Bgc Group Inc (BGC) 2016 Q2 法說會逐字稿

Welcome to the second-quarter 2016 BGC Partners Incorporated earnings conference call. My name is Christine and I will be the 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, Head of Investor Relations. You may begin.

Good morning. Our second-quarter 2016 financial results press release and 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 only on a distributable earnings basis unless otherwise stated. Please note that BGC now presents distributable earnings revenues consistently with revenues recorded under US Generally Accepted Accounting Principles or GAAP. This mainly relates to the NASDAQ earnout which had previously been recorded as other revenues from distributable earnings but is now recognized as other income under both methodologies. This change had no impact on GAAP results and no impact on pretax or post-tax distributable earnings although increased margins and decreased revenues for distributable earnings.

Please see today's press release for results under GAAP. Please also see the section of today's press release including distributable earnings to find differences between [distributed] results for distributed learning and GAAP and reconciliation of GAAP income or loss to distributable earnings for a revised definition of these terms and how, when and why management uses them. Unless otherwise stated whenever we refer to income statement items, we are doing so only a distributable earnings basis and the results provided on this call compare to second quarter of 2016 to the year earlier period.

For the purposes of today's call, all the Company's fully electronic businesses are referred to as FENICS. These offerings include financial services segment fully electronic brokerage products as well as offerings in market data, software, solutions and post rate services across both BGC and GFI. FENICS results do not include the results for Trayport which are broken out separately in today's press release and presentation. This is due to Trayport's sales to Intercontinental Exchange Inc. in December of 2015.

Also Newmark Grubb Knight Frank is synonymous with NGKF or our real estate services segment.

I will also remind you that the information on this call regarding our business that is not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended, Section 21E of the Securities 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 our Securities and Exchange Commission filing including but not limited to the risk factors set forth in BGC's public filings including our most recent Form 10-K and any updates to such risk factors contained in subsequent Forms 10-Q or Form 8-K filing.

I'm 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 all for joining us for our second-quarter 2016 conference call. With me today are BGC's President, Shaun Lynn; our Chief Operating Officer, Sean Windeatt; and our Chief Financial Officer, Steve McMurray.

BGC's post-tax earnings increased by 13% to $80.1 million. This is our sixth consecutive quarter of year-on-year improvement in post-tax earnings. Our revenues this quarter were $652 million. Two nonoperating items impacted the comparison of our revenues to last year. Our revenues would have been $21.7 million higher and above the midpoint of the range of our previous guidance but for the change in how we present our NASDAQ income. We now present our NASDAQ earnout as other income as opposed to other revenues. While this change had no impact on GAAP or distributable earnings, it does present our revenues as being lower when in fact nothing at all has changed.

In addition, our topline was reduced by the December 2015 sale of Trayport which last year generated $17.8 million of net revenues. The $650 million of Trayport proceeds added dramatically to our significant dry powder.

Our continued improvement in profitability is a result of the ongoing synergies with GFI, the growth of our real estate services company, Newmark Grubb Knight Frank, and the continuing strength of our high-margin fully electronic FENICS business. We expect our revenues and earnings to grow over time as we continue to invest our $899 million of liquidity and to reap the benefits for our recent acquisitions and front office hires. I'm happy to report that our Board declared a $0.16 qualified dividend for the second quarter which is unchanged sequentially but represents an increase of 14.3% year on year. At yesterday's closing stock price, this translates into a 7% annualized yield.

In addition to our strong liquidity position, we expect to receive over $840 million in additional NASDAQ stock over time which is not yet reflected on our balance sheet.

With that I will turn the call over to Shaun.

Thanks, Howard, and good morning everyone. Our financial services revenues were down by 7.3% to $390.9 million. This decline is predominantly due to the sale of Trayport which we sold in December to the Intercontinental Exchange. We generated 26.1% year on year organic growth from our data, software and post-trade businesses excluding Trayport. As well as solid organic growth from our desks in energy, commodities and credit, our profitability in the segment continues to improve largely because the ongoing strength of our high margin FENICS platform which increased its quarterly topline by 5.5% compared with a year earlier.

Our FENICS business increases pretax earnings by 19% to $33.4 million while its pretax margin expanded by 545 basis points to 48.3%.

Our overall financial services segment increase its pretax earnings by 5.6% to $83 million while pretax its margin expanded by approximately 260 basis points to 21.2%. Overall segment profitability improved despite the sale of Trayport which had pretax margins of nearly 45%. This is largely due to the growing percentage of revenues coming from FENICS and the synergies generated from GFI.

FENICS produced strong organic growth from its fully electronic credit and rates business during the quarter. As we have continued to migrate a hybrid and voice data onto our FENICS platform we now generate 25% of overall credit revenue from fully electronic brokerage which has more than triple the percentage of just three years ago. We have also further expanded the FENICS customer base beyond our traditional clients in both fully electronic and (inaudible) products.

We believe that speed straight through processing, our diverse product offerings and execution methodologies affect our anonymity and deep liquidity will drive businesses into our high-margin FENICS platform. We also continue to invest profitably in voice and hybrid brokers.

We recently announced an agreement to acquire Sunrise Brokers. Sunrise has been voted overall number one equity products broker of the year by Risk Magazine the past nine years and the top broker in its equity exotic derivatives for 13 years running. Sunrise has approximately 135 brokers generated approximately $90 million in revenues in 2015 and has grown its revenues and pretax profits for each of the last three years. We expect the transaction to be immediately accretive to BGC's earnings per share and to close by the end of the year. Subject to regulatory approvals, this acquisition will be perfectly into our plug-and-play model. We expect Sunrise and the overall company to benefit as we combine our technology, facilitate the growth of their customer base as they gain access to our platform and make their infrastructure and back office more efficient.

Turning now to our results for real estate services, NGKF brokerage revenues increased by 8.3% to $207.3 million while overall revenues grew by 6.3% to $254 million. This improvement was led by an almost entirely organic 35.2% increase in revenues from high-margin real estate capital market brokerage. We believe that we gained significant market share in capital markets as we easily outpaced relevant industry metrics.

During the quarter, NGKF acquired the CRE Group, a real estate services provider focused on project management, construction management as well as energy and environmental design consulting. We expect this addition to bolster our enlisting national program management platform as part of the global corporate services business. Historically, newly hired commercial real estate brokers tend to achieve dramatically higher productivity in their second year with the company. Though we incur related expenses immediately, therefore our net new 113 real estate brokers increased their near-term expenses while significantly improves our forward outlook. Investment in this revenue growth is primarily why our pretax earnings were down by 14.6% to $25.5 million.

As the recently hired brokers get up to full speed, we expect NGKF's revenues and earnings to show strong improvement in the second half of 2016.

Although we believe that industrywide brokerage was challenging in the US for the first half of the year, we continue to expect our real estate services business to dramatically outperform that of the overall industry the full-year of 2016.

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

Thank you, Shaun, and good morning, everyone. This was the first quarter in which our results include those of GFI for the entire year earlier period. BGC generated consolidated revenues of $652 million, down 2.6% compared to the prior year. Our revenues from the Americas were down by approximately 1% while revenues from Europe, Middle East and Africa were down by 3% and Asia-Pacific revenues decreased by 10%.

With respect to expenses, because the NASDAQ earnout and related items are now recorded as part of other income rather than as revenues, both compensation and non-compensation expenses increased as a percentage of revenues. Because there is no cost associated with the earnout, this change in presentation had no impact on earnings with increased margins all else equal.

Our compensation expenses declined by 1.2% although the ratio ticked up to 63.6% versus 62.7% a year earlier. This is largely due to the significant hiring in real estate services that Shaun just discussed.

In general, full-service commercial real estate services firms typically have higher compensation ratios but lower non-compensation ratios from financial services firms with fully electronic businesses.

Non-compensation expenses decreased by 6.2% although non-compensation ratio declined by approximately 90 basis points to 25.3%. Overall expenses decreased by 2.6% to $579.6 million.

Our pretax earnings before noncontrolling interest in subsidiaries and taxes were up 6.7% to $93.9 million. Our pretax margin expanded by over 120 basis points to 14.4%. BGC's post-tax earnings were up 13.2% to $80.1 million. Our post-tax earnings margin was 12.3%, an expansion of more than 170 basis points. Our post-tax earnings per share were unchanged at $0.19.

We expect our overall margin to continue to improve as our recently hired real estate brokers ramp up production and as we generate great financial services revenues in the higher margin FENICS platform as well as realize synergies related to GFI.

With respect to our target of $100 million in expected annualized cost synergies related to GFI, we are happy to report that we have achieved this target two quarters early. We now expect to achieve an additional $25 million in annualized cost savings bringing the total savings to $125 million by the end of 2016.

BGC had a fully diluted weighted average share count of $437.3 million for both distributor learnings and GAAP. A year earlier, our weighted average fully diluted share count was $386.5 million for distributor learnings and $366.8 million under GAAP. Our GAAP share count in the prior period was lower because it excluded certain share equivalents in order to avoid anti-dilution. The share count increased primarily due to 23.5 million shares issued related to GFI back-end merger as well as the shares issued with respect to various other acquisitions, front-office hires and employee equity-based compensation and general corporate purposes. This is partially offset by the redemption and/or repurchase up 8.5 million shares and units at the cost of BGC of $74.5 million or an average cost of $8.73 per share during the first half of 2016.

As of June 30, 2016, our fully diluted share count was 440.4 million assuming conversion of BGC's 4.5% convertible senior notes into 16.3 million shares. Subsequent to quarter end, these convertible senior notes matured and retired for $159.9 million in cash and approximately 7000 shares of BGC's Class A Common stock. This retirement had the effect of reducing the share count by just under 16.3 million.

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 $899.1 million. Notes payable and classified borrowings were $1.132 billion, book value per common share was $3.07 and total capital which we define as redeemable partnership interest, noncontrolling interest and subsidiaries and total stockholder's equity was $1.208 billion.

In comparison as of December 31, 2015, the Company's liquidity was $1.026.1 billion, notes payable and classified borrowings and notes payable rates parties were $840.9 million. Book value per common share was $2.56 and total capital was $1.299.7 billion. The decrease in BGC's liquidity since year-end was primarily due to the $111.2 million paid with respect to the GFI back-end merger and rated transactions, cash used for the redemption and/or repurchase of 8.5 million shares and/or units net with the cost to BGC of $74.5 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.

These items were partially offset by net proceeds from BGC's recent $300 million senior notes offering. It is important to note that our balance sheet does not reflect the expected receipt of over $840 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 will get paid all at once.

To put the $25 million contingency in context, NASDAQ has reported more than $1.5 billion in gross revenues for each of the last 10 years and generated gross 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 third quarter 2016 compared with a year earlier is as follows. We expect to generate revenues of between $655 million and $695 million compared with $685.3 million which last year included over $19 million related to Trayport. We anticipate generating pretax earnings of between $99 million and $115 million which compares to $99 million last year of which over $8 million was attributable again last year to Trayport. We expect our provision for taxes and distributable earnings to be in the range of approximately $15 million to $17.5 million.

We also expect NGKP'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 our real estate broker headcount.

We also anticipate updating our outlook towards the end of September.

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

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

Good learning, guys. I guess the first question is the incremental cost saves, the $25 million by the end of the year, Howard and Steve, is that just more savings that you have uncovered at GFI or could you get more specific on what areas they might come out of?

I think it comes from the consolidation of the business across the platform. It is really the combination of BGC. With GFI, I think we have strengthened our desks demonstrably and therefore I think we are getting cost savings in broker compensation, we are getting cost savings in technology and integration of their systems and ours. And the more we have got into the business, the more we like the producers, they more they blend well to together and the better we are able to get synergies out. So you will see it in decrease in compensation, you will see it in decrease in technology costs.

And will it continue to help you expand the FENICS margins as well?

They drive to FINICS is just coming so that is just part of the (multiple speakers). We expect as the technology costs come down as we said, you saw a big jump in this quarter but you will see that we expect our FENICS margins to get out to 50% at least as we have said before. And we are on the march towards there. As our technology costs come down, you will see those margins continue to expand.

Okay. And then there were a couple of reporting changes, one that a newswire got wrong on the topline revenue with the NASDAQ earnout moving down. But you also in the guidance you also guided to an absolute value now or I think $15 million to $17.5 million for taxes. Was there a reason why you went to that method versus the prior method you are saying 15% tax rate?

I think just more precise and so we decided we are doing an annual examination of tax now and we can give a more precise range so we felt we can just put out the number and make it easier for you to put it in your model.

So no changes in tax rate expected going forward or anything like that?

No, if you put those numbers together you would see it pretty much remains consistent with where we have been but that is the tax we expect to pay and obviously you could put that yourself against the earnings we expect to earn.

Okay. Then I guess my last question, Howard, is the progress on this strategic goal of unlocking shareholder value, can you update on is that -- I would think it would still be a priority of yours I would imagine?

It is definitely a priority. When I attended your conference, I said we only talk about it every day and that because I was with you in the afternoon, we had talked about it that morning but unfortunately since this is a morning call, I haven't had yet a chance to talk about it but it matters to us. It is fundamental to unlocking shareholder value.

We are growing FENICS, we are growing our real estate business and those two are highlighted in ways that we can unlock shareholder value and I would just say stay tuned.

Okay. If I could sneak one more in, I know as you expressed very specifically you expect to outperform significantly outperform the overall industry in real estate. But could you give us an update, an updated outlook of what you expect in the back half industrywide for real estate?

I think the market has been challenged. I think the expectation, I think the positive expectation for most of the industry is flat. I think that is at best, I think it may well be down a bit and we have said we will significantly outperform it and we expect it, so we expect to be up.

A good example is you saw our capital markets number this quarter up 35%. We are adding people and we are growing and when we add new people, they tend to not get the mandates for us. It just takes them time. I think you are going to see be back end of the year be just better for us and everybody else and then I think next year bodes very well as well. So I think flat to down a bit for everybody else or the industry at large and I think we should -- we will be up. We expect to be up strong.

Understood. Thanks. Thanks, Howard. Very helpful.

Patrick O'Shaughnessy, Raymond James.

Good morning, guys. So Howard, not to belabor the point but last quarter you were pretty specific about quantifying your relative outperformance in commercial real estate I think you said outgrow the industry by 15% and that is what you said the quarter before. Do you still feel comfortable of that level of that outperformance or are you maybe scaling back some of your near-term expectations?

We feel really good about our outperformance. It is just I am not sure how the market overall will perform, not us. We feel great about it so I'm not changing how I felt before. I am not sure how the market will be. Before I used to say zero to up 5%, now it is flat, maybe it is down 5%. The industry overall, those kind of challenges are challenge the industry faces but we will outperform and we remain as confident this quarter as we were last.

And when you say the industry may be flat to down 5%, are you specifically referring to just the US region because obviously a lot of the big competitors have large European franchises and some Asian franchises and I think Brexit has kind of thrown some things for a loop but you guys don't have that exposure. So are you kind of giving yourself the relative comp of just the US performance by your peers?

Yes. Yes.

And then sticking with commercial real estate, what is the M&A environment like? Because as you look at the Jones Lang LaSalle or CBRE, it seems like they announce an acquisition every two weeks so you guys have obviously bought some properties as well. What is the valuation environment like right now and how do you effectively bid against some of these deeper pocketed competitors?

I think we understand that as you have seen BGC grow, we understand what makes our business tick and how the puzzle pieces fit together. I think as you know, we buy accretively, we hire and acquire accretively and we know how it fits together so there are lots of opportunities. We said a year ago we were going to -- that we were undersized in capital markets and the selling of buildings and we were going to dramatically increase that and you have seen our percentage growth has been significant serious and just hugely better growth rates than our competitors.

So I think that is an area where we will do very, very well and it is an area that we can grow that the others can't. When you sort of have a reasonably good platform sort of everywhere, you can't really rock the boat whereas for us we can hire the best of breed everywhere and that is what we are doing. We have hired spectacular people across the country and they want to be part of our platform.

And so being relatively smaller means you can make moves that other people can't. We just can and so I think we've got lots of growth ahead of us in capital markets and then you're going to see us turn to the service side of the business. And we are if you compare us to the others, we are again demonstrably undersized which means, wow these guys can really, really grow in places that other people are pretty good and therefore they can't really make a move where we can make a huge move. And so I think you are going to see capital markets continue to grow and that is a much higher margin business and I think that will be great.

And then you are going to see us turn our attention to the service side of the business, property management, facilities management and you will see big growth there.

So we've got a long runway ahead of us and we feel good about it and it is just we have a different set of cards than they do and there are a lot more moves that we can make that win for us as opposed to others. And I still think even at BGC, the whole energy complex is a place, commodity complex, these are places that we can grow where the other guys already have big places and so they can't really grow it and up we go.

And you will see our commodities and energy complexes be really nice growth, those are just areas for us to grow that are our opportunity that may not be others and we are in a good spot.

All right. You kind of led me to my next question. So it looks like ICAP is going to have to divest its oil trading desk to sell its voice brokerage business to Tullett. Is that a property that you would be interested in?

No comment.

All right. I want to discuss your bond issuance this past quarter. I think it might fall in the category of there's no such thing as having too much cash but you guys already have a fair amount of liquidity. What was the rationale behind raising more in proceeds than you had to use to pay down that convertible?

We are being presented in front of a sort of a Sunrise as an example. The strength of the platform across real estate and financial services and the scale by which we were able to produce value from combining BGC with GFI has led us to really have a good view on what we can achieve with acquiring other companies and how we can drive value to the bottom line in ways that other people cannot.

I mean GFI is a perfect example to suggest that together with BGC we could take $125 million of expense out of that company combining it with ours, this changes the landscape of what is value for us as opposed to value for others. And I think we are in just an excellent position to examine and consider other deals and having scale and scope to be able to execute those kind of transactions is going to matter. It is what mattered to us to buy GFI. It will matter to us going down the pipeline.

We have really good opportunity because we now have scale in real estate and we have scale in financial services and we can take cost out of other companies that other people just cannot.

So I think the answer is we just see great opportunity ahead of us. We see a great runway and we wanted to make sure that we have the capacity to execute when it is presented to us as we did with GFI and I think as we will do going forward.

Got it. Last one for me, I think in your press release you did not disclose the purchase price for Sunrise. Are you able to disclose that at this point or are we going to have to wait for a regulatory filing?

We haven't chosen to do that now.

Okay, great. Thank you.

(Operator Instructions). David Cohen, Kerrisdale Capital.

Good morning, guys. Two questions. First, on the real estate, the NGKF results, the management services revenues seem to decelerate rather dramatically particularly compared to the results from the previous quarter. It is very rare I guess in this business to see a downtick there unless things are really [bad]. Can you guys talk a little bit about that?

Sure. Nothing of consequence changed with respect to the overall Company meaning that I haven't participated in any conversation where anything happen. I think what we acquired a number of companies and when you examine those companies and you examine economics of how they do their business, many companies operate differently than we do. Many companies do things that are not economical because they need to present themselves with a certain scale or size. That is just not the way we do things and so when we buy a company, we tend to initially rationalize and understand their costs and make sure their revenues are sensible to us.

So the first move when we buy a company often can be a decline in revenues because we don't like the math of it all. And then we go and build the business going forward. So nothing has really changed although we did rationalize some expenses and made some moves that we think will improve our margins going forward.

So is it fair to say that the management services and revenue decline is a function of a decline in revenue from properties from companies that you've acquired?

Yes.

Thank you. The next question I wanted to ask was about the share count and earnings growth. This has been something that I've talked to you guys about for a little bit. How do you guys think about growing the share count versus growing earnings? Are we still growing earnings this quarter which were pretty much 100% taken up by the increase in the share count which I guess goes to comp. We don't have any problem with compensation being issued as shares. How do you guys think about the split in earnings growth between comp and shareholders?

We think about earnings per share, that is what we think about. We think about moves that are accretive, that is what our management thinks about. The employees are large holders of the Company, management are large holders of this Company. That is what we think about. So we view the Company as a marathon, not a short-term race.

When hiring new brokers, cash would be far cheaper to hiring them and paying them in shares and we agree with you, we would rather pay them in cash. And we have the cash but the fact is by paying them in equity, we get retention value when their contracts expire. So in five years from today, that will be a great move but over the next five years, you would say that is expensive. The beauty of that is five years ago, we did massive hiring -- five years ago we did a significant amount of hiring and therefore that retention value and the appreciation of our shares will go to lower our compensation ratio over time.

Before we had the real estate business, that was really clear. I think you will see it present itself in our real estate business again which is over time by having our employees have equity we can drive down our compensation ratio and drive up our earnings per share.

So when you are hiring new people, they would rather have cash, we would rather them have stock for the long run of our Company but obviously the near-term financials we would of course rather pay them in cash. So we have a long-term view of the Company and we think it is going to produce enormous value to us so that is how we balance it but always with our eye towards increasing our earnings per share. Anything else is silly.

Got it. So would you say that most of the share count increase is a function of hiring in the real estate division?

The share count also came from the back-end merger obviously with GFI so it goes from (multiple speakers)

I mean the shares excluding the GFI merger.

I would say yes. The majority of it would be hiring in the real estate space new brokers.

Got it. Thank you.

I will now turn the call back over to Mr. Howard Lutnick for closing comments.

Thank you very much. I think we feel really good about our place. I hope that it was clear on the call. Lots of opportunity out there and we look forward to speaking to you again about it next quarter as we move forward. Thanks, everyone, for joining us and we will speak to you soon.

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