Bgc Group Inc (BGC) 2017 Q2 法說會逐字稿

Welcome to the BGC Partners, Inc. Second Quarter 2017 Conference Call. My name is Vanessa, and I will be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded.

And I will now turn the call over to Jason McGruder, Head of Investor Relations. Sir, you may begin.

Good morning. Our second quarter 2017 financial results press release and the presentation summarizing these results were issued this morning. These can be found at ir.bgcpartners.com.

Unless otherwise stated, the results provided on today's call compare only the second quarter of 2017 with the year-earlier period. We'll 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 the complete definitions of any such non-GAAP terms, reconciliation of these terms to the corresponding GAAP results and how, when and why management uses them.

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 of market data, software solutions and post-trade services across both BGC and GFI. Also, Newmark is synonymous with Newmark Knight Frank, NKF, or Real Estate Services.

I also remind you that the statements on this call regarding BGC and the proposed Berkeley Point transaction that are not historical facts are forward-looking statements that involve risks and uncertainties. Factors that could cause actual results to differ from those contained in the forward-looking statements include, but not limited to the following: possibility that the proposed transaction not be consummated in a timely manner at all, including as a result of a failure to satisfy condition of closing, including regulatory approval; that there may be an adverse effect or disruption from the proposed transaction that negatively impacts BGC's other businesses; that the anticipated benefits of the proposed transaction to BGC may not be realized as presently contemplated or at all; and that the other factors, including changes in interest rates, commercial real estate values, regulatory environment or other market conditions, pricing or other competitive pressures, could cause results of Berkeley Point to differ from the forward-looking statements contained herein.

For a discussion of additional risks and uncertainties, see BGC's Securities and Exchange Commission filings, including, but not limited to, the risk factors set forth in the most recent Form 10-K and any updates to such risk factors contained in subsequent Form 10-Q or Form 8-K. Except as required by law, BGC undertakes no obligation to update any forward-looking statements.

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

Thank you, Jason. Good morning, and thank you for joining us for our second quarter 2017 conference call. With me today are BGC's President, Shaun Lynn; Steve McMurray, our Chief Financial Officer; and our Chief Operating Officer, Sean Windeatt.

BGC generated record quarterly revenues of $738 million, led by double-digit organic growth from Newmark. Our overall top line improvement was also helped by acquisitions made within Financial Services as well as by double-digit organic growth from our Rates business.

Our post-tax earnings were up by 24% to $109 million, while adjusted EBITDA improved by 23% to $129 million. I'm also pleased to report that our board declared an $0.18 qualified dividend for the second quarter, which is up 12.5% compared to last year. At yesterday's closing stock price, this translates into a 5.4% annualized yield.

We recently announced our agreement to acquire Berkeley Point, which is a leading commercial real estate finance company. The addition of Berkeley Point, a top 5 GFC multi-family lender, together with our top 3 multi-family capital markets group, ARA, we expect would generate substantial revenue synergies across both platforms.

With that, I'll turn the call over to Shaun.

Thanks, Howard, and good day, everyone. Equities, insurance and other asset classes revenues improved by 87% due to the additions of Sunrise and Besso, which both generated solid results. Our Rates business generated a top line increase of over 10%, driven by organic growth, including an over 35% improvement from FENICS fully electronic rates.

Our overall revenues for Financial Services increased by 10% to $432 million. Segment revenues would have been at least $5 million higher if not for currency movements. Financial Services pretax earnings were up by 38% to $111 million. Our pretax margin expanded by over 500 basis points to nearly 26%. Our improved profitability in the segment was led by the cost synergies we delivered over the course of 2015 and 2016, and continued improvement in broker productivity, which was up by 4% year-on-year.

We continue to expect year-over-year third quarter growth in Financial Services at a similar pace to the second quarter. As you recall, the markets were unusually active following the last year's U.S. presidential election. Therefore, while we expect to grow in the fourth quarter, the comparison will be more muted.

Moving to our results for Real Estate Services. Newmark's real estate capital markets revenues increased by 18%. Leasing and other services were up by 16%, and management services were up by 13%. Newmark's overall top line was up by over 16%, while pretax earnings increased by 38%. This strong organic growth continue to outpace the industry.

Newmark's strong performance were driven by front-office revenue per broker increasing 15% year-on-year in the quarter, which contributed to the segment's pretax margin expanding by approximately 190 basis points.

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

Thank you, Shaun, and hello, everyone. BGC generated consolidated core key revenues of $737.8 million, up 12.8%. Our revenues were up by approximately 13% in both the Americas and in Europe, the Middle East and Africa. Asia Pacific revenues increased by 11%.

With respect to expenses, compensation increased by 8.5%, but declined as a percentage of revenue. Our compensation ratio improved by over 240 basis points to 61.3%. Our non-compensation expenses increased by 9.5%, but [falls to improve] by more than 70 basis points as a percentage of revenue to 24.8%. Our overall expenses were up 8.8% to $635 million.

Our pretax earnings before noncontrolling interests in subsidiaries and taxes were up by 27% to $131.5 million. Our pretax margin expanded by approximately 200 basis points to 17.8%.

BGC's post-tax earnings were up by 23.8% to $108.9 million. Our post-tax margin was 14.8%, an expansion of around 130 basis points. Our post-tax earnings per share were up by 14.3% to $0.24.

BGC's fully diluted weighted average share count was 451.9 million for distributable earnings and GAAP. The share count was up due to shares issued with respect to equity-based compensation and front-office hires and acquisitions.

Additionally, BGC redeemed and/or repurchased 1.5 million shares and/or units, net, at a cost of $16.8 million to BGC or $11.08 per share or unit during the first half of 2017.

As of June 30, 2017, our fully diluted weighted -- -- our fully diluted share count was 452.6 million, but the weighted average in core term share counts grew by approximately 3% compared to the year earlier.

Moving on to the balance sheet. As of quarter-end, our liquidity, which we define as cash and cash equivalents, marketable securities, reverse repurchase agreements, securities owned all held for liquidity purposes, less securities loaned and repurchased agreements, was $569.7 million.

Notes payable and collateralized borrowings were $990.9 million. Book value per common share was $2.93. And total capital, which we define as redeemable partnership interest, noncontrolling interest in subsidiaries and total stockholders' equity, was $1,170,900,000.

In comparison, as of year-end 2016, the company's liquidity was $756.9 million. Notes payable and collateralized borrowings and notes payable directed parties were $965.8 million. Book value per common share was $3.01. And total capital was $1,206,300,000.

The uses of BGC's liquidity since year-end 2016 primarily related to cash paid with respect to various acquisitions, the previously described redemption and/or repurchase of shares and/or units, ordinary movements in working capital and investments in new front-office hires.

We remind you that our balance sheet does not reflect the expected receipt of approximately $794 million worth of additional Nasdaq stock over the next 11 years as these shares are contingent upon Nasdaq generating at least $25 million in gross revenues annually. If Nasdaq undergoes a change in control, we would get paid all at once. For the $25 million contingency in context, Nasdaq has recorded 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 am happy to turn the call back over to Howard.

Thank you, Steve. Our outlook for the third quarter 2017 compared with last year is as follows. We expect to generate revenues of between $695 million and $740 million, this compares with $645 million; we anticipate pretax earnings to be in the range of $118 million and $140 million, that compares to $104.5 million; we expect our provision for taxes on distributable earnings to be in the range of approximately $18.5 million to $22 million, and this compares with $16.2 million.

This outlook does not include the results of Berkeley Point. And as you know, we anticipate updating our third quarter guidance, as usual, towards the end of September.

Operator, we are now available to answer questions, please.

(Operator Instructions) And we have our first question from Richard Repetto with Sandler O'Neill.

Howard, I guess the first question is in the guidance at the beginning of the month, you said you'd be -- I believe it said towards the high end. These results significantly exceed the high end of $720 million. So I was wondering what -- how would outperform -- what brought it up? Was it between -- as things that reported between [$1 billion] a month in your final results, why the big upside?

So in the world of real estate, when a tenant, let's say, signs a lease, sometimes we don't learn about it for a week or 2. It's just the way it works. So there's oftentimes right at the end of the quarter when we will learn exactly and precisely where we are, we're pretty good at estimating it. But obviously, we were able to get more business done in the quarter than we had anticipated, and so our real estate business exceeded where we had anticipated.

Okay. So the upside was from real estate then, I guess, is what you're saying. I guess the next question is, with the announcement of Berkeley Point, I'm just trying to see how that fits into the overall plans that you said publicly to spin out the real estate and do an IPO hopefully before year-end. Does that -- how does that impact that plan -- was that part of the plan? And just any more background on the unlocking of shareholder value here, I guess?

I think our timing remains the same as what I've said in the past. I don't think it has any impact on the timing from what I said in the past. So it's not earlier than -- same as I said, which was towards the end -- somewhere between the end of September and the end of the year, not Christmas is what I said in the past.

Okay. And was it incorporated in the plan? Or was this -- now with this -- could obviously [candor] on this for a longer time? Well, I'll do -- I'll ask [the last]...

The simplest way to say this, we're in registration, as you know, and so I'm not at liberty to answer questions with respect to that transaction.

Understood. Okay. And I guess the last question is the rate on -- the financing rate on the debt. Has that been disclosed? Or can you give us what that would be?

No. That hasn't been done as of yet, so no.

Or even the next expected...

We haven't closed on the transaction, so we haven't borrowed the money yet, so that we try to do those things sort of with each other.

(Operator Instructions) We have our next question from Patrick O'Shaughnessy with Raymond James.

So maybe asking Richard's question in a slightly different way. Was adding the financing capabilities to your commercial real estate segment kind of always part of your strategic plan?

We think the debt business and the growth of the debt business is an excellent part of that business. Newmark has been growing. Its debt capacity, the ability to assist in broker debt capacity for quite some time, and we think that's one of the key legs of the business. So yes, we like the debt business as part of our real estate brokerage business. We think it's a great part of the business to grow and expand.

Okay, fair enough. And then as we think about Berkeley Point, I think relative to the comp that's out there, you guys paid a pretty fair price, a pretty good price, actually. But I was curious, were there other potential acquisitions out there in this space, maybe smaller entities, not related party entities? Or is this really the only one that was available and/or made strategic sense for you?

Ever since Newmark purchased ARA, management has been interested in adding an agency multi-family lender to the business, and that has been something they've been interested in for quite some time. And so we're not really going to talk about what things the business did, but it's been interesting in that space for quite some time. And you can guess how the company has been dealing with that.

I get the strategy, but conceivably -- well, it's not conceivably, we know there are other competitors out there to Berkeley Point. There are other agency multifamily lenders out there. So why were they the right firm to partner with?

Actually we -- look, we look at lots of things, and we did and the board did the transaction that we thought was best for shareholders. And -- but we, by definition, looked at other companies.

Okay, fair enough. A question on your third quarter outlook. And I think as you commented on really strong second quarter, real estate revenue has kind of been the source of the beat relative to your updated guide. Is it kind of fair to infer that maybe there was some pull forward of revenues that maybe you thought were going to come in the third quarter and instead got pulled into the second quarter?

So the way the real estate business works is that pull-forward is true. But what happens is when times are good, the pull-forward from the third quarter pulls into the second quarter, the pull-forward from the fourth quarter pulls into the third quarter, the pull-forward from -- and that continues out as far as you can see. In the same way, when times get slower in the real estate market, everything sort of pushes out a little. Deals we hope we get done in this quarter gets done next quarter. So you know the names of all your clients, you know the deals that they're looking at, it's just how quickly do they come in or how quickly do they push out. That's how the real estate business works. So what happens when -- it's all pull-forward, it's all pull-forward. But what happens is that tends to also bode well for next quarter because that will pull forward and then following. There's no real end game. It's either all pulls forward on a consistent basis or it all pushes out a little bit on a consistent basis. That's sort of how the real estate business works. So it's not a zero-sum game. There are always new tenants out 2 quarters, 3 quarters, 4 quarters, 5 quarters. And if they move a little quicker because they're afraid the economy is growing, they need the space, they're afraid that rents will go up, they do things more quickly and our revenues come in more quickly or vice versa. So that's sort of the ebb and flow of the real estate business generally.

Okay, okay. And then on the financial services side, I appreciate kind of the additional color you gave on kind of what to expect in the third and the fourth quarter. But just to probe the fourth quarter commentary a little bit more, Shaun, you should presumably be up year-over-year just because of the acquisitions that you've made, Besso and I think -- oh, I forgot the other one. But you actually have a tough comp. But presumably, unless the market environment deteriorates substantially, you would generally expect to be up year-over-year in the fourth quarter. Is that a fair way of thinking about things?

That is a fair way to think about it, yes. And both Sunrise and Besso have been great additions to the company and have been a strong addition. So yes, that's a fair assumption.

All right. The new treasuries platform that you're launching, and there have been some stories about how, in order to garner liquidity, you guys are contemplating providing rebates to liquidity providers. Is there a possibility that, that is actually going to be a drag on near-term results? Or is that going to be structured that you're only giving the rebates if you're actually getting revenues, and it's going to be positive net revenues to the extent that it has any success?

We don't think it's going to be a drag at all. We think it's going to be very positive. We're very happy with where we are at the moment, and everything is moving ahead of plan. And towards the tail end of '17, as we've said, we will be looking forward to the launch.

Great. That's helpful. And then one last one from me. So what are your most updated thoughts now on Dodd-Frank? And it seems like stuff is taking longer to get through Washington than maybe a lot of folks hoped. But any updated thoughts on any relaxation of Dodd-Frank and what the potential implications might be for BGC Partners?

I guess the macro is -- or under the prior administration, there was a general overhang of regulatory constraint on trading volumes. I think under the current administration, there's a general overhang of positive view on what will happen with regulatory with respect to trading volumes. You're correct to say that, in fact, the literal changes have not come as of yet, but that general positive view is out there. If and when the Volcker Rule is repealed, replaced or otherwise modified, we think that will bode well for the volumes of our company. So Volcker Rule constrains volumes in a material way, and I think it will allow banks to trade more and trading firms to trade more, and that is good for our business. So I think there's a positive overhang and optimistic view of how things will change. That doesn't drive us. That's not how our earnings, up 20% in Financial Services, it does not rely upon it. We're doing our job. But it's nice to have a positive outlook out there that will come and help the company along the way. What that timing is, none of us know, but it is optimistic. It is positive out there, and it is likely to come in our favor, which is just a nice change otherwise.

We have no further questions in queue at this time. I will now turn the call over to Mr. Howard Lutnick for closing remarks.

Thank you all for joining us today, and we look forward to updating you at the end of the quarter. Thanks, everyone. Have a great day today.

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