芝加哥商業交易所 (CME) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the NYMEX Holdings Inc. 2008 first-quarter financial results conference call. My name is Niketa, and I will be your operator today. (OPERATOR INSTRUCTIONS). It is now my pleasure to turn the floor over to Keil Decker, Vice President of Corporate Communications and Investor Relations. Please proceed, sir.

Thank you, operator. Good morning and welcome to this NYMEX Holdings 2008 first-quarter financial results conference call. To obtain a copy of our earnings release issued this morning, please visit our website at www.NYMEX.com.

Before we begin formal remarks this morning, you should be aware that statements made on this call that are not historical facts are forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from when expressed or implied in any forward-looking statements. More detailed information about factors that may affect our performance may be found in our filings with the SEC, including our most recent annual and quarterly reports on Forms 10-K and 10-Q which are available on our website.

During this call we will refer to GAAP and non-GAAP pro forma results. You can find a description of these measures in the reconciliation table in our press release.

With us this morning to discuss the highlights of the first quarter are NYMEX Chairman Richard Schaeffer; President and CEO James Newsome, and CFO Ken Shifrin. At the conclusion of their remarks, we will open the call up for your questions.

I will now turn the call over to our Chairman Rich Schaeffer.

Thank you, Keil. Good morning and thank you for joining us, ladies and gentlemen. The first quarter was significant for NYMEX as we continued to strengthen our competitive position and product offerings, as well as our financial performance. Our outstanding financial performance is a result of growth in volume, strength in average rate per contract fees and the discipline we are applying to managing our expenses.

In the challenging economic environment that we are currently in, market participants value the credit risk mitigation, price discovery and risk management that our trading and clearing give them even more, which contributes to the growing participation in our markets and continued strength of our business.

For the first quarter, total operating revenues were up 27% to a record $208.9 million. Net income for the quarter was $78.6 million or $0.83 per diluted share, excluding merger-related expenses of $7.9 million. Including those expenses, our net income was up 27% to a record $71.2 million or $0.75 per diluted share.

Our pretax margin remains best in the industry at 72 for the first quarter, excluding merger-related expenses. Excluding merger-related expenses, our current margin for the last quarter was 76%.

In addition, yesterday the Board of Directors approved a regular quarterly dividend of $0.10 per share to shareholders of record as of June 6 and payable on June 27. As you are all aware, on March 17 we announced a strategic combination with the CME Group. This combination allows us to take our business and growth to a much higher level and create value for our customers and shareholders. We believe this combination serves the best interest of NYMEX investors, members, shareholders and all those who participate in global commodities and derivatives markets.

We're in the process of preparing a joint proxy and registration statement which will be filed with the SEC very shortly. At the same time, we are proceeding with the review process under the Hart-Scott-Rodino Act to obtain the necessary antitrust clearance to proceed with this transaction. We expect to complete the deal before the end of 2008.

While we're working diligently towards closing the deal with the CME, we're also making great strides in executing key business initiatives. Work on our alliance with the LCH.Clearnet to offer contracts cleared in Europe is moving along very well. We're very excited about being able to offer the marketplace exactly what it has been asking for -- to stay at the leading, proven and reliable European clearinghouse while gaining significant capital efficiencies and other benefits by working with both of us.

In addition, we're making significant progress in developing the Green Exchange. The Exchange recently added four new founding members, including Vitol, RNK, ICAP and Goldman Sachs. That was just last week. Green Exchange counterparties transacted the first-ever Exchange traded certified emissions reduction options contracts. We expect as reported in the press that the Green Exchange will become the leading Exchange for environmental market contracts. Jim will give you more details in a few moments.

To sum it up, we continued to deliver on our strong fundamentals of core business, while growing the business through the launch of new ventures and innovative products. Now I would like to turn it over to my partner, Jim Newsome.

Thank you, Mr. Chairman. During the first quarter, we continued to build on the strong fundamentals of our core business. Our core benchmark energy and metals contracts continue to grow in volume and open interest, and we've set numerous daily volume records throughout the first quarter.

In particular, we posted records for COMEX gold and other metals, as well as record volumes in natural gas, heating oil and overall electronic trading.

In March, as Richard mentioned, we announced an important alliance with LCH.Clearnet which will offer significant capital and operational efficiencies to customers and market participants. NYMEX will offer a comprehensive slate of OTC and future products for clearing through LCH.Clearnet encompassing the global benchmarks contracts of WTI, Brent, Gas Oil and key natural gas and electricity contracts. This alliance will allow market participants who currently clear through LCH.Clearnet to maintain their current clearing relationship and clearing systems while offering them the same contracts that they use today.

Additionally and very importantly, this new initiative will offer cross margining and margin credit benefits to customers who clear at both NYMEX and LCH.Clearnet. We're currently meeting with customers, and we will continue to provide the marketplace with regular updates as we prepare to launch in mid-2008.

Also, as Rich mentioned, the Green Exchange initiative is making great progress. The Exchange has established itself as the emerging leader in the environmental market space with first-ever contracts such as the Exchange traded certified emissions reduction or CER options contract, in which counterparties transacted 1150 contracts representing 1.15 million tons of CO2 reductions. Green Ex has transacted a similar number of European Union allowance options as well.

Thus far, NYMEX has launched 15 environmental futures and options contracts for the European Union allowance, certified emission reduction, nitrogen oxides and sulfur dioxide markets. These contracts will migrate from NYMEX to the Green Exchange when it receives approval from the CFTC to operate as a designated contract market which we expect in early 2009.

The emissions products complement NYMEX's energy complex and give market participants the flexibility to effectively manage risk and gain direct exposure to the emissions markets on the same screen where they've managed their physical energy risk.

In addition to launching new contracts, the Green Exchange has brought onboard a number of new founding members. This past quarter the Green Exchange welcomed Goldman Sachs, ICAP, Vitol and RNK Capital. These four industry leaders join NYMEX, Evolution Markets, Morgan Stanley, Credit Suisse, JPMorgan, Merrill Lynch, Tudor Investment Corporation, and Constellation Energy as founding members to help build what we and many others believe will be the world's premier environmental products Exchange.

The Dubai Mercantile Exchange venture in the Middle East has been steadily growing open interest each month, currently reaching over 14,000. Also, the DME was recently named New Exchange of the Year by Futures and Options World Magazine, and we want to congratulate our partners on this honor.

When it comes to new innovative products, NYMEX continues to lead the way. During the first quarter, we launched more than 40 new contracts on CME Globex, the trading floor here in New York, and NYMEX ClearPort. These new products range from energy to environmental risk to currency. Our new energy contracts include a physically delivered ethanol contract, 15 EIA on highways diesel and Gas Oil swaps, several new Brent crude oil options contracts, eight additional electricity contracts that serve the Texas market and two innovative crude oil futures indexes called the Crude Oil MACI and the Backwardation/Contango Index Futures contracts. These two indexes that I just mentioned help market participants reduce the burden of rolling their crude oil contracts forward each month.

This past quarter NYMEX also launched a Columbian Peso Index Futures contract on NYMEX ClearPort, our first currency futures contract. We launched this contract in conjunction with Marco Polo Network, the leading emerging markets electronic trading network providing access to Exchanges and Securities in more than 50 countries.

Finally, we're continually focusing on our technology to offer more features and better connectivity. An example is our average pricing system, which will go into production this quarter. This capability enables an average price build on a number of transactions, which reduces the amount of backoffice work which will be needed on multiple trades at different prices.

Overall we continue to focus on our fundamental business and achieve our strategic goals.

I will now turn it over to Ken who will discuss our strong first-quarter financial performance.

Thank you, Jim. We turned in another strong performance in the first quarter, driven by solid average daily volumes and ongoing improvement in our operating expenses netting transaction costs.

Let me recap our performance. Total operating revenues for the first quarter rose 27% to a record $208.9 million compared to $164.2 million for the first quarter of 2007. Excluding the merger-related expenses, net income for the quarter ending March 31, 2008 is $78.6 million or $0.83 per diluted share. GAAP net income for the first quarter of 2008 increased 27% to a record $71.2 million compared to $56.2 million for the first quarter of 2007. Diluted earnings per share for the first quarter of 2008 was $0.75 based on 95 million shares outstanding compared to $0.59 based on 94.8 million shares outstanding for the first quarter 2007.

Included in the first-quarter 2008 results are $7.9 million in merger-related expenses, of which approximately $6.7 million are considered nondeductible for income tax purposes. These expenses consist primarily of professional fees incurred in connection with NYMEX's proposed merger with CME and can be found in the other expenses line on the P&L. You'll find a reconciliation table in the press release which details the effect of the merger-related expenses.

The effective tax rate for the first quarter of 2008 was 47.04% compared to 43.6% for the first quarter of 2007. This increase was due to the following factors.

First, an adjustment for nondeductible compensation in accordance with IRS Section 162-M. Next, a shift in our investment portfolio from tax-free munis to treasuries and reduction of overall investment income as a percentage of total revenue, and finally, the nondeductible merger-related expenses, which were approximately $6.7 million of the total $7.9 million. Not including merger-related expenses, our effective tax rate for the first quarter was 44.87%.

For the first quarter, gross average rate per contract across all venues was $1.57, while the net rate per contract net of transaction costs was $1.32. Against, last year's first quarter, RPC is up from a gross average rate of $1.50 per contract and a net average rate of $1.27 per contract. We drive our business by volume, but each month rate per contract fluctuates based on product mix, incentive programs and member/nonmember mix.

For the first quarter, clearing and transaction fees rose 30% to $179.1 million. Market data revenues increased 13% to $26.2 million, driven by a 23% increase in the number of units and a 10% increase in revenue per unit 146,235 and $55 respectively in the first quarter of 2008 compared to $118,861 and $50 per unit during the first quarter of 2007. These results are due in part to a new fee schedule for each of the NYMEX and COMEX divisions that became effective on January 1, 2008, as well as an increase in the market data fees that became effective February 1, 2008.

Total operating expenses for the first quarter, excluding direct transaction costs of $28.1 million and the merger-related costs of $7.9 million, decreased 10% to $40 million compared to $44.4 million in the first quarter of 2007.

Total operating expenses for the fourth quarter of 2007 was $40.6 million. Total operating expenses continue to trend down compared to last year as a result of our continued disciplined expense management. Compensation expenses totaled approximately $20 million for the first quarter of 2008, including $3.7 million of management equity compared to $21 million for the same period last year, which included $600,000 of severance and $2.3 million of management equity. Non-compensation expenses, including direct transaction costs and merger-related costs, were down 14% to $20 million for the first quarter of 2008. Approximately $800,000 of Green Exchange expenses were included in our first-quarter operating expenses.

I would like to point out some additional expenses earmarked for the second quarter. We approximate that $1.5 million of Green Exchange expenses will be included in our second-quarter operating expenses. We expect that a majority of the Green Exchange expenses will be refunded to NYMEX when the equity structure of the new Exchange is finalized.

With regard to our LCH.Clearnet venture, startup costs of this recently announced initiative are expected to be approximately $2.5 million for the second quarter.

Now let me move onto nonoperating income and expenses. Investment income of $3.6 million for the first-quarter 2008 or losses from unconsolidated subsidiaries were $2.2 million, which relates primarily to our Dubai venture. The increase in our volume growth, increase in RPC quarter-over-quarter and ongoing cost-cutting initiatives all contributed to the increase of pretax income of 35% to $134.4 million compared to $99.7 million in the first quarter of 2007. Pretax margin as defined in our press release was 72% for the first quarter of 2008 compared with 68% in the first quarter of 2007. Excluding the merger-related cost, our pretax margin was 76%.

In closing, I will touch on a couple of items from our balance sheet. As of the end of the quarter, we had approximately $557 million in cash and marketable securities, and our working capital was $526 million. Capital expenditures were $4 million for the first quarter.

With that, I will turn it back over to Rich.

Thank you very much, Keil. Thank you, everybody, for being patient and listening today. Obviously we're very excited about where we're driving it, and we're very excited about where our gross margins are going. Since we started with you at the beginning in going public, we have come a long way. We recognize we still have a long way to go, and we are working hard to increase investor value.

Thank you and we will take questions at this time.

(OPERATOR INSTRUCTIONS). Rich Repetto, Sandler O'Neill.

Congratulations on a solid, solid quarter here. My first question, Rich, has to do with the 311(G), the bylaw about the revenue-sharing with the Class A members. You released something I guess it was a few weeks ago or a week to two weeks ago about with more details. I'm just trying to get the sentiment of the members. Did that help clarify in regards to going forward? Did it help clarify and improve the sentiment, or what is the sentiment in regards to that revenue-sharing in the CME transaction in general?

Well, we put out the information to begin to clarify the issue, of course. We have a meeting scheduled in response to a petition that was issued where a lot of the owners want clarification. So it did not go out two or three weeks ago. It just went out actually three or four days ago. So although we have not gotten a lot of questions, we anticipate a lot of questions, and at our meeting on -- what is the date, Rich? On June 3 we, of course, will address all the issues.

It is a pretty detailed report. It gets into numbers. I'm sure that we are going to continue to clarify it. It is our opinion that we have done it the right way, and we will educate all the members and tell them what we feel. So I would not say it is clarified, although we have not gotten many calls. I would say we will put the information out. We're very forthcoming. There's nothing that will not be given to the members before they will get to feel comfortable about the deal.

Understood, understood. Yes, I apologize. It just seems -- this is earnings season for us. It seemed like a long time ago. The next question would be on LCH.Clearnet, I heard Ken talk about $2.5 million in investments -- or in spending in Q2. Can you talk about what that is going to be spent on, and could you give us an update possibly on the sentiment of I guess the FCMs in regard to the venture?

Sure, I will be happy to, and then Jim can jump in afterwards. Ken, our very conservative CFO, says $2.5 million. I say it will be a lot less or less, but we will not debate that now. But he is being conservative. A lot of it will be marketing technology. But we have in place the technology to get it going. And I guess, Ken?

The majority off the bat is really professional fees, legal fees, accounting fees (multiple speakers) until we get it started up.

And legal fees as well. It is not the FCMs at the end of the day who make the decision where to put the business, although the FCMs are surely influential in pushing their clients to do business on one or another. We have heard and met with a substantial number of actual users and clients of the Exchange, and we feel there is significant interest in keeping business on the LCH, and our expenses will be, although we will not give forward projections, will be well exceeded at some point in the reasonable future by the income that we received. We're really excited about it, and the initial response has been really, really wonderful.

Jim, do you want to make a comment on that?

I will just add a couple of points. Certainly in the market that we are all operating in, uncertainty is a concern of everyone. And our customers seem very guided that we're providing certainty for them with regard to keeping their clearing on the LCH and trading the products that they have become accustomed to trading.

So the enthusiasm has been overwhelming from customers. They are looking for more details that we're working diligently to provide. But we are extremely excited with where we are in the process right now.

Okay. Great, guys. If I have more questions, I will get in the queue. Thank you.

Howard Chen, Credit Suisse.

Congratulations on the quarter. My first one, year-to-date you experienced a great pickup in ClearPort activity. I was curious, can you speak to some of the factors that you think are driving that increase in this tumultuous market as I think you put it, Rich. And anecdotally are there any particular user groups that you see who are more or less active during this kind of market environment?

Okay. We will not mention user groups for competitive reasons because some are with us and not our competitors. But clearly credit intermediation is almost on everybody's mind with some of these not only hedge funds having issues, but with all these companies that were looked at once as great, solid companies. Now some of them are in question.

In addition, our crude oil is starting to pick up quite extensively. Where previously it was probably 85, 90% natural gas, it is moving away from that. The natural gas is increasing, of course, in the busy times and high volatility, but there's a lot of crude oil starting to come on. We anticipate that to continue to grow. That is an area that is never -- that people were comfortable trading with each other previously. The treasurers of the companies are now getting involved and deciding where to do business as opposed to the traders themselves. So we're seeing tremendous growth coming out of the treasury offices of these big trading companies.

Okay. Thanks, Rich. And then to follow-up the NYMEX/LCH alliance, you all seem really excited about it, and it makes sense to me in terms of the continuity to the trading of these products. But can you give us an update on the estimated timing of launch, what specific regulatory approvals you have or need? And then your thoughts on the outcome of the FSA approval process?

I'm going to let Jim talk about the FSA approval, but we are gearing to be up and running by July 1 of this year. Jim, why don't you go through the regulatory?

Yes, the regulatory approval process is going extremely well. In fact, we have got a team in London now for I think the third trip over working on finalizing the regulatory approval. But the FSA has been a pleasure to work with, and we are completely confident that we will have the regulatory approval in place in time for the mid-2008 launch.

Okay. And then a real quick one just to clarify a comment that, Rich, you made in the prepared remarks. Have you officially submitted for the first review of Hart-Scott-Rodino? Are you now in the waiting period for the response from the DOJ?

Yes, we have submitted.

(OPERATOR INSTRUCTIONS). Mike Vinciquerra, BMO Capital Markets.

A follow-up on the ClearPort question. Looking at the RPC that that has been trending a bit lower the last several months versus the run-rate for '07. Is it just a product mix there, what you're talking about with more crude oil, Rich?

Well, what it is is we're pretty dynamic in how we build our business. So when we have the chance to have special programs for certain competitors who can bring in tremendous amount of business they are usually short-lived programs. But we do them in times where the economies of scale are such that we're not going to lose any money.

So I think we will not disclose who they or what they are, but as ClearPort comes up and has given us more revenue as you see, our average rate contract was what? 150 (multiple speakers) 157. Obviously last quarter was 143 or so. We picked up 10% in our rate increase. We're picking up in ClearPort because we're doing more ClearPort business. So that is the time to go out and try to take some business from our competitors by putting in some short-term programs.

Okay. So you would categorize the last few months not necessarily as the long-term run-rate in terms of RPC for the ClearPort business alone?

No, I would characterize it as the ClearPort bringing us up along with our increase, but in the long-term I think rates will stabilize. I'm not looking for a downturn in rates.

Okay, great. Thank you. And then looking at the margin requirements for your clients, I mean it is pretty consistent. Just going to your website, it has been one margin increase after the other due to the volatility. Can you talk about how you are managing that process, and at this point do you feel like the margins are at an appropriate place where we are not going to see a continued rise going forward?

Yes, we do feel comfortable where they are. We watch them very, very closely. We have a very large compliance staff. We have very large financial compliance staff who is monitoring this not on a daily basis but on an hourly basis.

One of the interesting things is what we're providing with this LCH.Clearnet situation, joint relationship, is margin relief so that the customers who stay on LCH will actually have much more efficient margins because they have right products. Where they are now paying full margin on both sides, we anticipate great relief for our customers because they are in a lot less risky transactions.

Just to add to that, I think it is important to note that the margin setting is a function of our compliance and research staff that is not determined by the business staff. We consider it a compliance function, and it is done separately with a firewall between the business and compliance group. Our compliance and research group meets everyday to look at volatility in the market, historic volatility, and using those calculations to determine what the margin should be. And at the end of the day, it is what it is.

And your volumes would indicate that the higher margins have had zero negative impact on volume. Is that something you even consider when you are looking at the margins? It sounds like you -- (multiple speakers)

No, because as Jim said, it is a firewall. So that decision is made based on what is the right risk portfolio that we should be managing, but no, it has had no negative impact. The increase in margins has had no negative impact.

You have to consider that the majority of traders are well-heeled commercial users of the market. Probably 80%, you know, or more. So when you keep hearing all this stuff in Congress and stuff, they are looking at the speculator or the individual. But most of the business done here and in other Exchanges in these large contracts is by very well-heeled people.

Right now the banks, a number of the banks are margining -- financing these customers. So, as the margin requirements get bigger, either the Company puts it up themselves, or the bank that is clearing them has a relationship with them on the banking side and cover those margins -- covers those margin excesses at a fee to the customer.

That is helpful, Rich. Thank you. And then just lastly, just a follow-up on the -- the June 3rd meeting, is there a particular reason why it was set at that date and not maybe trying to address the question sooner just to get it behind you and get the members comfortable with things?

You know what, I have our General Counsel here. Do you want to just make -- (multiple speakers). That is the date that we were comfortable with picking. Obviously we have a lot on our plate here, and it is not that far in the future.

I understand. Okay. Thank you, guys.

But I would add as well, Mike, that according to our bylaws that the members voted on, when the petition came in, we had a window of time between 60 and 90 days when we were required to set that meeting date.

Edward Ditmire, Fox-Pitt Kelton.

I have a question. I know that the proposed merger plan with CME (inaudible) it is the planned change in your headquarters as outlined in the enterprise efficiency plan. Have there been any modifications to the plans regarding other cost saves due to implications from the merger plan?

We are currently working on our integration plan. We're not prepared at this point in time to talk about it. But I can tell you our integration plan with the CME considers substantially more savings in all areas than we have looked at before. But again, we are working on it now literally on a daily basis, and we're not at liberty to talk about it.

Okay. Let me just ask and maybe you have already addressed this, and if so, I apologize. Do you think that there's any overlaps between the cost saves planned in that enterprise efficiency plan and the proposed merger synergies?

I have to give you the same answer. There is substantial not overlap -- there's substantial benefits in there, but we are just not at liberty to talk about them at the current time.

Chris Allen, Banc of America Securities.

Nice quarter. I just want to clarify, on the LCH agreement, you guys are talking like the traders make more decisions based on margin where I have always understood it to be that the traders make decisions based on liquidity. How are you --

Wait, Chris. Stop for a second. I never said the traders make decisions based on margin. What I said is, the treasurers of the companies, the CFOs, have over the last year gotten substantially more involved in where instruments are traded. In a lot a cases, particularly now, over-the-counter are less desirable than Exchange traded instruments, which there is no direct party on the other side, thereby driving more business to ClearPort.

So it is not the traders. The traders are making less decisions on what Exchange or where to put their business being over-the-counter -- not Exchange -- but over-the-counter for ClearPort, and that is driving a lot of new business to ClearPort.

Okay. And then just on the LCH agreement, just to make that I think a real tangible opportunity, wouldn't you also have to be building some liquidity in Brent and some of the other contracts to really be able to offer people an alternative to ICE?

Without a doubt. Yes, we are, and we're being very aggressive about it. We also embrace the interdealer broker community quite actively, and one would assume that we would be working very closely with them to provide a platform within which they can trade these products as easily as they could with ICE.

This concludes our Q&A session. I will now turn the call over to Mr. Schaeffer for closing remarks.

Thank you, again. We're going to get back to work and continue to drive our gross margins up. We thank you for your support, and we hope to have a little help from the stock market itself. But thank you very much for being with us today.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.