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GFI Group (NYSE:GFIG)

Q4 2012 Earnings Call

February 15, 2013 8:30 am ET

Executives

J. Christopher Giancarlo - Executive Vice President of Corporate Development

Michael A. Gooch - Founder and Chairman

Colin Heffron - Chief Executive Officer, President, Director and Member of Risk Policy Committee

James A. Peers - Chief Financial Officer and Principal Accounting Officer

Analysts

Patrick J. O'Shaughnessy - Raymond James & Associates, Inc., Research Division

Jillian Miller - BMO Capital Markets U.S.

Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division

Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Robert Rutschow - Credit Agricole Securities (NYSE:USA) Inc., Research Division

Michael Rogers

Operator

Hello, and welcome to the GFI Group Fourth Quarter and Full Year 2012 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Chris Giancarlo. Mr. Giancarlo, please go ahead.

J. Christopher Giancarlo

Thank you, Keith. Good morning. Welcome to the GFI Group Fourth Quarter and Full Year 2012 Earnings Conference Call. We issued a press release yesterday providing the financial results for our full year and fiscal quarter ended December 31, 2012, which is available on our website at www.gfigroup.com. We've also posted monthly revenue and trading day count information for the quarter on our website under Supplementary Financial Information.

To begin this morning's call, Michael Gooch, GFI's Executive Chairman, will give an overview of GFI's full year and fourth quarter 2012 business performance. He will then turn the call over to Colin Heffron, GFI's CEO, to review fourth quarter revenues and expenses. Next, Jim Peers, GFI's CFO, will review the fourth quarter financial results in greater detail. After Jim, Mickey Gooch will conclude with a few remarks. And thereafter, we will be pleased to take your questions.

Discussions during this conference call will include certain forward-looking statements. These statements are not guarantees of future performance. Actual results may differ materially from those expressed or implied in such forward-looking statements. More detailed information about the risks, uncertainties and other factors that may cause actual results to differ from such forward-looking statements are discussed in our filings with the SEC, including our most recent annual report on Form 10-K.

Also, the discussions during this conference call may include certain financial measures that were not prepared in accordance with U.S. Generally Accepted Accounting Principles. Reconciliations of non-U.S. GAAP financial measures to the most directly comparable U.S. GAAP financial measures were included in the company's earnings press release, which was furnished on a current report on Form 8-K filed on February 14, 2013. These reports are available on GFI's website, on the Investor Relations section.

I will now turn the call over to Michael Gooch, Chairman of GFI Group.

Michael A. Gooch

Thank you, Chris. Good morning, and thank you for joining us today. As I stated in our press release yesterday, I'm pleased and proud to announce the appointment of Colin Heffron as Chief Executive Officer of GFI Group. In his 25 years with the company, Colin has succeeded in every role and executive capacity he has undertaken, including as Group President since 2004. Colin's appointment as GFI's next CEO reflects the breadth of his executive duties and stature within the industry. I look forward to continuing to work with Colin in my ongoing role as Executive Chairman. I will turn the call to Colin in a few minutes to discuss GFI's fourth quarter performance. Let me first, however, provide an overview to our reported results.

A weak economic environment, tepid global trading conditions and broad uncertainty depressed trading volumes in 2012, particularly in the second half of the year. Those factors, combined with the effects of Hurricane Sandy and seasonally slow trading, resulted in difficult trading conditions in the fourth quarter. GFI's non-GAAP net revenues declined 9.2% in the fourth quarter of 2012 year-over-year, mirroring the volume of revenue declines reported in the broader OTC and exchange traded markets over the same period. GFI's performance is impeded by these lower brokerage revenues, along with ongoing technology and other business investments, front and back-office restructuring and regulatory compliance costs. However, GFI's software, analytics and market data revenues continue to grow largely due to Trayport, and GFI moved forward with ongoing technology development and cost reduction initiatives.

We believe that GFI's embedded technology and reduced cost base position us well in potentially improving economic and market conditions. Hurricane Sandy strengthened our belief that GFI's proprietary technology gives us a clear competitive advantage. GFI's electronic trade matching systems, as well as the successful execution of our business continuity plans from our disaster recovery sites in New Jersey, helped minimize the disruptions to GFI's New York area operations.

Electronic trade matching technology is deployed on approximately 40% of GFI's desks globally. Further, GFI's hybrid trading system support over 60% of brokerage revenues, excluding Kyte, and has significant product and geographical coverage. We have made good progress in rationalizing GFI's front and back-office cost structure. GFI's cost reduction efforts yielded over $31 million in cost savings in 2012. GFI's efforts to date have focused on headcount reductions and on building more flexibility in our compensation arrangements over time. We expect to reach our goal of achieving a run rate of over $50 million of reduced costs in 2013 as compared to 2011 expense levels. We expect to realize these cost reductions relatively evenly throughout the 4 quarters of 2013, and we are encouraged by preliminary January results which point to higher profitability. We remained cash flow generative during the fourth quarter with $18 million of cash earnings or $0.16 per diluted share, compared with $12.5 million or $0.11 per diluted share in the prior year fourth quarter. We also paid the company's regular dividend for the fourth quarter of 2012 on an accelerated basis on December 27, 2012.

I will now turn the call over to Colin Heffron to review GFI's fourth quarter performance.

Colin Heffron

Thank you. Good morning, everyone. GFI's fixed income product category, which consists of cash fixed income and fixed income derivative products represented 26% of total brokerage revenues in the fourth quarter of 2012. Revenues from fixed income derivative products decreased 37% from the fourth quarter of 2011 as a result of continued low volatility in trading volume. Revenue from cash fixed income brokerage were in line with those in the fourth quarter of 2011, resulting in overall fixed income revenues declining 17% year-over-year. Cash fixed income revenues represented 64% of GFI's fixed income product revenues in the fourth quarter of 2012.

Financial products, which were GFI's largest product category, represented 28% of GFI's total brokerage revenues in the fourth quarter of 2012. Financial product revenues increased 1.5% from the fourth quarter 1 year ago, as revenues from new offices offset lower trading activity in Latin American markets. Contributing to the success of the new offices is the deployment of GFI's hybrid electronics systems to new markets. Equity products represented 20% of GFI's total brokerage revenues in the fourth quarter of 2012. Equity product revenues decreased 16% year-over-year due to weakness in cash and equity derivative trading volumes globally. This decrease mirrors the declines in volumes in the broader exchange-traded cash and derivatives markets. Commodity products revenues represented 26% of GFI's total brokerage revenues in the fourth quarter of 2012. Commodity product revenues decreased 21% from the fourth quarter of 2011.

Looking at revenues by geography. GFI's brokerage revenues decreased 22% in the Americas and 8% in EMEA and Asia Pacific from the fourth quarter a year ago. Large decline in Americas can be attributed partially to Hurricane Sandy and its effect on customer trading operations. As Mickey noted, GFI's proprietary technology and the successful implementation of GFI's disaster recovery and business continuity plans from our dedicated backup sites in New Jersey allowed us to offset the impact of the hurricane on our New York operations. I want to commend GFI's facility management team and BCT teams and our Chief Operating Officer, Ron Levi, for their fine work in maintaining operational continuity following the hurricane.

Revenues from trading software analytics and market data products increased 16.6% from the fourth quarter of 2011, reflecting the strong performance of GFI's Trayport subsidiary, which grew 20% year-over-year in its functional currency, the British pound, and 23% in U.S. dollars. Trayport continues to grow revenues by leveraging its extensive customer network and diversifying its product offerings. GFI continues to expand its proprietary electronic trade execution capabilities, as well as the number of users. 2012 revenues from electronic trade matching sessions notably increased in fixed income derivatives globally. We've made significant progress in our cash bond business in the Americas, with approximately 35% of the fourth quarter revenues derived from electronic trade matching sessions. Our proprietary platforms span a significant range of geographical regions and asset classes. We firmly believe this technology capability will position GFI well in the future as regulations are finalized and implemented with the emphasis on electronic execution, transparency, clearing and post-trade reporting capabilities. International regulators are moving forward with the implementation of regulatory reform of swaps trading. Although the final rules are yet to be announced for the U.S. swaps execution facilities, or SEFs, we expect to see them soon. We are actively preparing ourselves to meet all regulatory requirements. GFI is confident the burdens of complying with swaps and futures regulations for the Dodd-Frank, MiFID and other laws will not materially impede our business success when greater trading activity returns to the global market.

Now let me review GFI's expenses. GFI's non-GAAP compensation expenses decreased in actual dollars in the fourth quarter versus the same period 1 year ago, but increased as a percentage of net revenues. The increased compensation expense as a percentage of net revenues reflects the lower trading volume environment coupled with front and back-office restructuring expense. Sign-on and retention bonuses paid were down substantially in the fourth quarter of 2012 and are expected to be down further in future quarters. As a result, the amortization of previously paid bonuses should dissipate over time, resulting in improvements in compensation levels. Further, any return in trader arbitrage should lead to higher revenues and a lower compensation ratio, particularly with the lower cost structure. Non-GAAP compensation expenses were lower than the fourth quarter of 2011 on an actual dollar basis and as a percentage of net revenue. Non-GAAP non-compensation expenses were down approximately $6.2 million in the fourth quarter of 2011. The reduction was broad-based and included lower communications, market data, travel, entertainment and other expenses.

We remain highly focused on reducing GFI's front and back-office cost structure and improving GFI's profitability ratios. In 2012, we reduced cost by over $31 million, relating mostly to compensation expense. We are on target to reach total cumulative savings of over $50 million in 2013 compared to 2011 expense levels.

Before I hand the call back to Mickey, I want to thank him and the board and my GFI colleagues for their trust in me as I step into the role of CEO. I am pleased that Mickey will remain actively engaged as Executive Chairman, supporting the senior management team, speaking to investors and setting long-term strategy. I'm excited to lead the firm forward in pursuing the emerging opportunities in the next quarter-century as GFI services the global market participants. Back to you, Mickey.

Michael A. Gooch

Thanks, Colin. So GFI's business remains cash generative, with cash earnings of $18 million or $0.16 per diluted share for the fourth quarter of 2012, up from $12.5 million or $0.11 per diluted share in the prior year fourth quarter, demonstrating GFI's ability to generate strong positive cash flow. GFI's balance sheet remains strong, and the company is in full compliance with all of its debt covenants.

Looking at the first quarter through the second week in February, GFI's preliminary total revenues are tracking down approximately 6% compared with total revenues through February 2011. We believe our preliminary quarterly performance is within the range of volume or revenue measures reported in the broader exchange-traded and OTC derivative markets. Although the January results were encouraging, we believe that markets will continue to be challenging until there is greater regulatory clarity, increased global trading volumes and improvement in investor risk appetite. Before offering my concluding remarks, I would now like to turn the call over to Jim Peers, our CFO, for his comments.

James A. Peers

Thanks, Mickey. Good morning, everyone. Our GAAP fourth quarter 2012 net revenues were $173.4 million, a decrease of $31.1 million or 15.2% compared to $204.6 million in the prior year's fourth quarter. Our non-GAAP fourth quarter 2012 net revenues were approximately $175 million compared to $192.6 million in the prior year's fourth quarter, a decrease of 9.2%. Our non-GAAP brokerage revenues in the fourth quarter of 2012 were $151 million compared to $173.7 million in the fourth quarter of 2011, a 13% decrease. Total revenues to software, analytics and market data were $22.5 million, up 16.6% from the prior year's fourth quarter and up 6% over the prior quarter.

On a sterling basis, Trayport revenues increased over 20% to GBP 10 million in the fourth quarter of 2012 compared to the same quarter last year. On a year-to-date basis, non-GAAP net revenues decreased $93 million or 10.6% compared to the same period in 2011. And on a year-to-date basis, our non-GAAP brokerage revenues decreased $99.7 million or 12.5% compared to the same period in 2011.

On a GAAP basis, GFI's fourth quarter 2012 net loss was $11.4 million compared to a net loss of $22.1 million in the fourth quarter of last year. On a non-GAAP basis, GFI's fourth quarter 2012 net loss was $2.9 million, compared to a net loss of $7.5 million in the prior year's fourth quarter. On a non-GAAP basis, GFI's full year 2012 net income was $8.9 million, compared to $26.5 million in the same period last year.

GFI's diluted GAAP earnings per share for the fourth quarter of 2012 was a loss of $0.10 compared to a loss of $0.19 for the fourth quarter of 2011. Diluted non-GAAP earnings per share for the fourth quarter of 2012 was a loss of $0.02 compared to a loss of $0.06 in the prior year's fourth quarter. GFI's diluted non-GAAP earnings per share for the year 2012 was $0.07 compared to $0.21 in 2011.

Our GAAP brokerage revenues were down by $24 million or 13.8% when comparing the fourth quarter of 2012 to the fourth quarter of 2011. Fixed income was down 17%. Derivatives were down approximately 37%, where cash was flat. Equities were down 16.2%, commodities were down 21.4%, and financials were up 1.5%. Fourth quarter 2012 GAAP brokerage revenues decreased $12.1 million or 7.4% compared to the third quarter of 2012. Fixed income was down 10.8%, derivatives down 12.8%, and cash was down 9.7%. Equities were down 0.3%, financials were down 8.1%, and commodities were down 8.4%.

Our brokerage personnel headcount at the end of the fourth quarter of 2012 was 1,188, down 83 from the fourth quarter of 2011 and down 26 from the third quarter of 2012. Our broker productivity of 125,000 in the first quarter of 2012 decreased from 136,000 in the fourth quarter of last year.

On a GAAP basis, pre-tax margin as a percentage of net revenue for the fourth quarter of 2012 was negative 5.4%. This compares to negative 13.2% in the same quarter last year. And on a non-GAAP basis, our pre-tax margin for the fourth quarter of 2012 was negative 3.7% compared to negative 2.5% in the fourth quarter of 2011. On a non-GAAP basis, our pre-tax margin for the year 2012 was 1.3% compared to 5.1% for 2011.

In summary, our key performance drivers on a non-GAAP basis for the fourth quarter of 2012 are as follows: non-GAAP net revenues were down $17.7 million or 9.2% compared to the fourth quarter of 2011. On a full year basis, non-GAAP revenues were down $93 million or 10.6%. Our compensation costs, which includes all employees, not just brokers, were 73.2% of net revenues in the fourth quarter of 2012, compared to 70.7% from the third quarter of 2012 and 71.6% for the fourth quarter of 2011.

On a year-to-date basis, our compensation costs were 70.2% net revenues compared to 69.1% in 2011. The non-GAAP compensation ratio on a year-to-date basis is only up 1.1%, yet brokerage revenues are down $99.7 million, which reflects the benefit of the cost savings initiatives we realized. Non-compensation costs were 30.5% net revenues, compared to 30.9% from the fourth quarter of 2011 and 29.7% from the third quarter of 2012. On a year-to-date basis, non-compensation costs were 28.4% of net revenues, compared to 25.8% in the same period for 2011. GFI's effective non-GAAP tax rate for the full year of 2012 was 11.9% compared to a rate of 39% in 2011. This was primarily driven by a release in the quarter of a tax liability related to prior years. Excluding this one-time benefit, the effective non-GAAP tax rate for 2012 would've been approximately 33%.

Our fourth quarter non-GAAP items are as follows. On the revenue side, our non-GAAP results excluded gain of $400,000 related to a mark-to-market adjustment, the current fair value for the estimated earn-out payment for Kyte. Also excluded is a $600,000 mark-to-market loss on equity warrants, and also excluded is a trading loss of $500,000 from startup operations. As I've highlighted on previous calls, we are long euros on the revenue side and short sterling on the cost side in Europe. Accordingly, GFI continues to enter into a number of FX forward contracts, which serve as an economic hedge of our exposure to certain euro and sterling cash flows. Our revenue hedges were mark-to-market at the end of the fourth quarter resulting in an unrealized, noncash pre-tax loss of approximately $700,000. These losses were excluded from our non-GAAP results. On the expense side, the fourth quarter excludes $4.8 million expenses related to expenses from a startup operation. Our non-GAAP results also excluded $2.5 million of expenses related to the amortization of acquired intangibles. And our results also exclude $900,000 of expenses related to the cost associated with Hurricane Sandy.

Additionally, the non-GAAP results exclude a $3.5 million reversal of an accrual related to a change in estimate on the Kyte acquisition balance sheet liability. And finally, our fourth quarter non-GAAP results exclude a credit of $3.2 million, representing an adjustment on the sublease loss accrual.

On the tax side, our non-GAAP results excluded $1.9 million of nonoperating adjustments for the recognition of a U.S. tax charge related to the repatriation of international profits. On the cost reduction front, we continue to adjust GFI's front and back-office cost structure with approximately $31 million in cost savings year-to-date compared to 2011 expense levels. We believe that the 2013 results will reflect over $50 million in savings versus the 2011 base. Total sign-on bonuses paid in cash and RSUs granted in the fourth quarter of 2012 were $2.4 million compared to $17.8 million in the prior year fourth quarter. The GAAP provision for income taxes increased approximately $5.8 million year-over-year. Although the GAAP pre-tax income or loss in both years were close to breakeven. Increase in the GAAP basis tax rate in the full year of 2012 compared to 2011 was primarily driven by permit differences and the tax cost of repatriation of certain foreign earnings on which no actual cash tax will be paid in the current year.

GFI continues to generate significant operating cash flows. Our cash earnings per share for the fourth quarter of 2012 was $0.16 compared to $0.11 in the same period last year, and our cash earnings per share on the year-to-date basis is $0.75 compared to $0.85 for the same period in 2011. This non-GAAP performance metric is reconciled on our Investor Relations website.

On a trailing 12-month basis, we generated adjusted EBITDA of $118.4 million compared to $142.8 million in the same period in 2011. Reconciliation of GFI's adjusted EBITDA is included in our Investor Relations website, and adjust GAAP net income for interest taxes, depreciation, amortization non-GAAP items and the noncash amortization of our RSUs and sign-on bonuses. Our balance sheet continues to be strong, and our cash position, which includes cash and cash equivalents, clearing cash, and which excludes client money, was $247 million at the end of December of last year, compared to $236 million at the end of September 2012. While our overall cash balance is down, our restricted -- unrestricted cash, I should say, of $96.3 million is up compared to December 31, 2011, due to our ability to free up capital mainly in Europe and Asia. GFI's unrestricted cash is up $1.4 million from September 30, 2012, despite setting aside an additional $20 million of regulatory capital in the U.S., approximately $3 million in share repurchases and paying an incremental dividend of $5.9 million in the fourth quarter of 2012. GFI's total balance sheet cash per share at the end of December 2012, was $2.11 compared to $2 at the end of September last year. GFI is compliant with all of its bank covenants and its leverage ratio at the end of the year is 2.11x compared to the requirement of 2.5x. The number of weighted average diluted shares for the quarter ended December 31 were $115.8 million on a GAAP and a non-GAAP basis. That concludes my remarks. Now I will turn the presentation back to Mickey for some closing comments.

Michael A. Gooch

Thank you, Jim. In summary, the fourth quarter remained challenging for GFI because of myriad of uncertainties, combined with Hurricane Sandy and a seasonally slow trading environment. However, under these difficult trading conditions, we were able to reduce costs through headcount reductions and through building flexibility in compensation arrangements and generate $18 million of positive cash earnings. We were pleased with what we're able to accomplish through both technology and cost initiatives in the fourth quarter, and are encouraged with preliminary January results, which showed increased profitability. We realized over $31 million in cost savings in 2012 and expect to save over $50 million in 2013 as compared to 2011 expense levels. These savings are largely in the compensation area, GFI's largest expense category. We remain steadfast on reducing the sign-on and retention bonuses, and this should result in further improvement in our cash flows and the compensation ratio in future years. GFI's subscription-based software analytics and market data revenues continue to grow, and customer usage of our proprietary electronic trading systems is increasing. GFI's balance sheet remains strong. The company is in full compliance with all of its debt covenants and continues to generate significant cash earnings, $0.16 per diluted share in the fourth quarter of 2012. It should be noted that this cash generation enabled us to pay our regular fourth quarter 2012 dividend in December.

Once again, I congratulate Colin Heffron on becoming GFI's new CEO. I shall continue to remain focused on the long-range strategy development of GFI, communicating with investors and working closely with our Board of Directors and senior management team. Thank you for your time and attention today. And we are now ready to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question comes from Patrick O'Shaughnessy with Raymond James.

Patrick J. O'Shaughnessy - Raymond James & Associates, Inc., Research Division

So my first question is on current default swaps -- or current derivatives, I guess. So we've seen your revenues in that business kind of dwindle down a little bit the last few quarters, and I think ICE's and Creditex' subsidiaries have seen the same sort of results. Where do you think this business is going to go once we have the Dodd-Frank rule finalization? How big of a rebound can we expect, or do you think that kind of the underlying market demand for a lot of these products has been permanently impaired?

Michael A. Gooch

I think we're going to get a significant rebound. As you can see right now, credit derivative revenues are just a little over 9% of our global brokerage revenues. Whereas at 1 point in time, it was 40%, and we were sort of considered a big credit derivative shop, but now it's roughly 9% and maybe 8% of our total net revenues globally. But once the full clearing mandate is in place, which I think comes later this year, for credit derivatives, and when we get a credit index futures contract, fully established, and the rules and regulations around the clearing necessities is clear to all participants, I think we will see a significant rebound in this credit derivatives space.

Colin Heffron

And the only thing I would add to that is when the futures take off or even the index swap is cleared, I would add that I think that the derivatives market of the back of that will see significant growth. So you'll see options and structured options off the back of a highly liquid index.

Patrick J. O'Shaughnessy - Raymond James & Associates, Inc., Research Division

Okay, that's helpful. And then my second question. So I guess during the fourth quarter, both CME and ICE kind of convert a lot of their OTC energy to exchange-traded futures. Did you guys see any impact on your commodities trading from this and kind of what's your view of that, basically, shift? I don't know if it's just shift in naming more than anything else, but kind of what's your view on the changes?

Michael A. Gooch

Certainly we've seen some impact, I think, in the North American market with this initial transition, just because it's not entirely business as usual. I think longer-term, there could be some impact in how it affects the way we do business because with everything in the North American market being primarily futures, there are potentially rules and regulations around what percentage of those futures must be traded directly on the exchanges' central limit order book and things like that, that could change the way we introduce trades into the futures market. Whereas now, historically, GFI and other IDBs have generally done the job of matching counterparties internally where we have counterparty A and B, we match them and then post them for clearing. Some element of the business might evolve where our brokers are simply directing 1 side of the trade into the central limit order book. But I also think that there might be other changes evolving in that marketplace that remain to be seen, that could have some further influence going forward on how that might all unfold. I don't think it's like a done deal at this stage of the game, that everything is going to necessarily remain significantly in the CME and ICE bucket.

Operator

And the next question comes from Jillian Miller with BMO Capital Markets.

Jillian Miller - BMO Capital Markets U.S.

So just a quick follow-up on Patrick's last question. One of the things kind of related to this whole futurization in energy that is talked about a lot is the block thresholds for futures. And I guess there's been a lot of talk recently by regulators about potentially raising the block threshold for futures in order to remove some of that disparity between the swaps and the futures rules. And I guess I'm just not entirely sure how to think about that from GFI's perspective because in some ways the higher block thresholds for futures might be good for swaps because it makes them more competitive, but then at the same time, raising the threshold, I would I think, would make more business have to go directly to the exchanges, that might have been what you were referring to in your comments, but it could potentially disintermediate you. So sorry, a bit of a long-winded question, but a little bit more clarity on exactly how the block issue fits in? That would be helpful I think.

Michael A. Gooch

It doesn't necessarily disintermediate us because, like I just mentioned to Patrick, it might just mean that some of our brokers are, like our equity brokers now, just directing traffic into a central limit order book. One of the issues that's going to arise is that when you had a Core Principle 9, which requires that a certain percentage of the volume be traded on the exchanges' central limit order book, once you go over that percentage, then that future has to be delisted and listed as a swap. And I don't see how the exchanges will be able to, in real time, manage that, and so there's a very good strong possibility that certain futures that are currently on those exchanges will, as a result of the amount of businesses getting crossed off exchange, actually end up being delisted to swaps. So the fact that the regulators are talking about leveling the playing field between swaps and futures in energy, I think, is a good thing for the over-the-counter market. And I think there are probably things in the works that are going to add some further interesting developments to that marketplace that might make it even more competitive. Not more competitive, but more -- it might make the over-the-counter market more competitive with the futures market going forward.

Jillian Miller - BMO Capital Markets U.S.

Okay, got it. And then on the outlook for just general activity levels in 2013, I mean, January was a very strong month, and I think it created a lot of optimism in the space, but it seems like from what we're hearing, February has kind of reverted back to that same tough environment we were very familiar with in 2012. So I kind of feel like we're getting mixed messages from the market. Any more color from you on how you guys are interpreting this first 6 weeks of volume data in 2013, I think would be helpful.

Colin Heffron

Okay. I think the way you put it was fairly accurate. The only thing I would kind of add to that is with the mix between 12% and 14%, we felt that there was genuine appetite to do business in what might be the new normal. February has not been as robust as January, but we don't expect to see the tail off that we saw throughout 2012. So I think that we've hit a base, we're going to bump along, it's going to be tough conditions. I really think the regulatory drag is the major impact. So I think we're going to be okay. And I'm -- obviously, we're going to continue to cut costs. It's probably our biggest focus right now, and I think with revenue levels even in February, if they continue at that level or bump up, we'll still be very profitable.

Jillian Miller - BMO Capital Markets U.S.

Okay. And with respect to these cost cutting plans, just trying to get an idea for the impact of restructuring on your comp rates in 2013, and I was hoping you might be able to give us an idea for, like, if we have a flat top line in 2013 versus 2012, do you have an idea for what your compensation ratio might be?

James A. Peers

I'll give you an idea on that, Jillian. I mean if we took the year-to-date 2012 brokerage revenues, and we're at the same level as 2011, for example, our year-to-date ratio in 2012 would've been 68%, compared to 70.2%. So it will be in that range. And we probably will see that sort of continue in 2013 as well because of now, we're going to get the full impact of the savings in the current year of at least $50,000 -- $50 million plus which will happen fairly evenly over the quarter. So even though our revenues maybe down, our bottom line should improve.

Jillian Miller - BMO Capital Markets U.S.

So it sounds like in a flat revenue environment, we're talking about like 300 or 400 basis points of improvement in the comp ratio year-on-year, am I interpreting that right?

James A. Peers

I would say, probably yes, 300 -- 3% is probably more in line.

Operator

Our next question is from Dan Fannon with Jefferies.

Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division

Colin , congratulations, and Mickey, good luck with a little more free time. I guess just a clarification on your comments around margins or profitability better this year in '13, I guess, what are you comparing that to? Is that from 4Q 1 year ago, I guess, what's the context?

James A. Peers

I think we're comparing to where we are so far this quarter compared to last quarter last year, '12.

Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division

So 4Q last year?

James A. Peers

No, first quarter last year compared to first quarter of this year.

Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division

Okay, with the down 6% revenue impact?

James A. Peers

Yes.

Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division

Okay. And I guess as you've gone through this cost cutting process, which has been ongoing, have you outlined additional costs, like as the revenue environment really hasn't been getting better since you initiated this, should we -- I guess, are you uncovering more additional cost savings opportunities as this is going on? Or how should we think about the evolution of the plan?

James A. Peers

Well, at this point in time, we have a run rate of greater than $53 million the beginning of the year. But we have not stopped, we're continuing to grow this. For example, just in the month of January alone, we added additional $6 million, and Colin and I will continue to stress the cost savings throughout the year. So my -- the way I look at it is $50 million is sort of the worst case scenario. But we think we can deliver better than that.

Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division

Okay. And I guess the brokerage headcount quarter-over-quarter ticked down, can you talk about the areas for which you're seeing the most attrition?

Colin Heffron

I think it's pretty broad-based. Percentage-wise globally, I think we're just looking at everywhere. I think when we were out of our own offices for a couple of months, a few areas got exposed. And I think some of that is in Europe, and some of it is in North America. It really is across the board, I don't really have any specific products. We're looking at our lower margin businesses, and saying that they just have to be higher margin, we're moving to a much more discretionary model. We're continuing to invest in technology because we think it allows us, in the changing world, to attract the best talent where -- regardless of what percent of revenue they think that a particular individual might be receiving, if their income continues to go up or maintained in these tough times, I think it's -- you're building a place where people want to be.

James A. Peers

Even though our net number was down year-over-year 83 people, the actual number of brokers that left last year was probably around 140.

Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division

Okay, that's helpful. And I guess I just want to clarify, several of your competitors have been named or discussed in the LIBOR issues. Have you guys had any discussions around that?

Michael A. Gooch

We're not involved in that. That's an area of business that kind of relates back to that whole money market business that the other 4 interdealer-brokers were historically involved with for the last 40 years, money market deposits. It's the rate at which banks lend to each other in the short and in the medium-term. And GFI has just not been a money market broker, so it's an area where we have no real functionality. So our business and our brokers have not been associated with that.

Operator

And the next question comes from Niamh Alexander with KBW.

Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division

Most of my questions have been answered, but I wanted to understand how is this sponsored access model going? We were talking about before in the new world, there's kind of an emerging role for maybe the dealers to become more liquidity aggregators, necessarily, than providers. Maybe for the interdealer-brokers to become maybe centers of liquidity, providing white labeled access for customers in. How is that progressing? Has anything been happening there, are you actually doing some trades by this model yet?

Michael A. Gooch

It's progressing. We are doing some trades by that model. We've got some licensing agreements that are moving their way through the various processes that finally get them to be on the table. But it is a model that is progressing, and we are actually investing further in it now, bringing people on to pursue it even more aggressively because we think it's going to be very much a part of the future landscape of the business.

Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division

Which products do you think you'll kind of have more of a specialty area in?

Michael A. Gooch

I think you'll see it in the credit space and the financial space, not particularly in the energy space because, because, as we were discussing earlier on the call, a lot of that's futures. All the counterparties come into us anyway, there's no sort of delineation between market maker and customer like there is in the financial and commodity space. And then in the equity space, that's a wide open marketplace already where companies like GFI do business with broad myriad of hedge funds and things. So I think primarily in the credit space, so cash and derivatives, and in the financial space derivatives.

Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division

Okay, I appreciate it. And then moving over, as we kind of came into last year, you'd announced the cost restructure, you're 1 year down the line and your compensation ratio is moving lower, your cash earnings are higher, like things are starting to feel a bit better. But also as we came into last year, you were kind of rolling out that Swiss office with the focus on emerging markets and NDFs and whatnot. I think that was quite a drag maybe for longer than we've expected, and there were some other new offices opening. So where are we now versus 1 year ago? Is that -- kind of that part of it is still a bit of a drag or are we kind of in a position where that's adding? And what about other new initiatives? Is there kind of -- should we look for them maybe to offset some of these cost saves for a while yet?

Colin Heffron

I think that, as you said, some of the investments early last year didn't take off as quickly as we'd like. I think that's no longer a drag. I think that we're really, as we said, a coiled spring. We're revenue dependent at the moment, and we're going to continue to lower the cost basis. So I think that we're not experiencing any drag from past investments, aside from just amortization, that is a bit of a hangover. I think that will go over -- go away over the next couple of years because we're sort of out of the sign-on business and out of the retention business.

Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division

Okay, fair enough. And then just lastly, you'd said on the LIBOR and the interest rates that you weren't really involved. I just want to clarify because I understand there's some, there's some work going on around potential rigging by dealers and non-deliverable forwards and I know that's a market that you participate in. But do you know if that -- have you looked internally at anything? Or is it the products that you participate in that might come up in the future?

Michael A. Gooch

We have always non-deliverable forwards, but I'm not aware of anything that's going on in that space right now in terms of the dealers rigging the market.

Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division

We've heard of something in the middle and Asian markets.

Michael A. Gooch

Sorry?

Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division

The Asian markets.

Michael A. Gooch

In the Asian market, you mean in the Far East?

Colin Heffron

We'll have to investigate them. We have a presence in that business. It's a small market share, but we're not aware of anything.

Operator

And the next question comes from Chris Donat with Sandler O'Neill.

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Just 1 question from me on your -- on the cost initiatives you've got. I'm just trying to understand the process there. Is that something where it's been an executive committee that sort of decides what's you're going after and how you're going to do it, or is there a single executive that's been responsible? And really specifically to Colin, what has your involvement been in identifying areas for cost reduction and getting involved in it?

Colin Heffron

It's been across the board. For the last 20-odd years, this business went from a discretionary model to a fixed model, and then the fixed compensation as a percentage was raised over the years due to competitive pressures. And then you drew in sign-ons and guarantees and the money -- the profits were squeezed out of the business. So basically, if you take away the sign ons, you take away the guarantees, and you offer someone greater see with better technology and the ability to make money off of the back of a reasonable payout, you return to what is a possible cost structure. And that allows you to reward the people who are really, really driving the business, and also pay fairly the people who are participating in the business. And that's where we're going, and I think that's where you're going to see us able to manage our comp line to a more reasonable rate over the next 18 months.

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Got it. And I understand that you're heading that way, do you feel that competitors are? Or in the past, Mickey has used the expression about the circular firing squad that the industry had formed, do you feel like that, some of those competitive pressures have diminished?

Colin Heffron

I do feel that way. I think that, frankly, technology is a huge part of the business now, and all of our employees want to be somewhere where, that they have access to communicating to their customers through matching sessions or through central limit order books or through some sort of auction technology. And there's very few people who have successfully deployed that technology, so I think that makes us a market leader. And I think, frankly, that the other competitors, as you say, are experiencing volume problems as well, so they're going through similar cost cutting exercises. I can't speak for them all, and I don't talk to them about such things but I can't imagine that they're -- we look at their results as well.

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

And then just last one for me. Jim commented on the in terms of the number of brokers, 140 left but you're only down 83. Where's the roughly 60 brokers that were hired? What sort of places? What products?

James A. Peers

That was mainly the Switzerland office and Paris.

Operator

And the next question comes from Rob Rutschow with CLSA.

Robert Rutschow - Credit Agricole Securities (USA) Inc., Research Division

I was -- I think, Jim, you mentioned that you allocated another $20 million to the U.S. business for capital purposes. Can you give us a little more color on what the driver was if that's correct?

James A. Peers

Yes, we, as you know, with the new Dodd-Frank, basically all of your brokerage business now is going to be regulated. And so, therefore, we had to regulate Amerex and brokers which were previously not regulated, so we put an additional capital for those 2. We probably will get some of that capital back as we start seeing the consolidation of where our revenues are coming. And also, as we go forward into the new year, we'll probably have a small amount of increased capital that will be needed for the second, things like that, but nothing significant.

Robert Rutschow - Credit Agricole Securities (USA) Inc., Research Division

Okay. And could you give us like a total capital number of the U.S. business?

James A. Peers

Well, right now, it's approximately $60 million.

Robert Rutschow - Credit Agricole Securities (USA) Inc., Research Division

Okay. And then, I think you called out, I think, for the first time, the investments in startup activities. Can you just talk about what those are? Is that just the Swiss office or is there other things in there?

James A. Peers

There's other things in there, and I think that's all I'd like to say at this point in time.

Operator

And the next question comes from Michael Rogers with Conning Asset Management.

Michael Rogers

A couple of fixed income questions if I might. Moody's took your debt rating down 2 notches recently, and I'm wondering how you expect this will impact revenues in 2013, and related to that, I guess, the willingness of customers to continue to do business with you with the volumes and the magnitude that they had in the past, particularly now that you're a B1-rated firm. And I guess also related to that, too, how would you handicap the probability that the banks will renew your credit line, which comes due at the end of this year, and might they seek to tighten the terms of the credit line?

Michael A. Gooch

Joe, I'll answer those questions for you. First of all, it has no impact whatsoever on our customers' business with us because I think as you understand, maybe, we don't carry customer accounts. We have a significant financial balance sheet. Our customers do business with broker-dealers that are a fraction of our size. The downgrade of the debt, we obviously don't agree with. As we just pointed out in our presentation, we were generating significant cash income, and in fact, we ended the year 2012 with about $45 million more free unrestricted cash than we started the year with, and we paid dividends and we paid our debt. So it has no impact on when we're matching buyers and sellers in these products. Our customers are not concerned with our bond debt rating. It has no impact on revenues. And then the second part of your question was again -- can you just remind me? Our bank -- our handicap, the likelihood of our renewal of the bank facility at 100%.

Michael Rogers

Okay, that's a high percentage, I appreciate that color. The bank, with the downgrade on the bonds, I know there's a coupon adjustment. Where does that coupon rate now sit, please?

James A. Peers

We're at 9.625%.

Michael Rogers

9.625%.

James A. Peers

The maximum it can go up is 200 basis points from the initial yield.

Michael Rogers

From the initial coupon when the deal was offered?

James A. Peers

But it could also recover if our rating improves.

Operator

As there are no more questions at the present time, I'd like to turn the call back over to Chris Giancarlo for any closing remarks.

J. Christopher Giancarlo

No closing remarks other than to say this concludes GFI Group's Year End and Fourth Quarter 2012 Earnings Conference Call. Thank you, everyone, this morning, for joining in. Goodbye.

Operator

Thank you. The conference has now concluded. Thank you for participating in today's presentation. You may now disconnect.

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