HOWARD LUTNICK: Good morning and thank you
Transcription
HOWARD LUTNICK: Good morning and thank you
HOWARD LUTNICK: Good morning and thank you for joining us for our first quarter 2015 conference call. With me today are BGC’s President, Shaun Lynn, our Chief Operating Officer, Sean Windeatt, and our Chief Financial Officer, Graham Sadler. BGC’s post-tax earnings increased by approximately 32 percent to 62 million dollars, the third quarterly record in a row in terms of profits, and the second consecutive quarterly record in terms of revenues. These best-ever results also reflect pre-tax earnings growth of nearly 65 percent for our high margin fully electronic businesses, due mainly to the remarkable success our brokers have had in converting voice and hybrid Financial Services desks to much more profitable fully electronic trading. 1 This significant growth came despite the strong U.S. dollar reducing our Financial Services revenues by more than 20 million dollars during the quarter. Our results include GFI for the month of March. At the end of the first quarter BGC owned approximately 56 percent of GFI’s outstanding common shares. On April 28th BGC acquired an additional 11 percent of GFI, resulting in our total ownership of 67 percent of GFI. We are now able to control the timing and process of the full merger of the two companies. While the front office operations of GFI and BGC will remain separately branded, we have already begun integrating the back office, technology, and infrastructure of these two companies. Beginning in the first quarter of 2016, we expect to have reduced our expense run rate by at least 50 million dollars a year, and by an additional 40 million dollars by the end of the 2 following twelve months, for a total of at least 90 million dollars. We also expect to increase productivity per broker and to continue converting voice and hybrid broking to higher margin fully electronic trading, all of which should lead to increased revenues and profitability. By freeing up duplicative capital set aside for regulatory and clearing purposes, we will also be able to use our balance sheet more efficiently. We love the business of Trayport and would be delighted to keep it. But the reality of the stock market is that high growth, high margin technology companies like Trayport often don’t get the valuation they deserve inside a company like ours. So in order to maximize shareholder value, we need to explore getting the right price for this asset, as we did with eSpeed. We have retained Cantor Fitzgerald to assist in the sale of 3 Trayport. We expect numerous parties to be interested in acquiring this business at a valuation that reflects its high margins, growth rate, leading technology, and strategic importance in the global energy and commodities markets. We anticipate completing a transaction before the end of 2015. The gain from the sale of this business will be excluded from distributable earnings. A successful Trayport transaction, combined with increased profits from integrating GFI, growing our fully electronic businesses, and the strength of our Real Estate Services business, will lead to BGC’s liquidity being dramatically higher. We also anticipate receiving over 635 million dollars in additional NASDAQ OMX stock over time. As we execute our strategy, we expect to have significant capital with which to make accretive acquisitions, profitably hire, pay dividends, and 4 repurchase shares and/or units of BGC, all while maintaining our investment grade rating. I am happy to report that our board declared a 14 cent qualified dividend for the first quarter, which represents an increase of 16.7 percent. At yesterday’s closing stock price, this translates into a 5.8 percent annualized yield. With that, I will now turn the call over to Shaun. SHAUN LYNN Thanks Howard and good morning everyone. Financial Services revenues were up by 23.9 percent to 355.7 million dollars. These revenues would have been over 20 million dollars higher in the quarter but for the strengthening of the U.S. dollar. Our Financial Services business increased its pre-tax 5 earnings by 32.5 percent to 78.3 million dollars. We were able to expand our pre-tax margins by over 140 basis points to 22 percent due largely to the significant growth of our more profitable fully electronic businesses. Excluding Trayport, revenues for our e-businesses rose by 73.7 percent to 40.8 million dollars, while their pre-tax earnings increased by 64.9 percent to 20.5 million dollars. This improvement was driven by revenue increases ranging from 54 to 133 percent for our fully electronic products in FX, rates, credit, market data, and software solutions, reflecting our strong double-digit organic growth and the acquisition of GFI. This e-business trend continued into the current quarter, as revenues for these e-businesses more than doubled year-on-year over the first 16 trading days of April. Even excluding Trayport, our fully electronic businesses have much higher quarterly 6 revenues and growth rates than eSpeed did in the two years before its sale for over 1.2 billion dollars. Including GFI, we now have a pipeline of over 1.5 billion dollars of annual voice and hybrid Financial Services brokerage revenue, a large portion of which can be converted to fully electronic brokerage and generate valuable market data. So we expect our e-businesses to continue their positive growth momentum for years to come. Looking at our overall Financial Services results by asset class: Revenues from our fully electronic rates products were up by approximately 54 percent, while our overall rates revenues were up by 7.3 percent in the quarter to 122 million dollars. In comparison, rates volumes were down by 2 percent at Eurex. The global FX markets benefited from higher volatility in the quarter, although our growth outpaced the industry. Our e7 FX revenues, including both spot and derivatives, were up by over 80 percent. Our overall FX business was up by 40.1 percent to 72.9 million dollars. In comparison, overall FX volumes were up between 5 and 31 percent at Thomson Reuters, CME, and EBS. We generated a 67 percent increase in revenues from our fully electronic credit desks, while overall credit revenues increased by 2.6 percent to 67.2 million dollars. These results outpaced industry statistics. For example, the daily average Primary Dealer volumes for corporate bonds were down by approximately 5 percent year-over-year according to the Federal Reserve, while dealer gross notional credit derivatives outstanding were down by approximately 46 percent according to SIFMA. Our revenues from Equities and Other Asset Classes, 8 increased by 22 percent to 36.2 million dollars. This improvement surpassed most relevant industry volumes. For example, equity derivative volumes ranged from being down by 19 percent for ICE to being up by 16 percent at Eurex. This category no longer includes revenues from our energy and commodities desks, because we have broken them out as a separate category due to their significant growth and the addition of GFI. BGC’s revenues in energy and commodities increased by 125.2 percent. This compares with the combined number of energy and commodities contracts traded at the ICE and CME being up by 13 percent and 15 percent, respectively. Moving on to our Real Estate Services business - NGKF continues to benefit from the low interest rate environment, easier availability of credit and a steadily improving U.S. 9 economy. According to NGKF’s research team, the overall leasing market continued to improve, with the combined vacancy rate for office, industrial, and retail properties declining from 9.1 percent to 8.5 percent year-over-year. In real estate capital markets, first quarter U.S. commercial sales volumes were up by 17 percent according to Real Capital Analytics. Financing activity was also robust, with U.S. nonagency CMBS issuance up by over 20 percent for the trailing twelve months ended March 31st, 2015, according to Commercial Mortgage Alert. While helped by these positive industry trends, we believe that NGKF continued to gain market share. Our revenues from leasing and other services improved by 19.4 percent to 105.4 million dollars, while real estate capital 10 markets increased by 149.0 percent to 53.8 million dollars. Management services and other revenues were up 2.9 percent to 41.1 million dollars, while NGKF’s overall revenues improved by 33.7 percent to 200.4 million dollars. Pre-tax earnings increased by 28.7 percent to 19.6 million dollars in Real Estate Services. Industry wide, commercial real estate brokers tend to be seasonally slowest in the first calendar quarter of the year in terms of revenues and profitability, sequentially stronger in each of the next two quarters, and then strongest in the fourth calendar quarter. Based on these historical patterns, we are confident in reaching our goal for our Real Estate Services business to generate at least 1 billion dollars in revenues for the full year 2015. Turning to headcount - We had 1,293 Real Estate brokers 11 and salespeople as of quarter-end, up 46 percent compared with 888 a year earlier, mainly due to the additions of Cornish & Carey and ARA. Average revenue per real estate broker increased by 1 percent to 126 thousand dollars. We finished March with 2,579 Financial Services brokers and sales people, up by 72 percent from 1,497 a year earlier, primarily due to the addition of GFI. Excluding Trayport, our average revenue per Financial Services broker/salesperson was flat at 184 thousand dollars. Historically, productivity has increased over the following year after significant headcount growth. As we continue to convert voice and hybrid brokerage to fully electronic, we expect to increase broker productivity in Financial Services. Company-wide, our front office headcount was up by 62 percent to 3,872 brokers and salespeople. 12 With that, I would now like to turn the call over to Graham. GRAHAM SADLER [These prepared remarks have been updated subsequent to the Company’s first quarter 2015 conference call on April 29, 2015, to correct the Company’s Q1 2015 revenues by geography] Thank you Shaun and good morning everyone. As Howard mentioned, our results include those of GFI for the month of March. This had an impact on a number of income statement and balance sheet line items. BGC generated consolidated revenues of 563.9 million dollars, up 26.5 percent compared with 445.9 million dollars. Our revenues from the Americas were up approximately 28 percent. Revenues from Europe, Middle East, and Africa were 13 up by 28 percent while Asia-Pacific revenues increased by 10 percent. As Shaun mentioned, our non-U.S. results were negatively impacted during the quarter by the stronger U.S. dollar, mostly in our European offices. Turning to expenses: Compensation and employee benefits were up by 26.4 percent on an absolute basis, but our compensation ratio improved slightly to 61.7 percent. While non-compensation expenses increased in absolute terms by 23.0 percent, they were down as a percentage of revenues to 24.9 percent compared with 25.6 percent. The absolute increase in quarterly expenses was primarily due to the impact of acquisitions, as well as interest expense related to the Company’s fourth quarter issuance of 300 million dollars of 5.375 percent Senior Notes due 2019. Our pre-tax earnings before noncontrolling interest in 14 subsidiaries and taxes were 75.2 million dollars, up by 33.7 percent when compared with 56.2 million dollars. Our pre-tax margin this quarter expanded by around 75 basis points to 13.3 percent compared with 12.6 percent a year ago. BGC’s effective tax rate for distributable earnings was unchanged at 15 percent. Our post-tax earnings were up by 31.5 percent to 62.1 million dollars, compared with 47.2 million dollars. Our post-tax earnings margin improved by around 40 basis points to 11.0 percent compared with 10.6 percent, while our post-tax earnings per share were up by 20 percent to 18 cents. BGC had a fully diluted weighted-average share count for distributable earnings of 378.7 million in the first quarter of 2015 and 338.5 million under GAAP. A year earlier, our fully diluted share count was 362.1 million for distributable earnings 15 and 322.1 million under GAAP. The GAAP share counts were lower because they excluded certain share equivalents in order to avoid anti-dilution. The share counts increased primarily due to issuances related to the acquisitions of Cornish & Carey, ARA, Remate, and HEAT Energy Group; equity-based employee compensation; and new front-office hires. This was partially offset by the redemption and/or repurchase of 16.5 million shares and units at a cost to BGC of 124.8 million dollars, or an average cost of 7 dollars and 57 cents per share or unit over the trailing twelve months ended March 31, 2015. As of the end of the first quarter of 2015, our fully diluted share count was 379.4 million, assuming conversion of the Convertible Senior Notes into 40.3 million shares. After the end of the quarter, BGC’s 150 million dollars of 8.75 percent 16 Convertible Senior Notes were converted into approximately 24 million Class A common shares. These shares were already included in our fully diluted share count, which was therefore not impacted by this conversion. Our 4.5 percent Convertible Senior Notes, due July 15, 2016, remain outstanding and are potentially convertible into approximately 16.2 million shares. Moving on to the balance sheet - As of March 31, 2015, the Company’s liquidity - which we define as “cash and cash equivalents,” “marketable securities” that have not been financed, and “securities owned” held for liquidity purposes was 458.4 million dollars; notes payable and collateralized borrowings, and notes payable to related parties were 991.4 million dollars; book value per common share was one dollar and 78 cents; and total capital, which we define as “redeemable 17 partnership interest,” “redeemable noncontrolling interest,” “noncontrolling interest in subsidiaries,” and “total stockholders' equity,” was 983.8 million dollars. In comparison, as of year-end 2014, the Company’s liquidity was 825.5 million dollars; notes payable and collateralized borrowings, and notes payable to related parties were 706.7 million dollars; book value per common share was one dollar and 83 cents; and total capital was 641.4 million dollars. The changes in BGC’s liquidity since year-end 2014 were primarily related to cash used to purchase GFI and ARA during the quarter; the redemption and/or repurchase of shares and units in the first quarter of 2015; and previously disclosed legal settlements. As Howard mentioned, we purchased yesterday 18 approximately 43 million newly issued shares of GFI’s common stock at yesterday’s closing price of 5 dollars and 81 cents per share, for an aggregate purchase price of 250 million dollars. The purchase price was paid to GFI in the form of a note due on June 19, 2018, that bears interest at LIBOR plus 200 basis points. Due to intercompany eliminations, the new shares and the note will have no impact on the consolidated balance sheet of BGC. GFI expects that any funds received in payment of the principal of the note would be earmarked for GFI’s existing 240 million dollar senior notes due July 2018, or potentially be the basis of collateral with respect to such GFI Notes. Following the issuance of the New Shares, BGC owns approximately 67 percent of GFI’s outstanding common stock. With that, I am happy to turn the call back over to Howard. 19 HOWARD LUTNICK: Thank you, Graham. Our guidance for the second quarter 2015 as compared to a year earlier is as follows: We expect to generate revenues of between 650 and 680 million dollars, an increase of between 51 and 58 percent when compared with 430.3 million dollars. Our revenue guidance would be at least 18 million dollars higher, but for the continued strength of the U.S. dollar. We anticipate pre-tax earnings to be range of 70 to 80 million dollars, an increase of between 32 and 51 percent as compared to 53 million dollars. We expect our effective tax rate to remain around 15 percent. 20 We intend to update our second quarter guidance by the end of June, 2015. Operator, we would now like to open the call for questions. Q&A After Q&A - Howard Lutnick: Thank you all for joining us today and we look forward to speaking to you again next quarter. 21 JASON MCGRUDER Good morning. Our first quarter 2015 financial results press release and a presentation summarizing our results were issued this morning. This can be found at “Investor Relations” sections of our web site at www.bgcpartners.com. The financial results and other metrics for BGC’s majorityowned division, GFI Group Inc., are consolidated with those of BGC from March 2, 2015 onward throughout this call. Whenever we refer to the results of quote “the Company” end quote we mean the consolidated results for BGC Partners, Inc. Throughout today’s call we will be referring to our results only on a distributable earnings basis. Please see today’s press release for GAAP results. Please also see the sections of today’s press release entitled “Distributable Earnings,” “Distributable 22 Earnings Results Compared with GAAP Results”, “Reconciliation of Revenues Under GAAP and Distributable Earnings”, and “Reconciliation of GAAP Income to Distributable Earnings” for a definition of these terms and how, when and why management uses them. Unless otherwise stated, whenever we refer to income statement items, we are doing so on a distributable earnings basis. Other than balance sheet items, the results provided on this call compare the first quarter of 2015 with the year-earlier period. Also, “Newmark Grubb Knight Frank” is synonymous with “NGKF” or our “Real Estate Services.” segment. I also remind you that the information on this call regarding our business that are not historical facts are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities 23 Exchange Act of 1934, as amended. Such statements involve risks and uncertainties. Except as required by law, BGC undertakes no obligation to release any revisions to any forwardlooking statements. For a discussion of additional risks and uncertainties, which could cause actual results to differ from those contained in the forward-looking statements, see BGC’s Securities and Exchange Commission filings, including, but not limited to, the risk factors set forth in our public filings, including our most recent Form 10-K and any updates to such risk factors contained in subsequent Form 10-Q or Form 8-K filings. I am happy turn the call over to our host, Howard Lutnick, Chairman and CEO of BGC Partners. 24