Bgc Group Inc (BGC) 2017 Q3 法說會逐字稿

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

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

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

Newmark Group, Inc.'s recently filed registration statement on Form S-1 will also be available on this same website. Unless otherwise stated, the results provided on today's call compare only third quarter of 2017 with the year earlier period. We will 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 sections of today's press release for the complete definitions of any such non-GAAP terms; reconciliation of these items 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 the Financial Services segments, fully electronic brokerage products as well as the offerings in market data, software solutions and posttrade services. Also on today's call Newmark is synonymous with Newmark Knight Frank, NKF or Real State Services segment.

BGC's financial results have been recast to include the result of Berkeley Point with [serif] for all period -- prior periods discussed on today's call because these transactions involve reorganizations of entities under common control.

Beginning with the third quarter 2017, BGC, again recording the receipt of payments from NASDAQ as part of Real Estate Services. As a result, the NASDAQ payment for the quarter just ended was recorded as other income from Newmark rather than as part of Financial Services. This change does not affect BGC's consolidated results for either GAAP distributable earnings, but only just the presentation of the consolidated company's segments.

I'll also remind you that the information regarding our business on today's call, they are not historical, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E Securities Exchange Act of 1934 as amended. So the statements involve risk and uncertainties. Except as required by law, BGC undertakes no obligation to update any forward-looking statements.

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

I'm now happy to turn the call ever to Howard Lutnick, Chairman and CEO of BGC partners.

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

Earlier this week, our subsidiary, Newmark Group, Inc., filed an S-1 with respect to its IPO. We will not discuss this planned offering nor answer questions regarding it on today's call. As Jason mentioned, you can view the S-1 on our website.

BGC's revenues grew by nearly 13% to $827 million, while our posttax earnings were up by 25% to $131 million. Our improved revenues were led by Newmark and our Rates and Fund Exchange businesses. Our growth was also driven by solid performance from our FENICS, fully electronic business.

I'm also pleased to report that our board declared an $0.18 qualified dividend for the third quarter, which is up 12.5% compared to last year. At yesterday's closing stock price, this translates into a 4.5% annualized yield. We believe that the inclusion of NASDAQ payments in Newmark will benefit our shareholders, and it will give Newmark additional resources to profitably hire, make accretive acquisitions and continue to grow its market share.

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

Thanks, Howard, and good day, everyone. In the Financial Services business, revenues from equities, insurance and other asset classes more than doubled, due mainly to the additions of Sunrise and Besso. Our Rates business generated a top line increase of nearly 10%, driven by organic growth, including an over-40% improvement from FENICS fully electronic rates.

Our overall revenues for Financial Services increased by approximately 18% to $417 million. Financial Services pretax earnings were up by 33% to $88 million. Our pretax margin expanded by approximately 240 basis points, all when excluding the NASDAQ payment from the prior period.

Excluding the NASDAQ payment this year but including it for last year, Financial Services pretax earnings were up by approximately 6% to $88 million. An improved operating profitability in Financial Services was led by the cost synergies we delivered over the course of last 2 years and continued improvement in quarterly front-office productivity, which was up by 11% year-on-year in the segment.

Moving to our results for Real Estate Services, we generated strong growth in leasing, capital markets and management and servicing fees. Newmark's overall revenues for the quarter were up by 7% to $399 million. Excluding the NASDAQ payments, pretax earnings increased by nearly 18% for Real Estate Services while pretax margin expanded by approximately 160 basis points. Including the NASDAQ payments, Newmark's pretax earnings were up by 51% to $86.2 million.

Gains from mortgage break banking activities decreased in the third quarter of 2017 due to decline from record loan originations in the overall multifamily agency lending industry in the third quarter of 2016, and because Berkeley Points had some particular transaction last year. However, Berkeley Point's multifamily agency loan originations were up by 33% in the 9 months ended September 30, 2017, compared to a year earlier period. The timing of the company's originations can vary from period to period. Over time, we believe that the addition of Berkeley Point will significantly increase the scale and scope of our Real Estate Services business, and that the combination of mortgage brokering, multifamily business sales and agency multifamily lending will generate substantial revenue synergies.

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

Thank you, Shaun, and hello, everyone. BGC generated consolidated core fee revenues of $872 million, up 12.5%. Our revenues from the Americas were up by approximately 7%, while revenues from Europe, the Middle East and Africa were up by 26%. Asia-Pacific revenues increased by 23%.

With respect to expenses, compensation increased by 12.1% but declined as a percentage of revenue. Our compensation ratio improved slightly to 57.2%. Our noncompensation expenses were $194.3 million compared to $167.6 million a year ago. As a percentage of revenue, our noncompensation expenses were 23.5% versus 22.8% in the year ago period, which reflects the impact of increased interest expense associated with the Berkeley Point acquisition.

Our overall expenses were $667.2 million in the third quarter 2017 compared to $589.3 million. Our pretax earnings before noncontrolling interest in subsidiaries and taxes were up by 28.4% to $156.6 million. Our pretax margin expanded by more than 230 basis points to 18.9%.

BGC's posttax earnings were up by 25.3% to $134.5 million. Our posttax margin was 15.9%, an expansion of more than 160 basis points. Our posttax earnings per share grew up by 16% to $0.29.

BGC's fully diluted weighted average share count was 457.3 million with distributable earnings in GAAP.

After the end of third quarter 2017, our spot fully diluted share count was 457.9 million. The increases were due to shares issued with respect to equity-based compensation, front-office hires and acquisitions.

Additionally, BGC redeemed and/or repurchased 2.3 million shares and/or units net, at the cost to BGC of $27 million or $11.52 per share or unit during the first 9 months of 2017.

Moving on to the balance sheet. A number of balance-sheet-related items, including total capital and book value per share, were impacted by the recast of our results with respect to the Berkeley point acquisition. This recap had the effect of increasing our total capital and book value per share for the year-end 2016 by approximately $480 million and $1.20 respectively. Because the Berkeley Point acquisition involves entities under common control, the company does not record goodwill or intangible assets that it would've otherwise, with respect to this acquisition.

Upon closing the transaction, the previous increase in total capital is reversed and that, which would otherwise have been net goodwill, reduces capital by approximately $264 million.

As of quarter-end, our liquidity, which we define as cash and cash equivalents, marketable securities, reverse repurchase agreements, securities owned or held for liquidity purposes, less securities loaned and repurchased agreements, were $700.7 million. Notes payable and collateralized borrowings were $1,955,800,000. Book value per common share was $2.38. And total capital, which we define as redeemable partnership interest, noncontrolling interest in subsidiaries and total stockholders' equity, was $932.9 million.

In order to execute the Berkeley Point acquisition, we entered into a $400 million 2-year unsecured senior revolving credit facility and a $575 million unsecured senior term loan. The proceeds from Newmark IPO are expected to be used to repay the term loan. The balance of the financing of this is expected to be repaid from future financing arrangements, existing financing sources, cash on hand and/or future equity issuances.

In addition, the use 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 $720 million worth of additional NASDAQ stock over the next 10 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 generated gross revenues 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 fourth quarter of 2017 compared with the recast figures for last year is as follows: we expect to generate revenues of between $800 million and $850 million compared with our recast revenues of $755.8 million. Our historical revenues for the fourth quarter of 2016 before the recast were $673.2 million. We anticipate pretax earnings to be in the range of $140 million and $160 million as compared with our recast pretax earnings of $149.1 million. Our historical pretax earnings for fourth quarter 2016 before recast were $129.1 million. Our outlook includes an additional $7.5 million of interest expense related to new debt for the Berkeley Point acquisition that was not included in our retax pre -- in our recast pretax earnings for the fourth quarter of 2016. We expect our provision for taxes on distributable earnings to be in the range of approximately $23 million to $27 million compared with our recast provision for taxes on distributable earnings of $19.9 million for the fourth quarter of 2016. We anticipate updating our fourth quarter consolidated company guidance toward the end of December.

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

(Operator Instructions) And I am currently showing no question. I would turn the call back over to Mr. Howard Lutnick, Chairman and CEO for closing remarks.

You have another question.

Looks like we have a question from Rich Repetto with Sandler O'Neill.

So I'm trying to understand the seasonality of the businesses in 4Q versus 3Q. And given your outlook of the $800 million to $850 million. Could you give us a little bit more, how do I -- granularity of -- like Financial Services normally goes down in -- seasonally in the fourth quarter, Real Estate up. Can you give us -- how that is actually shaping out, given what you've seen in October so far? And what's built into the $800 million to $850 million?

Sure. So why don't I let Shaun answer with respect to Financial Services for the quarter, and then we'll talk about Real Estate.

Yes, with financial services, the -- we're supplying the guidance in October. You may also remember, we spoke about this last quarter. We guide what we know, we guide what we see. So far, October has been stronger than previous October. However, as we also mentioned, November last year included the U.S. election, which exaggerates the November number. So included in our guidance is our expectation, which has our overall revenues up around about 10% year-on-year. It's just slightly softer than -- because of the election than the first 3 quarters.

And with respect to Real Estate, the fourth quarter is always the best quarter and that is less true for Berkeley Point, so that's a mitigating fact as the financing of multifamily tends to be more balanced across the year. But this year, we have a one-off anomaly, I guess, which is the combination of hurricanes in both Texas and Florida effectively softened those 2 markets. Now it's horrible. The people in both Texas and Florida have dealt with a horrible circumstance, and I don't mean to talk about these hurricanes just in business without commenting on how difficult that is. And of course, also to the people in Puerto Rico, it is really just dreadful and horrible. But with respect to our business, what happens in the quarter is they clean up and they do the work to make things get right again. And the transactions and the business of ordinary Real Estate sort of take a backseat to cleaning up and moving forward. So I think a bit of the third quarter was affected by the hurricanes, which happened at the end of -- in -- that happened in September, through the month. The fourth quarter in those 2 markets will definitely be softer than they otherwise would be, and that will start to dissipate. Well, probably the first quarter will be a little softer, and then that will dissipate as the year goes on. We do not view this as a lasting impact. What we do view it as is just a timing impact that slows things down as people clean it up. So I think what you may have seen in our fourth quarter is just the reality of 2 excellent markets with spectacular people in them being horribly affected by terrible weather conditions. And that has really harmed them and just created effect of creating a slowing in those 2 markets for everybody's business.

And Howard, would that impact be felt, looking on percentage basis, both at Berkeley Point the same as the overall Real Estate business in the fourth quarter impact?

I think those 2 markets are comparatively larger for Berkeley Point than they are for Newmark taken as a whole because there's just more multifamily in those particular markets than the business, for instance, taken as a whole. So it would be slightly more exaggerated. It would be more exaggerated in the Berkeley Point side of that equation. However, we do not view the financing of multifamily having any long-term impact whatsoever. It'll simply be -- they'll clean up afterward, take stock in the market. And then those who wish to finance or refinance or sell their multifamily buildings will do so, and we will have our participation. So we are very, very bullish on the business of Berkeley Point. We are very, very bullish on the business of Berkeley point together with ARA, our sales organization in multifamily buildings. And we are very disappointed in the horrible events that happened to these 2 communities. But -- and I don't mean to minimize it, but for our business it's a time issue and nothing else.

Understood. I think I could probably back into this, but Shaun said that Financial Services was going to be up 10%, I think that was sort of the guidance around 10% year-over-year. Would you have the same percentage for the fourth quarter for Real Estate, whether it's combined or Berkeley Point and the rest of the business?

As we didn't do the math, so if you went back into it, go ahead. I just don't have it on my fingertips.

Okay. Then the next question is, would you expect the -- or we can back into the overall expenses, given your guidance. But any color on the compensation ratio, given these movements, I guess, for next quarter, 4Q?

No, I guess the number is lower because Berkeley Point carries with it a lower compensation ratio because it's a different kind of business. And therefore, this will be the slower compensation ratio. Should be the new range at the company.

Got it. And then, I guess, maybe a broader question on the regulatory front. The Treasury white paper report, like, pretty much I would be sort of deregulation umbrella, I guess, or theme, as you've talked about, has been sort of a tailwind for the big banks. And I guess, incrementally, given what's come out, would you expect any of that tailwind or -- to be about the same, given what you've read in the 200 and -- over-200 page Treasury report and the recommendations that they were making?

Yes, we still think the combination of the regulatory outlook and framework, coupled with the United States no longer doing quantitative easing and starting to slowly reduce the scale of its balance sheet with the probability that within the reasonable period of time, the European Central Bank might follow suit, granted it's behind and it's still growing, it's -- they're still -- the Global Central Banks outside of the U.S. are still growing their balance sheet. But as that stabilizes and shrinks, I think you really have a combination of just baseline underlying resource that is a tailwind for our business that you have not seen in years and years and years. We've seen company successfully run into a headwind of quantitative easing, using low volatility. And as that wind subsides and were to shift to behind our backs, you'll see numbers that are just better from this company. This quarter was excellent, and I think just the underlying economics of our business are improving.

Okay. And one last thing, Howard, you've also seen another example of electronic businesses spun out with the BondPoint sale to ICE, announced either yesterday or the day before. But I guess, a couple of questions on that. How does that -- that's a -- predominantly a retail system, but could you give us any color on the corporate? What you see as a corporate bond -- on municipal bond trading businesses as far as automation? Well, that's the first question, I'll follow-up from there. Does it mean anything to you when I -- yes.

What we've seen together, right, we started with a near-20x sale of eSpeed in 2013 and then we made a sale of Trayport at around 16x and now BondPoint at around 20x. And that's a small revenue business, its revenues are a fraction of the sales price. So what you see is that the -- when separated, these businesses are tremendously, tremendously valuable. And each time one of these transactions happens, I can't help myself but point out that once upon a time, we had eSpeed inside of us, which we sold; once upon a time we had Trayport inside of us that we sold. And I would like to point out that we own a business called FENICS, which does over a quarter of a billion dollars in revenues and has profits that are wildly higher than the revenues of BondPoint, maybe you have 3 or 4x there. So maybe more than that, I think. So I just think we are -- we have a -- we are building valuable assets, and our objective is to make those assets work for the benefit for our shareholders. And I think this just points out the value of the assets that we're building inside of us and that the value that these exchange place on these kinds of businesses because this is their future. These businesses, we build, and firms like us build them, and they buy them and they operate them, I think, very well. So I think there's a nice model of firms like ours build them, and these great exchanges buy them and operate them. And that's an ecosystem that we are happy to live in. As you know, we sold one business to NASDAQ and we sold another business to The New York Stock Exchange. We like these exchanges. They are great operators. And they are the healthy place for these things to end up, but we build them.

Understood, and I'll keep asking questions. These -- is there -- I know you've talked about, eventually you'll try to give us more transparency or information on some of the electronic businesses that you house. And I guess the question is, you may not be prepared for that but I'd ask, is there any other platforms that you'd to highlight within FENICS right now that are more dominant, I guess?

I mean, we have -- there's a number of businesses. Our Rates business, our nonbenchmark Rates business grew 40%. So Rates is 25% of FENICS business, data software and posttrade drive 20% of the business. And -- or I guess, FX business about 11%, credit about 25%. So -- and those businesses are -- those are the areas that we electronically traded in, and we'll get bigger at them. We are building a spot foreign exchange business as well as we are building a benchmark U.S Treasury business.

All of these businesses, Rich, continue to mature within the brand of -- within the group of FENICS. We continue to invest and we continued to innovate and expand through various different options, pretrade, posttrade, execution. All of the things that you would expect us to be doing as a global footprint company and answering the questions to the regulators with regards to MiFID II and issue margin. You saw -- we announced this week, as well, going live, I think it was on Monday. But we continue to invest. So we are very excited about the proposition of FENICS over the course of the next -- the future.

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

Thank you all for joining us, and we'll look forward to updating you around the end of the year. Thank you very much, and have a great day today, everybody.

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