Q2 2023 BGC Group Inc Earnings Call
Greetings and welcome to the BGC Group second quarter 2023 earnings Conference call.
At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded it is now my pleasure to introduce your host Jason Chris like the head of Investor Relations. Thank you Jason you may begin.
Thank you and good morning, everyone. We issued Bgc's second quarter of 2023 financial results press release and a presentation summarizing. These results. This morning prior to the market open.
You can find these at IR dot <unk> Dot com. We've done you can find additional details on our quarterly results in today's press release and Investor presentation.
Unless otherwise stated and historical results provided on today's call compare only the second quarter of 2023 with the prior year period.
Certain revenue figures are provided to the current period as indicated we will be referring to our results on this call only on this call only on an adjusted earnings basis, unless otherwise stated.
You may also refer to adjusted EBITA.
You may refer to our liquidity, which we define as cash cash equivalents plus marketable securities that have not been financed reverse repurchase agreements in financial instruments owned at fair value less securities loaned and repurchase agreements, we define total capital as redeemable partnership interest total stockholders' equity and Noncontrolling interest in subsidiaries.
Please see today's press release for results under generally accepted accounting principles or GAAP. Please also see the relevant sections in the back of today's press release.
And updated definitions of any non-GAAP terms reconciliations of these items to the corresponding GAAP results and how when and why management uses such terms.
Information with respect to our GAAP and non-GAAP results, Matt Johnson. This call is available on our website at <unk> Dot com and in our Investor presentation.
Refer to the company's technology driven businesses as phenix.
This offering includes the next markets impacts growth platforms. I also remind you that information regarding our business on today's call that are not historical are forward looking statements. These include statements about.
About the company's business results financial position liquidity and outlook.
Any forward looking statements involve risks and uncertainties, except as required by law BGC undertakes no obligation to update any forward looking statements any outlook and targets discussed on this call assume no material acquisitions buybacks extraordinary transactions or meaningful changes to the company's stock price.
For a discussion of additional risks and uncertainties, which could cause actual results to differ from those contained in the forward looking statements cpg's.
See bgc's SEC filings, including but not limited to the risk factors and special note on forward looking information set forth in these filings and any updates to such risk factors and special note on forward looking information contained in subsequent reports on Form 10-K, and Form 10-Q or form 8-K.
I'm now happy to turn the call over to Howard Lutnick Chairman of the board and CEO of BGC group.
Thank you Jason.
Good morning, and welcome to our second quarter 2023 conference call and our first call after our corporate conversion.
The BG C group with.
With me today are chief operating officers from India, and our Chief Financial Officer, Jason Hoff.
We generated strong revenue growth of over 13% in the second quarter as our business continued to improve following the end of manufacturers zero interest rates BGC outperformance reflects the breadth and scale of our global platform, we are and expect to remain a growth company.
The beginning of the third quarter, we completed our corporate conversion and reduced our fully diluted weighted average share count to approximately 484 million shares, which is a 21 million share reduction, which lowered our share count by approximately 4%.
With respect to <unk>, we are waiting see FTC approval.
We expect to announce our strategic investors and the transaction details in the fourth quarter.
<unk> U S. Treasury platform continues to outperform the industry and captures market share from the CMA.
In U S interest rate futures, we will execute the same playbook, but now with the added support of these strategic partners, who are the largest users of these products.
<unk> represents the unique opportunity to reshape the U S interest rate cash and futures markets for that I'd like to turn the call over to Sean.
Thanks, and good day everyone.
Our revenue grew by 13, 2% to $493 1 million in the second quarter of 2023 with revenues increasing across all geographies.
This growth was primarily driven by the Americas, which improved 21, 9% as we continued to execute our growth strategy to increase market share in the region.
Our revenue growth was led by a 48% improvement.
Energy and commodities business, driven by our leading environmental broking business, along with strong double digit growth across our energy complex and ship broking businesses.
Energy and commodities now represents our second largest asset class behind rates.
Our rates credit and foreign exchange businesses generated solid year over year growth driven by strength in inflation products as well as European and emerging markets fixed income and foreign exchange products.
We expect continued improvement across fixed income and foreign exchange markets going forward.
Yeah.
We generated double digit growth across all adjusted earnings metrics during the quarter.
Pretax adjusted earnings grew by 17, 1% to $105 $5 million.
Post tax adjusted earnings increased by 18% to $100 million.
For 'twenty.
Sure, reflecting a 17, 6% improvement.
Adjusted EBITDA improved by 18, 5% to $135 1 million for the second quarter.
Turning to banks.
Earnings grew at an industry, leading pace of 14, 2% generating revenue of $125 1 million, which represented 25, 4% at BGC total revenue during the quarter.
This strong growth was led by Phoenix rates any.
Credit and data network and post trade businesses.
Beginning this quarter, we've renamed the line item from data software and post trade to data networks and post trade to better reflect the nature of the businesses.
Our Phoenix market revenues increased 10, 1% and Phoenix growth platforms generated record revenue of $18 1 million, a 46, 1% improvement versus last year.
Turning to U S Treasury revenue increased by over 40% and captured significant market share during the quarter.
Our club market share during the second quarter grew to 23% up over 200 basis points from 21% in the first quarter.
Portfolio match, our fully electronic credit platform grew its use credit volumes over fivefold from the second quarter of 2022.
Portfolio continues to outperform the industry and increase its market share across the credit markets.
Thanks go a fully electronic equity options platform, so revenue growth more than doubled in the second quarter, primarily driven by significant market share gains across Asia index products.
Data network in post trade revenue grew by 15, 4% driven by strong double digit revenue growth across <unk>, Sarah Phoenix market data and catheter lab post trade business.
Our data network and post trade businesses support $100 million of revenue over the last 12 months for the first time.
We expect continued growth as we execute on our customer pipeline and roll out additional offerings.
These businesses generally have longer term recurring revenue contracts supported by high renewal rates.
Turning to our outlook I am pleased to provide the following guidance for the third quarter of 2023.
We expect to generate total revenue of between $445 and $500 million.
As compared to $416 $6 million in the third quarter of 2022.
This represents growth of 13, 4% at the midpoint of our outlook range.
We anticipate pretax adjusted earnings to be in the range of $87 million to $110 million.
$82 $8 million last year.
With that I'd like to turn the call over to Jason.
Thank you Shaun and Hello, everyone.
BGC generated total revenue of $493 1 million, an increase of 13, 2% as compared to last year.
By asset class energy and commodities increased by 48%.
Excluding our Trident acquisition organic growth in energy and commodities was 35, 2%.
Credit increased by seven 4%.
Rates increased by five 2%.
<unk> increased by four 3% and equity has decreased by one 6%.
By geography, Americas revenue increased by 21, 9%.
Excluding China organic growth in the Americas was 16, 2%.
Europe Middle East and Africa revenues increased by nine 5% and Asia Pacific revenues increased by five 4%.
Turning to expenses.
Our compensation and employee benefits under GAAP and adjusted earnings increased by $14, nine and 13, 9% respectively.
This increase was led by greater hiring to enhance our growth across both our Fedex and voice hybrid businesses.
Our non compensation expenses under GAAP and adjusted earnings increased by three 2% and 10, 6% respectively.
Moving onto our adjusted earnings our pretax income was $105 $100 5 million.
A $17 1% improvement.
But the 72 basis point margin expansion to 21, 4%.
Yes.
We recorded post tax adjusted earnings of $100 million.
18% increase from last year, and an 84 basis point margin expansion.
Our adjusted EBITDA was $135 1 million.
An 18, 5% improvement.
Turning to share count our spot share count as of June 30 decreased by 0.3% sequentially to $503 5 million shares.
Our fully diluted weighted average share count increased <unk>, 9% sequentially, but decreased <unk>, 3% year over year to $505 5 million shares. However, as Howard mentioned at the beginning of the third quarter. Our corporate conversion resulted in an approximately 21 million 21 million share reduction of our fully diluted weighted.
Average share count to approximately 484 million shares, which lowered our share count by 4%.
As of June 30, our liquidity was $766 $8 million.
Compared with $524 3 million as of year end 2022.
This change primarily reflects net proceeds received from our $350 million, 8% senior notes offering completed on May 25, less the reduction of paying down our revolver.
In July we repaid the $450 million five 375% senior notes.
Because both of these senior notes were outstanding for the last five weeks of the quarter interest expense was higher than otherwise would have been.
We largely offset this additional interest expense with interest income during the period.
We incurred an additional $5 $6 million of interest expense. However, we earned an additional $4 $8 million of interest income effectively mitigating the duplicative interest expense and higher note rate.
On July one 2023, BDC completed its corporate conversion to a full C Corporation, which included changing our name to the BGC Group, Inc, and ticker symbol to BGC.
Our new structures aimed at attracting a broader and more diversified investor base, which we believe will deliver significant value to our shareholders.
Upon corporate conversion all former partnership units were converted to restricted stock.
<unk> or restricted stock units.
In connection with the conversion of GAAP equity based compensation charge of $60 9 million, we recorded in the second quarter for the redemption of certain partnership units and issuance of net shares of BGC class a common stock.
There are no expected material charges related to the corporate conversion going forward under GAAP, our adjusted earnings.
Today, we published our second quarter earnings presentation on our Investor Relations website.
This presentation contains information about our corporate conversion, including our estimated adjusted earnings tax rate operational synergies and pro forma share count following the conversion.
In addition to lowering our fully diluted weighted average share count. We are also targeting operational synergies of 4% to $7 million.
We are working toward unlocking capital that sits across multiple entities and geographies following the conversion.
In terms of post corporate conversion estimated tax rate under adjusted earnings we expect the balance of 2023 to be in the range of 6% to 9%.
For 2024, we are currently expecting our adjusted earnings tax rate ticked up slightly to a range of 7% to 10%.
With that I'd like to turn to Howard for closing remarks.
Thanks, Jason.
Bgc's strong competitive advantage lies in our global breadth and scale, which sets us apart from the other execution platforms and market intermediaries, we offer a truly global comprehensive product suite across the financial energy and commodity markets are.
Our strategic our strategic position alongside a steadily improving macro trading landscape to provide significant opportunities for bgc's continued growth.
We look forward to updating you on FX and we are pleased to have completed our corporate conversion.
We are happy to be reporting here today for the first time as the BDC group.
As Jason said, where the news simple ticker BGC.
We'd now like to open the call for questions.
Okay.
Yes.
Yes.
Okay.
Operator.
Thank you well now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment may be necessary to pick up your handset before pressing the star keys, one moment. Please while we can.
All for questions.
Thank you. Our first question is from Patrick <unk> with Piper Sandler. Please proceed with your question.
Yes. Good morning, Thanks for taking my question.
Congratulations on the strong quarter. It seems like revenue is really accelerated in may and June which.
Which is consistent with what some of your peers have said, but.
<unk> significantly outperformed the industry.
So I guess my question is what do you think drove this outperformance if you could dive into that a little bit more.
And I'm wondering Howard if you could just update us on how you see the back half of 2023 playing out.
The 13% growth.
Revenues in the third quarter it seems a little it seems pretty strong. So I'm just wondering if that's maybe what we should expect going forward or if you would maybe expect that to come down.
After the third quarter. Thanks.
Thanks, Pat and as Sean said, why don't I start I think.
In terms of the quarter just gone.
As I said in my prepared remarks, it was driven by driven.
Driven by Big growth in America, and 21, 4% in America, which which we've always said we were undersized in America, and that's where we had tremendous opportunity to grow and we're executing on that.
I mean, that's one of the reasons for our outperformance compared to the industry.
In terms of asset class, we always said that LNG.
LNG commodity business was undersized and stuff that you have seen the growth of 48% this quarter because we're.
We're gaining market share in that huge asset class and we also wanted to point that that debt.
Even excluding the small acquisition that we made on LNG and commodity ingredient business grew by 35 percentage points and then and then in terms of the rates credit and FX all win.
So nice double that nice single digit increases again, I think that's exactly as described as the marketplace gets set gets better. We gained further market share you saw our European business drive by just under 10% as well.
<unk> is executing on the strategy that we've got in place for the last 12 months.
And.
As we look forward.
Macro.
Market.
Structure is.
Healing right it was.
It was beaten upon by this manufactured zero interest rate scenario that we all lived through for 14 years and 14 years have an oddity.
Produces people, who think that is reality instead of realizing it was a 14 year oddity, so as Janet Yellen said.
Yesterday.
And this morning that the fed is planning to now issue more coupons unless treasury bills, that's a healing process, but thats going to do and thats going to raise longer term rates simply by supply coming into the market that will just create more volatility more volume of trading not only in U S treasuries, but across the <unk>.
And foreign exchange markets, we now talk about foreign exchange rate bounce around based on interest rates for 14 years. All we've talked about is foreign exchange based on the macro economy of Europe versus the U S. That's kind of a slow moving boat now you have interest rates moving kind of every month and so what would you go.
Going to see and you're going to see is a healing macro environment of which BGC.
Ross.
Deep set of businesses that are going to benefit from.
We have a giant sale and for 14 years. It wasn't windy now the wind is picking up and Youre starting to see this both moves you have seen nothing yet I think there are great opportunities ahead of us coming I don't feel this quarter is impressive I don't feel it is.
Coming down I feel this is who we are this is who we deal and I think we have.
Really really good business beneath our feet and we.
We feel really good about this quarter and I'm not going to project the fourth quarter, because I don't know what that world will bring but certainly you just finished the quarter at $13 to mid point of our guidance was $13. Four obviously this company feels pretty darn comfortable with the way the world is rocking going forward, it's coming our way.
Finally 14 years.
And now it's coming our way and it's going to stay that way for a long long time.
Thank you.
Very helpful color.
So my next question was going to be on Pemex, and Howard maybe if you could.
Give any.
Color on your thoughts on the recent announcement from CME in there.
Expanded cross margining opportunities with the DTC and just given the delays that you've seen in getting the <unk> approval.
Is there any you think these delays have given CME anytime to counter.
And so far as any possible advantages that FX is planning to offer their customers.
Well alright.
Take that apart.
So the CME.
It has a longstanding relationship with the DTC and those are two pumps, meaning the GTC holds the treasuries.
<unk> holds the futures and they kind of want to work together to try to give the market. Some cross margin benefit but the fact is when you have two different people holding the money they have.
A certain healthy skepticism of the other one buy back so they hope to get to 70% benefit, meaning if you're long the treasury and Youre short that treasury future there.
They expect to get to a 70% margin offset that.
Our view.
With the <unk> is a one part model, where <unk> will hold both pieces and when Youre holding both pieces, you're actually only care about the actual risk.
That should be sort of 95% to 97%.
A reduction in March so if you have an interest rate swap.
With the LCA and they have the gigantic marginal percentage of all swaps and Youll have eurodollars treasuries against it you would get 95% to 97% margin. So I think the CME, which is an excellent company and extraordinary monopoly in America.
They are smart capable competitor, but having never had an actual competitor I think this will sort of shocked them into thinking Gee, 70% sounds good but when the other guy is 95% to 97.
We are going to be a really really thoughtful capable clever competitor.
That so.
So that's sort of the baseline so 70% is good we think 95% to 97 is better.
Number one we.
We are we.
We are waiting Cft's C approval.
We do not think it's if we just think it's a win it's a process. We're working through the process. We are thoughtfully carefully working through it and we are confident.
Certain that it will.
Okay, what day it will come we don't control, but it will come what I've tried to say today is it is our intention.
That we will.
Now in the fourth quarter, the details of our strategic relationships with our investors.
And who they are and the details of that transaction to get so that as we're starting we're trying to put a finer point, saying, even if the CFC whatever data they give it to us we intend to.
Try to come with that announcement and some sales in.
The fourth quarter.
Okay. So that's that's sort of our plan now remember when.
When we bring in our bank partners. These big financial institutions. They come with two pieces there like twins not only do they have spectacular trading desks, who are the largest users of the product, but they also have things called <unk> yet they are the largest.
Brokers.
The world of institutional and individual users of futures and you get both of those states. So remember when building a futures market you need to have both the traders and you wanted the broad group of users, but when you bring in these banks as strategic partners you get both.
You get the largest.
Intermediaries have all the institutions of the world's coming online and bringing their customers online so you're really wildly shortening the timeframe by which we.
We will have to capture the broad use of creating.
Full full competitor to.
To the CMA.
And that's why we have this model that's why they want to do it.
And that's why we want them to do so there is a logic to it.
Paul.
Process, but its comment it is coming with the FTC will.
Prove it when we're finished with the process with them and we will then.
When we have the fully documented.
Strategic arrangement with all of our banks at all of our other users the high frequency players of all the US then we will we will bring it out and we will let them.
Great Great color, there as well and then I guess lastly, my my last question would just be around capital return Howard I think you've said.
On last quarter call that.
Or maybe you hinted that there could be accelerated share repurchases in the second half. So just wondering maybe if you could give us an update there.
And what we should expect in the second half.
Sure so.
Because of the seasonality of the business.
Our best two quarters at.
It starts at the beginning of the year and sort of slightly declines each quarter thereafter.
But we collect the money.
Let's assume it's between 90 and 120 days later, so we we earn our money in the first two quarters and we collect the cash and the second two quarters in the first quarter, we paid bonuses, we pay taxes. So we have lots of uses in the beginning.
And generally we generate more cash in the second half of the year. So we tend to be.
Bigger spenders of our cash in the second half of the year right. So we're going into the second half of the year. So that makes me feel good right now.
We're in a good part of the year.
Capital return.
Sure.
The company growing there's two ways to return capital this buy back shares and theirs.
To increase your dividend right now with the stock trading where it is with us being a growth company and that's doing much better obviously.
In buying.
Buying back shares if you looked at us for the last two years.
We have a $560 million fully diluted share count and now we have a $484 million foot.
Fully diluted share count so we've cut our share count 80 million shares, which most people would consider a lot and we.
We like that model of relentlessly using our cash.
To reduce our share so the corporate conversion had the result.
Are allowing us to.
Issue net shares.
Send the cash to the government, which is an effective buyback right. It has the same effect of a of a buyback meaning reducing.
Fully diluted weighted average share count so I would think in the near term.
Share repurchases seem to be the top of the list.
But over time I could see our board revisiting the dividend.
Considering increasing the dividend going forward, but.
Short term I would say share repurchases are the top of the list but.
We are not taking the dividend off the table, but I don't think that would be for.
Why.
Alright, great ill leave it there.
Congrats again on the strong quarter.
Thanks, Patrick.
Thank you.
No further questions at this time I'd like to hand, the floor back over to Howard Lutnick, Chairman and Chief Executive Officer for any closing comments.
Thank you all for joining us today.
It is a pleasure to come to you as BGC group.
And we look forward to.
Many many quarters of growth together thanks, everybody.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.