GFI Group, Inc. Q1 2009 Earnings Call Transcript

May. 1.09 | About: GFI Group (GFIG)

GFI Group, Inc. (NYSE:GFIG)

Q1 2009 Earnings Call

May 1, 2009 8:30 am ET

Executives

Chris Giancaro – Executive Vice President Corporate Development

Michael Gooch – Chairman, Chief Executive Officer

James Peers – Chief Financial Officer

Analysts

Chris Allen – Pali Capital

Dan Fannon – Jefferies

Mark Lane – William Blair & Co.

Christopher Donat – Sandler O'Neill

Operator

Welcome to the first quarter 2009 GFI Group earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today's call, Mr. Chris Giancaro, Executive Vice President of Corporate Development.

Chris Giancaro

Good morning. Welcome to the GFI Group first quarter 2009 earnings conference call. We issued a press release yesterday providing the financial results for our fiscal quarter ended March 31, 2009 which is available on our website at www.gfigroup.com. We have also posted monthly revenue information for the quarter on our website under supplementary financial information.

To begin this morning's call, Michael Gooch, our Chairman and Chief Executive Officer will review our business performance in the first quarter of this year, highlight some developments and set out expectations for the current quarter and beyond. Next, Jim Peers, our CFO will review in greater detail the financial results for the quarter. After Jim, Michael Gooch will conclude with a few remarks. Thereafter we will open up the call for your questions.

Our 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 account principals. Reconciliations of non U.S. non-GAAP financial measures to the most directly comparable U.S. GAAP financial measures were included in the company's earnings release which was furnished on a current report on Form 8-K dated April 30, 2009. These reports are available on our website at www.gfigroup.com under the investor relations section.

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

Michael Gooch

Good morning and thank you for joining us today. Our brokerage revenues for the first quarter of 2009 decreased 34% from the first quarter of 2008. Even though our results were well below the record levels of the first quarter of 2008, we demonstrated our ability to adapt to changing market conditions by recording sequential revenue growth in three of four product categories and by realizing a 21% sequential increase in our non-GAAP net income.

The market conditions we faced in the most recent quarter were very different from those we experienced in the same quarter a year ago when markets were very active. The first quarter of this year was marked by the continuing global credit crisis and recessionary environment keeping equity index and other asset values depressed globally.

The derivative markets in the first quarter of this year also suffered some liquidity and dislocation due to lingering uncertainty about evolving market structure and government regulation and oversight. Also, the strengthening U.S. dollar adversely affected our non U.S. dollar revenues as translated to U.S. dollars compared to last year.

Looking more closely at our performance by product category, our revenues from credit products represented 38% of total brokerage revenues in the first quarter of 2009. While credit product revenues were 33% below the first quarter of 2008, they increased 30% from the fourth quarter of 2008 because of the strong contribution of cash fixed income brokerage.

We invested in our cash fixed income business in 2007 and 2008 in anticipation of market growth in the category and I'm happy to report a significant return on our investment. Our revenues from cash fixed income and sovereign debt products increased 66% from the first quarter last year and were nearly double those of the 2008 fourth quarter. This partially offset a 66% decline in revenues from credit derivative products year over year.

Credit derivative product revenues were down 16% sequentially from the fourth quarter of last year. Whereas credit products still represent the largest revenue category GFI, credit derivative revenues represented approximately 13% of total revenues in the first quarter of 2009 compared to 26% of total revenues last year.

Credit derivative products continue to be affected by dealers and hedge funds deploying less capital in certain markets as well as uncertainty about changing market structure and proposed government and regulatory action. The decline we saw in the first quarter in credit derivative revenues also was caused by the combination of overall lower market volumes and the defection of a number of our New York credit derivative brokers to a competitor a year earlier.

Fortunately, there has been progress in the clearing of credit derivatives which I will discuss shortly. There are signs of growing confidence and growing certainty in the credit derivative markets that we believe will help lead to increased trading volumes in due course.

Equity product revenues represented 27% of total brokerage revenues in the first quarter of 2009. Following very strong growth in '07 and '08, equity product revenues were down 32% from the first quarter of 2008 and 27% sequentially primarily because of lower equity market volumes and because of depressed share values in Europe where commissions on certain cash equity and equity derivative products are based on motional values.

Commodity product revenues which represented 20% of total brokerage revenues in the first quarter of 2009 were down 32% year over year, but the increased 9% sequentially. The significant decline in the Baltic dry freight index in the fourth quarter of 2008 has impacted our dry freight business in Europe and Asia, although the index has recovered somewhat in the first quarter of 2009 and we believe that our dry freight business has stabilized.

In the first quarter of 2009 commodity market conditions and customer deleveraging continued to favor the short end of the energy product curve, adversely impacting revenues from brokering longer dated products.

Looking at sequential comparison, we had an increase in European electricity and emissions revenues and in North America, revenues from natural gas and emissions rose over the 2008 fourth quarter, so we are seeing growth in revenues from emissions trading in both Europe and North America.

This is an area of business where we see significant future potential. Our trade platform is particularly well positioned for growth in the emissions market. Already, approximately 90% of OTC emissions trading in Europe utilizes our trade platform.

Financial product revenues which represented 16% of total brokerage revenues in the first quarter of 2009 declined 40% from the first quarter of 2008, although they rose 11% from the fourth quarter of 2008. As I mentioned on the last call, dealers have scaled back their trading operations in Asia and emerging markets globally where we saw substantial growth in the past.

I also noted that our revenues were reduced by the transfer to a third party of our global U.S. dollar interest rate swap business in March 2008 and by our restructuring initiatives implemented in the second half of 2008. There was moderate volatility in the financial product markets in the first quarter of '09 resulting from global economic uncertainty and aggressive managing of fiscal policy by central banks world wide.

Looking at our revenues geographically, brokerage revenues decreased in all regions compared with the first quarter of 2008 with Asia Pacific down 49%, Europe, Middle East and Africa down 38% and the America's down 25%.

However, revenues leveled out sequentially in the America's and Europe, Middle East and Africa where they registered 1% increases and they increased 12% in Asia Pacific in comparison to the fourth quarter of 2008. Once again the significant strengthening of the U.S. dollar negatively impacted the value of our overseas revenues affecting the year over year comparisons.

Revenues from trading software and analytics and market data products increased 16% from the first quarter of 2008 and represented approximately 6% of our total revenues in the first quarter of 2009. This includes a contribution of $6.9 million from our Trayport subsidiary acquired in January 2008.

When measured in its functional currency, the British pound, Trayport achieved revenue growth of 37% over the first quarter of 2008 with the largest revenue contribution coming from its trading gateway product licensed to energy trading counter parties.

In past calls, I've discussed GFI's participation in efforts to encourage the development of centralized clearing in credit derivative markets and our conviction that GFI will be a beneficiary of greater transparency in the OTC derivative market place.

Our effort was realized in the first quarter when ICE Trust became the first clearing house to process certain credit depot index transactions. As you may remember, we were an early investor in the Clearing Corp along with several other dealers and industry participants. The Clearing Corp was acquired by Continental Exchange in March of 2009, resulting in the formation of ICE Trust.

We continue to add an economic interest in ICE Trust. As I stated in today's earnings release, we believe the advent of central clearing credit derivatives, standardized contract terms and increased electronic trading will help facilitate the recovery of our trading volumes and credit derivatives.

Controlling costs continues to be a major focus for GFI. It was the main driver behind our restructuring initiatives in the second half of 2008 and we took additional action in the first quarter through front and back office restructuring to further our progress.

On a non-GAAP basis, employee compensation benefit expenses decreased 27% from the first quarter of '08 but rose 3% over the fourth quarter. Employee compensation expenses increased as a total percentage of revenues in both periods. The increase as a percentage of revenues compared to the first quarter of 2008 resulted from a substantially lower revenues, the cost of stocking new brokerage desks covering cash equities and fixed income and the continuing impact of the expense we incurred to restart credit desks last year.

The balance of our expenses decreased 18% from the first quarter of '08 and 12% from the 2008 fourth quarter on a non-GAAP basis. While the increase as a percentage of revenues mainly due to the effect of lower revenues, they improved sequentially as a percentage of revenues.

Turning to our outlook for the second quarter of 2009, we currently expect our total revenues to decline by approximately 23% compared to the second quarter of 2008. I point out that we are seeing the pace of our year over year revenue decline moderate. We posted our first quarter monthly results last night and you will see that January revenue was down 42% year over year, whereas February and March were down 32% and 25% respectively.

We are projecting year over year revenue decline for the second quarter of approximately 23%. I anticipate that by the fourth quarter of 2009 we will see a return to year over year revenue growth.

I would now like to turn the call over to Jim Peers, our CFO for his comments and then we'll offer my concluding remarks.

James Peers

Good morning everyone. On a GAAP basis total revenues decreased in the first quarter of this year compared to the first quarter of last year by $98.4 million to $216.2 million versus $314.6 million for the prior year which was a record Q1. Non-GAAP revenues for the first quarter of this year are $212.3 million compared with $314.6 million in the first quarter of '08.

Q1 brokerage revenues totaled $197.6 million and total revenues for Trayport were $6.9 million. On a Sterling basis, Trayport revenues were up 8.7% from the fourth quarter of '08 and as Micky already indicated were up 37% from the first quarter of '08. Non-GAAP Q1 '09 revenues increased by $1.4 million compared to the fourth quarter of '08.

On a GAAP basis, first quarter net income was $11.6 million versus $36 million in the first quarter of last year. On a non-GAAP basis of this year, net income increased 20.6% to $12.9 million compared to $10.7 million in the fourth quarter of '08.

Diluted earnings per share for the first quarter of '09 was $0.10 compared to $0.30 in the first quarter of '08. Non-GAAP earnings per share for Q1 '09 was $0.11 compared to $0.32 for the same quarter last year. Our non-GAAP earnings per share has increased 22% to $0.11 versus $0.09 in the fourth quarter of '08.

Our non-GAAP brokerage revenues decreased by $100.6 million or 33.7% from Q1 to Q1 '08. Credit is down approximately 33% resulting in CDS desks down 66% which was offset by an increase in the fixed income desks of 66%. Our financials are down approximately 40%. Equity is down 32% and commodities were down 32%.

Brokerage revenues increased by $3.8 million or 2% in the first quarter of this year compared to the fourth quarter of last year. Credit was up 29.5%, financials were up 10.8%, commodities were up 9.2% and equities were down 26.7%.

Brokerage sign on bonuses paid in cash and RSU's in the first quarter this year were $17.2 million compared to $7.6 million in the first quarter of '08 and $23.8 million in the fourth quarter of '08.

Brokerage sign on cash and RSU bonuses expensed were $11 million in the first quarter of this year compared to $7.5 million in the first quarter of '08 and $10.4 million in the fourth quarter of '08.

Our brokerage personnel head count at the end of the first quarter stands at 1,039, down nine from Q1 of '08 and up two from the end of the year 2008. Our brokerage support staff head count ratio improved in the first quarter of '09 to 2.16 times compared to 1.95 times in Q1 of '08. Our broker productivity has increased to $188,000 in the first quarter of this year compared to $283,000 in the first quarter of last year.

Our pre tax margin for the first quarter of '09 was 8.4% compared to 18.3% for the same quarter last year on a GAAP basis. on a non-GAAP basis, pre tax margin for the first quarter of '09 was 9.5% compared to 19.4% for the same quarter last year and compared to 7.4% from the fourth quarter of '08.

In summary, our key performance drivers on a non-GAAP basis are as follows; revenues for the first quarter of '09 are down $102.3 million from the first quarter of '08. Trayport total revenues for Q1 '09 were $6.9 million, and revenues are up $1.4 million from the fourth quarter of '08.

The comp costs are at 66.7% for the first quarter of '09 compared to 61.4% for the first quarter of '08 and 65.2% for the fourth quarter of '08. Non compensation expenses in Q1 '09 as a percentage of revenues were 23.8% compared to 19.2% for the same quarter in '08 and 27.3% for the fourth quarter of '08.

GFI's effective tax rate for the first quarter is 36% which is flat to the '08 rate also at 36%.

I would now like to highlight some other areas that will be of interest to you. The number of diluted shares for the quarter ended Q1 '09, were 120.4 million shares. In the first quarter of this year, we had a severance and restructuring charges of $4.6 million. We eliminated 65 front and back office positions in the first quarter. In total we have eliminated 143 front and back office positions in the last few quarters.

It's anticipated that our annual savings from this head count reduction will be approximately $18.5 million.

As I highlighted on our last call, we are long Euro's on the revenue side and short sterling on the cost side in Europe. Accordingly, in the fourth quarter of last year, GFI entered into a number of FX forward contracts that serve as an economic hedge of our exposure to certain Euro and sterling cash flows in 2009 and 2010.

These hedges were mark to market at the end of the first quarter, resulting in an unrealized non cash pre tax gain of $3.2 million with no accounting offset for future cash flows.

As part of the Clearing Corporation's merger with Ice, we exchanged our equity in the Clearing Corp for cash and an interest in a holding company who's operating entities provide clearing services and credit default swaps and other over the counter derivative products. This generated a book gain of approximately $700,000.

On April 28, we amended our bank facility as follows; the revolver has been decreased from $265 million to $175 million. The definition of EBITDA now better reflects our cash earnings. The leverage ratio was lowered from 2.5 to 2 and our borrowing rate as LIBOR plus 250 basis points, up 125 basis points. Given the increased level of cash GFI has currently, we were comfortable lowering the revolver.

That concludes my remarks. Now I will turn the presentation back to Micky for some closing comments.

Michael Gooch

In conclusion, while the path to full recovery in our markets and our financial results still lies ahead, we made solid movement forward in the first quarter of 2009 including our 21% in crease in profitability over the fourth quarter of 2008.

Importantly, we continued to demonstrate our ability to adapt to changing market dynamics and we intend to make further progress during the balance of the year including developing new sources of brokerage commissions and other revenues.

We also continue to focus on controlling direct and indirect costs. We have continued to maintain and preserve our strong balance sheet and cash position. Because of it, we were able to declare our sixth consecutive quarterly cash dividend this quarter and return value to our shareholders.

Thank you for your time and attention today. We are now ready to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Chris Allen – Pali Capital.

Chris Allen – Pali Capital

If you comment just in terms of our outlook for the cash credit business and then can you give us a little bit of color on how you see the CDS market proceeding here. Obviously we've seen some stability, seeing signs of life, but when do you think it could really return to health?

Michael Gooch

I think the combination of the credit derivative market, the explosion of the credit bubble, all of those factors and the position that credit derivatives has found itself in in terms of partly a scapegoat for some of the concerns about systematic risk in the market and where we find ourselves today, what has resulted in that is certainly that there's been more activity in the cash markets.

Our business is obviously had to adjust to that and you can see that we successfully adjusted our business to take advantage of increased activity in cash markets. Also, I think in the cash markets things have become more thinly traded.

There's been less commitment of capital from the street and so I think that agency brokers like ourselves have found ourselves in a position of being able to put together more cash corporate fixed income and sovereign debt business than we may have done in the past. We've also added in that area, we added stuff and we are actively looking to make that a part of our business growth in the future.

In terms of the credit derivatives, the fixed side of that is the credit derivatives have therefore been less liquid. I still think the credit derivative market is a very good functioning, solid market place, but whilst there's been uncertainty in the market, the discussion around what the clearing mechanism will be, whether or not the Fed was going to come in and do something specific with moving things to a CFTC type cleared or even exchange executed environment, I think that has led to some less degree of use of credit derivatives in the fourth quarter and the first quarter.

And to the degree now that many of those issues are beginning to be cleaned up and we've got this big bang agreement between the North American credit derivatives traders and customers and now to some degree largely with Europe as well, where there's this new approach to credit derivatives to where you're going to have these standard contracts that can be easily fungible and offset with each other with upfront payments and allowance for coupons, etc. with the auction reset of the different levels.

It's really the next evolution in my mind for the credit derivative market. The credit derivative market got itself very big. We've had the issues in the credit space. Now with ICE Trust centralized clearing, at the moment I think that's mostly just indexes and I think it's just mostly the big pints putting their existing books in there.

But as we go forward, I think that what we've got now is the basis for a new solid credit derivative market. So we've got a situation where the credit derivatives only represent about 13% of our revenues at this point in time whereas a year ago they represented 26% of our revenues.

Meanwhile credit as a sector is still our largest sector representing 38% of revenues, but as we look out forward, we think that there's opportunity in both sectors for us both in the cash and in the credit derivatives.

So I fully expect our trading volumes in credit derivatives to grow over the next year. I'm expecting to see volumes in credit derivatives be at least 30% to 40% higher by the first quarter of 2010.

Chris Allen – Pali Capital

Big bang was just a couple of weeks ago. Have you started to see activity pick up a little bit since then?

Michael Gooch

What I'm seeing is a lot of confidence in the market place amongst our brokers and our customers that things are going well. It doesn't affect us directly on the trading desk in terms of putting together deals.

What is going on behind the scenes with the contracts is really bank to bank. But in terms of us putting deals together, we're still just doing the same job, matching buyers and sellers of these credit derivatives.

They're just more standardized, more fungible and therefore from the customers' perspective, they're reducing counter party risk and are reducing the mismatches within the books, and I would just say that the general sentiment is positive and you'll see that our brokers are positive about how that is developing.

So that is why I believe that that will translate into growing trading volumes in credit derivatives.

Chris Allen – Pali Capital

Obviously you're making great progress on realizing some savings. The annualized savings of $18.5 million from the head count reduction, what's in the run rate right now or should we continue to see some benefits into next quarter and beyond? And also is there any more room to maneuver on the non compensation expense logs?

James Peers

On the comp line yes. We'll start seeing some of that come through in the remaining part of the year so I would think; right now we're currently at 66.7%. I don't want you to think that number is going to come down to the low 60% immediately, but will start coming down over time quarter after quarter.

At the same time, you've got to remember we have put on a lot of new heads in these newer areas that Micky was talking about earlier and so until we see how those start hitting the ground running, the ratio still might be up around 66%, 67% range for the next quarter or so.

With regards to the other expenses, yes we continue to make progress on those. I think T&E is where we had a dramatic decrease and I'm hoping we can keep it at those levels. We also are looking though at how we cut our costs down in Clearing, but Clearing also is a function of the equity business so it's harder to predict.

But at the same time, we're also looking at how we better control our costs on communications/telecoms and quotes.

Michael Gooch

If I could just add, not all of our cost savings initiatives when we did a little bit more here in the first quarter, it takes a little while for some of that stuff to bleed through. So the improvement that you're seeing in our costs, and we've had this total of 143 back, middle and front office head reductions, that is still bleeding in. So that should improve.

And I also would say that if I am correct and we're seeing this trend of a moderation in the slowdown where the year over year revenue decline is decreasing, I think that by June/July we'll be down to maybe 15% to 17% year over year decline, and by year end fourth quarter, I think we could be actually back to positive year over year revenue growth.

I think in that situation, since we're working our way through the handful of bad contracts that we had with broker employees, and we're very diligently getting the unnecessary expense out of the business, I would say that that compensation percentage that's in that high 60's right now, if we increase year over year revenue growth by the fourth quarter, that number is going to be back down to 63% to 64% or something like that at worst I think.

Operator

Your next question comes from Dan Fannon – Jefferies.

Dan Fannon – Jefferies

Just to build on that last question, I was wondering have you been adjusting the pay outs or the cost structure with your current employees so when revenues do return are we going to be able to see greater margin expansion than we've seen in the past even when revenues were at higher level? I'm just trying to see if you're taking the opportunity today to kind of work out those pay outs that you pay your brokers to help you down the road.

Michael Gooch

The standard pay out that we are paying our brokers hasn't really adjusted tremendously. I don't want to put a specific number out there but it's relatively standard within the brokerage industry. Some of the stuff we're doing now in the corporate cash fixed income area is an improved margin to our business.

Some of whether or not we'll get improvement will depend on where the revenue growth comes from as we go forward. But I would say that it's not as if the environment in the market place has meant that the average pay out for brokers has been slashed 30% because actually, the one area of the business that has held up during this whole crisis is being agency execution brokerage services.

There are certain sales staff from the banking community that are anxious to get employment and at once certain point in the cycle I think there was opportunity to pick people up on slightly lower pay outs, but the general model I don't think changes dramatically.

I still think that what we're going through is an anomaly change from our business plan. We didn't anticipate the credit melt down. We've got a number of signing bonuses that are still being amortized through the P&L which represents about $1 million a month at least just coming from the restructuring of the credit desk.

And as that stuff washes its way through, I don't see as great a likelihood of that being that type of bonus payment. So that will partly help the margin that you're talking about in terms of total compensation.

The other thing is we didn't reduce our spending on technology with the revenue slowdown. So when the revenues pick up that number isn't going to shoot up dollar for dollar with it either, and so we'll get improvement there in the compensation margin because when you see that 67% number, it includes our development teams in those numbers.

And I think that revenues coming from growth from Trayport and from Data and From Fenics and these things, that's on a significantly improved margin relative to compensation. So overall, I would say that as we go forward and as the revenues continue to recover and grow, that we have managed to shake out some expense that we might not otherwise have addressed if it hadn't been for the credit crisis.

So we should overall end up getting to our target which was to get compensation down to somewhere in the high 50's as opposed to in the 60's. And I think we'll get there at some point in 2010, maybe late 2010. That's the direction that this thing is going.

Dan Fannon – Jefferies

As you think about the characteristics of your guidance and the confidence and the bullishness towards things getting positive in the fourth quarter, are you looking towards what happened in the energy markets post Enron and that you're kind of correlating that to what you think is going on in credit? Is there other factors that you're looking at to give you that positive tone?

Michael Gooch

I'm looking at our business mix and I'm looking at the fourth quarter of 2008 had to be in many respects from the financial services industry, the worst quarter ever. At the beginning of the quarter, there were plenty of concerns about who would even be remaining in business. So it was a very sloppy, high volatility difficult quarter.

So when I look to the end of 2010, obviously I'm being optimistic that we're not going to have a repeat of that, and that things are stabilizing generally in the credit markets. There's still plenty of other issues that could arise that could put that off track, but I'm certainly optimistic at this point.

In that respect I'm looking at things like the level of the vics which at one point was above 80 and then for awhile there was above 50 for a significant time and then got down into the 40's and in the 30's. And my impression is that our business being somewhat derivative centric, is likely to improve as the vics goes lowers.

In other words, volatility is our friend but not too much volatility. So I'm not talking about the vics going to 3%. I'm talking about the vics when it's back into high teens or low 20's will probably translate into a return of pretty good solid derivative interest in the market place.

Wall Street has a short memory and I think that if things stabilize and volatility is reasonable, our investment in technology and electronic trading, our growth of emissions, our credit derivative trading platform, the renewed interest in credit derivatives as things standardize, these are all positives towards our business model going forward.

Operator

Your next question comes from Mark Lane – William Blair & Co.

Mark Lane – William Blair & Co.

On the CDS business, last quarter with the departures from the domestic credit, and you sort of downplayed those departures having any impact on lost market share and that sort of thing. Are you now starting to see that impact because it seems like you're talking about that as a factor as to why your credit derivative revenue is down maybe more than the market?

Michael Gooch

I don't recall actually ever saying that we didn't have any lost market share as a result of the departure of those credit derivative brokers. I think we have a substantial business in credit derivatives in Europe where we do not believe we lost market share. But by any measure, you have to recognize that there were five brokers generally speaking in the credit derivatives in North America and after the departure of the brokers from our shop, there were then six.

And by any measure, I think I said that we all effectively have seen some erosion of our market share because there's six sharing instead of five sharing. But I also do think that the departure of those brokers did negatively impact GFI in North America in terms of its market share in credit derivatives.

But I think that what we're looking at now is credit derivatives representing 13% of our business and as a sector, I believe that it can grow and it can be large contributor to the company. But it's going to be now because of the new era in credit derivatives and the new products and the central clearing and just sort of renewed interest in the sector.

It's difficult to really say at this point what the direct impact is dollar for dollar for the departing brokers. It's complex.

Mark Lane – William Blair & Co.

Do you think with your revenue guidance for the second quarter, the 23% decline, can you hold non comp expenses flat with the first quarter levels?

James Peers

I would hope so. I think we can. I think the only hesitation I have is depending on the mix and that is what happens in equities and what that could do on the clearing side because I can't really predict that. But if you have the same sort of mix as you had in the first quarter, yes I would think we could.

Mark Lane – William Blair & Co.

Do you know what brokerage revenue growth was and also within the CDS business what the growth was on a constant currency basis?

James Peers

Not on CDS on a stand alone basis. On an overall basis if you just look at our European business the growth would have been, the lack of growth we were at 33% and it would have been down by another 6%. It would have improved by 6% if we used a constant currency.

Mark Lane – William Blair & Co.

For the entire brokerage business?

James Peers

Yes. For Europe.

Mark Lane – William Blair & Co.

Is that just for Europe or for the entire brokerage business?

James Peers

6% for Europe, 3% globally.

Operator

Your next question comes from Christopher Donat – Sandler O'Neill.

Christopher Donat – Sandler O'Neill

Can you give us a little color on, you talked about making investments in cash fixed income in 2007 and 2008? Can you tell us what sort of investments those were that set the table for you to have the strong quarter this past quarter?

Michael Gooch

It was really just hiring cash fixed income brokers as the opportunities came along over the course of the period.

Christopher Donat – Sandler O'Neill

Is there any ability for some of the brokers who have done more CDS to walk into the cash fixed income market pretty quickly to just transfer over or has this been more of a case the people that you brought on a year or two ago were the ones who generated the revenue this quarter?

Michael Gooch

It's a combination frankly. Some CDS brokers, their clients trade CDS and cash, and the broker is covering them for both CDS and cash and it's just his business mix changes. He does more cash than CDS. In some cases we may have taken certain CDS brokers and moved them over to cash.

We've got a very strong business in Europe in bank and finance in cash and we've got a very strong sovereign debt business and in some instances CDS brokers have moved over to cash brokering. But at the same time we've also hired a few people along the way.

Christopher Donat – Sandler O'Neill

From the outside it seems to us maybe what we're seeing, from a dealer perspective that they're less interested in trading the CDS maybe just for a short time period and more interested in trading cash products. Do you think that could just be a temporary trend here?

Michael Gooch

I think some of that's going on but at the same time, I think that we've probably gained market share in cash at the same time. So even if there's been a shift towards trading the cash over the CDS, as the CDS recovers, that doesn't mean then that we equally lose an equal amount of cash business back to CDS.

I think that we will find that we have gained market share in the cash business and we will benefit from both the growth of the CDS business and our increased position in the cash markets.

Christopher Donat – Sandler O'Neill

Your optimism about returning to year on year revenue growth around the fourth quarter, is that all products or is it driven largely by what you think will happen in a more normalized CDS market.

Michael Gooch

It's all products. I would never want to sit here and say all products are going to have increased revenues because I'm sure I'll find some product somewhere that won't. But generally speaking across the market place, I think that our business will benefit as things stabilize, normalize and volatility levels subside as the economy recovers towards the end of the year, that we will see improvement in all of our businesses.

Christopher Donat – Sandler O'Neill

On the non compensation spending, just to test again on how sustainable this is, just looking at the travel and promotion, that's as low as its been since 2006 when you only had about 800 brokers. Are these travel and promotion numbers sustainable here or is it just kind of a seasonal thing you just cut it off in the first quarter and we'll see it creep back up going forward?

James Peers

I don't think so. I think we've done two things. First of all, we lowered it as a percentage of revenue, but we've also gone back to a lot of our desks and also put dollar caps on it as well in some cases. So therefore we're trying to control the overall expense.

And then also I think given this time in the new era that there probably will be less spending on it. But as our revenues start to improve, yes the absolute dollars will probably go up again. But I'm hoping that we can keep them within reason compared to the same sort of level of discounts you say this quarter.

I think the other thing that you'll also see go up slightly in the coming quarters is the interest rate compared to Q1. Obviously with the new increase in our rate, that would equate if we borrowed the full $175 million, which I don't think we will because we probably start paying down some of that loan right now, but if we fully utilized the facility that would be a $500,000 a quarter increase.

But it's substantially lower than last year especially in the fourth quarter because it's a function of the LIBOR rate being so low right now and we would anticipate that the LIBOR rate is going to remain low for the foreseeable future.

Christopher Donat – Sandler O'Neill

So that $500,000 increase that would be off the $2.5 million you had in the first quarter?

James Peers

Yes.

Christopher Donat – Sandler O'Neill

It's ancient history but there were quarters ago you were talking about how competitive the market was for hiring and here you talked earlier on the conference call about how some contracts looked different, what is the typical contract now? Is there any sort of bonus or is it a pure pay out in general?

Michael Gooch

I would say in general I would say that we're mostly into dealer space. The concept of the big upfront bonus and guarantee is sort of, I don't ever want to say a thing of the past, but it is certainly subdued a lot, and there's quite a lot more discussion with new employees about compensation being based on production and not on any sort of upfront guarantee.

I think the upfront and the guarantee was something that was particularly put in the bubble and just from what I hear from what is going on with our competitors; they're all scaling back in terms of putting a lot of cash on the street. Cash is king and cash tied up in signing bonuses is very expensive. So the pendulum has swung in that respect.

I know you're trying to get a handle around our costs going forward and I think what Jim is saying, we have taken out those 143 heads and we have substantially cut back on our indirect expenses, and that is going to stay with us. We're not going to go out and suddenly hire 100 middle and back office staff.

It's possible that if we get a mix of increased trading in equities, we might see a small bump up in clearing expense, but this attack of expenses of $18 million. One thing has come from the market environment is this opportunity to really sort of get in there and attack costs. And that at this point is permanent.

Operator

Your next question comes from Chris Allen – Pali Capital.

Chris Allen – Pali Capital

I wanted to ask a little bit about the emissions markets. It's obviously one of the fastest growing markets out there. I'm wondering if you can give us any color in terms of how many brokers you have focused on this market and how do you see it evolving over time?

Michael Gooch

It's not a huge amount of brokers at this point. We probably have six or seven brokers focused on it in North America, Europe and Asia. Europe is where it's having the most success right now. But in terms of that business, that is where Trayport has a very important position because the Trayport platform is the platform that is being utilized by the trading community when they're executing these emission contracts with one of the other IDB's or even with certain exchanges.

So as we look at emissions, we've got a number of opportunities with potentially, where we've got this API now to CME for contracts in North America and Europe to travel over Trayport and we get a revenue share for that. So if something like the green exchange gets legs, we would potentially have a substantial revenue source from that and it would be very good margins as well.

So that's why I have a general optimism about the emissions space. It's not huge right now, but it's an area where we have good potential and we know that in North America it's very likely to be a Trayport program introduced. So then we'll see activity in North America similar to that we see in Europe. So it should be a nice business going forward.

Operator

This concludes the question and answer session. I would now like to turn the call back over to Chris Giancaro for closing remarks.

Chris Giancaro

Thank you very much for participating in our first quarter 2009 earnings call. We look forward to speaking to you again soon.

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