue, and distributable earnings.

I don't think we went through that. But I think we have put out that there annual revenue in 2013 was about $135 million. So you can sort of figure out -- we bought it in the middle of the quarter. A little bit more revenue comes toward the end of each quarter in real estate. So, I wouldn't say it would have been about half of what they would have done in the third quarter, probably be a little bit more. But -- I don't know it to be wildly more, but I haven't looked in particular.

That's the best I can do at the moment, since we hadn't said it and we didn't think it was -- it's not the driving force of -- our future is combined with our real estate business doing really well, increased volatility in the financial service business and turning our financial services business electronic is the driving force of our business. And Cornish & Carey will be a great part of that, but it will be a part of it and there will be more parts to come.

Howard, the only reason why I'm asking -- when you look, real estate obviously was strong this quarter. The revenues went up $30 million. I know you give the year-over-year comparisons, but just judging where the business is because you added acquisition. But it went up -- your revenue went up $30 million. And I've done that math of Cornish & Carey. It would equate to about, for half a quarter, about $17 million. So, I guess it's tough for us to assume that it's a little bit more than half of the -- if Cornish & Carey added $17 million on that $135 million run rate, it was a little bit more than half of the revenue growth in real estate. Correct?

Yes, sounds about right.

Okay. And then the other question is -- and I know you've given the numbers for the fourth quarter. I'm just trying to see how was -- you don't give these numbers out anymore, but the revenue in October, given the high volatility and the higher proxies that are out there?

Well, the proxy is in the -- toward the high single digits, 8, 7 to 8, 9, in that range is probably fine. The problem is our real estate business is becoming an ever bigger portion of the business. And if we just talk about financial services, it's part of it. And we don't -- the way the real estate business works, a strong portion of the business comes in at the end of the quarter. So guiding in the middle of the quarter where you stand is kind of -- it could be absolutely useless. You could say -- it could look like it was down as compared to last year and the end of the quarter could be wildly higher. So that's why we stopped, because we would end up giving out statistics that would confuse rather than assist.

But I don't think the metrics that are out there are -- if you go between 7 and 9, that's about right for financial services. But I think Shaun pointed out that our electronic business was up 75% in the month of October. And it's gratifying because you guys know how much money we've invested and how much time we've invested. And as it starts to take hold, that will change the fundamental economics of our business and value of the Company.

Right. And those numbers were strong. And I guess it was hard to keep pace with the numbers that were coming out. But I do understand that the margin improves when you convert to electronic. I guess any more color -- I know you went through the numbers, Shaun, but I couldn't absorb them as quick as you were going. But what products are you seeing that this conversion over -- and how are you actually achieving that? Is this just converting, getting the brokers to convert and the usual process? What products should we be focused in most on this conversion to electronics? I know you mentioned corporate bonds was coming, et cetera.

Yes. Look, credit -- I think I said credit, spot FX, FX options. But for generally, Rich, it's across the whole of the company. There's more take-up from our client base, from the brokers' acceptance within the marketplace that are looking for quick execution. And because we've had this pipeline for so many years, invested so much money on some of these, we are now starting to hit it out of the park.

But of course, we continue to invest. We continue to be realistic with what's achievable in the marketplace because you need volatility and you need it to be accepted by the marketplace. But for us, we continue to drive forward across all of our markets.

Rates is the huge potential for us. You should expect to see us grow in rates in the fourth quarter and in 2015. So specifically for this quarter and going forward, you have FX, FX options, credit. But you should also be thinking about rate money we've invested and you should be thinking about 2015. We are now through Dodd-Frank, we are now through lots of migration work. You've seen the recent announcement. We have a new Chief Information Officer that's just joined us. We are focused on growing and building into the new wealth and being light and nimble and moving with the marketplace. So that's what we are doing.

Okay, thank you very much. And congrats on the strong quarter here.

(Operator Instructions) Niamh Alexander from KBW.

I appreciate the guidance on the quarter. I'm thinking it's mostly revenue driven, as we saw nice revenue in the third quarter. But just to switch to expenses for a sec, your compensation ratio is coming nicely down. You had talked about delivering cost savings, and we are seeing it translate outside of non-comp. But is there visibility there to get below the 60%, get back towards the 50s as you were pre- the real estate deal? Or is there a timeline to that?

Well, that's really a math of which deals we do and the scale of those deals and when they come. So I think it's just a mix. You know, look, the real estate business, the splits for brokers, the way they call a split for their commission percentages, 60% -- that's for the brokers. And that you have the support services, which means you still have accountants, you have all the rest of the work. So their compensation ratio would be higher. In financial services you have a lower payout, but you'd have a higher spend on technology and other things to support them. So the math ends up being about the same.

So the answer is, over time we expect to have an improvement in our compensation ratio as compared to what it would otherwise be, had these companies not joined our world. They will do it, as you know, through the partnership. They will do it through, as you know, for having better technology as you draw. But ultimately (technical difficulty) continuously improve a point or two. But I don't think we expect the real estate business to match what we have in financial services. I don't think that's our goal and objective, but our goal and objective is to run an extraordinary real estate brokerage business, an extraordinary financial service brokerage business, and do them individually and specifically, not to compare them across. That just doesn't make sense to us.

Okay. Fair enough. Thanks, Howard. And then with respect to the real estate business, is it -- what you've acquired Cornish & Carey. Is it the same that seasonally the fourth quarter is the best quarter of the year? It's a nice offset to the financial services? Has anything changed there?

No. The real estate business, the fourth quarter is the best quarter, the third quarter is the next, the second quarter is the next, and the first is the next. And that is the polar opposite of financial services, where the first quarter is best and then it goes second, third, and then fourth. So they just work nicely together. So we are going to have a big quarter and real estate in the fourth quarter and we expect to have a big quarter in financial services in the first quarter. And it works really nicely together.

Okay, fair enough. Thanks. And then just on the capital, you are quite cash-rich. You announced your tender offer. And we talked little bit before about the dividend. You are at the low end of the payout ratio that you have been at historically. I would expect, given the potential hostile or otherwise offer ongoing, that you don't do anything with it for up while. Is that a pretty reasonable assumption to make?

Well, I think the idea for our Board is we had committed to -- we have the dividend be stable for the year. And then, once the year ends, we will address that at that time. So I think we've got pretty of time between now and the end of the year. Certainly, our business is doing very well, and it's a high-class problem to have a Board considering whether they are happy with the dividend or they wish to raise it. But they will consider that for next year.

So you don't think the Board would let the potential deal that's under consideration -- that wouldn't really impact the dividend discussions?

I wouldn't think so.

Okay, fair enough. Thanks, Howard. And then I know you are limited in what you say, but then you've got this public offer out there. So it made me ask some questions. Have you actually spoken or has Shaun or some of the management spoken with the management at GFI since the tender offer has come out?

I guess I'll repeat it, sorry. I don't want to talk about GFI with the live tender out there other than to say we are interested in buying the company, and we are very real.

Okay. Thanks so much. Bye.

We have no further questions at this time.

Well, thank you all for joining us today, and we look forward to updating you at the end of the quarter and speaking to you again at the end of this one. Thanks, everyone. Speak to you soon.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.