洲際交易所 (ICE) 2008 Q2 法說會逐字稿

Good morning and welcome to the IntercontinentalExchange second quarter earnings call. As a reminder today's call is being recorded. At this time I would like to turn the call over to Kelly Loeffler. Please go ahead, ma'am.

Good morning. To obtain a copy of the Company's second quarter earnings release and presentation please visit the investor and media section of our website at theice.Com. These items will be archived and our call will be available for replay. Please be aware that our comments may contain certain forward-looking statements. These statements represent our current judgment and are subject to various risks, assumptions and uncertainties as outlined with the Company's filings with the SEC. Actual results may differ materially from those that are expressed or implied in any forward-looking statements. Please refer to our filings with the SEC including our most recent Form 10-K, and our second quarter Form 10-Q for a description of the risks that could cause our results to differ materially from those that are described in the forward-looking statements. In addition, please see annex A of our earnings release or the appendix of this presentation for a reconciliation of non-GAAP measures. With us today are Jeff Sprecher, Chairman and CEO; Scott Hill, Chief Financial Officer; and Chuck Vice, President and Chief Operating Officer. At the conclusion of the prepared remarks they''ll take your questions. I'll now turn the call over to Scott.

Thanks, Kelly and thank you all for joining us this morning. Before we go through some of the key metrics I'd like to highlight a number of milestones that we achieved in the second quarter. Despite the fact that the second quarter has historically been a seasonally slower quarter for ICE, this past quarter ranked as our second best quarter ever in terms of revenue and net income and we generated a record level of operating cash flow. Also, for the second consecutive quarter over 120 million contracts were traded on the ICE platform. Both our ICE Futures Europe and OTC energy market delivered their highest volume quarter ever and we recorded our second highest quarterly volume at ICE Futures US. Both the ICE Brent and ICE WTI Crude oil contract set new all-time quarterly volume records. Our OTC business once again recorded average daily commissions exceeding $1 million and last but not least our market data business reached a record $25 million in revenue for the quarter. These accomplishments are particularly noteworthy when viewed in the context of uncertainty in the credit, regulatory and economic environment.

As we work towards the launch of three significant new long term growth drivers during the third quarter our core business fundamentals remain strong. With that introduction, I'd now ask you to flip the slide four where we can review the details of our second quarter performance which capped off a record first half. ICE delivered among the highest growth rates in revenue and net income in the global exchange sector. Consolidated revenues of $197 million were up 44% over last years second quarter. Operating income was up 74% to $133 million, and our operating margin was 67%. Our effective tax rate for the second quarter was 35.5%. Net income increased 58% to $85 million and diluted EPS was $1.19. As you may recall our Q2 2007 net income included $7 million of after-tax CDOT transaction expenses. Adjusted for this item our 2Q 2008 net income grew 40%.

Moving next to slide five, you'll see that ICE continues to demonstrate a track record of significant growth across-the-board. Year to date we've already traded over 250 million contracts resulting in record revenue and operating income. The product diversification that we've achieved over the past 18 months has provided significant benefit to the business as we are no longer reliant on the trends or cyclicality of any one asset class. Indicators such as increased numbers of trading IDs and system connections from June and into July as well as the ongoing buildout of commodity sets give us confidence that our business is well positioned to further expand in the OTC and futures market.

Now let's turn to slide six and discuss our consolidated revenues and expenses. Transaction revenues are derived from our global futures and OTC segment. Second quarter transaction revenues totaled $167 million, up 42% year to year. Market data revenues increased 61% to $25 million. Our broad and expanding portfolio of products and asset classes continues to enable solid overall revenue growth.

Moving to expenses, second quarter consolidated operating expenses were $64 million, up 7% compared to last years second quarter. Adjusted for the CDOT related costs, expenses increased 31%. As you know, ICE has a pay for performance compensation structure consistent with our prior guidance our strong first half results and our expectation that we will exceed certain full year performance targets contributed to a $6 million year to year increase in non-cash compensation for the first half. Also contributing to expenses during the quarter was investment in ICE clear Europe which increased nearly $3 million year to year. Our depreciation and amortization expenses also increased $3 million due to technology investments and recent acquisitions. So far this year our technology staff has delivered new clearing systems in the US and Europe, the fastest trade execution platform in futures and OTC and a new primary data center in Chicago. We continue to make enhancements to the ICE trading platform that provide new functionality across asset classes. Our expenses once again reflect targeted investments that will support our continued growth.

Turning now to slide seven, we've included some volatility data for both ICE and non-ICE contracts. Price volatility is one factor that influences volumes year to year and you can see that volatility increased in most commodities compared to July of 2007; however, volatility has dropped off compared to the first quarter of this year for most agricultural commodities. For example, volatility in cotton is down dramatically from 1Q '08 and volumes declined from 1Q '08 to 2Q '08. Natural gas volatility, on the other hand, increased from 1Q and is up significantly year to year. As a result of this and other factors, volume growth in that product has been strong. While volatility is a key factor with regards to trading volume, market fundamentals, margin requirements and in some cases higher prices will also influence participants hedging strategies. As we continue to diversify our portfolio of products our ability to deliver consistently solid growth will increase regardless of the dynamics affecting any single market.

Starting with slide eight, I'll touch on the result of our futures and OTC business. Average daily volume or ADV of contracts for ICE Futures Europe was 610,000, an increase of 19% versus 2Q '07. Second quarter rate per contract or RPC for energy futures was $1.21. Growth in our energy futures segment was driven by continued strength in our crude oil futures market. During the second quarter, we posted record total quarterly volume for both the ICE Sprint and ICE WTI Crude Futures contract. This morning, we reported July volumes. ADV at ICE Futures Europe was 541,000 contracts, roughly flat versus the prior year. The rolling three-month RPC was steady at $1.21.

Slide nine shows the performance of our North American futures exchanges during 2Q. RPC for agricultural commodities futures in the quarter averaged $2.21. ADV was 288,000 contracts per day, up 12% year to year. As mentioned previously the cotton market saw significant quarter to quarter decline in volatility and was impacted by a number of other fundamental factors excluding cotton which is typically our second largest soft commodity contract, volumes in 2Q across the other ICE Futures U.S. product grew nearly 20% year to year. We set new volume records for Russell and the US dollar index and have the second highest volume quarter for sugar, coffee and cocoa. And in our volume release today, we reported a three-month rolling average RPC for our US agricultural futures of $2.22. Our July ADV at ICE Futures US and Canada was 212,000 contracts up slightly versus the prior year.

Now let's take a look at our OTC business on slide 10. Transaction revenues totaled $80 million in the second quarter up 71% year to year. For the second quarter average daily commissions rose 69% to $1.2 million per day. And this morning, we announced July average daily commissions of $1.3 million, representing 50% growth over July 2007 and our seventh consecutive month of ADC in excess of $1 million. We continue to see increased trading and hedging activity and deep liquidity in our OTC markets. Chatham and NGX once again contributed to record natural gas performance and the further enhancement of the value of ICE 's OTC market to commercial hedgers.

I'll wrap up with a few comments on our first half performance on slide 11 and highlight two items from our earnings release this morning. Our business performed very well during the first six months of this year. Revenues grew 54%, operating margins improved to 69%, and net income grew 62%. This strong growth combined with disciplined expense management helped generate a record $192 million of operating cash flow in the first half of '08. We ended June with $374 million in unrestricted cash and short-term investments. Our debt ratios remain low and we continue to have access to our revolving line of credit. This healthy capital structure paired with strong growth and solid cash generation gives us excellent financial flexibility.

With regards to ICE Europe as mentioned in our press release this morning despite a two month shift to a September launch date, we continue to anticipate revenues in the range of $20 million to $25 million over the last three and a half months of 2008. In addition we now expect operating expenses for ICE clear Europe for the last six months of 2008 to be in the range of $6 million to $8 million. And finally, our Board of Directors has authorized the repurchase of up to $500 million in ICE common stock over an open market program over the next 12 months. This authorization reflects our view that ICE shares have recently been trading at a price range that does not reflect the fundamental value of our Company. We will utilize cash on hand, future cash flows and up to $200 million of our existing low interest rate line of credit to execute the repurchase following the closing of the credit transaction in the next few weeks. Our strong balance sheet and cash flows enable us to execute this program while continuing to invest for future growth. We provided additional updates and guidance with our earnings announcement today so please refer to the press release or the appendix of this presentation for complete details. I'll now turn it over to Jeff.

Thank you, Scott, and good morning, everyone. As you can see, ICE continues to demonstrate a solid track record of revenue and earnings growth. We have a number of new initiatives coming online in the third quarter that will reinforce the strength of our global exchange model. We believe we have distinguished ourselves in the industry as the leading operator of both regulated futures markets and well established transparent over-the-counter markets. There's a lot I'd like to cover this morning including an update on recent activity in Washington. I'll also discuss our Clearing and Russell strategies and our core business.

As most of you know commodity prices have become a central issue in Washington and across the globe, given the impact that rising prices and commodities have on businesses and consumers alike the United States Congress' focus on this issue is understandable. Those of you who have followed commodity markets over time will realize that this situation is not new. At many points in history, legislators when faced with complex market conditions that the are not easily explained have blamed speculators for rising prices. Today, this is especially true in the case of the global crude oil markets. However, there are many contrary views emerging that point towards basic market forces as the drivers of prices in crude oil markets. Today, the United States imports over two-thirds of its oil competing with countries around the world for an increasingly scarce supply of a necessary commodity. The interim report on crude oil which was produced by an interagency Task Force on commodity markets in the United States rejected the idea that speculation was a primary driver of today's crude oil prices. Rather, experts such as the Chairman of the Federal Reserve, the US Secretary of Energy, the US Secretary of the Treasury, the Commodities Futures Trading Commission, and the International Energy Agency have agreed with the conclusions of the report that supply and demand are the primary drivers of crude oil prices.

Finally it's important to note that prices of most commodities, those that are actively traded in futures Markets and that are in commodity indexes have risen dramatically over the past year. Taken together, these facts present an inconvenient truth for those who are attempting to blame speculation as the primary driver of commodity prices. ICE and many other industry participants have invested significant time and resources to provide Congress with information about the role of energy markets and our existing regulatory structures.

Slide 12 for example, offers a basic outline of ICE's global market structure. Owl note that each division or subsidiary complies with its own unique regulatory requirement. As a result of the education actions undertaken by ICE and by our peers we are encouraged to see that many of the extreme proposals seen earlier in the debate have not gained traction in Congress. These proposals included increased margins, dual regulation of foreign markets and other limitations on the US's participation in the global energy market. We believe that many of these proposals failed to gain traction due to a realization that they would not lead to lower energy prices and could actually make problems worse.

As a result, on slide 13, we have been providing the CFTC with trading information regarding the WTI futures contract since early 2006, shortly after our contracts launch. We're in the process of establishing an enhanced reporting and position accountability regime that we expect to have in place during October. We also expect little impact from legislation in our OTC markets which as many of you recall from previous announcements are subject to enhanced reporting and oversight for significant price discovery contracts under the recently passed Farm Bill.

For example, our Henry Hub natural gas swap will be subject to these rules, but again, this is an instance where we have been reporting large trader information to the CFTC for this contract since 2006. We believe that these regulations are a measured approach to transparency, and they will actually help bring regulatory certainty and enhance confidence in ICE's global markets. The recent legislative proposals that were brought to the Senate and House floor both of which failed to pass were modest proposals in terms of their direct impact on ICE's markets, given that they largely codified previously announced regulatory changes that have already been required for trading in ICE's WTI Crude Futures market for example. It appears that the debate has now turned to more practical market proposals that will attempt to to address underlying energy supply and demand fundamentals.

During September, the CFTC will issue the results of an in depth study of energy the enery markets which many lawmakers are waiting for before pursuing further policy initiatives. As a result of the lengthy debate that took place this Summer we anticipate that legislative efforts upon Congress's return in September will be more bipartisan in nature and we will seek real solutions to long term supply and demand issues which potentially may include certain modest market proposals seen late in the debate to ensure broad confidence in the operation of markets.

To summarize our thoughts here, we think we've made good progress in Washington towards helping provide regulatory certainty for our customers and our investors ahead of any legislative proposal by proactively working with our regulators and with members of Congress. We believe that ICE' business is built on strong fundamentals and they are are not driven by excess speculation or by large positions in any one contract by any one participant. Let me repeat this, we believe that ICE's volumes are not the result of a different regulatory regime nor are they the result of excess speculation or a large concentrated position by any one participant. Our diverse, global, commercially oriented customer base gives us a great deal of confidence in our business and in our future and we are backing this up with a share repurchase program that we've announced this morning.

If you turn now to slide 14, you'll see three of our key growth drivers for the next several quarters. These drivers are in addition to the growth that we continue to see in our core commodity market. First of all we have spoken to you about our move into the US equity index business through our exclusive Russell index futures agreement. The final contract role takes place toward the end of September and we anticipate a complete transition during the fourth quarter. We've worked for many months to ensure that participants from the buy side and the sell-side including major institutions and market makers have had the opportunity to learn about our market and make a smooth transition. Many of our long timeshare holders have witnessed our selective entree into growth areas of the business and the equity index futures category is no exception. Today, it is one of the fastest growing share markets. Volume in the Russell 2000 E-mini contract as traded elsewhere has recently ranged between 200 and 300 contracts per day. As we move towards September and the Russell transition we expect ICE' volume and open interest to grow substantially.

Moving on to our launch of ICE Clear Europe we're approaching the final phase of our year long transition from LCH clear net. This is a historic move for ICE, and ICE clear Europe will be the first major clearing house in the UK in over a Century. The launch date was moved from August to September 15, in order to accommodate the European holiday schedule and to provide sufficient time or testing of a finally agreed to transition scheme. Today, 100% of the open interest is ready and is contractually committed to make that transition. Once the existing futures and over-the-counter contracts are transitioned to ICE Clear Europe we'll begin rolling out an extensive suite of new Clear contracts. We announced our intention to build a new clearing house back in April of 2007 and since that time, we were unable to list new Clear products through LCH Clearnet. This has resulted in a backlog of innovative concepts for new cleared contracts that we intend to offer our customers. For example, this extensive new pipeline includes energy futures and OTC contracts based on oil, natural gas, power, and coal. We plan to introduce a significant slate of new product within six months of the launch of ICE Clear Europe. We anticipate that this will serve as yet another growth driver for ICE. Most of all we look forward to regaining our ability to innovate in the area of new products. I'm pleased to note that ICE Clear Europe recently received multi-lateral clearing organization status from the commodity futures trading Commission for the United States. This designation permits ICE clear Europe to clear contracts in the US swaps markets.

The third initiative I'll discuss today is our entry into the credit default swap or CDS market through our acquisition of Creditex. ICE will hold a call upon the closing of the transaction later this quarter to provide you with further operating metrics and pro forma financials and to update you on how Creditex may impact any of our previous guidance. In the meantime, we're already working closely with Creditex to support important post-trade processing initiatives that are currently under way. Sunil Hirani, the CEO of Creditex and his team have built a reputation for service and innovation among the CDS community which is due in part to the diverse set of capabilities beyond the core trade execution that Creditex is known for. Sunil and I have had extensive meetings in New York and London with customers, regulators and government officials to determine how we might best serve the rapidly evolving CDS market. We see the CDS market in a similar place in its evolution as the OTC energy markets were just seven years ago. This was before clearing, post-trade processing and other basic market structures were being adopted. Today, the over-the-counter energy markets on ICE are large, liquid, and transparent and the overall market is many times larger than when the market infrastructure did not properly support its growth. We've demonstrated our ability to bring opportunities to the dealers and energy and we look forward to supporting Creditex and doing the same in credit. In the meantime we'll continue to move forward with initiatives in trade processing which is where the industry is actively looking to improve.

In July, Creditex announced a joint initiative with market partners to launch portfolio compression for the CDS market. This process has the support of the major dealers in the CDS market as well is ISDA. The Creditex market platform supports commitments made by market participants to the Federal Reserve Bank of New York relating to improved operational efficiency and risk reduction. Creditex was successful in gaining the confidence of major industry participants due to its positioning with straight through processing and its history of providing well respected settlement services that are Incorporated into the protocol of the business. We expect that this positioning will allow Creditex to continue to grow important with the OTC derivative space.

These through new initiatives, our Russell transition, our launch of European clearing and our entry into the CDS market represents the growth and diversity inherent in our balanced exchange business. I'd like to close this morning with a discussion of customer trends and competitive metrics that I think you'll find helpful in analyzing the fundamental strength of our business both on a standalone and a relative basis.

ICE continues to outperform by virtually any measure. As you can see on slide 15, volumes in our energy market, which encompass both futures and OTC remain strong, both on an absolute and a relative basis. Because ICE Futures Europe does not trade in US natural gas futures. Direct comparisons with overall NYMEX volume growth are not possible without adjusting for the differences in our product mixes. Adjusting ICE's OTC Henry Hub natural gas contract into NYMEX futures equivalents you can see that ICE continues to produce sector leading growth. Many of you have asked about our customer base, given the state of the global credit markets, and while we will be gathering more detailed information in our WTI futures markets under the new CFTC reporting requirements we can see that we continue to have the support from the global energy companies who rely on both Brent and WTI oil futures markets for hedging.

In fact, in the OTC energy markets our customer mix in the first half of 2008 was 50% commercial, compared to 46% in the same period last year. This commercial expansion during a period of incredible growth en our OTC markets demonstrates a growing committment by commercial users to our markets. We also see continued participation by proprietary traders and algorithmic customers who bring important liquidity to our commercial users. As Scott mentioned earlier, we believe that higher margin requirements and higher commodity price levels may have reduced the levels at which some participants might otherwise transact. Margin requirements serve as an important risk management tool, and as volatility and underlying prices have increased over the past several months commodity margin levels have also increased dramatically. It's logical that these factors can impact transaction volume and commodity markets in the short-term but as you have hopefully come know to know we work to position our business for our long term growth. We focus on strategies that will allow us to diversify and grow as we meet the needs of our market participants. ICE has never been satisfied to simply sit back and merely benefit from cyclical trends.

In our focus on expanding the business, we remain thoughtful about finding and creating opportunities to benefit from cost efficiencies and on slide 16 you can see our strong operating income results. These results in part reflect our disciplined approach to growth such as delivering synergies ahead of expectations with the integration of ICE Futures US, our operating performance takes into account the fact that we own and maintain our own technology with a world class in house technology staff. If you take a look at the competitive metrics on the bottom of slide 16 you'll see how we stack up against our competitors. The CME Group in particular which has a similar model of product diversification, expansion into OTC markets, in house clearing, and in house technology. These metrics demonstrate that ICE is a faster growing business both in terms of volume and revenue than CME and NYMEX. As a result of our operating discipline and our unique market model, ICE's margins and operating income per employee are very strong. We've built one of the most productive, efficient and global businesses in this space while controlling our clearing and technology, and while operating across diverse futures and OTC markets. All the while, we do this while executing on a strategy to support the cost overhead of operating regulated futures exchanges and regulated Clearing houses in multiple countries to take advantage of opportunities on a global basis.

In closing I'd like to thank all of you for joining us today and for your interest in ICE. This is a dynamic time in our business and the entire ICE team is focused on continuing to strengthen and to grow our Company. As always I'd like to thank our customers and our employees for delivering a very strong quarter.

I'd like to mention that Scott and Kelly and I are also joined by Chuck Vice who is our President and who is sitting next to me and he may assist us in answering your questions and with that, Operator we're now ready to start the Q&A session.

Thank you. (OPERATOR INSTRUCTIONS) We'll take our first question from Daniel Harris with Goldman Sachs.

Hi, Jeff. How you doing?

Good morning.

I was hoping you could talk a little bit about the transition from LCH to ICE Clear Europe? What exactly happens there? Is there just a shift of the open interest or is there some sort of transition trading that has to occur?

Sure, Dan, let me ask Chuck Vice to take that one for you since he's been intimately involved.

Yes, I'll try to answer that from a couple points. One, we've talked in the past about the technology aspect of that and there we've tried to insulate the Clearing members as much as possible from what has to be, from the transition itself by using the same, well some of the back office systems, same back office systems provided by a third party that LCH uses today. From a legal standpoint, there are actually open interest innovation agreements that each and every clearer has signed at this point that specifies the legal rights and obligations of LCH and ICE Clear Europe and the members themselves in terms of the timing of that transition over to what we've been calling transition weekend. When those contracts become rather than -- excuse me, rather than LCH being a counterparty on those contracts that ICE clear Europe becomes a counterparty to those contracts.

The final step that we're working on now, the financial aspect of it is theres about 15 billion to $17 billion worth of margin that has to move from LCH to ICE Clear Europe and that is, that's quite a challenge because you don't want to or we certainly want to avoid double margining members over that weekend which we've been able to do and negotiating all of the details with LCH and the members in terms of how both the collateral and the cash itself will be held in trust on behalf of ICE and then move over to ICE on that Monday after transition weekend. So it's a very complicated ambitious I would say probably one of the most ambitious projects we've taken on at ICE and as far as we had initial date in July, we've deferred that a couple times as Jeff mentioned in his remarks, and I think at this stage, we're very confident in that weekend in September as we've now got all the finer points of the transition agreed to with all of the parties.

So then is the margin balance shifting more just a matter of there could be an issue of a couple of days or is there anything else that could happen there?

No, it will all happen over that weekend.

In other words we'll put the margin into trust and the trustee will move the margin money with the positions.

Okay, thanks. And then Jeff, just as a follow-up here, I was just hoping you could comment a bit about what we've been seeing in the WTI and Brent markets here over the past few months. Certainly there's been obviously a lot of noise going on from a regulatory front but can you just address how you see the market share plague out in WTI, and on some days it seems like you guys have been dipping below what we normally expect and other days it bounces back but certainly there's been a lower trend in some cases than we've seen in the past and yet your Brent is also doing very well so anymore color there would be great.

Sure. A couple of points. One is when you step back and look at crude oil to begin with, it's not a product that you and I will ever consume. It's a raw material and so people that actually are the natural hedgers are oil companies who are both on the buy side and the sell-side, on the buy side, as refiners and on the sell-side as producers, pumpers of oil, so what we're hearing from large integrated oil companies as well as witnessing in the market is that there's a tremendous amount of hedging that's going on right now in the energy complex but the hedging has tended to be in the actual product that people are exposed to, so natural gas, for example, we mentioned has been doing quite well on ICE. The oil companies are telling us that the crude markets are very very choppy. They've never seen this kind of price movement intraday. It can move $10 while somebody is at lunch, and so which is a big move for the crude market, so what's happened is that people that trade crude oil have traded shorter dated positions instead of holding longer positions. A lot of the, in a rising price environment, a lot of the oil companies don't really need to hedge as they're the net beneficiary of rising prices and so that leads to overall lower volumes in crude oil trading, and a lot of people because of the choppy nature of the markets have instead captured those trends or hedged those trends in the options market, which is not a market that we have, and in the options market, the options expire into the underlying, in other words if you hold an option into expiration, you get the underlying futures contract which can shift the daily volume numbers that you're looking at, Dan.

The two last just sort of local points that I think -- or past history and may not be representative of the future is that there's been a significant margin requirement difference between London clearing house and NYMEX, as much as 40% more margin has been required to trade ICE's products. I think once ICE gets control of our own Clearing house, we obviously have the incentive to be very, stay on top of margins and move them up and down with volatility. London clearing house as a third party provider doesn't necessarily have the same incentive to reduce them as they do to increase them over time, and so nothing negative against LCH. It's just that they're there to manage risk and we're here to operate the market globally. And the last thing was NYMEX had a major customer who is not a customer of ICE who took a very very large position which ultimately led to their bankruptcy. That dislocation was in the NYMEX market and the resulting market share from both the accumulation of that position and then ultimately the disposition of that position which may still be there because parts of it may have been assumed by others. We'll have to roll through.

So, as I think you know Dan, we measure our crude oil market share based on total barrels of crude oil and what we've seen is that between our WTI and Brent, we've sort of held similar market share, and in fact, we're amazed given the movement into the options business by the marketplace and given that the NYMEX has had a lot of traders move from their outright pit into their options pit and their volumes have been and their open interest is really doing well there. We're amazed at how well our market share is holding up, frankly. As you know, we'll have our options platform rolling out here pretty soon. We've got some innovative things that we're doing and that market has not yet electronified and we think frankly it's going to be up for grabs based on technology and other market moves that competitors do to bring that market on the screen. Thanks very much.

We'll go next to Ken Worthington, JPMorgan.

Hi, good morning.

Good morning.

You had presented an expense savings road map from the acquisition of NYBOT. Can you just talk a little bit about where you stand right now on that savings timeline and what has yet to be realized ?

Ken, we had mentioned earlier in the year that we were actually trending ahead of where our original guidance had been with regard to synergies. In fact, we had increased the synergy total for this year to the 18 million to $20 million range and we remain well on track to that. Frankly the synergy story at ICE Futures US has been a really good one for us. If you look at the absolute operating margins for that business, in the first quarter I think I even remarked on the call that we were close to 70% in operating margin, which was nearly double where they were in the first quarter a year before, and we had similar performance in this quarter. We once again saw very solid margins in line with the rest of the Company from our ICE Futures US business, so we remain well on track to the synergies that we guided this year which were increased from the original business case and the profit contributions from ICE Futures US continue to be very strong.

On that 18 million to $20 million, are you most of the way there already or is that back end loaded? Can you give us a little more? No, it's in our run rate now, Ken. The 18 million to $20 million is a full year number but we're on track to that through the first half and into the second half, so it's in our run rate now.

Okay, and I apologize for this next question if I've gotten this wrong. I thought on ICE clear Europe, the original synergy or the revenue guidance was somewhere for 25 million to $30 million for the second half of '08 and I think if I read correctly in this press release you said 20 million to $25 million.

Do I have my numbers right or did I?

You do have them but let me give you a little context. The 25 million to $30 million was assuming a July launch date. The 20 million to $25 million we're holding despite a two month shift in that launch.

Okay. So I think in your July 7, release you wrote that you didn't expect guidance to change at all and it decreased by call it $5 million. I wanted to see if there was something that I needed to read into that.

No, what I think we actually said was that we would be at or near the low end of the range and we are at or near the low end of the range at 20 million to $25 million. Again with two months less operating time in the year. Okay, great. Thank you very much.

We'll take our next question from Roger Freeman, Lehman Brothers.

Hi, good morning. I wanted to come back to the Creditex business and your thoughts with respect to how you're going to be positioning the CDS market. So what we're seeing is the brokers are basically shooting for a year-end move on to a clearing centralized clearing facility, and I guess there's a joint venture to do that. How do you, what do you think your opportunity around that move into a centralized platform and should ultimately there be some sort of exchange feature or platform where some of this may be more liquidated and could trade?

Sure. I think it's early days here, so in making the acquisition, we thought about a couple of different road maps if you will on how the market might unfold and we're trying to be prepared for any one of those but at 50,000 feet, our sense is that whether we're involved in solving the back office problems and clearing and credit problems or not, as those are going to get solved and we believe they will, we think the market is poised for growth so Creditex, if it does nothing more than it's doing now we think it's very well positioned in what will be a growing market.

Given that Creditex has really specialized in electronic trading and the electronification of the most liquid part of the credit market, and I would just say stepping back even at 100,000 feet, I think we believe that credit is an asset class and that asset class is here to stay regardless of some of the problems that we're in now and without respect for how it's going to unfold. More specifically, the dealers and the movement towards clearing has been focused on the index business which is the easier part of the business to think about clearing. It's the most liquid. It's the most standardized, and but Creditex has been working and we knew this at the time that we were doing diligence on the Company and got quite excited about it. They've been working on this compression system and algorithm for single name CDS, and under that scenario, the dealers are going to use Creditex's break through processing and hook to their back office systems and send the trades to us and market together and we're going to do a number of things that I'm not necessarily privileged to talk about right now in terms of manipulating them and reducing the outstanding number of trades.

We think that being in that work flow process bodes well for us. We think that an index clearing model alone is not enough to deal with the credit problems and that in the CDS market and so we're quite hopeful because we're in a daily dialogue with the major users of the market. As the market is being redesigned and restructured that we'll have a lot of visibility into it and be able to be opportunistic about how we might work with the major participants. So net-net, I think regardless of who does the back office systems and credit amelioration Creditex is very very well positioned. And that's the bet we're making. Of all of the things ICE has bought, I've suggested that this is probably the one that has the most risk because nobody has a crystal ball for what's going to happen to these markets and exactly how they are going to unfold and when.

Okay. That's helpful, thanks. And then I guess my second question would just be around volumes. So you showed, interesting chart on your slide 15 with the aggregating your energy volumes and it just highlights how much stronger the growth rates been in the OTC business, and I guess can you just maybe comment a little more around that ? Are we seeing sort of specific to natural gas here volumes or is this a sign of the OTC markets like more dealers or counterparties wanting to move into a clear platform because of credit concerns or how do you sort of parse part the differential in growth rates between that and the futures

I think it's everything you mentioned. As I said in my prepared remarks we're seeing more commercial users in those markets and so I think that as our OTC markets have become more regulated, more transparent and we've been able to go out and sell customers on the participation in those markets in ways that they hadn't used them before, we're getting the hedging business and the hedging business really like I mentioned on an earlier answer to Dan Harris is a business where if you can hedge the specific commodity you want to do that so ICE has largely natural gas and electricity in those OTC markets. NYMEX has gasoline and natural gas has futures and then both NYMEX and ICE have heating oil, ours in the form of something called gas oil and theirs in US heating oil which is a middle distillate hedge. In many cases for example, an airline, if you were thinking about an airline hedging, an airline could buy crude oil potentially to hedge but a closer substitute would be heating oil because it's a distillate product that captures the problems that are inherent in the global refining industry right now. So what you're seeing is sort of that movement out of the benchmark crude contract into specific products and a positioning of ICE's OTC markets with more confidence in them, with these reporting requirements and position requirements that were part of recent regulation. Thank you.

We'll go next to Howard Chen with Credit Suisse.

Hi, good morning everyone.

Good morning.

Thanks for taking my questions. First on the ICE Clear revenue guidance you spoke to achieving 20 million to $25 million in '08 but I didn't hear an update to the full year '09 guidance. Can you give us any update here on a full year basis?

Yes, Howard, we're not going to project out future revenue streams because it is very similar to our futures business where we don't provide forward-looking guidance. It's very sensitive to volume, and so anything I project for you in 2009 would by definition have to include some prediction of volatility and volumes and we just frankly, don't have the data to make that projection. So what we did, even the fourth quarter, the last three and a half months guidance that we've provided does have some underlying volume assumption in it but we're not going to project as we move forward with regards to top line.

I guess put another way is it fair to say if we assume no growth in your business from fourth quarter levels or new product traction in '09 that 80 million to 100 million in synergies was a good starting point for '09? I mean annualizing that three and a half months?

I think that would be a reasonable approach.

Okay. Thanks and then my follow-up, with all that's going on in Capitol Hill, Jeff, and addressing energy prices is all the debate and discussion helping or hurting the conversation to evolve other market structures of other over-the-counter markets like what's going on in credit derivatives now?

Well, I guess looking at the positive of what's been going on in Capitol Hill, ICE has had a lot of opportunity to meet lots of Congressman and senators and have a lot of sit down conversations and we've we've taken the opportunity to talk more broadly about businesses and that go beyond energy. Similarly, the debate about energy has gotten into other parts of government, the White House, the Treasury, and the Fed, and so we've had an opportunity to talk about the broader OTC space with the most senior people in policymaking in the US and in Europe, and so I think it's boded well for us in that we have a good dialogue.

I mentioned in a recent article that was written about us, that one of the things that we've concluded is that we need to get out ahead of some of these issues as it relates to credit, talking privately about our vision and with policy makers and with major market participants so that as those markets grow, which I am projecting that they will, they don't suddenly hit the radar screen in Washington and there's a knee jerk reaction to them, and so that's, I think if there was any take away from what we've been going through, it's just sense that our industry as a whole and ICE specifically, we did not do enough education on the Hill to even educate on some of the most basic matters which is why is it important to have a predictive futures market that's open and transparent and available globally to everybody, and so I think at least with respect to ICE, we're putting in permanent infrastructure to continue to deal with that with really some great people that we've been able to attract to help us with our message. Thanks, that's helpful.

We'll go next to [Jonathan Casteleyn] with Wachovia Securities.

Hi, good morning.

Hi, Jonathan.

Jeff, you mentioned recently a market share calculation of near 10% in OTC, net gas and power. Just wondering how you formulated that market share and just what you think going forward what your target market share could be.

Sure. I mean as you know, it's very very hard to project market share in the over-the-counter market. It's very hard to know exactly where it begins and where it ends for example, which is frankly one of the reasons it's been hard to regulate those markets. That number that I threw out there represents our best guess at the overall size of over-the-counter energy trading globally, so it would include foreign gas and power markets as well as crude oil and more importantly, the products from a barrel of oil that would be included in those markets as well. Things like NAPTHA, things like European and Asian jet fuel, those kinds of things which are traded also in the over-the-counter swaps market. And as far as the target market share, customers generally don't let one venue go all wait to 100% so just wondering what do you think is achievable? Yes, I, unfortunately, I agree with you on that point, but it's still really early days.

I mean a lot of the, one of the things that, if you followed us on the Hill and read some of the articles about is one of the things that we kept pointing out is that 0% of the distillate and crude markets trade electronically right now, yet they're very very large markets and the things that have caught on were electronic trading are largely gas and power swaps, and I think that owes itself to the fact that those are emerging markets and to a certain degree, ICE and Chuck Vice who is sitting next to me helped design the early tradable swaps because we were working with the dealers to design something that had standard structures so that we could clear them, and we helped move the market into a standardized format so it really was borne out of the fact that we wanted to do clearing, so that is happening in these other markets. More of these OTC swaps are available for clearing which means that over time, they will become more standardized particularly as people have pressure on their balance sheets and so then they make themselves available to electronic trading once they become standardized. So I think that that addressable market is big and if you look at the moves that we've been making recently through M&A, we're trying to get deeper into the OTC markets because it is a bigger addressable market as opposed to buying things that bolster our future position.

Great. Thanks for that. Just quickly I know you promised us a forward call after the potential closure of Creditex, but just wondering in the T-0 products you talk about a fee per transaction processing event. Any insight as to the specific economics there?

No, I would say that T-0 is really a small revenue producer right now but poised for big things. The T-0 connectivity is going to be used by the dealers for the compression and T-0 has over 200 buy side firms that are hooked up to it so the compression that's starting right now is just an inner dealer compression, and once that gets going and proves itself out and the goal is to take $10 trillion worth of notional value out of the system by the end of the year so there's a lot of work to do there but once that gets going then I think it will be opened up to the buy side potentially and try to compress all of the single name CDS that we can do, and because it's using the connectivity in T-0, it then opens up the other products that are hooked on the T-0 platform to the broader community, things like Novation, which is another big area that the Fed is pushing on the CDS community to standardize around. Does Creditex get paid for dealer compression or you're saying that's initial? No, we do get paid, and it's, we were aggressive in terms of making it low cost to the dealers so that it wouldn't, that the amount of money wouldn't stand in the way of them selecting our compression, but it's a good number, so I think there's a lot of hidden value in Creditex and that's actually why we wanted it. There's been a lot of talk and maybe you've heard from some of your customers about the exchanges moving into the IDB space, and while it's symbolic I think that ICE has moved that way with Creditex, it was so many of these other factors that were inherent in Creditex that really got our attention, not the fact that it just solely served the dealers, and Creditex was able to do that because of the high quality people that they have working there, and we just, good businesses are about having good people and so I think between the two of us, some of the parts they have and some of the parts we have and with a team that's already been working very intimately together on this compression initiative, I think it's poised for bigger things.

Understood. I appreciate your time. Thank you.

Thank you.

We'll go next to Rich Repetto with Sandler O'Neill.

Good morning, guys.

Hi, Rich.

I guess most questions have been asked already. First, what is, is there a difference between the margin requirement that LCH is charging requiring for WTI and Brent versus the NYMEX and what is it if there's a difference?

Yes, let me ask Chuck to answer that for you.

There is a difference. I don't know the exact percentage. It's meaningful. Keep in mind margins are updated periodically based on the level of prices, the volatility in prices. LCH has historically updated those on let's just say on a less frequent basis than we plan to, keep in mind LCH has, they clear many more markets beyond ICE and have to manage margins in all of those markets, and so there are times when one market lags the other, sometimes LCH has been higher than NYMEX, sometimes it's been lower. At the moment since the recent surge in crude prices over the last three or four months as the margin prices were adjusted by both NYMEX and LCH, currently our crude margin rates and LCH rates are I'm guessing--.

Yes, they are about 25% higher.

Rich, ITI right now is at about 14,000 and I'm sorry, NYMEX I think is somewhere between 11,000 and 12,000 so about 25 to 30% more.

Right. So what we plan to do, be it the transition obviously on the weekend of transition, we want as few things changing as possible so we will go forward over that weekend with the existing LCH rates and over the ensuing weeks, we will move toward our own risk analysis which we have completed and are in place and risk team and processes that will update those margin rates on a pretty frequent basis, and so we don't know what between now and mid September may look like but if we were managing those margin rates today, our rates would show a decline in the WTI rate that Scott just mentioned.

I would imagine it's probably very frustrating for you right now, but imagine you don't have a lot of lobbying power either right now with that?

Well, again, I mean margins are a very sensitive thing as you've seen on Capitol Hill and risk people, the people that manage these rates, it's not driven by trying to get an advantage over a competitor. It's pure number crunching, based on the data and objective margin rates come out, and they are what they are. You want to make sure that they're accurate and they reflect all of the correlations between products and so fouth, but yes, at this moment in time, the difference is maybe having some effect but these things tend to balance out over the long term I think.

Okay, and my follow-up question would be for Jeff, on the CDS, since you have a seat at the table by Creditex being a part owner of the Clearing Corp, I guess the question is, if the investment banks do get their way and it looks like they're well on their way to clearing centrally cleared, the indices of the most liquid products like you mentioned, does this essentially lock you out of, does the question of fungibility now of those indices,where they 're trading, does that essentially lock you out of clearing these products and it looks like you're positioning that the economic value of T plus zero and the trade compression is very material, and I guess just trying to figure out, does that lock you out and will you be not part of -- and how meaningful is the economic value of the compression?

Yes, a couple of things. First of all, ICE is hooked to the Clearing Corp. We have API and direct connectivity to the Clearing Corp. Because that's where we clear our climate and emissions contracts, so from a technology standpoint, we have an understanding of how to get positioned in and out of the Clearing Corp. And I think that the dealers are really looking to minimize the footprint of risk in the CDS market and a lot of them have, I mean, a number of these mid tier banks have almost stopped trading or really dramatically reduced their trading because they have run out of balance sheet in the CDS space, so I think anything that unlocks that Rich, whether we do it or whether third party does it, I think it's going to increase the volume and velocity of CDS trading.

The Creditex electronic platform is really very well liked and used by the interdealer community and so I think they will still be doing their execution and they should be doing more execution and there may be competition for execution because I don't think the dealers want any one execution venue to dominate, and how those trades get from our execution platform into the Clearing Corp. will be determined over time but I think technologically we'll have straight through processing in the back office in credit, and understanding of how to get things into the Clearing Corp. through the API that should make it relatively easy for us to send trades there if that's what the industry wants.

In terms of the compression, the point I'm trying to make is that all of the talk right now and the scrambles to figure out how to clear CDS has been in the indices, but the broad based business has a lot of individual CDS in the form of single names and structured deals, and there's a lot of risk in there and it's a complicated clearing structure and the market may itself adapt with some new products and that's part of what's going on, that's part of the dialogue and the discussion with the dealers right now is the potential creation of new products that can replace some of this going forward. So it remains to be seen what those may be, how those may unfold, and whether or not they are going to be cleared or not, and we have a seat at the table, we're part of the debate, we're helping to drive the decision-making there, and I think that at the end of the day we're resourceful enough that we'll figure out tools that will help the industry and figure out a way to make money on those. I don't want to give you specific guidance on compression other than to say, it's a meaningful number in the sense that our efforts will be rewarded and there will be margins against the costs we're spending on building the compression algorithm.

That was the key point I was going to add. It's incremental revenue against a cost base it really didn't increase. It's the existing technology people at Creditex that we're working with drive that and then just another statistic, Rich, just before Jeff's point on the uptake of the electronic trading and Creditex's technology, Creditex through the first half of the year has seen 36% of its business traded electronically. That's nearly double what they saw just a year ago, so the uptick in electronic has continued to increase and in the US in the second quarter, US has typically been about 1% electronic. That number grew to 6 which is still not a huge number but it's a huge step forward.

All right, thanks.

We'll go next to Chris Allen with Banc of of America Securities.

Good morning, everybody. I just have one quick question. Just on ICE Clear Europe, when you provided the initial guidance way back when, I think the rates that we could back into LCH worked out to about $0.27 in the futures side and about $0.30 per contract on the over-the-counter side. Are those rates still applicable or can you give us an update in terms of what kind of rate per contract you could be charging?

Yes. We could get you the information after the call but the rates are actually published. Our rates that we're going to have post-transition are equal to what the LCH rates are today so Chris we can get you that information. I don't have every one of the rates in front of me but we can get you the rates and it's available to anyone who needs it.

Is it fair to say it would be roughly in line with in terms of blended overall with the rates originally we expected to?

Yes, the clearing rates haven't really changed much, so yes.

Thanks a lot.

We'll go next to Mike Carrier with UBS.

Thanks just actually another question on the clearing. It's tough to predict the volumes but looks like your annual revenue should be in the 70 million to $90 million range and that was up from the original $60 million guidance and besides the growth in the business and if your fee rates are unchanged is that really just a driver of the increase and then Scott, post the Creditex close, should we expect the buybacks to take place in the next say 3 to 12 months

Let me take the first question. So with regard to the guidance, I think we had said originally 25 million to $30 million and if you just want to do simple math, you can double that and that gets you a full year run rate and that was on backward looking volume so obviously as we've gotten deeper into the year, we have seen volume growth and so that's I think what's enabled us to hold into the low end of the range despite the fact that we lost two months. The other thing I'll tell you that's not factored into the answer I gave earlier that we're particularly excited about, our OTC cleared revenue is still about 87% of the total. That only represents about 15% of our OTC product. So one of the things Jeff mentioned in his remarks is we have a great opportunity now that we're going to own the clearing to get more of the OTC products cleared that our customers have told us they want cleared. So that's I think a key opportunity for us to grow the OTC business related to clearing. And I'm sorry what was your second question again?

Just on the timeline on the buybacks post the Creditex transaction. Like should we be expecting buybacks in the next 3 to 12 months ?

The authorization is over the next 12 months. How that plays out will depend on market conditions.

Okay, and then Jeff, just one follow-up on like the OTC clearing market and the focus with regulators and based on your discussions, we know the initiative with the broker dealers with the Clearing Corp, but do you think that platform can really handle the industry or will there be others and if so, what would be the likely timing and whether it's in the CDS market or other OTC markets where do you guys see the most potential opportunity?

That's a big question, because I think buried in there is the understanding that there is a lot of stress on the balance sheet of the major banks globally and there are a lot of over-the-counter markets that have become standardized enough and transparent enough that they probably are clearable, and as a minimum, they're netable or compressible, but probably clearable, so of all of the over-the-counter markets that have yet to go through clearing, credit in our minds is one of the smaller ones. There are other OTC opportunities that all of the exchanges in ICE particularly are looking at, and talking to various market participants about.

In terms of the Clearing Corp, I mean, it's got all of the right pieces there. I mean, it's got the right owners. It's got a committment by the Board to make it work. It's got systems that only, I don't know, what seven or eight years ago it was the largest Clearing Corporation in the world I think, so from that history, everything is there. Business is about execution, however, not ideas, and it remains to be seen how people execute on that. I don't think that it's necessarily going to be exclusive. I think these are big markets and there's going to be a lot of opportunity for various venues to come up with various products and specialize, and we've seen particularly in the case of ICE versus NYMEX that we've been able to provide similar but slightly different offerings that have been able to attract various parts of the market to each one of us. Together we've been able to grow the market. Together we've been able to grow each other by the arbitrage that's created between the two things that we do, and so I don't think that necessarily the Clearing Corp. is going to be the exclusive post-trade service. It the will be an important one I suspect, and one that has a lot of attention right now, but we're planning for the long run and looking at other opportunities that coexist outside at clearing Corp. As are the major market participants with us. Okay, thanks, guys.

We'll take our final question from Don Vandetti with Citigroup.

Hi, good morning. Quick question. Jeff, your over-the-counter average daily commissions were up very strong in July year-over-year. Just given all of the volatility and what we've seen on NYMEX were you a little surprised it wasn't stronger in July on a sequential basis?

I know that it's a hard market in your position to predict and it certainly has a correlation with what goes on in futures markets, but coming up with that exact correlation, that's the secret that I'm not sure anybody could figure out. We do have certain market maker programs in some products, so the number that we show you is a net number, and so you know, you're trying to correlate volume out of futures into OTC and the reality is we report revenue, so you see the net.

So it further complicates that, but no, I think there have been a lot of dislocations right now in the markets in the futures markets with the talk on Capitol Hill, I think people that trade futures, there may have been some people actually exiting the futures market or reducing positions in the futures market which will lead to volume growth but that's not necessarily a healthy growth when people leave your markets or when people go bankrupt. Those are not market share numbers that I think should be touted by people because they're really precursors to smaller future growth. So it wasn't surprising for us. We really are seeing a lot, there were a lot of sort of one-time looking impacts that were going on in the markets this Summer, and it looks like there's a very fair sentiment right now in the crude market so it may be that prices stay flat. As I mentioned in my prepared remarks, when Congress comes back, the group of 10 who have proposed, or 10 bipartisan Senators who have proposed supply and demand and investment regulation and energy will be B debated I suspect and will also filter into Presidential politics a bit, and so I think some of the extreme kinds of things that happen this Summer will be out of the market. That's our hope, knock on wood.

Okay, thank you.

July of last year was the second best month we've ever had in OTC and we still managed to grow the total 50% on a year-over-year basis.

Good point, thank you.

That concludes today's question and answer session. I'd like to turn the call over to Jeff Sprecher for any additional or closing remarks.

Thank you all for joining us today and we look forward to talking to you again in the new future.

Ladies and gentlemen, that does conclude today's conference. We appreciate your participation. You may disconnect at this time.