Bgc Group Inc (BGC) 2016 Q1 法說會逐字稿

Welcome to the first-quarter 2016 BGC Partners, Inc. earnings conference call. My name is Hilda and I will be your operator for today.

(Operator Instructions)

Please note that this conference is being recorded. I would now like to turn the call over to Mr. Jason McGruder, head of Investor Relations. Mr. McGruder, you may begin.

Good morning. Our first-quarter 2016 financial results press release and a presentation summarizing our results were issued this morning. These can be found at ir. BGCpartners.com.

Throughout today's call we will be referring to our results on a distributable earnings basis unless otherwise stated. Please see today's press release for results under US generally accepted accounting principles or GAAP. Please also see the section in today's press release entitled distributable earnings, distributable earnings results compared with GAAP results, reconciliation of revenue under GAAP distributable earnings and reconciliation of GAAP income to distributable earnings for a revised definition of these terms and how, when and why management uses them.

Unless otherwise stated when we refer to income statement items we are doing so only on a distributable earnings basis and the results provided on this call compare the first quarter of 2016 to the first quarter of 2015. For purposes of today's call all the Company's fully electronic businesses are referred to FENICS or eBusinesses. These offerings include Financial Services segment fully electronic brokerage products as well as offering cross data, software and post-trade including both BGC and GFI.

FENICS results do not include the results of Trayport which are broken out separately in today's press release and presentation. This is due to the Trayport sale to Intercontinental Exchange, Inc. in December 2015. Also Newmark Grubb Knight Frank is synonymous with NGKF Real Estate Services.

I also remind you that the information on this call regarding our businesses 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 and Exchange Act of 1934 as amended. Such statements involve risk and uncertainties.

Except as required by law BGC undertakes no obligation to release any revisions to forward-looking statements. For a discussion of additional risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements see BGC's Securities and Exchange Commission filings including but not limited to the risk factors set forth in our public filings and closing almost recent Form 10-K and any updates to such risk factors contained in the subsequent Form 10-Q or Form 8-K filings.

I'm happy to turn the call over to Chairman and CEO Howard Lutnick.

Thank you, Jason. Good morning and thank you all for joining us for our first-quarter 2016 conference call.

With me today are BGC's President Shaun Lynn, our Chief Operating Officer Sean Windeatt and I'm pleased to introduce Steve McMurray, our Chief Financial Officer, who has recently joined us. Steve brings to BGC a broad skillset having previously worked as a director of finance at Amlin, a UK-based insurance company, and as the chief financial accountant at the Bank of England. Welcome Steve, we are pleased to have you with us.

BGC's post-tax earnings increased by 24% to $77 million while our revenues were up by 17% to $660 million. Our strong performance was driven by the addition of GFI, the ongoing success of NGKF and the 68% year-over-year revenue increase generated by our high-margin fully electronic FENICS business. We expect our results to further improve as we continue to invest the proceeds from our sale of Trayport and continue to realize synergies from GFI and our other recent acquisitions.

Given our liquidity position and expectations for strong pre-tax earnings growth, our Board raised our dividend to $0.16 for the first quarter which represents an increase of 14.3% both sequentially and year on year. At yesterday's closing stock price this translates into a 6.8% annualized yield.

With that I will turn the call over to Shaun.

Thanks, Howard, and good morning everyone. Our Financial Services revenues were up by 22.8% to $436.7 million. These revenues would have been around $7 million higher had the US dollar not strengthened relative to the other major currencies.

The increase in revenues was driven by the acquisition of GFI as well as the organic growth from our data, software and post-trade businesses and from energy and commodities as well as equities and other asset classes. Our Financial Services business increased its pre-tax earnings by 31.4% to $102.9 million. Our pre-tax margin was 23.6%, a 160 basis points increase.

Improvement in Financial Services profitability reflected the synergies we were able to extract with respect to GFI as well as strong growth from our fully electronic FENICS platform. FENICS revenues rose by 68.1% to $68.6 million while its pre-tax earnings increased by 55.2% to $31.8 million. This strong performance was driven by the addition of GFI as well as by the strong double-digit organic growth generated by data, software, post-trade and fully electronic credit business.

You may have noticed we've changed the term market data and software solutions to data, software and post-trade to better reflect our growing electronic post-trade business. Our post-trade services are generating strong momentum and (technical difficulty) developing this platform demonstrates BGC's technological focus and capabilities. We expect substantial growth from the sector going forward.

Looking at our overall Financial Service results by asset class we more than doubled revenues from our fully electronic credit desks while our overall credit revenues grew by 25.8% to $84.5 million. Our FX businesses increased by 7% to $78 million. Our energy commodities revenues were up by 129.6% to $67.5 million.

Our revenues from equities and other asset classes increased by 41.4% to $51.2 million. And revenues from our rates products were down by 2.9% to $118.5 million largely due to a decline in European wholesale market activity industry-wide.

Offsetting this industry-wide decline, we expect growth from our FENICS rates platform to drive our rates revenues higher in the second half of this year. While the overall trading environment was challenging for our largest customers during the first quarter we believe we have continued to gain market share from our financial services competitors.

Turning now to our results for the Real Estate Services, NGKF's revenues increased by 7.2% to $214.8 million due to a 15.4% increase in revenues from higher-margin real estate capital markets brokerage and 13.4% growth from a largely reoccurring management services fee. We believe that NGKF's revenue growth outpaced the relevant industry metrics.

Our comparative out-performance was driven in part by organic growth as well as by the additions of computerized facility integration, excess space and the completion of our acquisition of ARA. We've also continued to invest in high profile and talented brokers having added over 100 brokers since the second quarter of 2015.

Historically newly hired commercial real estate brokers tend to achieve dramatically higher productivity in their second year with the Company although we incur related expenses immediately. This is largely why NGKF's revenues were higher but it's pre-tax earnings were down by 11.1% to $17.4 million.

As our newly hired brokers ramp up their production we expect NGKF's revenue and earnings growth to strongly accelerate in second half of 2016 thus demonstrating our pretty leverage. Although US industry-wide activity across commercial, leasing and capital markets was down in the first quarter, we expect NGKF's top-line growth to outperform that of the overall industry by approximately 20 percentage points for the full year of 2016.

With that I'm now happy to turn the call over to Steve.

Thank you, Shaun, and good morning everyone. It's great to be here and I look forward to getting to know you all over the coming quarters.

This is the fourth full quarter in which our results include those of GFI. Q1 2015 only included GFI for one month.

BGC generated consolidated revenues of $660.1 million, up 17.1% compared with the prior year. While revenues from the Americas were up by 16%, revenues from Europe, Middle East and Africa were up by 18% while Asia-Pacific revenues increased by 17%.

With respect to expenses our compensation ratio decreased by around 30 basis points to 61.4%. While non-compensation expenses increased in absolute terms by 16.4% they were down approximately 20 basis points as a percentage of revenues of 24.8%. Our overall margin improved due to synergies related to GFI and a greater percentage of Financial Services revenues from the higher-margin FENICS platform.

With respect to our $100 million in expected annualized cost synergies we're happy to report that we are more than 80% of the way there. With regard to earnings, our pre-tax earnings before non-controlling interest in subsidiaries and taxes were $90.8 million, up 20.7% when compared with the prior year. Our pre-tax margin expanded by nearly 50 basis points to 13.8%.

BGC's post-tax earnings were up by 24% to $77 million. Our post-tax earnings margin was 11.7%, an expansion of approximately 70 basis points. Our post-tax earnings per share were unchanged at $0.18.

BGC had a fully diluted weighted average share count of 434.9 million for both distributable earnings and GAAP. A year earlier our weighted average fully diluted share count was 378.7 million distributable earnings and 338.5 million under GAAP. Our GAAP share count in the prior period was lower because of excluded certain share equivalents in order to avoid anti-dilution.

The share count increased primarily due to issuances related to GFI, various other acquisitions, equity-based employee compensation and new front office hires. This is partially offset by the redemption and/or repurchase of 7.6 million shares and units at a cost to BGC of $65.9 million or an average cost of $8.70 per share during the quarter. As of March 31, 2016, our fully diluted share count was 430.8 million including the 23.5 million shares issued subsequent to year-end in connection with the GFI backend merger and the shoe-in conversion of it BGC's 4.5% convertible senior notes into 16.3 million shares.

Moving on to the balance sheet, as of quarter end the Company's liquidity, which we define as cash and cash equivalents, marketable securities, securities owned held for liquidity purposes, less securities loaned was $680.6 million. Notes payable and classified borrowings were $838.6 million, book value per common share was $3.15 and total capital, which we define as a redeemable partnership interest, non-controlling interest in subsidiaries and total stockholders' equity was $1.2249 billion. In comparison as of December 31, 2015 the Company's liquidity was $1.0261 billion.

Notes payable in classified borrowings and notes payable to related parties were $840.9 million. Book value per common share was $2.56 and total capital was $1.2997 billion. The decrease in BGC's liquidity since year-end was primarily related to the $111.2 million traded with respect to the GFI backend merger and related transactions, cash used for the redemption and/or repurchase of 7.6 million shares and/or units net at a cost to BGC of $65.9 million, cash used to pay previously accrued year-end taxes and employee bonuses and significant amounts invested with regards to new front office hires in Real Estate Services.

It is important to note that our balance sheet does not reflect the expected receipt of over $765 million worth of additional NASDAQ stock over the next 12 years as these shares are contingent upon NASDAQ generating at least $25 million in gross revenues annually. If NASDAQ undergoes a change of control we would get these shares all at once. To put the $25 million contingency in context, NASDAQ has recorded more than $1.5 billion in gross revenues for each of the last 10 years and generated growth revenues of approximately $3.4 billion in 2015.

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

Thank you, Steve. Our outlook for the second-quarter 2016 compared with a year earlier is as follows.

We expect to generate distributable earning revenues of between $645 million and $685 million. This compares with $684.6 million.

We anticipate generating pre-tax earnings of between $85 million and $100 million. That's an increase of between 10% and 29% and that compares to $77.5 million. And we continue to expect our effective tax rate to remain around 15% for the remainder of 2016.

The Company's outlook reflects the sale of Trayport in December 2015. Trayport generated annualized gross revenues of approximately $80 million and pre-tax profits of over $35 million. We are proud that we have more than made up for these earnings through our ongoing successful integration of GFI and through the growth of FENICS.

We also expect NGKF's performance to be much stronger in the second half of 2016, both sequentially and year on year, due to the significant and recent ramp-up of our real estate broker headcount. We anticipate updating our outlook towards the end of June.

So now, operator, we are ready to open the call for questions.

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

Yes, good morning. I guess the first question is, Howard, it's hitting the headlines that I think is a competition or competitive market, the CMA in the UK is doing a deeper review of the Trayport transaction, I guess it's sort of unusual that it's closed but they are doing this. And I guess just your color on this and what kind of impact it could have on there I guess? Or if they did rule how would you manage through this and what would be the actions if there was an unfavorable ruling?

Well it has no impact on us. And we really we have no comment. This was news to us but we closed the transaction, it really has absolutely no impact on us.

Okay, so they would have to -- you're saying that if there was rulings they would have to divest or do what remedies to handle it themselves? Nothing would be put back to BGCP?

Absolutely nothing. They paid us, closed, signed, sealed, delivered, over, has nothing to do with us whatsoever.

Understood. Okay.

Then the next question, and this probably isn't fair to the new -- could you just remind me, I missed the part, I know you mentioned the synergies but how much of the synergies and what's still to guide? I thought I heard 80%, but can you just refresh the numbers on the GFI synergies and where we are?

Hey, Rich, it's Shaun. We've said that we would -- you remember last quarter we said we were up to 100 million, that we could do 100 million by the end of 2016 and in the prepared notes we suggested we were 80% of the way there during the first quarter. So more than 80 million as at the end of Q1.

Got it. Okay, thank you. And then the very last thing is on the real estate, the guidance that you -- I get the hiring and the significant improvement in the second half.

I guess what I'm trying to get at is is the revised guidance now just to outperform the industry by 20%? And with the previous guidance I thought being the $1.2 billion in revenue targeted for 2016, is that revised now?

Well it's both. I guess you could say it's either both revised or not revised, meaning we had said last time if the industry was up to zero we would be up 20% more and that would put us at $1.2 billion.

If the industry is down 5% we would be 5% lower. And if the industry was up 5% we'd be 5% higher. So I think we just put a more nuanced point to it which is if the industry is flat for the year, we expect to need things.

So nothing has changed with respect to us. We were just making a macro-comment that if the industry is down we'd be 5% lower but if the industry is up of course we'd be 5% higher.

Got it. Okay, thanks, and congrats on the solid quarter.

Patrick O'Shaughnessy, Raymond James.

Hey, good morning guys. So just to follow up on the last question, last quarter your view was that industry-wide volumes or revenues would be relatively flat in 2016 in commercial real estate.

Does Barry and his team, do they have an updated view at this point? Or is that still kind of their baseline assumption?

I think the quarter industry-wide was a little weaker than people had expected and I think it's trending down 5% or so now. So I think from our view last quarter where we saw it as basically flat to possibly up 5% I think right now what we see is down 5%.

So I think that's sort of the map of what we see in the industry. We expect to outperform the industry by 20%, so that's kind of what we're seeing now.

All right, got you. And then, Shaun, in your prepared remarks you talked about your outlook for interest rate revenues to be up in the back half of this year which is pretty atypical given normal seasonality trends. Can you dig into that a little bit deeper please?

We've seen strong markets. Obviously the traditional marketplace with regards to sell side banks has continued to go through difficult times. But we've seen and we continue to grow into that with new clients coming onboard and technology taking a bigger footprint hold in the marketplace.

And we feel that we picked up market share on our competitors and we've continued to grow into that space. So we're feeling confident that we're in a very, very good position.

Okay, got it. Appreciate that one. Then lastly, Howard, it seems like the odds of a Brexit are lower now than they were maybe two or three months ago but it's still probably a material risk. How do you look at that in terms of impacting your UK operations because obviously you have a very large presence there?

You know, volatility of that type is a friend of the Company. So if one we're rooting for numbers we would root for Brexit because it would just create so much excitement and uncertainty that there would be enormously amounts of trading and volatility.

But otherwise I think it really will have a de minimis impact on us. I think it would be beneficial if they exited just because it would be good for business. It would be odd but still good for business but overall I don't think it will have a consequential impact either way.

All right, got you. And one last one from me, liquidity declined I think it was $345 million quarter over quarter. I think you had spoke broadly about the big buckets there but can you kind of help quantify a little bit more where that the balance sheet decrease went to?

Sure. So I think Steve sort of went through the list which is the biggest number was we closed the balance of the GFI acquisition which was about $111 million. We bought back stock for just about $66 million. We have said that we had taxes on the Trayport transaction, obviously we paid them during the quarter.

We had said we expected those taxes to be around $65 million. So just in those things, and then we had normal employee bonuses which we pay at the end of the quarter and then you can see if you look at our loans number we've made significant hires in the Real Estate business. And if you add all those things up you'll see that that is the lion's share of the cash.

All right got it. Thank you very much.

(Operator Instructions) Robert Krayn, MidOcean Partners.

High, Howard, thanks for taking my call, I appreciate it. Just a quick question here for you guys, on Financial Services revenue when you give the breakout between 2015 and 2016, what is the, I don't know if you guys disclose this, but what's the breakout between how much of that is attributable to GFI and how much kind of is organic growth?

I don't think we split it out like that. We can go take a look at it and get back to you details and we can put it out to the market if you'd like. But obviously the scale of GFI when we bought it was around --

Yes, around $650 million.

Between $600 million and $650 million in revenue and obviously the marketplace overall is down a bit from those levels then. So if you thought of GFI at about $600 million, you know pre-acquisition that would be sort of a good sense of them bringing that on to us. And then you can see our headcount has declined and that is basically us rationalizing the business.

You know, there were BGC desks that were trying to build businesses that GFI had. There were GFI desks that were trying to build businesses that that BGC had. And by rationalizing that headcount, the headcount being down 5%, we had less revenue and less revenue from that and greater productivity per head.

Then we sold Trayport, that was an $80 million revenue decline, GFI sold Kite. That was another tens of millions of dollar decline. So that sort of puts I guess brackets around it for you, and we can go take a little further work on it if you'd like.

I kind of backed into some rough numbers but if you guys had anything that you could share that would be very helpful. Appreciate it. That's it for me, thank you.

We have no further questions at this time. I would like to turn the call over to Mr. Lutnick for closing remarks.

Thanks everyone for joining us today. We look forward to speaking to you again next quarter.

Have a great day today everyone. I appreciate it. Thank you.

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