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BGC Partners, Inc. (NASDAQ:BGCP)

KBW Securities Brokerage & Market Structure Conference

November 19, 2013 13:45 ET

Executives

Howard Lutnick - Chairman, Chief Executive Officer

Analysts

Niamh Alexander - Keefe, Bruyette & Woods

Niamh Alexander - Keefe, Bruyette & Woods

We will just get started with instruction here. So thank you all for coming back after lunch. Welcome Howard Lutnick, Chairman and CEO of BGC Partners. Just a quick intro if I could on BGP. Leading entity dealer broker with the growing presence in commercial and real estate brokerage as well much bigger than [indiscernible] as well.

And market cap around $2 billion, stock is up 58% year-to-date, [indiscernible] and the sale of eSpeed put a very fine price. And dividend yield is currently around 9%. So this makes it nicely diversified. So we will kind of like to talk about maybe some of the different products within the IDB as well as commercial real estate brokerage.

But if I could, I would like to start off with a commercial real estate brokerage business, was working with adding this to the BGC complex right now, what revenue synergies are you beginning to see and maybe what cost synergies should we think about as we kind of look forward?

Howard Lutnick

Well, so the first thing was that the business of commercial real estate business is nicely diversified across a broad spectrum of different clients. So we did Facebook transaction and the Morgan Stanley transaction. So financial service firms are the biggest users of real estate, they both -- company like JP Morgan not only uses 85 million square feet, but JP Morgan asset management manages 500 million square feet. So our relationships with the big banks and asset managers is a great leg up for us, if you’re relatively able to do this synergy.

So you saw the synergies in our – getting hired [indiscernible] selling this CME, NYMEX building downtown would be an example of us obviously doing NASDAQs business you could figure out why we have to get back also the SunGard transaction. So those are examples of how our relationships across the financial service business and Morgan Stanley transaction I mentioned just help us do business in commercial real estate with the same clients that we do in financial services.

Niamh Alexander - Keefe, Bruyette & Woods

And the commercial real estate brokerage business that you are writing – the industry is in a good phase, you have pretty up beat outlook for the business of south, how we think about where you would like to allocate your growth capital within the commercial real estate brokerage business, potential – look into acquire more businesses there, is there lots of kind of – you think you can already do a lot more with what you have – now, you kind of year end [indiscernible] some parts of it.

So do you think there is kind of if you start ramping up at this point because we have been talking about – there is so much more to come on this business and maybe with more will come on the cost side or on the efficiency side? And then last quarter, we saw a little bit of it and the revenue cycle [indiscernible]. So I’m just trying to understand, are you kind of still – you are still not kind of quite run rate revenues in there, do you think there is more to come?

Howard Lutnick

So I think there is a long way to go. It’s the real estate business and it’s the brokerage business, so like all the other businesses we have their asset light, they are not really – they don’t really – you can’t see it on your balance sheet other than you have receivables. And then you give a percentage of the receivables to your brokerage when they come in. So it’s very consistent as a business model to the rest of our business but the ability for us to acquire firms in the United States and internationally is so great and the opportunity is so best to accretively hire and acquire, much like you heard me talking for years we want to hire and acquire in financial services.

So we now have real estate where – we got a great presence in New York and that presences, you need the New York business to heart beat, right, you want the guys in Ohio who have the best law firm in Ohio, when they want to expand they go to New York, right, being able to approach your New York business. So we have got a great business in New York. We have gotten an excellent facility in Silicon Valley which helps us get the Facebook deal in New York, when Facebook comes to New York.

You know things like that its just being able to continue to acquire and hire. So we hired seven great brokers from [indiscernible] we hired a great group of brokers down in Washington DC from CBRE. And also great talented people joining us and I think you are going to see us very accretively acquire companies for a long, long, long runway to come. And some maybe small, maybe $20 million, $25 million in revenues some maybe larger $100 million, $125 million in revenues. I don’t think, you don’t need to do transactions in $500 million. You could do them, if they price right and if they fit well.

But these are opportunities where we are looking for the right price and the right fit and I think there is such a big runway and then you are going to start saying well, how about internationally you got a partnership in Knight Frank but maybe you want to acquire those companies in Europe and Asia. And obviously, we are comfortable with it, we are good at it. So I think we have a long runway and right now we got $900 million and its 30 basis points. That’s all we are making.

So almost anything we do obviously will be accretive but even to 12% yield, we could easily I think invest our money north of 10% yield, so buying business is better than 10x earnings. And then adding them to our mix making those earnings even better than adding that by bringing in more and more clients and raising the average revenue and getting yields up into the 15% range.

And then I think you will really see the earnings and earnings per share, the company sort of expose themselves as opposed to now what we have tons of cash, we own 10% of the NASDAQ stock market and we are widely under-levered company.

Niamh Alexander - Keefe, Bruyette & Woods

And in the commercial real estate brokerage, I mean, it sounds like there is still a long way, there is opportunity to hire staff as well as to buy smaller businesses maybe you are not interested in making big acquisitions. And when [indiscernible] cost because it used to be all those brokers that pay cash and then when you bought the businesses, you are kind of bringing them over to the BGC model there was more stock which you kind of accrue over several years.

And how far long in that process are you, I’m just wondering if there is a bit of opportunity to kind of maybe some margin expansion or lower comp ratio. You bring more them on to the comp structure or is that all done now?

Howard Lutnick

Well, as you remember from the years past as we bring – our brokers get paid 90% in cash and 10% in equity. And the 10% of equity they get paid is, if they leave and compete, they go for the equities, so they retire to theirs but it totally goes to zero. So what happens is, it gives us what I call the home field advantage. When someone is trying to hire our brokers, they will have to pay a much higher price – higher than we have to retain them.

Niamh Alexander - Keefe, Bruyette & Woods

Yes.

Howard Lutnick

So what you see is, over time when you saw BGC is over the first three or five years, they are with us. Then their comp ratio declined because I don’t have to pay them to re-up their contract. It’s not that they are core computation is different, its 60% and you know its not that we don’t pay more or less than anybody else going rate its that when hire someone to join you, maybe you will pay them 30% of their compensation for their first year contract. You want that – so that’s a 70% pay up for that one person for those three years. You want that percentage to decline.

Niamh Alexander - Keefe, Bruyette & Woods

Yes.

Howard Lutnick

And that’s why we use our partnership structure. And so we are virtually all of our employees have it –

Niamh Alexander - Keefe, Bruyette & Woods

All their commercial real estate brokers right now?

Howard Lutnick

Already.

Niamh Alexander - Keefe, Bruyette & Woods

Okay.

Howard Lutnick

I mean, when we did Grubb & Ellis all came in.

Niamh Alexander - Keefe, Bruyette & Woods

Right.

Howard Lutnick

Now right away these are the rules if you want to come, come everyone we hire, everyone we hire comes with that model and so what happens is, come to see your anniversary as Newmark comes out of its three year anniversary, you are going to start to watch our computation ratio start to decline

Niamh Alexander - Keefe, Bruyette & Woods

Okay.

Howard Lutnick

Because our cost of retaining the employees it’s just not as highest as other people.

Niamh Alexander - Keefe, Bruyette & Woods

Okay, fair enough. And I guess on the commercial real estate broker sale, I mean there were other opportunities to reduce some of the expenses I guess, the non-compensation, is this mostly there or in the financial services so you kind of see some opportunities to make cuts?

Howard Lutnick

Primarily financial services, I think we were able to buy Grubb & Ellis attractively because when you buy a company out of bankruptcy you only take the parts you like.

Niamh Alexander - Keefe, Bruyette & Woods

Yes.

Howard Lutnick

So I think we were able to take the 400 best brokers. Those parts of the business we like but we were able to get rid of the office space we didn’t want. I mean, just we didn’t take it. We didn’t have to get rid off it.

Niamh Alexander - Keefe, Bruyette & Woods

Yes.

Howard Lutnick

We just didn’t take it. So we got really a huge scale benefit right away with the Grubb deal and that’s why it worked out so nicely so quickly. I think what you will see is, with the sale of eSpeed, we had sort of two R&D models going on within the company all the time. We have the long-term where you go from 800 milliseconds to 400 nanoseconds sort of big movements.

The other thing we had is, we have a team of people who were always tweaking it every quarter making it better and better and better and better and better. We don’t need the tweaking group anymore. And I think part of that model of being in sort of raise to nowhere as if somehow 900 milliseconds or 200 nanoseconds makes some difference to who, that’s a big question. But somebody we needed to be faster than them.

Now, I don’t have that sort of raise. So I think we can save 10s of millions of dollars that will not have a consequential impact on the business but rather we won’t be in some idiosyncratic raise to speed ourselves up in a relevant amount, right for no business purpose and that savings I think was a key part of us announcing that we could cut $15 million of cost next year.

I think you get $20 million of it where there would be no impact on the company at all. It was just part of this ever speeding quarterly mentality. I’m not touching the people who are going to say look I still need to have the world’s fastest system two years from today. But do I really need to spend $20 million making the systems now, 160 milliseconds faster for next quarter and the answer is no. For $20 million a year, we are going to have a bigger bottom line and that’s unnecessary for us because we made that’s it.

Niamh Alexander - Keefe, Bruyette & Woods

Okay. Quite helpful, thank you. I guess, what we are stressing on the commercial real estate, then you sold the eSpeed this year, you kind of indicated publicly several times you opened [indiscernible] you will be interested maybe south, other businesses within the complex, I mean, you think [indiscernible] selling the commercial real estate brokers, you just bought it, you are just setting it down, you are just kind of getting some of the revenue synergies from it. I mean, would you be interested to sell the commercial real estate brokerage business?

Howard Lutnick

Well, I don’t think – I think my point, so I guess the right answer is, I should say I’m open to anything, right. But when we see the earnings doubling in the fourth quarter it’s kind of hard to give me a multiple that I think it would be fair given the growth rate that we see on it.

Niamh Alexander - Keefe, Bruyette & Woods

Okay.

Howard Lutnick

We saw on the treasury business, because of quantitative easing the growth rate was wrong, right you saw the treasury business was down 7%.

Niamh Alexander - Keefe, Bruyette & Woods

Yes.

Howard Lutnick

And the government issuance debt all over the place, but the fed is buying it.

Niamh Alexander - Keefe, Bruyette & Woods

Yes.

Howard Lutnick

And you’ve see that just – that’s a weird structure and in a public company when your earnings are down people think the worse of you, right? Whereas in this case it was the hands of the governments are sort of pressing on it keeping it down. So I think the -- that was the right time to sell a business so for instance our electronic foreign exchange business.

Niamh Alexander - Keefe, Bruyette & Woods

Right.

Howard Lutnick

So we have this electronic foreign exchange business and it makes us very popular. Do you remember I used to always talk about how -- people would always come, the heads of exchanges would always come and visit me for coffee? But I say what it’s my good looks or charming personality, why they are coming for coffee, they were coming to talk about if I ever wanted to sell eSpeed please call us. And that’s basically exactly what we did in fact.

So I’m popular again because we have a foreign exchange dark pool that’s growing that’s really just a tremendously neat integrated piece of software. The difference in that and eSpeed is, its growing at 20%. So if I sold this year versus I sold it next year like you would be, I think I will get a 20% for next year when I sell because the business is growing.

Niamh Alexander - Keefe, Bruyette & Woods

Yes.

Howard Lutnick

So, will I be willing to sell? Sure. Is it -- will I get the right price for today as opposed to waiting a year and then waiting a year. I want to be open minded because I don’t think the stock is fairly priced. And as the largest shareholder I just think – [indiscernible] care by your shareholders and if there is transaction that are going to fundamentally move the needle, then let’s do them.

Niamh Alexander - Keefe, Bruyette & Woods

So this FX business, what exactly is fair, its not an easy end and what is the FX business that you are expecting?

Howard Lutnick

So we have a dark pool and that’s our pool means there is no bid, there is no offer, there is no quote there is no nothing. What happens is, banks put in a feed of their risk reducing transaction. This is not for traders, this is only for naturals non-traders and they all put in their risk reducing desire. And if their risk reducing desires match in the middle of the market as we determine the middle of the market that transaction happens.

We then analyze each and every transaction based upon how that transaction is, how it’s trading. That means are you, if your risk reducing you should be right or wrong, about the same amount of time it should be random right? Where as if you are taking a very sharp look at it, you could be right more often that you are wrong. If you are right more often than you are wrong you have to make a good -- make whole payment to the other player, [indiscernible] play any more.

So it’s either rich production or its own player. So it’s non-trader related and that’s a very, its an unusual business model. But you remember it comes from probably six years ago I was talking on a conference call, we’re going to try to build the business from foreign exchange. So we tried a regular [indiscernible] business model and then we workout to while we couldn’t get enough liquidity. So we tried it in another way, then we tried it another way. And finally we tried it this way and we got great success.

And so as a software company with connection and access to the larger players in the world what we can do is we can develop software that meets the goals and objective of particular clients, and so in this particular case, we started with four banks, then eight banks then twelve banks and obviously it’s a network effect model and its very, very successfully, right there is billions a day but it’s just quite. It’s not about which, I mean its nice for our earnings its part of when you see well, you sold eSpeed at $80 million and retained fully electronic. That’s a key part of that, it’s a key part of that and that will continue to grow and we would be -- willing to sell it someday. Of course we would, but at 20% growth rate on a 50% profit margin frankly I don’t want to.

Niamh Alexander - Keefe, Bruyette & Woods

Okay. I don’t think it will pay for it?

Howard Lutnick

They will pay for that, look I am sure.

Niamh Alexander - Keefe, Bruyette & Woods

Pay enough for it?

Howard Lutnick

I would not think it would have gotten a different multiple than the treasury business. I think if I was interested in it someone would pay us that multiple which was 22x earnings or 12x revenue, so I think that I can get that again I do but eSpeed was down 7% when I sold it and this is growing at 20. So my reason to sell today is just different, I think if we wait till next year, the number will be up 20%.

Niamh Alexander - Keefe, Bruyette & Woods

Okay. Fair enough. I guess in terms of growth you talk about 20%, some of the core more traditional inter-dealer financial services brokerage business areas and you have been struggling because the dealers have been struggling and not growing as much and the volatility has been suppressed, how we think about your outlook for that business which products have growth, do you look for some revision. Do you think there is some structural issues that have shrunk the market?

Howard Lutnick

Well, so we have a couple of things going. We have the -- so Dodd-Frank gets passed, right, and it’s been going on for endless amount of time, finally the rules coming to being October. And the rules just impact how the bank trade with each other. So they don’t really touch the banks trading with declines. We all know that’s coming February 15th but not today. So you have – everybody preparing for change. And then change and then the government closes and then everyone wants how they are supposed to do it. And then the CFTC puts out rules about how they are supposed to do it last week. And basically there is friction, right. And friction is going to reduce the volume of business period. Now that period is going to last through to February 15th. And in on February 15th, there is going to be more friction for the banks as their ability to do business with their clients comes under direct change, right.

So the banks volume are definitely going to decline with that friction, right. But what will happen on February 15, is the clients, the biggest clients in the world, the BlackRocks, the PIMCOs, the Fidelity’s they still have to do their business. And they are going to have to find a way to do their business. And they weren’t at the high volume, with around kind of people, they just need to do what they got to do. They will find a way to do their business.

And that would be the beginning when those clients start to come across to firms like ours. They are – we are obligated to take them on a rate card, the banks are obligated to deal with them. There is no open – you can’t yell at them, you can’t scream at them. There is no other alternative. They can’t call the bank anymore and do a bilateral trade. Can they do business with Tradeweb and Bloomberg and MarketAxess sure, it will be good for those businesses, of course, it will. But will it be good for company’s like ours, of course it will. Whether they do business through your staff or they do business through our DCM, ELX, right, which is, you don’t read the rules, it says [indiscernible] DCM and then some times it says DCM or [indiscernible]. So we just have two ways they can do it, they set different rules but the concepts are the same.

So some of those clients will creep across and then what else will happen is that the banks are having more friction and they are doing less business. And the giant client needs to still do the same amount of business that they have always done. Someone needs to fill that gap and my answer is going to be – its going to be a series of either other broker dealers [indiscernible] would be examples of people who come into the game in a much bigger way they have ever been before people, other companies like that has an example.

Hedge fund, the trader, leaves the bank and goes to work at hedge fund XYZ and basically does the exact business he use to do at bank now he does it for hedge fund $500 billion hedge fund and they come back in the business.

If you look back at the treasury business, once upon a time, all the big banks were the number one, two, three, four and five client. When we sold eSpeed, the number one client was not a bank, the number two client was not a bank and the number three client was not a bank. They were hedge funds, who are professional trading funds. They were as good as trading at banks, they just did more volume that would be the model that is coming. There will be new clients where the largest volume clients or in the middle of the pack, it doesn’t matter but over time, you will see a pushing out from only 10 players in the world to 50 players. And those 50 players will make our business much, much better.

Niamh Alexander - Keefe, Bruyette & Woods

Do you see a lot of the products arriving, I mean the dealers provide liquidity in liquid markets right now and professional traders don’t want to be in those markets because there is not enough liquidity. And they need turn over and they need transparency and they liquidity, right?

Howard Lutnick

Well, they couldn’t be in the business, right. When we think about it you could not be in the business in interest rate swaps unless you’re a joint bank. I could do one like BGC did a bond offering, I could swap my fixed bonds through floating, but I couldn’t intermediate it and buy from you and sell to you and buy from you and sell to you because I didn’t have the financial grip of Citi Group that you have to be either go big or go home. But you were not a 10-year swap counterparty unless you are gigantic, now you can be a 10-year counterparty by having variation margin.

Niamh Alexander - Keefe, Bruyette & Woods

So you didn’t see a lot of new customers coming into these markets sort of procuring and the trading –

Howard Lutnick

There will be 50 world class companies that come into this market to buy and sell swaps like the banks did because they had no access with absolutely closed door and they will come in, now will that happen February 16, oh, of course not. It’s not like there is a gun going off and the oil pour in, I mean that does happen but only when I’m asleep then I think that’s going to happen.

The real thing what happens is, it’s a slow natural process and over the course of the next two years, the business of being in IDB in interest rate swaps were set in interest rate swaps will be an excellent business. They will be the big three Tradeweb, Bloomberg and MarketAxess so I think they will be successful. There will be lots of people come and compete with them and don’t succeed. It will the companies like ours and IDBs, there will be lots of businesses who come and compete with us and they won’t succeed. And our business will be much, much bigger because the opportunity and who we can deal with will be much bigger than it ever was before and so that’s why when Dodd-Frank was passed, I said look I can read the rule, its either going to be beneficial for us or violently beneficial in my opinion. But, I just don’t see it being bad because there is nothing bad about the rule given what I confer with it.

Niamh Alexander - Keefe, Bruyette & Woods

Okay. And I guess kind of we are living through right now the other regulatory uncertainties neither issues that are going on your [indiscernible] local customers, so the other markets are not open to you right now, you can’t go to – going back to client and but meanwhile they are dealing with Basel, they are dealing with leverage rules, they are dealing with Fed calling off, they get repo books down, so that has been impacting your flow, that has been impacting you and everybody in the industry?

Howard Lutnick

Definitely. Look in swap it’s just out right friction because of the rules, right. In credit its just Basel III and capital being contributed there. And you say okay there is less trading in credit but in the same time that there is less trading credit, there has never been greater issuances of credit.

So which along with those two pictures and the answer is, it’s going to be structural modification where other players come into fill that gap. And so is there stream and structural pain or friction or how everyone call it today, I would say absolute yes. So I think year from today, it will be clear of the positive momentum yes. And do I think two years from today people will care about the trade between October of 2013 and February 2014, actually they won’t care.

Niamh Alexander - Keefe, Bruyette & Woods

It’s really like the last two years, its not just October to February --

Howard Lutnick

What’s going to happen is, February 15th will be sort of let’s say the bottom, right. And then what will happen is you will start to see a positive framework start where, we say we added some clients so we added this, we added that. And it won’t be market share because the problem is, you could double and double again and then end up with the same market share that we had before because the business is just going to grow so dramatically.

So I think, its going to stay the course, its painful and aggravating. But the world – the structure of the world is, if they stop issuing credit bonds, I don’t really have much to say. There was a time you remember when Bill Clinton was President we were running budget surpluses, I would have a meeting like this and you would ask me, what you are going to do if there are no government bonds, I will tell you what, whatever answer I gave you, it was very stressful, right because there is no government bonds to play with, what are you going to play with but if they are going to continue to issue credit bonds with world-class records eventually they are going to find the structure way to trade. It’s an absolute credentially the government bond business segment [indiscernible] would be sensational so is the government takes a pan off the top, okay.

Niamh Alexander - Keefe, Bruyette & Woods

I guess, maybe this leads to and maybe you have answered it a little bit already, just your view on the inter-dealer broker market now, it sounds like you see a changing because you see a lot of opportunities to go directly to clients, if the client backs the committee. There is quite a inter-dealer brokers or high public, there is a lot more non-public and where do you see BGCs role and how has that changed, some of these regulatory opportunities kind of translate to, from revenue dollars?

Howard Lutnick

So there are in many markets around the world, the small local IDB, they are in Spain, they are in Brazil and they need to be a foreign exchange or there could be credit or there could equities or they could be commodities, there could be fixed income, I mean, it’s just a list of them.

So the regulatory pain of being – lets say you are $50 million local IDB, the regulatory clause of out being in America or being Europe is probably $5 million a year. So that’s your margin right there, right. So the of being a small player would raise so dramatically. So the opportunity for the big guys to acquire the small ones for a fair price which the reason we haven’t done it before is just because its just not a fair price you go see them and they want – I will get your multiple for me. You say no, no, no, I have billions of dollars, I have huge technology infrastructure, I have only thing that you are a little guy. I’m not paying you my multiple, and they say no, no, I want that both.

When they start to give me an accretive deal and I think that’s coming right now. The pain of the regulatory environment is manifesting itself of the earnings of these companies and their ability to live in that new world will give us the opportunity and you are going to see transactions for us definitely and I assume for the other guys as well for those who have money and maybe I’m in a better position. If I have $900 million in cash that does make me feel a little better than the other guys because I have $900 million in cash and I have $400 million to debt, I will say it again, $900 million.

But we have $400 million in debt and we have $550 million of NASDAQ stock. So the way I think of it is, if you put the NASDAQ stock together with our debt, right. We really have $900 million unleveraged company. So the opportunity for us and everybody knows it that we can do deals more quickly. We could pay cash if they want, we have a big stock buyback ,so I don’t mind as long as the employees are committed and sign the right contracts, they will take the 90.10 and all that kind of stuff. We are open minded to do transactions in the right way.

But you remember I don’t want to buy companies, I want the people in the inside. I don’t want furniture and fixtures and some brand. So I need the employees to be committed to sign contracts to the partners, to be part of.

Niamh Alexander - Keefe, Bruyette & Woods

I will take the asset clause, you kind of like to expand into the – maybe you think the certain expectations you are finally coming around to?

Howard Lutnick

Energy. We have chatted about being the better player in energy for a long time. And I think just now, we are starting to get that flow of people we have hired in gas, we hired in electricity. You are going to see nice numbers. I mean, I would always like it to go faster, but I always only want to do if the numbers are right. I don’t – we are so aligned with the shareholders that I can double the size of the company by doing deals that aren’t accretive and then I would run a bigger company. And the stock didn’t go up and it would be boring. So why do I want to do that, I try to do each transactions so that our earnings per share go up. And then what I think you will see now is, we have modified the way we issue shares.

So our share count issuance should always be constrained going forward and we will always be constrained going forward as compared to what it was. I would say sort of structurally its about 5 million shares a quarter or somewhere between 5 million or 6 million shares a quarter less our buyback.

Niamh Alexander - Keefe, Bruyette & Woods

So is it like a fiscal like number cap in place or is it proportion cap in place now or is it –

Howard Lutnick

No, but its basically based on the computation of the employee.

Niamh Alexander - Keefe, Bruyette & Woods

Have you modified all those computation arrangements now over the last – just happened in the last few months, is it there?

Howard Lutnick

Correct that what happens when we do the – you have to remember what happened because they were all partners, right. And then we did a NASDAQ transaction and that meant that we are going to have a huge gain that we wanted to have, it’d be tax efficient. So a significant amount of our partnership was converted to public stock. And in that conversion would you like to be converted to public stock, yes. Here is what I need you to do.

And so we had a nice quid pro quo where they get liquidity, right, of their own stock, it doesn’t change the share count. But it in change for that they know that we need to modify things going forward and they get. So we were able – and the reason we were able to do more it quickly is, when you $400 million the partnership turn into public stock. You know people will listen to you, $400 million by the way, it speaks really, really loud to your employees.

They are already in the share count but it helps them – that’s the deal of the company, right, you heard me talk about it all the time. Liquidity versus doing the kind of things the company wants you to do.

Niamh Alexander - Keefe, Bruyette & Woods

So that enables you to change a lot of the compensation plans and [indiscernible]?

Howard Lutnick

Lots of [indiscernible]. I won’t say it, its mostly done more than half.

Niamh Alexander - Keefe, Bruyette & Woods

Okay, okay more than half of that. Because in the past that’s kind of one area we would kind of struggling to keep up with, it was like – there was a lot of diminishing half million. So you’re seeing revenue growth but it wasn’t translating to a little bit of earnings growth. And –

Howard Lutnick

And I agree, it was a fair criticism of the company. And I think what happened was the we had hired so many people and had so much issuance going out. And we weren’t driving the competition ratio down quickly enough to sort of balance it also and look our issuances growing too quickly. And the ability to fix all that and to stop it means that as we grow now, you just exceed EPS. But it’s going to be much more visible going forward. And we look forward to sort of a more balanced approach where I think it will be much more comfortable for yourself and then want to understand the issuance structure and the EPS income.

Niamh Alexander - Keefe, Bruyette & Woods

Okay, fair.

Howard Lutnick

We are going to buyback. We have $250 million share buyback outstanding and we are going to buyback public share.

Niamh Alexander - Keefe, Bruyette & Woods

Public shares, like the public domain.

Howard Lutnick

Absolutely.

Niamh Alexander - Keefe, Bruyette & Woods

Okay, okay. Okay, good. And I do want to make sure I get all my questions before I open it up, but the dividend can we touch on the dividend because I guess, we are in the silver part of the air [indiscernible] the core business. So it looks on the distributed earnings basis that you might not earn the dividend and got all this cash, so you can continue to pay in for quite some time but philosophically how does the board, how you feel about maybe paying dividend that you might not earn for a couple of years or for a year or how do you think about with that?

Howard Lutnick

We have our $900 million earnings 30 basis points. Okay that’s not go into stay in 30 basis points, [indiscernible] 245 basis points that’s not my point. Is that as we acquire accretively, right, even if we bought a company at 10x earnings it’s a 10% yield.

So earning enough money to cover the dividend and higher percentage that we did ever before, it’s not very difficult, right. And so its simply matter of us doing the transactions buying the companies with the right price, getting synergies out of them and say okay we bought this company at 7x right and with the synergies we think, it will be 6x and we think that’s a 15% yield and so its been a $100 million or less $15 million were earnings, continuously going on that way. And if you issue stock going into the public market and buying back the shares so it’s offset because we have the cash.

And the moral of the story is, if we reasonably investor money, we should have a substantially out of equity amount of cash earnings to more than offset our dividend and cover it healthy and stop putting money to invest in the company. So it’s not like we are going to use our cash to pay our dividend, its really just start burning a hole in our pocket. That’s all. But we will invest better than 10x earnings so we expect to earn better than a 10% yield and therefore we should and to our earnings substantially and just heard that now that stock is going up either.

Niamh Alexander - Keefe, Bruyette & Woods

You are running out of contingent earn-out through the EPS, right?

Howard Lutnick

Correct. And now we get about just under a million shares a quarter so now that it would be today’s price about $37.5 million. You remember we sold eSpeed was making $60. so that means all you have to replace is $23 million. Right, sorry, I meant to say a million, if I didn’t, I would say every year will get about so this year would be about $37.5 million [ph] growth.

Niamh Alexander - Keefe, Bruyette & Woods

Okay, okay. Fair enough. So it seems like you definitely have the visibility on putting the money to work [indiscernible] you will get it done but it seems like what I’m hearing today that’s new [indiscernible] expectations are getting a lot closer, stopped where they were and you seem more excited about maybe some of the commodities in the energy business that you are looking at and commercial real estate brokerage too?

Howard Lutnick

Yes, I think the answer is yes in the financial services the cost of regulation but they would suffer compared to what we would marginally suffer.

Niamh Alexander - Keefe, Bruyette & Woods

Yes.

Howard Lutnick

Is making a transaction more balance.

Niamh Alexander - Keefe, Bruyette & Woods

Okay.

Howard Lutnick

Okay. So and that wasn’t there a year-and-half ago I knew the company that wanted to buy -- they just estimated at a price different from my EPS.

Niamh Alexander - Keefe, Bruyette & Woods

Right.

Howard Lutnick

So I don’t want to announce I did a big deal in energy and our EPS is flat. Why am I doing that, that I am filling a gap for no money.

Niamh Alexander - Keefe, Bruyette & Woods

Yes.

Howard Lutnick

I don’t want to be big for the sake of being big its no fun at all, I want to be bigger for the sake of having my EPS grow. So that is coming our way. And then real estate is simply a matter of fragmentation. There is just a lots and lots and lots of small ones that you can purchase for a better price than the public comps, there are just so many of them and the idea is to find the right one that fits nicely with us.

Niamh Alexander - Keefe, Bruyette & Woods

Okay.

Howard Lutnick

But we have such a strong New York it’s like a heart beat in real estate. If you don’t have New York then the math of being in Ohio isn’t this good.

Niamh Alexander - Keefe, Bruyette & Woods

Right.

Howard Lutnick

Because when the big client in Ohio chooses to come to New York and that’s the big money because Ohio isn’t big money by getting the big law firm decides to come to New York and that’s where we make the money. Right, if you don’t have the New York, then you lose that to the third-party. What’s the plan imagine, imagine covering Facebook in Palo Alto and when Facebook stays on 250,000 square feet in New York you don’t get that deal. That would -- see the pressing right but if you can actually pass that to New York where the big money is that’s when the moment really sings for you and that’s why having a big New York which is why we invested in new market maybe acquisition of Grubb work.

Niamh Alexander - Keefe, Bruyette & Woods

Right.

Howard Lutnick

Grubb didn’t work because it was great national office with no New York. [indiscernible] storage just told you, what happens if you have no New York, I will tell you what happens sooner or later.

Niamh Alexander - Keefe, Bruyette & Woods

So I guess we go back to the regular forum, we go for a second, I mean you talked about a little in February and [indiscernible] mandate that kicks in, clearings has already kicks in and do you still think clearing is going to be good for your business long-term or going for your business long-term is this just, I think [indiscernible] trading maybe for your business it’s not really having much of an impact there?

Howard Lutnick

Correct, I would say that’s right. So clearing without clients clearing, that the banks were already using clearing anyway.

Niamh Alexander - Keefe, Bruyette & Woods

Yes.

Howard Lutnick

I think so it didn’t really affect me but from a structural perspective without clearing the hedge funds couldn’t come into the market, right. And without the hedge funds coming into the market the dislocation of the banks trading less would mean less period. So we need more capitals come into the market like the treasury market, you know these new people come in. We’re going to see trading hedge funds come into the market, and they will just add liquidity and able to clear it, and that will be the key difference without clearing.

Niamh Alexander - Keefe, Bruyette & Woods

Yes.

Howard Lutnick

None of this, I wouldn’t be able to say any of the positive things, I am saying.

Niamh Alexander - Keefe, Bruyette & Woods

Okay.

Howard Lutnick

That’s sort of the foundation that we need to have in order to bring new players in.

Niamh Alexander - Keefe, Bruyette & Woods

Right, sure. [indiscernible] questions?

Question-and-Answer session

Niamh Alexander - Keefe, Bruyette & Woods

Okay. And the core inter-dealer, the voice broker, what is the role of the voice broker in the new world?

Howard Lutnick

Yes, voice brokers has a couple of different roles. So in -- we have this product called Volume Match, so you would think electronics is only for the most liquid products.

Niamh Alexander - Keefe, Bruyette & Woods

Yes.

Howard Lutnick

We’ve actually had a barbell. We are really good at the most liquid products and we are also good at the least liquid products. So what we do is out voice brokers figure out, where do they think the most liquid ridiculous instruments and where we trace, a couple of people are interested in playing.

Let’s say I’m willing to sell it at 100 and we know you are willing to buy at 90, very liquid and that’s spread that’s a mild one. And so our brokers will say where do you think this is going to trade? We will call an option at 93.5. It’s not a price discovery option. We say 93.5. Right now what happens is, in complete secret even to our brokers I decide to why I want to sell at 93.5. So it’s an instant of liquidity but nothing else. So I will decide to play now or I might not have another chance to do this for another two weeks.

Niamh Alexander - Keefe, Bruyette & Woods

Right.

Howard Lutnick

So you know what? Outsell. The key is no one knows whether I put in $1 million or $100 million, you put in that you want to buy $2 million. All that the world would see is $2 million traded with 93.5. Right? No one knew whether I put in $100 million or just $2 million.

Niamh Alexander - Keefe, Bruyette & Woods

Great.

Howard Lutnick

And not even my brokers know, because if anybody knew that I was going to sell a $100 million that would depress the market. And so what happens is my brokers are the information knowledge of the market. So they have a place in electronics, they have a place in covering clients through electronic. And then there are 100 products in between that they make a good living producing 60% of the revenues and the answer is we will figure out a way to go this way or we will figure out a way to go that way and by them being partners with the company go win either way. And that’s the key to be a partner in [indiscernible] and being a partner BGC and being a partner of all these done, all these years because they know that they will share in the upside if they get it right.

Niamh Alexander - Keefe, Bruyette & Woods

Okay. Fair enough. I think we have to stop it up here. Thank you very much Howard. Thanks for coming.

Howard Lutnick

Thank you, Niamh, for [ph] inviting us.

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Source: BGC Partners' CEO Presents at KBW Securities Brokerage & Market Structure Conference (Transcript)
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