Good day ladies and gentlemen and welcome to the Second Quarter 2009 NYSE Euronext Earnings Conference Call. My name is Ann and I will be your operator today. (Operator Instructions).
As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Stephen Davidson, Head of Investor Relations at NYSE Euronext. Please go ahead, sir.
Thank you, Ann. Good morning and welcome to the NYSE Euronext second quarter 2009 earnings conference call. Before I introduce today's speakers, let me remind you that comments on the call may contain forward looking statements within the meaning of the Private Securities Litigation Reform Act. These statements are based on NYSE Euronext’s current expectations and involve risks and uncertainties that could cause NYSE Euronext actual results to differ materially from those in the statements.
These forward looking statements speak as of today and you should not rely on them as representing our views in the future. Please refer to our SEC filings for a full discussion of the risk factors that may affect any forward looking statements. Except for any obligation to disclose material information under the federal securities laws, NYSE Euronext undertakes no obligation to release publicly any revisions to any forward looking statements to reflect events or circumstances after this conference call.
We will discuss non-GAAP financial measures during the call. These non-GAAP measures are fully reconciled in the tables attached to the text of the earnings press release that we issued earlier this morning. We believe that these tables provides investors useful information about our business trends however our non-GAAP measures do not replace and are not superior to GAAP measures for the call today call today, Duncan Niederauer, Chief Executive Officer will review our second quarter financial highlights comment on market conditions and provide a business by business update Michael Geltzeiler Group Executive Vice President and Chief Financial Officer will then review the financial results for the quarter and he will walk you through the key factors that are driving our positive cost savings development and update you on our financial positions.
We’ll then go back to Duncan for closing comments before we open the lines for your questions and when we go the Q&A session please limit your question to one to allow for broader participation. Also on the call today for the Q&A session are Larry Leibowitz Group Executive Vice President & Head of U.S markets and Global Technology Stephane Biehler Chief Accounting Officer and Corporate Controller. We are incorporating slides for the call today, which are available for viewing on our website and Duncan and Mike will refer to the slides during their remarks.
With that let me now turn over to Duncan
Thanks Steven good morning everybody and thanks for joining today’s call. before I get to the results I have a quick riddle for you What do Rich Repetto, Carlos Delgado and Jose Reyes have in common? They are all on the disable list as a result of baseball related injuries. So Rich, I heard you hurt yourself at Yankee Stadium the other night and I hope you've recovered. I was pleased to hear that while you were crashing into the wall you managed to hold onto the ball and make the catch in spite of being knocked unconscious or so congratulations. Hopefully you'll be back in the line soon rays.
As you guys will see from the slide presentation which has been a other busy quarter for NYSE Euronext so I'd like to encourage to turn to slide 3 please. You will see hopefully when you review the quarter, that we’ve maintained our focus on expense management and we’ve continue to investing our businesses and our technology, which we hope and expect to drive future growth.
Our second quarter 2009 results were solid, characterized by growth and Pro forma gross revenue net revenue operating income and diluted EPS compared to the first quarter of ’09.
Transaction volumes have held up very well and we are at levels that nobody had anticipated at the end of 2008. While we continue see pricing pressure in our equities business we are making moves to bolster the competitive position of these businesses. And I am looking forward to the second half of 2009, when I anticipate continued improving results and more favorable year-over-year comparisons.
Focusing again on slide 3, you will see that Pro forma non-GAAP EPS for the second quarter was $0.51 up from $0.43 in the first quarter of 2009, but down from $0.75 in the second quarter of 2008. Net revenues were $611 million in the quarter. A decrease of $96 million versus the same quarter last year $57 million or roughly 60% of this decline was driven by the negative impact of foreign currency fluctuations.
And on the cost side, we’ve reported $398 million in fixed cost in the second quarter of ’09, which were 6% below the levels last quarter and also below last year despite acquisitions and new businesses we have launched in the last 12 months.
I am extremely pleased with the efforts we’ve made on the cost side. Considering the challenging market conditions and the new initiatives that we have in our place Michael going to the specifics around these expenses later in the presentation.
We expect the headcount reductions in the second half of ’09 was significantly lower annualized run rate cost as we move through 2009 and into 2010. Few of our strategic initiatives the establishment of NYSE Liffe Clearing and the down sizing of staff we are advanced in this quarter in this quarter and necessitated that we take a pre-tax charge of $442 million. The combination of these two items drove our GAAP loss for the quarter but will be sources of future revenue growth and expense reductions respectively.
As I – as I indicated earlier, I’m pleased with the progress we have made this quarter on our strategic initiatives that will diversify our business model and drive future growth. We commence the operations for NYSE Liffe Clearing earlier to date and we anticipate that NYSE Liffe Clearing will be accretive to earnings in 2009. To further move to build our U.S futures business and offer innovative solutions to the market. We recently agreed to create New York Portfolio Clearing, or NYPC a joint venture of for clearing U.S. fixed income derivatives with DTC.
As discussed in the last quarter we have signed a non-binding term sheet with several market participants to take in equity interest in NYSE Liffe in the U.S.. We expect to close this partnership agreement in the third quarter and we are in discussions to use the similar , a similar semi-mutualized model to grow our share of the U.S options business.
More to come on that later. The European cash we rolled out the simplified pricing effective April 1. The new pricing framework was a critical move, which simplified our pricing and made our platform more competitive for our most sensitive clients.
In June we completed projects acts with the rollout of speed improvements for all NYSE stocks on June 5 the project we call SDBK bringing the average execution down from a 105 nano seconds to a average of 5 nano seconds. With the migration of cash of a –of U.S cash businesses to UTP scheduled to begin in this quarter and hopefully to be completed in large part by the end of the year, we will see some incremental improvements in terms of licensing. Remember UTP not only provides us as one of the fastest matching engines. It also allows us to retire legacy systems, which translate into additional cost savings. Derivatives will next up after we complete the migration of our U.S. cash businesses.
Also in June, we signed and closed our cutter exchange investment, which will be making an investment in installments over the next four years. NYSE technology will also provide managed services to the cutter exchange as well as the latest software and technology to develop a modern stock exchange and hopefully a derivative exchange in the future.
Lastly, in the second quarter NYSE like U.S. signed a licensed agreement with MSI. We introduce a suite of domestic and international index futures products build on the range of MSI global equity industries.
Please swing to slide four for me. On slide four we highlight several macro factors that our broad indicators of the underlying help of the financial industry. These factors in our view have recently began to show early signs of stabilization. In the upper left quadrant we have the quarterly progression in secondary offerings.
In the second quarter of 2009 with the recent capital raises we return to level not seen since the second quarter of 2007 around the time when the credit crisis began. You heard us talk about this publicly quite a bit, because I think the media has been overly focused on IPO issuance and the point we keep making is that’s not the only measure of the health of equity of the equity capital markets where the capital markets overall I think the level of secondary issuance and the level of dead issuance has been a lot higher than the media is telling us about and I think we take a lot of reasons to be optimistic out of that and in the upper right hand quadrant we’ve got a chart of the British pound and the Euro going back to 2007 You will on there while the currency headwinds persists year-over-year, we have experienced some recent weakening of the dollar, just positively impacted our results from Q1 to Q2. In the lower left hand quadrant we've got a chart of the tent spread going back to before the crisis and you can see that that spread has returned just about pre-crisis levels and I think we can safely say that the spike in the third quarter of 2008 is well behind us.
And lastly in the lower right hand quadrant, we talk about investment grade new issuance which I alluded to a minute ago which dropped significantly in the third and fourth quarter last year and as return to I think pretty significant levels now. Our longer term view is that the equity capital markets will continue to be an attractive place for company’s define reasonably price capital and while we started to see the IPL market improved I think our expectation is – we could be setting up for a very strong second half.
So, overall what we think down side risk remain for the economy and we are certainly not out of the woods we are encouraged by the relative stabilization of several broad indicators of capital markets help. Stabilization of the markets with more positive tender will few of our listing business where the pipeline continues to be robust as well as our interest rates derivative franchise with returning to pre-crisis levels in June.
Well decrease in volume in the U.S. equities market has come on the heals of the decrease in volatility beginning in April and we are starting to feel the impact of seasonally slower summer months. I'm confident that the U.S. equity market will return to historic levels of volume growth overtime.
Shifting to slide five. This is a slide, you have seen in the last two or three earnings calls and we will see probably for another earnings call or two and then by the end of this year, we will shift to 2010 areas. of focus. But I think you're familiar with all the initiatives on this page. page. As we continue to move to 2009, I am pleased to report that we have and we will continue to execute against every one of these focused areas delivering on our commitments to streamline our operations, position our businesses for future growth, and eliminate unnecessary costs. So starting on slide 6, I’m going to go into a little more detail on some of these initiatives.
Slide 6 is an update on our European and U.S. cash businesses. Lets start with Europe. In the first half of the year in Europe, we’ve made several important strategic moves to position our business in the phase of increasing competition from new entrants. First, we launched our new MTF offering SmartPool and NYSE Arca Europe.
On the regulated market we implemented a new a new simplified pricing structure that I alluded to earlier that not only meets the needs of our high frequency client base but is also designed to drive activity to our NYSE Arca platform by creating a bridge that that rewards users of our MTF with pricing incentives on their regulated markets activities.
It’s a regulated market, new pricing we are now charging flat euro fees on a per order basis as opposed to a per transaction basis. By charging on a per order basis, the high frequency community in Europe can now predict their trading cost much more accurately, because they are charged for the initial trade – the initial execution of their order and then any subsequent executions that make up the order are free. 20% reduction from the fee change combined with pricing changes made by LCH Clearnet effective July 1st, combined to make our platform much more competitively priced.
Remember that those changes on the clearing side, were reductions by LCH Clearnet that are pass through to our clients if they do not impact our margins in any way. While we are watching pricing in market share development closely, we are also trying to take meaningful, rational approaches to pricing that directly respond to our client needs. We're also continuing to develop SmartPool which I mentioned earlier and broadening the involvement of a number of customers there.
We recently announced the addition of 14 more leading investment banks joining the platform. We also lowered the minimum order size accepted by the platform and that's led to getting some pretty successful results in individual stocks on market share so I think it’s fair to say that platform is finally out this starting blocks.
Lastly on the European side, BlueNext, our emissions trading exchange has experienced strong growth in the first half of 2009 and recently signed a partnership agreement with the China Beijing Environmental Exchange as a first step towards greater cooperation between the two companies.
Turning to the U.S. the implementation of the new market model in the fall of ’08 has bolstered the dedicated liquidity on the NYSE and helped dampen market share deterioration in the face of an unsustainable dynamic pricing environment. Since January of 2009, our matched share of all U.S. equities has gone from just over 33% and just below 30% at the end of June. A decline of roughly 340 basis point. The matched share of our next largest competitor has gone from 27% to just over 20%, a decline more than 600 basis point.
In Type A, our matched has declined from 42.3% to just under 40%, a decline of 240 basis points. While our closest competitors match share has gone from just above 20% in January to just about 15% in June, a decline of 500 basis points. Most of the share loss this year as gone to broker internalization and some has gone ELP programs and flash orders, which are receiving the regulatory scrutiny we believe they deserve.
While we continue to watch pricing developments and their impact on our market share closely. We remain focused and balancing profitability with market share. As illustrated by the pricing adjustment we made in March, which raised our take rate from $0.08 to $0.18 for 100 in conjunction with the speed enhancements we introduced.
I am also pleased to report that as I mentioned in my opening remarks, the speed enhancement process and program that we completed on June 5, have reduced the execution time from over a 100 milliseconds to roughly 5 milliseconds and this officially retire some of the old legacy systems like SuperDOT that we thought we are in the way in terms of the migration to UTP.
Later this year when UTP is rolled out to NYSE and NYSE Amex as well as NYSE Arca there will be an additional boost in transaction speed on those platforms. In addition to speed improvements we are also in the process of modernizing the floor to accommodate more floor based trading businesses and to expand the SLP program by adding new participants. Please do not be confused about what SOPs do and what these ELP type programs or the SLP program is open to anyone. And any SLP who wants to collect the rebates are providing liquidity, it strictly performance based. It must be displaying codes they must execute at the inside market. And then in only then if they performed do they receive the rebate, just very different and some of these other programs that our competitors are using, which have no obligations and in any many cases not even a displayed quote to attract the order. This is all part of our ongoing efforts to expand liquidity on NYSE classic platform and specific on the floor lastly the second quarter show a nice jump in equity fund raising following the – of successful IPO’s in Q2 Chinese market is also began to show signs of opening up we welcome Chemspec International and Duoyuan Global Water to the NYSE both during the month of June. Please shift the slide 7 for me.
Slide 7, provides an updates on our Global derivates business Europe the launch of NYSE Liffe Clearing gives us gives us a clearing capability that leverages LCH Clearnet's core competence in managing risk in managing risk with a default fund and gives us the strategic flexibility to develop new products and services and bring them to market in a to market in a timely fashion. The interest rate products have shown renewed strength with total volumes coming back to pre-crisis levels although they've tailed off a bit in July. Total volumes for the first half of 2009 were up 20% and first half versus the first half of ‘’07 and only down 4% on the record first half of 2008 and be clear our OTC trade administration in clearing service volumes are up 45% year-to-date 2009 versus the same period of 2008
In the U.S. as I mentioned earlier we announced our intension to establish NYPC a joint venture with DTCCs to develop an innovative fixed income clearing solutions that I will discuss in more detail on the following slide. We're actively pursuing this mutualized approach to develop our U.S. futures and options businesses. Our prospective partners in both of these efforts are key players in their respective spaces that will help us build out liquidity and share the cost of developing these platforms. We expect to have a definitive agreement with our partners in the NYSE light business sometime in the next few weeks regarding U.S. options we made some pricing changes effective July 1st which we anticipate we will grow our market share in the first month, that the pricing change has been in place we have already seen a positive response and – positive impact on market share and profitability. First we eliminated the firm facilitation fee, secondly we reduced the firm electronic fee from $0.50 to $0.15, which should help us grow our electronically executed volume higher from the current 25% level. We are not sitting still with approximately 18% of the options market. We are committed to growing our market share and we are exploring bringing on partners to develop this business as well as I mentioned a couple of times.
Finally, a little more detail on the agreement we signed with MSCI who as you all know is a leading provider of investment decision support tools worldwide and the agreement there enables us to introduce a suite of domestic and international index futures products built on their range of MSCI equity indices.
Over 90% of the international equity mandates in the U.S. track MSCI indices, and given their 25% market share in the U.S. ETF market, NYSE Liffe U.S. is well positioned with this agreement to create a virtual circle of liquidity around MSCI futures, ETFs and options.
We will be launching the first round these new products this quarter probably in September, initially with MSCI U.S. EFA and emerging market index futures. These products will continue to be clear to OCC along with the silver and gold contracts already cleared there.
Now please shift to slide 8, and then after slide 8 I will turn the call over to Mike. As promised, slide 8 is going to go into more detail on what I think is this very important and significant announcement that we’ve made to establish a 50-50 joint venture with DTCs fixed income clearing corp to create NYPC.
For those of you not familiar with DTCs role in the in the fixed income markets, their FIC unit has over 80 members consisting of leading commercial banks and broker dealers and they process an average of more than $4.1 trillion each day in U.S. government, agency, mortgage back and repo transactions.
As of December '08, FIC held more than $39 billion in cash and securities in its clearing fund as margin. The new clearing house NYPC will be a four profit venture that will combine the industry leading capabilities of our growing NYSE Liffe U.S. platform DTCC FIC to offer the innovative offsets with U.S. fixed income securities by bringing together for the first time cash positions and their natural hedges in the futures market via a single pot margin methodology. In essence, we are solving for capital efficiency at a time when the cost of capital far outstrips the benefit of lower transaction costs and new technology.
NYSE Euronext will contribute our market leading clearing technology which currently facilitates member position management for NYSE Liffe Clearing in London and ICE Clear in Europe. Additionally, NYSE Euronext will contribute working capital and commit to $50 million financial guarantee to reinforce the safety and soundness of NYPCs clearing fund.
NYPC will be leveraging DTCCs risk management structure and while the venture remains subject to to regulatory and other approvals we remain optimistic that we are on track for a spring 2010 launch of this facility. By bringing together cash positions and their natural derivative hedges in one central location rather than spread across separate clearing houses, market participants will be able to avoid split margin pools with one single margin call and collateral movement between cash and futures. The model will be scalable and can be expanded to other derivative products as dictated by the market and the regulatory environment.
Joint venture will also provide an unprecedented level of transparency to regulators across U.S. fixed income securities and their derivates that will help do – increase transparency reduction in risk Doug – with the Obama administrations recently announced financial regulatory reform goals and aligns broadly with statements from CFTC Chairman Gensler and U.S. Treasury Secretary Geitner who have advocated for regulators to have more thorough and timely information about the positions of participants in the derivatives markets. This is a very important issue for the derivatives markets and reflects our commitment to supporting to help to restore in the U.S. capital market and enhance market transparency this support buildings our U.S. derivatives business and bringing capital efficiency and transparency to markets we have added Walt Luke into the team. Walt as in many of know is the former acting CFTC Chairman who joined NYSE Euronext on July 13 it will be instrumental to us as we continue to make headway and growing our presence in Global derivatives.
Before I turn the call over to Mike let me emphasize the technology is at the core what we do and in the second quarter we continue to make significant progress in building out our Global platform NYSE technology business. We launched our safety infrastructure in Europe with over 100 customer contracts signed we were the first to implement Sienna's 100 G network that will drive superior speed and ultra low latency for our clients and lastly we launched next generation market data platform designed for high volume latency sensitive markets
With that let me turn the call over to Mike to review of our financial results.
Thanks Duncan Slide 10, details our GAAP results for the second quarter compared with Q1 2009. And Q2 2008. they’ve also included a table that details the restructuring charges we reported for the respective periods. In the quarter we reported a GAAP loss of $0.70 or $1.3 billion of gross revenues.
GAAP losses entirely attributable to a $442 million or $1.21 per share, charge related to restructuring activities. This includes the anticipated and perviously announced termination of our clearing new agreement. With LCH, which facilitate the in sourcing of clearing activity until the brand name in NYSE Liffe Clearing.
Another restructuring actions primarily attributable to severance. Termination payment to LCH of $355 million is being issued today the effective date of the transition, but with accrued in the second quarter. Following FSA approval of the transaction.
This charge is fully tax deductible. These charges through the GAAP loss for the quarter. Both items will enhance future profitability. We expect NYSE Liffe Clearing. To generate annualized revenues. In excess of $150, should we accretive to earnings immediately. Getting this year. Severance actions reported this quarter. For the European social plan, new USV written. And technology staff energies will generate annualize savings in excess of $60 million.
Slide 11, provides our Pro forma results for the second quarter. Pro forma diluted EPS, was $0.15 versus $0.43 in Q1 2009, and $0.75 in last year. Pro forma gross revenue, net revenues operating income and EPS will all above Q1 2009 levels.
Pro forma gross revenue were $1.1 billion up 10% versus Q2, 2008. Revenues for all trading venues benefitted from higher year-over-volumes. However the largest contributor growth with structural changes to U.S. pricing. Following introduction of rebates with the new market models.
Net revenues for the quarter declined 14% compared to Q2, 2008, after adjusting for the $57 million unfavorable currency effect in the quarter. Net revenues were 6% lower in the same period last year.
Fixed operating cost declined 6% versus Q1, 2009 and Q2, 2008, after adjusting for currency effect M&A activity and other new initiatives. Fixed costs were 12% lower than this quarter last year. Pro forma operating income for the quarter rose $32 or 18% from Q1 and decline $68 million from Q2 2008.
This included $27 million unfavorable currency effect in the quarter. Additionally investments and NYSE Liffe U.S. safety Europe, IT integration activity and duplicate data center costs added $17 million to the expense variance.
On slide 12, we show our second quarter revenue by both product line and geography. Geographic mix of net revenues remains the same as last quarter 48% U.S. and 52% Europe. Although comprising a higher proportion of our growth revenues 51% of our net revenues came from trading activities in the second quarter. This compared with 49% in Q1, 2009 and over 60% Q2, 2008.
Net trading revenues were slightly higher than last quarter driven by volume growth and higher net capture rate in NYSE classic as we benefited from the full quarter effect of the higher take fee. This growth was mitigated by lower European cash revenues and the price reduction implemented April 1st versus prior year, net trading revenues were negatively impacted by the strong U.S. dollar, lower net capture rates for the European and U.S. cash market and less trading days in the quarter. Software and technology revenues were above last year mostly attributable to timing of the prior year acquisitions of AEMS Exchange Solution business and the launch of Safety Europe. Software sales in the quarter remain a bit sluggish attributed to the economic slowdown and some larger transactions not closing in the quarter. Regulatory revenue was lower this quarter reflecting a reduction in gross focus revenues, which impacts pricing. The increase in other revenues is attributed primarily to BlueNext which was introduced in the fall 2008
Slide 13, shows the quarterly volume trends for our major trading operation. Q2 volumes were above last year figures across all four trading venues and rose versus Q1 2009 in each market except U.S. cash. For NYSE Liffe derivative business we have separately displayed volumes for their full service Liffe connect offering from the OTC post trade BClear product Net volumes for Q2 were at their highest level since time last year driven by improvement in short-term interest rate and equity futures. BClear volumes were up 53% however this product line is offered at lower price levels and subject to price gaps. Volume growth for U.S. derivatives is is fueled by our acquisition of the AMEX options business in October 2008 increases in market ADV. And overall market share growth as we pursue a higher percentage of electronic trading transactions. Volumes have tapered of considerably as we enter July. Partially attributed to the seasonal trends, July 14, provides a split of liquidity, routing and clearing fees between our U.S. and European businesses. The European net revenues, the chart also shows comparative currency neutral trading results. Net revenue in the U.S. Cash business increased versus Q1, 2009, a decline versus Q2 2008, higher growth revenues.
Improvement in the quarter mostly attributed to the higher take fee introduced on March 1st of this year. the unfavorable revenue variance to prior year it’s fully attributed to more competitive pricing and a higher mix participation from DMM and NYSE classic following introduction of the new market model.
DMM participation on NYSE classic in June was 9.1% versus 3.6% in September 2008. U.S. derivative revenue grows in Q2, 2009 with the addition of the Amex options business. Option revenues grew more modestly than volume because some of the volume growth in the quarter was in lower margin, institutional flow. The euro, dollar relationship improved 4% this quarter with 12% below last year.
Similarly the British Pounds strengthened 8% this quarter versus the U.S. dollar, it was 21% below last year. on a currency neutral basis net revenues for European derivatives increased slightly versus Q1, 2009 and decline marginally versus prior year.
The volume driver of the variances. The European cash revenues were lower in this quarter by 19% mostly attributed to the April 1st price reductions to reduce pricing by approximately 20% versus the prior year. The result are also impacted our last year’s second half introduction of Pack Epsilon pricing.
Slide 15, provides a harmonized deal of $0.50. This sort which we produce each quarter reconciles for fixed expenses segregating the effect of foreign currency variances and portfolio changes and one time IT integration costs. This is consistent with our 2009 expense guidance and synergy projections. Despite the investments we are making to grow our business, fixed costs continue to decline and we are pleased to – have broken 400 million barriers in this quarter.
And 398 million, fixed costs and have 75 million below their level in the fourth quarter of 2008. The incremental cost reductions in this quarter come from the final stage of staff reductions and integration to the AMEX business.
Reductions in global staffing and contractors, right management of discretionary spending in $10 million containment gain from changes made to U.S employee benefit programs.
In Q2 Pro forma fixed cost declined 6% or 21 million versus Q1 2009 versus Q2 2008 Pro forma fixed cost also declined 6%. If you are adjusting for foreign exchange variations incremental spending attributed to portfolio changes in the acquisition AMEX and the interchange solutions and other new business initiatives like NYSE Liffe US. Pro forma fixed operating cost declined $50 million or 12%. The year-over-year cost reductions would have increased by approximately $37 million if we incorporated AMEX expenses in our Q2 2008 on a pro forma basis. Slide 16 provides a comprehensive summary of the commitment we made to reduce costs and how we're performing against these objectives from almost every vantage point we're exceeding our plan and the results show in first half expense base.
In summary, the savings for the first half of 2009 have arisen from one executing our IT harmonization and integration plan; Two, dramatically overachieving on the integration of AMEX into NYSE; Three, realizing a portion of the targeted compensation savings from lower staffing levels, more efficient use of contractors, and making some tough decisions on benefit plans; And four, executing a Companywide focus on reducing discretionary expenditures such as travel costs, professional fees, marketing activities and procurement.
During the second quarter we took restructuring charges and formalized the remainder of this plan which will further reduce compensation and technology costs during the second half of the year and into 2010.
Slide 17 addresses our annual expense guidance. After a strong first quarter performance in terms of cost reductions. In April we increase our cost reduction by an incremental $100 million and adjusted our full year guidance as shown in this slide. While another strong quarter and cost management and the finalization of our European social plan second U.S. and accelerated integration of technology resources we believe that we will likely exceed our previously communicated cost reduction target for 2009.
As such we now project full year fixed expenses to be at or below the low end of our cost guidance range of $1.728 million, on a currency adjusted basis. Fixed cost were $820 million year-to-date through June. In the second half, we will incur incremental costs for NYSE Liffe clearing, other new business development, IT integration and transitional data center cost, and some discretionary marketing and other projects that were delayed in the first half.
These will somewhat offset by lower employee cost and the full effect of our previously announced debt reduction programs. We’ll continue to track our progress against these benchmarks as the year unfolds.
Slide 18 shows the revenue and costs from our new initiatives for each of the first two quarters compared to our full year guidance. The new initiative guidance we provide refers to a combination of new initiatives for 20009, and the incremental portion of revenues and costs we’ll realize this year on 2008 acquisitions, including AMEX Exchange Solutions and Wombat.
In Q2, new initiative revenue is driven by prior year acquisitions of NYSE AMEX and Exchange Solution formally AEMS. BlueNext carbon trading operations were also a major driver of the revenues in both Q1 and Q2.
Lastly, we began to build some clients for safety Europe this quarter. The European MTF, NYSE Liffe U.S. and NYSE Liffe Clearing contributed minimally to the first half revenues, but our expected to increase their contribution overtime.
The higher new initiative revenue and costs in Q1 was mostly attributable on that, which was included in the first quarter, but not the second as we have reached the one year anniversary of this March 2008 acquisition.
Incremental cost, for new initiative decline significantly in Q2 2009, contributed to Wombat cost no longer be included I discuss previously, Amex now being fully integrated at a lower cost base and reduced burden from the start up cost for Safety Europe and the European MTF.
Slide 19 details of our cash index position as the June 30 2009. During the quarter we spent the $134 million on capital expenditures. Including $85 million related to data centres, the $40 million for first installment to purchase 20% of the ForEx change. A growth debt remain at $2.5 billion same as Q1 for the year-end level of $2.09 billion. Cash and marketable securities we are also around last quarter’s levels.
Net debt was $1.9 billion. $2.5 billion of debt as of June 30 consist that $2.1 long-term and $0.4 billion short term debt.
During Q2 we repaid our 250,000 note, which majority in Just and we pleased to with the $250 million euro top of our existing note. The weighted average cost of borrowing on the $2.1billion in long-GAAP with 5.3%. With more cash on hand and short-term debt and $7.2 billion a committed back facility. During very strong financial position both agencies rate as it high investment grade. Our AU rating at Standard & Poor's is currently assigned a negative outlook. We have met with S&P analyst, end expect feed back from their annual review in the near future.
I’ll now turn the call back to Duncan for some concluding remarks before we take your questions.
Thanks Mike. So you can see we’ve got a lot going on here as always so, exciting times for our company and I think also exciting time set to be participant in the financial markets. I think we continue to make progress to operating a leaner, more efficient, more customers centric and more technology focused company than we've ever had before and you can see we tried to position ourselves for the future. We continue to invest in businesses and parts of the value chain that we think are going to serve us well in future. we have touched on something today that are technology related somethings would take us into new regions like Middle East with Qatar and I think we've also talked about post trade services like the – NYSE Liffe Clearing getting started today and the joint venture with DTCC. so, we really do believe with all of these investments we are building the marketplace for the future.
We have shown no fear and launching MTS platforms to the complementary to our regulated business in Europe I think we have manage to operate two different equity model two different cash equities models in the U.S. and two different options models in the U.S. so, we are continuing to explore all opportunities to those business and while we are doing all these investments you can also see that we are very, very focused on keeping our costs base down which we think is going to provide leverage in the future.
We have alluded to a lot in the call. The latest V-rip in the U.S. and the social plan in Europe, keep in mind that while we have taken charges for these because we have announced them the majority of the resources impacted by these positions or still with the company and will be leaving in a stage way between now and the end of the year is various projects completed et cetera so, I think that give us an opportunity to have continued control over the overall expense base. Excuse me.
Now, as you’ve also noticed in spite of the challenging environment around us. We have also recommitted to providing leadership and we are showing trust in the financial markets and being part of the solution. we have ramp up our efficacy efforts and behalf of our issuers we haven’t penetrated the public stands on an number of issues and we have also been supported where we thought it was appropriate of the administration, regulatory, reform direction and constructively critical when we thought it certain proposals were out base and I think our customers can count on us with trading participants or listed issuers they can count on us and they continue to do that.
Now in recent days, you have seen that the issue around flash orders and high frequency trading has captured a lot of attention of the media and I want to think a minute before we open it to questions to clarify our view.
First I think it is important as we said repeatedly don’t seem to have much success getting anyone to listen that the practices around these various order types and high frequency trading are two completely different issues high frequency trading for what ever anyone write about it is actually the most consistent source of liquidity provision and not just in the equity markets but in a number of different financial markets.
It’s unclear to me what that has to do with all of these order types, the point that we have been trying to drive home on these order types and I would point out that we are only one amongst the poor leading venues in the United States not to have programs like these we just think these order types are giant step backwards for market structure it still supplying field towards a select group of participants. It sounds a little bit like what model here use to be, which we have taken great to eradicate because we thought leveling the playing field in terms of informational advantages was the right thing to do given the encouragement to use a euphemistic word we got from a lot participants in the market to do that it’s a little ironic some of the people we are existing that we eliminate those information advantages seem to be now encouraging and order type to us I say, like a giant step backwards. So we'll count on the regulators to review those we’re not going to see and say to much more about but I think it quite a different issues then the issues around our frequency trading
Well thanks for listening on the call you can see this clearly a lot going on and we are commitment to providing to all you more and more clarity more and more transparency around the business and around over initiatives you have taking so with that we’ll stop the formal part of the call and we will turn it over to all of you to ask your questions. Thanks. Eric, Steve, you guys before.
(Operator Instructions) And the first question comes from the line of Rich Repetto with Sandler O'Neill. Please proceed.
Richard Repetto – Sandler O'Neill Partners
Yeah good morning guys.
Richard Repetto – Sandler O'Neill Partners
And Duncan you actually stole my thunder a little bit on my question but I did want to step with it since we have only one question, but it is on industry issue and it appears that like you said high frequency trading is getting linked with flash orders and I would even put in third the sponsorship sponsored access issue. And I guess my question after listening to the CFTC hearings and I was awake for those yesterday but the regulators just from my perspective, they aren't aware location and I guess the question to you is to the regulators due to feel like are you confident that the regulators differentiate these issues between flash high frequency trading and sponsor that access and they are going to make that are fully educated and formally not set the markets what I would think back, even all the political pressure that are there now?
It’s a good question and it’s very timely and I have a lot of confidence that they are going to be able to safe through that was some of these issues I think being linked some what purposefully by other participants in the market potentially I think the SEC and conversations we’ve having with them around them various CapEx seems pretty easily able to separate that the difference and I think the most distinctive difference in their mind which is one we certainly agree with is that the high frequency trading community is probably the most not only the most consistent provider of liquidity with the most consistent provider of this –liquidity and if we go back to what all the regulation of the equity markets where meant to be about 7 years ago there were meant to encouraged more – liquidity and tighten the spread I think everyone understood that with the advent of technology the average order execution size was going to drop precipitously and it was going to become somewhat more challenging to execute meaningfully sized orders and that would have happened with or without high frequency trading is our surmise but that group of customers is a consistent provider of displayed liquidity and a lot of these I think order type programs that, basically show the order to us, select you. I think that liquidity is not displayed they don’t have any obligations to display that liquidity. I think the two are quite different and I think the SEC, to based on their recent comments seems to understand that. So I don’t think there is any fear than doing something that would severely damage that displayed liquidity in the U.S. equity markets.
Richard Repett – Sandler O'Neill
Okay I am going to stick by the rules but congrats on the expense side of the results this quarter as well. Thanks.
And the next question comes from the line of Niamh Alexander with KBW. Please proceed.
Niamh Alexander – KBW
Hi, good morning. Thanks for taking my questions and again congrats on the expenses. Really strong expense management. On that subject I did want to follow up with Mike, the expense guidance of $1.7 billion to $1.8 billion here, and it just – a, it's going to be a significant bump up and the quarterly run rate through the second half of the year, and am I my understanding that correctly and I guess on the same subjects. The new initiatives the guidance there is for the range of 245 to 285, but looking that your release, it look like there is only $32 million spend so far. So am I misinterpreting the release there on page 13?
I think so. Let me ask the first question first. So, I think, what we didn’t update the guidance as we mentioned, we are trending towards the lower end, as I mentioned in my prepared remarks with the first half being 20 if you double that we would be considerably below that.
Niamh Alexander – KBW
I mean we have on the second half, as I had indicated the big cost is late clearly and we have, it’s $100 million annualized revenue source that are incremental costs, they are paying the LCH for the treasury activity. So, it’s a whole business line, incremental costs. The currency rates also are little stronger and we will incur increase integration and duplicate data centre it cause a little closer to going live on that effort, and then some of U.S. Liffe investments as we move forward within NYPC and MFCI there is incremental spend, not big numbers. On the positive side we'll get the favorability of of the headcount, so I think we've thrown out there the facts probably are a little conservative in our guidance and we'll continue to track that. in terms of our new initiatives I refer more to slide 18 I mean that’s what we produce that, so, what we are basically say in this for the new initiatives which both include acquisitions we made last year and we don’t have a fully reflect of we track in the revenue and costs. so, we have already spend 83 in the first quarter and 51 in the second quarter on those new initiatives. What that would be is the Amex extends base for the first three quarters. The last year we didn’t acquire Amex October, chain solutions we acquired last year in August as well as the incremental liffe Clearing cost it will incur start up costs for our smart full of even in that categories on the slide and that debt introduction which we say is going to be 25 to $30 million so, I would refer you to what we are talking about the range that 18
Niamh Alexander – KBW
Niamh Alexander – KBW
Okay that’s helpful thanks so of the 134 expenses –run rate in the first half that run rate should be up to like 240 to 280 by the end of the year?
What we have indicated is the numbers will be considerably less in the fourth quarter so this will you see the second quarter is less than the first as we go through the year end this number will decline.
Niamh Alexander – KBW
So in terms of the – the total cost coming in it look likes the initiative is coming in with low guidance, right?
Little favorable as well.
Niamh Alexander – KBW
If you look at the fourth quarter for instance we NYSE last year we have AMEX this year so that would charge.
Niamh Alexander – KBW
Okay that’s helpful. Thanks.
And the next question comes from the line of Roger Freeman with Barclays Capital. Please proceed.
Roger Freeman – Barclays Capital
Hi good morning so I just wanted to ask a question a couple parts I guess on the U.S business so if you think about the price changes you through both in options and cash this quarter, is there been a there was a pick up in option share in May and June, June had a pick up in cash but both have fallen of a fair amount in July so I’m wondering sort of your thoughts on that both the price changes on the U.S. cash any changes opposed the reduction of say in terms of type of orders coming through like the algo orders and then just to clarify on the flash order types I am assuming Dunkan that do you put Schumer up to his comments and has this guidance the SEC’s attention were they asleep at the switch when they approved direct hedges filing back several months ago?
So this is Larry, I want – sort of jump in some of this first regarding flash which seems to be topics of or not go away I would – I don’t think see was asleep at the switch but some of these rules are complicated and they have to – they really required a lot of thinking through and I think we have seen the result of it and we don’t agree with it we most – did not put send after to Senator Schumer up to his letter. I'm going to guess that that was triggered by the New York Times front page article because if you notice the timing with the same day so that was not our idea. We believe the SEC has announced they are going to take a look at that, they had indicated to us they are going to that anyway and we think the process of works in – we are going to let it go through to be honest, the reason we keep commenting as we keep getting at the question. I think in terms of market share any options space it's a competitive marketplace, as everyone jockeys for a position particularly in the maker taker area which is Arca and BATS and NASDAQ and a couple others, and we're very pleased with the take up of the retooled AMEX platform and we think that going to continue to do well. We have plenty of options rolling out further coming up soon that will probably help that make you take your models and drive some more market share but we are please with that platform. we understand that U.S. cash equities remains competitive, we have competitors, who don’t really need to make profit out there and they are pushing hard and I think some of these – have also garnet share if you look to your efforts grown and there is a lot of internalization going on. Remember that some of this is being driven by very high volume in just a few securities like CIT or Bank of America are guides like that and they can actually have a pretty major effect on market share. We need a couple percentage point or two. When they trade gigantic volume because remember the back drop of the market is that is not a lot of volume going on in general. So, just a few stock similarly dominate things and if you want to add to that by the way apologize to everyone. I'm in a separate location so we're not, maybe not as coordinated as we could be. Dunc?
Thanks Leibo, just a couple of things to add to what Larry said Roger. Remember when you asked about direct edge the way the rules work, ECNs don’t really go through common periods. They just make order type proposals or real change proposals and they’re effectively immediately approved. So I don’t think that's surprised us that's, they got approved at all because it really is no approval process. I think what did surprise a few people is when the NASDAQ and BATS Copycat fillings got approved. We obviously could have made our own filing at that time and we shows it not too. That's in the interim that's clearly hurt our market share on the Arca platform by a percent or two, but I think we’ve got that was the right decision to make and also has the question about has given that we’ve got the speed down, how is the demographics of order flow changed I think one of the reasons we did try to get the speed down was there we could attract other liquidity providers that frankly when we were a 100 millisecond we just wanted to attracting. So I think we are cautiously optimistic that is we getting to August here, we are going to have a few other people who have indicated to us, it's now worth building the connections to NYSE Classic and I think you will see our provided in display of liquidity at go up pretty significantly. Thanks.
Roger Freeman – Barclays Capital
All right. Great thanks.
One of the quick piece of that, since the STVK is gone instance, at least just going down we’ve gotten a number of SLP applications through meaning that the SLP type market makers are much happier on a platform that's faster.
Roger Freeman – Barclays Capital
Great. Thanks Larry.
Okay thanks guys. Next.
And the next question comes from the line of Justin Schack with Rosenblatt Securities. Please proceed.
Justin Schack – Rosenblatt Securities
Hi, good morning guys. Thanks for taking my question. I have a question about U.S. futures strategy you mentioned NY portfolio clearing. When you ask CME about this they are quick to say that they already have cross-margining in effect with FIC so how is your offering materially different for customers? What do you do or will NYPC do that the cross-margining with CME and FIC does not?
Well, Justin, it's Duncan. I'd like to take that one off-line with you, because I think that the CME has had a program with FIC for quite sometime. We think what we are doing is actually quite different. But I guess they are entitled to their opinion if they think it’s the same thing. But we actually think it’s quite different. We think the process, what CME does with DTC is not a single part margin. There is some netting at a certain point in the process, but in our opinion doesn’t really hasn’t really borne a lot of fruit in the time they’ve had it. And so it’s – that’s not a new thing. They’ve been doing that for quite sometime, and the results speak for themselves. We think this is quite different. That it’s – it’s truly a single pot between futures and cash products.
Justin Shack - Roesenblatt Securities
Thank you. And just very quickly, any updates you can provide on the agreements with order flow providers there and more specifically how they might be structured, are people getting stakes in NYSE Liffe if they are partnering with you or is it in NYSE and is that a dividend paying investment? Can they hope to ever have a capital gain from that?
Thanks for sticking to the one question rule.
Justin Shack - Roesenblatt Securities
I’m sorry about that. I’m happy to just take that off-line if you’d like.
Yeah and if I think we’ve already touched on them on the earnings call and we can provide a little more detail, but it’s when I say semi-mutualized I mean really remutualizing, but you should think of it as sharing the ownership of the specific enterprise, nothing any broader than that.
Justin Shack - Roesenblatt Securities
We can take at least one more and then we got and going to the next one.
Okay and then next question comes from the line of Mike Carrier with Deutsche Bank. Please proceed.
Michael Carrier – Deutsche Bank
I think when you look at the different business, when you look at the U.S. cash business, the European cash and the U.S. options and each of your competing with some of the private firms which makes which is tougher, on the pricing standpoint so make sense, looking at all these new initiatives especially of those demand in the market, for clearing some of the fixed income products I think when you look at the clearing opportunities both with LCH and then in the U.S. fixed income and market it seems like some of the economies what we can see all that grade and then some of them can be can be great especially in futures, type of clearings structure where it were integrated so I guess when you guys are looking at the opportunity particularly in the U.S. what’s the like the economy opportunity look at is it the clearing it is the trading longer term, in the studies you plan out.
I think that’s the questions we ask ourselves what are time and we should we asking ourselves as Larry into and his remarks, by U.S. equity space I think is destined to remain extremely competitive and all we’re asking for there competition spine we realize we have to compete with some organization that have very different organizational contracts and ownership contracts and we do and we just kind of have to deal with that but we see that the to the regulators at these levels – and by that I mean if let’s go back to Roger’s question If an ECN can change rule overnight I think we should be able to innovative at the same phase and not have to through commentary –regulated exchange where one success or trading venue we should have to go to the same process we go through. And I think what we are saying there is – it’s okay if you’re going to – on a lot of people to compete with us but then at least are must fight back and let us play the game on playing field and that’s an argument that were carrying out both here and in our European businesses as well, where I think that the competitive landscape is shifting specifically in cash equities if you notice a lot of the investments we have made would be in the technology space and would be in the derivative space and specifically most recently in the – space I would say are better in U.S. futures as if we have any success and we are not into any illusion we are competing with very successful and well in trench of formidable competitor in the U.S. derivatives business and I think if you can get some creative offerings like we are trying to do you can have success on not just a clearing side of the ledger but actually on the trading side of the ledger that ‘s what our bed is right now and we will see other place out overtime but I think that a lot of benefit we are going to get if NYTC is successful as by driving transaction volume to the trading side of the equation because that would be differentiated would be reason to trade those products, are exchanged that no one has right now.
Michael Carrier – Deutsche Bank
Okay, thanks guys.
Thank you guys.
We can take one more. Okay one more and then we are going to call it a wrap.
Okay and our last question come from the line of Ken Worthington with JP Morgan. Please proceed.
Ken Worthington – JP Morgan
Hi, thanks for letting me speak in there. Can you talk, give some more details but the European multi lateral facility and I think this is one of the place as you are on the attack and I think you guys launch back in March. Give us more detail on statistics how we are doing and the outlook maybe for the next couple of quarter in that business.
Sure. So we've got two different MTFs, one is called SmartPool which is really call that a dark pool for it was designed for broc trading. And also try to compete some of the other offerings out there. I think that overtime we try to figure out how to get more clients connected to that. Until recently we hadn’t had enough success getting them connected. So I mentioned the 14 new firms that are now connected to us. And we also reduced as I mentioned in my remarks the overall order size is that though we were constraining growth by having too high and order size hurdle to actually get into the- tried to get into the system. So slow start I think it’s now really up and running we had a couple of situations recently where we’ve had single high digit market share and has some high volumes back. So we feel like we are finally getting a little bit of traction there. And then on NYSE arc of Europe I think the challenge there is also a technological one. And we’ve got people that are active on the platform. We’ve got people that we like to have connected to the platform as you would expect look at us say boy our tech resources are really constrained right now as a customer we are working on a lot of other different things. Now we are breaking records every week. But I should have this number I am not even sure we gotten up to 1% market share yet on NYSE RK Europe I think we still committed to launching the platform. And getting it up and running and we are trying to get very creative as I said in my remarks to build bridges from if you provide liquidity and NYSE RK Europe is that enable you to reach a new tier on the regulated market. So we continue to try to have them peacefully co-exist and be complementary offerings and we are certainly committed to continuing to make a necessary investments to have them be successful.
Ken Worthington – JP Morgan
All right. Thank you.
Thanks for joining the call today. If you had other questions which I am sure many of you do you didn’t get to ask Mike and the team will make themselves available. So just connect with Mike or Steve whom ever and then will do – we always do – on behalf to answer your other questions, in one-on-one setting. Okay, thanks a lot. Have a good day everybody.
Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect. Have a great day.
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