芝加哥商業交易所 (CME) 2005 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the CBOT Holdings Incorporated earnings conference call. My name is Ann Marie and I'll be your coordinator for today.

(Operator Instructions)

I would now like to turn the presentation to Ms. Tammy Kamaroskus, director of investor relations. You may proceed please.

Good morning and welcome to the CBOT Holdings Earnings Call. In this call, President and CEO Bernie Dan and Senior Vice President and CFO Glen Johnson will discuss third quarter 2005 results.

As a preliminary note, you should be aware that this presentation contains forward looking statements which represent our current judgment on what the future may hold and while we believe these judgments are reasonable these forward looking statements are not guarantees of future performance and involve certain risks and uncertainties.

Therefore, actual outcomes and resulting in different material, materially from what is expressed or implied in any forward-looking statements.

Please refer to our filings with the SEC for more detailed information and now I will turn it over to Brian.

Thank you Tammy. Good morning and welcome to CBOT Holdings First Earnings Call following our recently completed initial public offering. Let me start out by stating that Glen Johnson and I were very pleased with the positive reception we received during our recent road show. However, we are ready to return full force to the business of positioning the CBOT's dynamic market model with new and existing customers and continue to implement many value enhancing initiatives.

For those of you who may not be familiar with the CBOT, I will begin by providing you some background on CBOT Holdings and its exchange subsidiary the Chicago Board of Trade.

The CBOT operates a marketplace for the trading of commodity, financial and equity index futures contracts as well as options on futures contracts. The CBOT offers a highbred market structure that provides an open and transparent platform for market participants whether trading via the open auction or the electronic venue. We provide a forum for price discovery, it's the world's largest and most sophisticated participant including investment banks, hedge funds, investment firms and commodity producers and processors. We are the second largest US futures and options on futures exchange based on 2004 contract volume.

Our long-term goal is to enhance shareholder value by capturing a greater share of the global derivatives trading volume and increasing our operating margin. To achieve this goal we strive to continue providing our customers with what they value most, a highly liquid and transparent marketplace with a suite of products and services that meet their needs.

In addition, we continue to develop and promote contracts designed to satisfy the evolving trading, hedging and risk management needs of our market participants worldwide. Our ongoing effort to maintain, upgrade and develop new capabilities that enhance the distribution, accessibility, liquidity and usability of our products reflects our commitment to providing an industry leading trading and settlement platform.

In general, our business requires continual technology enhancements and periodic major upgrades such as the one we implemented in our electronic trading system, the CBOT, powered by Life Connect 2 weeks ago.

To increase our operating margin our goal is to carefully control baseline expenses, increase contract volume on existing benchmark products, develop new products and expand the use of market data and other services.

Before turning to our results, I want you to know that our intention as a public company is to be as candid as possible and provide you with straightforward information and insight into our business. We welcome your feedback on how well we are communicating with you.

Now, lets turn to the financial months. For the first 9 months of 2005, first the same period of 2004, revenue grew by 18% and operating margin grew from 25% to 29%. These results were due in part to an increase in trading volume, 17% during the same period, and an increase in exchange fees implemented in January 2005.

Our third quarter revenue and earnings also grew from the same period last year. Total revenues were up 20% to $112 million, due in part to 9% growth in volume and 11% higher average exchange in clearing fee rate per contract and increased fees charge for our market data.

Our third quarter 2005 operating margin improved to 29% from 21% during the 2004 third quarter as revenue grew faster and our non-volume related or baseline expenses.

Total average daily volume, ADV for all of CBOT's products was 2.6million contracts in the current quarter, representing a 9% increase from third quarter 2004. ADV and each CBOT product category grew during the third quarter. For financial products the rate of ADV growth slowed somewhat with ADV growing 7.6% to 2.1 million contracts during that same period. We attribute this reduced growth rate to historically low levels of interest rate volatility on the longer end of the yield curve which tends to reduce trading in out benchmark US treasury products and to a decreased market focus on long term interest - on long term instruments as the yield curve remained relatively flat during the third quarter.

ADV in our equity products was up 7.9% to 103,000 contracts during the third quarter. Our third quarter agricultural ADV growth was particularly strong at 19%. We believe this growth was mainly due to the drought like weather experienced in many of the Midwestern states this past summer.

Before I pass the call to Glen I will share an update on our business development efforts. Our business development efforts fall into 3 main categories, product, partnership and global expansion.

In the area of product development, so far during 2005, we added South American soybean futures and ethanol futures. In addition, we have prepared for the recently announced reintroduction of the 30-year bond auction by the US treasury, which we understand is expected to begin again in February of 2006. Historically, futures and options on futures on the 30-year US Treasury bond were some of CBOT's most significant product offering. Reaching a peak ADV of over 600,000 contracts before declining to an ADV of 289,000 during 2001, the year the US Treasury ceased issuing new 30-year bonds.

In the partnership category, the CBOT continues to focus on expanding access to our markets, making a particular effort to drive product standardization, 2) to expand markets Rae date distribution and 3) drive further adoption and expanded distribution of CBOT. In the global expansion category, one example of our efforts is our planned establishment of a new point of presence in Singapore.

Pending approval of the monetary authority of Singapore, this point of presence is expected to be operational in mid November and is designed to enable customers located thought Asia to locally connect directly to the CBOT.

Another example of our global expansion efforts is our recent agreement with the Singapore exchange. Under this agreement we are jointly exploring the establishment of a new commodity derivatives exchange in Singapore which would leverage the same infrastructure planned for our Singapore point of presence and is expected to offer futures and options on futures contracts on Asian based commodities. While we haven't confirmed any details yet, these new contracts are expected to trade on eCBOT.

Finally, our most recent example of our of our global expansion efforts, is our recently sighed licensing agreement with the Sydney futures exchange to launch one day option products based on 2 CBOT futures contracts. CBOT mini-sized DOW and CBOT 100 outs gold futures. Through the licensing agreement and with the permission of Dow Jones indexes, the CBOT will permit the Sydney futures exchange to use the settlement prices of the CBOT mini-sized Dow futures contract to settle a new SFD CBOT one day, mini-sized Dow option contract.

More generally, we continue to upgrade our technology and drive the development of enhancements of eCBOT. In particular, we recently launched upgrades to eCBOT, which provide new functionality, including order book management; stop orders at the host level and 9 intercommodity spread strategies. In conjunction with these upgrades and our desire to expand globally we also expanded the number of available trading hours per day from 21 to 22 in the specific effort to reach a greater number of global market participants with a focus on Japan and China.

Now, I'll turn the call over the Glen to cover the financial results in greater detail.

Thank you Bernie and thank you all for joining us this morning. I will focus in more detail on our third quarter financial results and provide our current fourth quarter outlook on certain key metrics.

Since Bernie covered volume trends, I will begin with additional revenue detail. Revenues for the third quarter of 2005 increased 20% or 18.6 million to 112.2 million form the third quarter 2004, due to higher trading volume, exchange fee rate increases and price adjustments for market data real time quotes. With each contributing 6.2 million, 8.2 million and 2 million respectively to the overall quarterly revenue increase. The higher trading volume was mainly on the electronic trading platform where volume grew 20% and revenue grew 49%.

Total operating expenses for the third quarter were up 7% to 79.3 million from the same period during the previous year. Volume based expenses which are included in total operating expenses were up 11% to 17.3 million for the third quarter. These expenses include contract license fees and clearing services, which were up 9% and 11% respectively.

The base line, or non-volume related expenses grew by 6% to 61.8 million from 58.2 million. Growing much slower than the revenue for the quarter and giving this the 8% point increase in our operating margin to 29%. Compared to the prior third quarter, salaries and benefits increased 7% to 18.1 million from 16.9 million.

Information technology services expense increased 20% to 10.7 million from 8.9 million. Contributors to this increase included an increase in software and hardware maintenance expenses of approximately $1 million and an increase in electronic trading platform connections in installations of $1 million.

These costs were primarily related to the improvement of technology platforms and 46% increase in the total number of eCBOT trading great ways, which in turn, broadens global access and drives our trading volume.

Depreciation and amortization increase d 14.2% to 13.1 million from 11.5 million. This increase was due - also due in part to our continued investment in trading platform enhancements since the third quarter of 2004.

Professional services decreased 22.1% to 5 million from 6.4 million. Mainly related to a 1.7 million decrease in consulting costs due to decreased reliance on external technology consultants.

Although we cannot provide any assurances in this regard, we believe that the third quarter baseline expenses are generally representative of baseline expenses we currently expect for the fourth quarter 2005. One exception to this is stock based compensation expense from stock grants and options granted in connection with our IPO which will appear as an expense for the first time in the fourth quarter

We estimate on an annual basis the stock based compensation expense will be about 2.1 million to 2.5 million per year.

The fourth quarter 2005 stock based compensation expense is expected to be higher than the annual run rate, due to stock grants that best, as granted and market performance based options that may vest earlier than anticipated due to an increase in our stock price since the IPO.

Other anticipated increases in base line expenses during the fourth quarter include increase expected in the technology and depreciation costs. As the most recent platform enhancements are currently expected to add $800,000 of quarterly expense to both technology service costs and depreciation. Salary expense are also expected to increase another $700,000 during the fourth quarter as a smaller portion of staff time is expected to devoted to software development networks, the cost of which would have been capitalized in prior periods.

Net income rose to 19.8 million in the third quarter from 12.2 million during the same period last year. This is an increase of 63%. The effected tax rate for the third quarter was 40%. Our quarter effective tax rate generally is in the range of 38 to 44% and we currently expect 42 to 44% in the fourth quarter.

Moving on to the balance sheet, there were no short term investments at the end of the same period last year, so we think a better view of our liquidity is to look at the change in total cash plus short term investments which was up 27.4 million from September 30th 2004 to September 30th 2005. Subsequent to September 30th 2005, we received net IPO proceeds of $172 million.

Now, lets take a look at our outlook for the fourth quarter. As previously announced, exchange fee rates were increased on October 1st in connection with upgrades to eCBOT for certain interest rate products traded on eCBOT and as a result, we expect the average rate per contract should increase between 7 to 10% during the fourth quarter. In addition, although we cannot provide any assurances in this regard, given current market conditions and what we know - what is known by us today, we currently expect the following in the fourth quarter 2005. Base line expenses, or non-dogging (ph) based expenses of 65 to 69 million, including $1.8 million to 2 million of non-cash stock based compensation expense and depreciation and amortization of about $14 million.

Volume based expenses of about 10.5 cents per reported contract, capital expenditures of 12 to 17 million, and effective tax rate of 42 to 44%. Dilutive shares outstanding of about 53 million including ending shares outstanding after the IPO plus an estimated 220,000 shares for dilutive options that are in the money as of today.

CBOT does not provide an outlook for trading volume but does report the trading volume daily on its website, offering investors a high level of transparency. Please go to investor relations, under about CBOT on our website and look for the volume reports link.

Our 2006 planning process is well underway but will not be finalized until later in the quarter we expect to communicate our 2006 outlook for certain key metrics when we report our fourth quarter 2005 results next February.

Now, I will turn it back to Bernie for closing remarks.

Thank, thank you Glen. This has been a very exciting year for the Chicago Board of Trade, after working tirelessly for years our numbers; employees and other stakeholders have achieved a successful IPO. I could not be more proud of the team right now. They are also exciting times for the entire industry and exchanges in particular given the underlying growth drivers in the derivatives market and the multiple avenues for the CBOT to build upon its strength.

Our unique best of breed operations model has been built specifically to allow us to scale globally and expand our operating leverage when we look forward to keeping you updated on our progress going forward.

And now operator please open the call for questions.

Thank you sir.

(Operator Instructions).

And your first question will come from Richard Hur (ph) with KBW. You may proceed.

Hi, good morning guys.

Good morning Richard.

Just start us - maybe you can give us an update, obviously you've changed pricing October 1st, effective October 1st. any kind of early color you can give us on the member reception to that?

Richard, I think my comments would be that we explained the various changes in transaction fee pricing from October 1st '05 in relationship and connection with enhancements that we've drove and implemented on eCBOT and so I'd say that the reception has been positive in the sense that users understand the value of the capabilities that we've introduced and are benefiting from those capabilities.

Okay, thank you. That's helpful. Just one follow up question. Just in terms of the, in terms of the US Treasury trading and some of the position limits you put on, how was - was the role period handled better this time around. We hadn't seen anything in the papers as far as what had happened in Q2 or recurring in Q3 and in terms of the hard to find cheaper to deliver bonds.

No, we had a very successful expiration of the September treasuries, its was one of the largest expirations the Board of Trade every handled. Through our regulatory oversight, working with other regulators in monitoring positions as we approached the expiration it was smooth, it was flawless and we're well positioned to handle future expirations as well.

Thank you very much.

Thank you sir, and your next question will come from KCM Braxwood (ph) from Millenium. You may proceed.

Thank you very much for taking the question. It looks like the company did 2.58 million contracts for the third quarter, right?

On an average daily volume per day.

Yep.

Yes.

Okay, and right now it looks like October is running a little bit light, around 2.3 I think, I know you don't give guidance, maybe we can kind of get into why the contracts are running a lot lighter in October.

Yes, I kind of mentioned it in my earlier comments and I think it has to do with the financial products and where the focus is on the yield curve and where the volatility lies. And just to repeat that, there - the average daily volume for the treasury products during the third quarter was, that growth was about 7.6% and was 2.1 million contracts during the same period a year ago.

And we attribute that reduced growth rate to the historically low levels of interest rate volatility on the longer end of the yield curve, which tends to reduce trading in those benchmark products. And so it's a function of volatility in the yield curve and I think what, I think what we monitor is some of the macro interest rate policies that exist in the US in terms o f how that may effect the board of trade in the future and that's what I would encourage others to do as well.

Okay so, when there's - I just want to make sure I understand this. So, when there's less volatility in the interest rate, on the yield curve, normally impacts contracts.

It depends on where that volatility is but yes, that's true -

That's a good way to think about it.

That's true of any futures product. That's correct.

Okay, all right, because I'm looking at your expense guidance and if I kind of pencil out the 2.3 million basin expense guidance, tying it down to 25 to 30 cents for the fourth quarter.

Well, we're not - like I said, we're not giving guidance on our trading volume but you can follow along on our website.

The other thing I'd add to Glen's comment is that, remember we recently announced a transaction fee increase effective October 1st, that's also available on the website as well.

Okay, I thought that was posted. Okay. Thank you very much.

(Operator Instructions)

And there are no further questions at this time. I'd like to turn the conference back over to Ms. Tami Kamarauskas.

Thank you operator and thank you everyone for joining us. All of our contact information for the IR team is out on the website, www.CBOT.com under the investor relations section, so if you have any follow up questions please contact us via website email or telephone, talk to you later. Thanks again.

Ladies and gentlemen, once again thank you so much for your participation in today's conference, this does conclude the presentation and you may now disconnect.

Have a nice day.