Bgc Group Inc (BGC) 2016 Q4 法說會逐字稿

Welcome to the fourth-quarter and full-year 2016 financial results conference call. My name is Christine and I will be the operator for today's call.

(Operator Instructions)

Please note that this conference of the recorded. I will now turn the call over to Jason McGruder, Head of IR. You may begin.

Good morning. Our fourth-quarter and full-year 2016 financial results press release and a presentation summarizing our results were issued this morning. These can be found at IR.BGCpartners.com. Unless otherwise stated, results provided on this call compare only the fourth quarter 2016 with the year earlier period. Please see today's call for full-year results.

We will also be referring to our results on this call only on a distributable earnings basis unless otherwise stated. We may also refer to adjusted EBITDA.

Please see today's press release for results under Generally Accepted Accounting Principles or GAAP. Please also see the section in the back of today's press release for complete definitions of any such non-GAAP terms reconciliation of these items to the corresponding GAAP results and how, when and why Management uses non-GAAP terms.

For the purpose of today's call all the Company's fully electronic businesses are referred to as quote FENICS end quote. These offerings include financial services segment, fully electronic brokerage products. As well as offerings of market data, software solutions, and post-rate services across both BGC and GFI. FENICS results do not include results of Trayport which are broken out separately in today's press release and presentation.

They also do not include the results of eSpeed for prior periods. This is due to eSpeed sales in NASDAQ and a Trayport sales to Intercontinental Exchange or ICE. Also, Newmark (inaudible) is synonymous with [NGKF] or real estate services. On November 4, 2016, BGC acquired 80% of the Lucera business not already owned by the Company. The Lucera is a financial technology network and infrastructure provider headquartered in New York. The revenues for which are now recorded as part of data software and post-trade.

Because this transaction involves entities under common control, BGC's financial results have been retrospectively adjusted to include the results of Lucera in the current and prior periods. This adjustment impacted a number of line items for the financial service segment, corporate items and the consolidated Company for all periods discussed in today's call.

Finally, I'd like to remind you that the information on today's call regarding our business that are not historical facts are forward-looking statements within the meaning of section 27A of Securities Exchange Act of 1933 as amended and section 21E of Securities Exchange Act of 1934 as amended. Such statements involve risks and uncertainties except as required by law. BGC undertakes no obligations to update any forward-looking statements.

For the discussion of additional risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements see BGC's Security and Exchange Commission filings, including but not limited to the risk factors set forth in our most recent form 10-K and any updates as such risk factors contained in subsequent form 10-Q or form 8-K filings.

I'm now happy to turn the call over to host, Howard Lutnick, Chairman and CEO of BGC Partners.

Thank you, Jason. Good morning and thank you for joining us on our fourth-quarter 2016 conference call. With me today are BGC's President, Shaun Lynn. Our Chief Operating Officer, Sean Windeatt. Our Chief Financial Officer, Steve McMurray and our NGKF CEO, Barry Gosin.

Our post-tax earnings were up by 33% to $108 million, which is a record for any quarter. Our strong results were led by business integration synergies, the improving profitability of our high-margin fully electronic FENICS business, and our highest ever revenues generated by Newmark Grubb Knight Frank's Real Estate Capital Markets business.

The environment in which we operate is improving. Growing economies throughout the developed world, increasing interest rates, and a more favorable regulatory outlook for financial service firms, are all positive developments for our industry and our Company.

Additionally, we anticipate our overall top and bottom lines to further improve as recent acquisitions and front office hires reached their respective levels of productivity. I'm happy to report that our Board of Directors declared a $0.16 qualified dividend for the fourth quarter, which is unchanged sequentially, but still represents an increase of 14.3% year-over-year. Yesterday's closing stock price, this translates into a 5.8% annualized yield.

With respect to our dividend review, we expect to evaluate any increase next quarter. The Board also increased our stock repurchase program by $170 million, bringing the total amount authorized to $300 million.

Earlier today, we issued a press release relating to the confidential filing of our registration statement for the proposed IPO of Newmark, our real estate services business. We do not plan to discuss this on the call today however. Please refer to the press release for more information. With that, I'll turn the call over to Shaun.

Thanks Howard, and good day everyone. Our financial services segment increased its pretax earnings by 25.7% to $87.7 million. Our pretax margins expanded by approximately 600 basis points to 24.4%. This substantially improved operating leverage, came despite the sale of Trayport, which generated pretax earnings of nearly $8 million in the fourth quarter of 2015. We were able to increase our profitability, largely because of the successful integration of GFI, and the ongoing strength of FENICS platform.

FENICS increased its quarterly pretax earnings by 5.3% to $24.9 million. While pretax margins expanded by over 200 basis points to 41.3%. As we continue to convert hybrid and voice [discs] to fully electronic trading, further expand our customer base, and rollout several new offerings over the course of 2017, we expect to improve FENICS earnings and revenues.

Our overall financial services revenues were down by 5% to $359.3 million. The segment revenue was reduced by $15.8 million due to the sale of Trayport and $6.5 million as a result of the stronger US dollar. Excluding these items, financial services revenues would have slightly increased.

The widely discussed regulatory changes should be beneficial for both our clients and our Company. Over time, the [auto] industry could return to activity levels seen a few years ago. For example in 2011, BGC's financial services business and GFI, excluding Trayport and [Kite], generated combined net revenues of nearly $2.2 billion, more than 40% higher than recorded in 2016.

As we continue to invest around $140 million per year in technology, and operate with reduced expenses from successfully integrating GFI, we expect future revenue growth to produce strong incremental margins for the business. I am now happy to turn the call over to Barry Gosin. Who will discuss our results for the real estate services.

Thank you, Shaun. Our real estate capital markets brokered revenues increased by 43.2%. This outpaced the overall market as real capital analytics reported that US investment sales decline by 20% year on year in the fourth quarter. Our industry-leading real estate capital markets growth was almost entirely organic as the investments we made over the course of the last few years have begun to bear fruit.

Our management services business with its recurring and predictable revenues, increased its top line by 9.2%. Leasing and services declined by 10.9%, as the uncertainty following the election results in the UK and US caused some delay in signing deals, particularly in Gateway cities.

NGKF's overall revenues increased by 6.5% to $306.1 million. Pretax earnings increased by 4.8% to $49.5 million. We think the fundamentals remain solid for commercial real estate in 2017.

Steady GDP and employment growth generally provides a positive tailwind to our leasing business. And so the most recent economic reports, as well as the consensus forecast bode well for us.

In addition, interest rates in the US and other major economies remain low relative to capitalization rates and spreads between Cap Rates on benchmark yields and are still long below the long-term averages. We think that continues to make investing in commercial real estate attractive.

We anticipate making further accretive acquisitions and profitable hires over the coming year as our recently hired brokerage ramp up their productivity, and as we continue to execute on our strategy. We expect to grow our revenues and profits faster than the overall industry in 2017 and beyond.

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

Thank you Barry and hello everyone. BGC generated consolidated revenues of $673.2, down 0.2%. Our revenues from the Americas were down by approximately 3%, while revenues from Europe, Middle East, and Africa were up by 5%. But would've been up 14% excluding Trayport. Major Pacific revenues increased by 2%.

With respect to expenses, compensation declined by $22.9 million or 5.4% reducing our compensation ratio to 59.8% versus 63% a year earlier led by the financial services segment.

Our overall non-compensation expenses decreased by 6.4% while the non-compensation expense ratio declined by approximately 160 basis points to 23.8%. Our overall expenses decreased 5.7% to $563 million.

Our pretax earnings before non-controlling interest in subsidiaries and taxes were up 27.7% to $129.1 million. Our pretax margin expanded by approximately 420 basis points to 19.2%. BGC's post-tax earnings were up by 33.4% to $108 million. Our post-tax earnings margin was 16% an expansion of over 400 basis points. Our post-tax earnings per share were up by 19% to $0.25.

BGC's fully-diluted weighted average share count was 433.4 million, both distributable earnings and GAAP versus 404.1 million for distributable earnings and 405.4 million on the GAAP last year. The share count increased primarily due to the 23.5 million shares issued related to the GFI [back end] merger. As well as the shares issued with respect to various other acquisitions, front-office hires, and employee activity-based compensation.

This is partially offset by the repayment of BGC's 4.5% convertible senior notes for approximately $160 million which reduced the fully diluted share count by 16.3 million as of July 15, 2016.

Additionally, BGC redeemed and or repurchased 12.4 million shares or units net at the cost to BGC of $110.5 million or $8.90 since per-share or unit in full-year 2016. As of December 31, 2016 our fully diluted share count was 434.2 million.

Moving on to the balance sheet, as of quarter end, while liquidity, which we define as cash and cash equivalents, marketable securities, [reverse repurchase] agreements and securities owned, all held for liquidity purposes less securities loaned were $756.9 million. Notes payable and collateralized borrowings were $965.8 million. Book value per common share was $3.02. And total capital, which we define as redeemable partnership interest, non controlling interest in subsidiaries, and total stockholders equity was $1.2095 billion.

In comparison, as of December 31, 2016, the Company's liquidity was $1.027 billion. Notes payable and collateralized borrowings and notes payable to related parties were $840.9 million. Book value for common share was $2.50. And total capital was $1.2891 billion.

The use of BGC's liquidity [draw] in 2016 primarily relates to the $160 million used to retire BGC's 4.5% convertible senior notes; cash used for the previously mentioned redemption and/or repurchase of shares or units; significant amounts invested with regards to new front office hires and real estate services; and $89.9 million paid with respect to the GFI back-end merger and related transactions. These items were partially offset by net proceeds from our $300 million senior notes offering.

It is important to note that all balance sheet does not reflect the expected receipt of over $750 million worth of additional NASDAQ stock over the next 11 years. As these shares are continued to (inaudible) 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 $2.4 billion in gross revenues for each of the last 10 years. And generated gross revenues of approximately $3.7 billion in 2016. With that, I'm happy to call back over to Howard.

Thank you, Steve. Our outlook for the first quarter of 2017 compared with last year is as follows. We expect to generate revenues of between $655 million and $700 million and that compares with $640.7 million last year. We anticipate generating pretax earnings of between $94 million and $120 million. And that compares to $88.3 million of last year. And that's an increase of between 6% and 36%. We expect our provision for taxes on distributable earnings to be in the range of approximately $14 million to $19 million. And we continue to anticipate updating our outlook towards the end of March.

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

(Operator Instructions)

Patrick O'Shaughnessy, Raymond James & Associates.

Good morning, guys. So, first I wanted to ask about that acquisition you did in early January, of Besso Insurance Groups. Can you talk a little bit about the margin profile and overall nature of the insurance brokerage industry? As well as what your strategic plans might be moving into that vertical?

Patrick we really haven't given that out. But is roughly the same as you should think about it as real estate. It's along the same sort of lines. We haven't really given anything out to the public as yet.

Can you perhaps talk about the strategy though? It's obviously a new business area for you. It seems a lot like you're in entering into commercial real estate a few years ago. What is the underlying strategy?

We consider it insurance as exactly the same as the brokerage industry that we've been specializing in for the last 30 odd or 40 years. For us it's a new vertical. Something we have spoken about the past exactly as we did when we started looking into commercial real estate four years ago. We saw a great opportunity then. And as we've proven over the last four or five years, we've looked at opportunities and been able to bring them into the Company accretively.

Got it thanks. And speaking of acquisitions. So you close the Sunrise acquisition late in the fourth quarter. Is that big enough that there could be meaningful cost synergies from that one over time?

Absolutely. From somewhat there of reasonable size. They are a profitable company. They are number one in exotic equity options. It's a very exciting acquisition for us. Which, it rounds off our overall equity options offering. It's not a huge size company, but it's a meaningful acquisition for us.

The synergies will be in the millions of dollars. We would never rank to big numbers.

Got it. Thank you. And a question about your overall commentary about the regulatory environment. And I appreciate the comparison you gave to a few years ago when the environment was more favorable. But is it your expectation the broker-dealer bank balance sheets could rise again and become anywhere near where they were a few years ago when pro forma GFI and BGC were generating that's sort of revenue?

I think the scale by which trading can come back onto the radar screen, having been pushed off the radar, will be substantial. Allowing the banks when the Volcker rule drops away, and other trade reducing regulatory rules. If they were to drop away in America and then after Brexit drop away in the UK, you could see just more trading. I don't know that the balance sheets will grow like they did. But just the volume of transactions I think will demonstrably improve heading us back towards those levels. We're not talking about 2007 levels, we are talking about 2011. And so I think you'll see meaningful progress along those lines. I think it's going to be great for the banks. It will be great for the banks' bottom lines, as well.

Got it. And one last one for me. On the real estate side of things, I know that you're not giving guidance at this point. But Barry you did comment on the overall outlook for 2017 is relatively favorable. Are there any broad industrywide metrics, particular for US commercial real estate that you could convey to us in terms of general expectations for the environment in 2017?

Interest rates are historically very low. And for us, it is never a bad time to hire great talent. And we continue to be attracting incredibly great talent. And things that are generally accretive. So, we feel pretty good about our prospects. And I think pretty good about the US.

Great thank you.

Rich Repetto, Sandler O'Neill.

Yes. Good morning, guys.

Good morning

So I guess you had a good quarter. Given the higher volatility that you experienced after the election in financial services. It's usually the lowest quarter, but this time it actually increased quarter over quarter. But it didn't look like FENICS went down quarter to quarter. I was just wondering why, given the overall activity levels, that FENICS didn't improve more quarter to quarter?

One of our growing businesses is our compression business, or post-trade business. And we have been growing that incredibly well. That's part of FENICS. And once the election dramatically increased the volatility around the world, our clients put off their compressions until the volatility settled down. Because compressions are most appropriately done -- it is not necessary to do them on any particular date or time, but they're better done when volatility is low.

We need a couple of days where things are going to settle down. And obviously at the end of the year there were none of those days. And so that's kicked off. I think our view of FENICS has not changed at all. You will see, over the course of this year, that our compression business is more lumpy than the other electronic businesses that we have. It is a full electronic business. And you'll see it's a little more lumpy. So you will have some big quarters. So some lesser quarters. But you will see, we are excited about our growth rate over the course of the year.

And Howard, ballpark, how much would compression business make up the $35 million of FENICS revenue or $60 million total?

It's in the low in the low millions.

Okay. And then the next question is, say that we can't comment on the filing, could you talk about the range of potential, you talked about unlocking shareholder value and coming in a number of ways. Could you talk about other potential things you might be doing to unlock value away from this filing?

Sure. So the other place that we focus on internally is in FENICS. Growing FENICS, building FENICS, creating electronic value across our financial service business is a place of clear focus within the Company. It drives our margins, drives our bottom-line. And then ultimately, using that FENICS business to drive shareholder value. And how we do that, whether that's through a sale or separation or otherwise, we'll examine over time. But FENICS is a plus $260 million top line with 40% plus percent margins. I mean it's a really attractive business. And it's got a huge amount of our Management focused.

Got it. And my last question would be, when you look at your acquisition of the insurance broker that you made. Could you compare how you expect growth to be? You had a more measured pace compared to real estate. Could you compare the expected growth of that? How you might add onto it compared to how you built out real estate?

We will look at opportunities that come along. Our focus is on the right acquisition. The accretive acquisition. Using an earner over a period of time upon their performance. So we'll look at the opportunities as they come along. If there's something great and it makes sense, then we will obviously move quickly. But it's a new vertical for us. And will give at the same attention as we gave real estate.

It's hard to do a comparison. Because remember, with real estate we ended up doing a rather large acquisition with Grubb and Ellis. And we are open-minded. And our first acquisition was as an attractive accretive multiple.

That is good for us. And I think we are going keep and remain open-minded, to hire talented people, and to acquire companies. But we have three verticals now which to look at. And we're going to choose to invest in the ones that are most accretive for our shareholders. So I don't know necessarily that we have a set pace for insurance. But I would tell you that it is insurance brokerage business.

My executives, if nothing else, are the world's great experts at the brokerage business. And there are three financial services. Number one, real estate. Brokerage would be number two. And insurance brokerage number would be number three. We have now opened the three top verticals in the world in brokerage. And I think we're going to grow the business very nicely.

But it wouldn't put a particular comparative pace, because we did get to buy Grubb and Ellis at a very attractive rate in the real estate business. And we bought GFI for an attractive rate. So I'm hoping to right one falls to us but I'm not going to a project it.

So to paraphrase. To say that if another scale acquisition in insurance that would essentially that may cause, that's what you don't have right now is the scale like you did initially in real estate?

Rich, we always start right. Once you start right, you get the capacity to add and grow. Owning Newmark, which was the right Company with Barry Gosin at the helm with the right management allowed us to buy Grubb and Ellis, which do not have management and was able to then bring that into us and build it correctly.

So, having the management we really like the management of Besso. So that's good. And now we have a foundation on which to build and integrate that into the Company. And that will give us the capacity to then add and grow. When you have management and you have a foundation you can then do interesting fun things that can drive value, that can drive synergies.

You know how well my Company's executives do in driving synergies to the bottom line right? The GFI transaction was a beautiful example of their expertise. So now they can do that in insurance as well. They have done it very well across the real estate segment. And I'm really excited to give them yet another opportunity for them to do what they do best.

Okay. Thanks for taking my questions.

(Operator Instructions)

Jay Romney, KBW.

Thank you. On the real estate side can you characterize what you're seeing in terms of investor sentiment for properties put out for bid? Are you seeing it consistency in terms of the number and quality of bidders? Or are you seeing deals take longer to close in terms of buyer hesitancy that you alluded to? Is this driven by interest rates or uncertainties say around tax reform?

Well, the market in terms of the number of bidders on any project has decreased. But the numbers have been generally holding up. And the volume of activity has declined somewhat this year. A lot of that has to do with uncertainty. But there still is an enormous increase in offshore investment in the US. And an enormous amount of interest and the US market in general to invest in.

So you might see fewer bidders, but they're higher-quality bidders with long-term view to investing. And as I said interest rates are still at historic lows. So opportunities are still great. And there hasn't been an enormous amount of increase in the supply in the US in most categories of real estate. And certain categories are performing better. Multifamily, industrial et cetera. While other categories are just staying strong.

In terms of 1Q seasonality, do you expect a more severe 1Q slowdown due to the uncertainty? Or do you expect the normal seasonal pattern this year?

We expect a normal seasonal pattern. We have yet to see something that is different. But we can only tell you what we've seen so far. And so far it seems traditionally seasonal.

And then just on the leasing side. Can you comment on what you're seeing there? If you're seeing corporates be hesitant to make space utilization decisions, given the uncertainty? Or if you're seeing that recent growth trend continue?

Corporations are always hesitant during periods of uncertainty. But our sense is that people are fairly optimistic. And they're beginning to spend more money. The last couple years a lot of companies have looked to extract savings through compressions and densification and consolidation. A lot of that has been done. And a lot of companies are looking to grow and expand in areas that they might not have thought about before.

Things for taking my questions.

Patrick O'Shaughnessy, Raymond James.

Hey. One more for you Howard. Can you comment on the new stories that were published, I think it was late October, about the ongoing FX options investigation? I know that a few quarters ago I asked you about it and it didn't seem to be a matter of great concern for you. But curious if you have any update there?

I would say the same answer then.

Alright, thank you.

Thank you I will now turn the call back over to BGC for closing comments.

Well thanks very much for joining us today. And we look forward to updating our guidance at the end of March. And then will speak to you thereafter. Everyone have a great day and those in New York stay warm.

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