LaBranche & Co. Q4 2007 Earnings Call Transcript

Jan.18.08 | About: Labranche & (LAB)

LaBranche & Co Inc. (NYSE:LAB)

Q4 2007 Earnings Call Transcript

January 18, 2008 9:00 am ET

Executives

Stephen Gray – Investor Relations

Michael LaBranche – Chairman of the Board, President, CEO

Jeffrey McCutcheon – CFO, Senior Vice President

Analysts

Daniel Harris – Goldman Sachs

Richard Repetto – Sandler O’Neill & Partners

Mike Vinciquerra – BMO Capital Markets

George Walsh – Gilford Securities

Marc Sulam – Healy Circle

Operator

Good morning ladies and gentlemen, my name is Natasha and I will be your conference operator today. At this time I would like to welcome everyone to the LaBranche fourth quarter 2007 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer period. If you would like to pose a question during this time, please press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you, it is now my pleasure to turn the floor over to your host, Steve Gray. Sir, you may begin.

Stephen Gray

Welcome to the LaBranche 2007 fourth quarter and full year conference call. Anyone who has not received a copy of this morning’s press release, please call the offices of KCSA at 212-896-1250. A copy will be faxed or emailed to you, or please visit the company’s website at www.labranche.com.

The format [unintelligible] their formal remarks this morning, I would like to remind you that to the extent the company’s statements or comments are forward looking, I refer you to the risk factors and other cautionary factors in today’s news release as well as the company’s SEC filings.

The company’s fourth quarter results and any forward looking statements are present expectations and actual results and events may differ due to the impact of factors such as: industries, volatility, general economic and market conditions, the competitive environment and other risks and uncertainties detailed in the company’s SEC filings.

Please note that the company disclaims any obligation to update its forward looking statements. In addition, this call is being recorded on behalf of LaBranche. It is copyrighted material and cannot be recorded or rebroadcast without the company’s express written permission. Your participation on this call implies consent to this statement.

With us this morning are Michael LaBranche, Chairman and Chief Executive Officer and Jeff McCutcheon, Chief Financial Officer. Michael and Jeff will take your questions after they conclude their formal remarks. With that, I’ll turn the call over to Michael.

Michael LaBranche

Alright, thanks Steve. Today we reported earnings of $2.3 million not including our NYX stake and these earnings include non-cash expenses for depreciation and amortization compensation $2.5 million for the year. Our pro forma profits were $1.6 million, $0.03 a share. Included in the results were $16.7 million in non-cash expenses as well for the year.

Also included in our results were approximately $24.7 million in net interest expense related to our bonded debt. These are expenses that we’re working very hard to reduce and I think will make a big difference. At this point I’ll turn the call over to Jeff.

Jeffrey McCutcheon

Thank you Michael. Good morning everyone. As reported, our fourth quarter GAAP net income is $18 million or $0.29 per diluted share, which includes an unrealized after tax gain of $15.7 million related to our investment in the NYSE-Euronext Inc. common stock. Excluding the after tax NYX gain, the company had a pro forma net income from operations of $2.3 million or $0.04 per diluted share. The comparable pro forma net loss from the operations for the fourth quarter 2006 was $1.8 million, or $0.03 per diluted share as noted on the regulation G reconciliation attached to the press release.

For the 12 months ended December 31, 2007, the company reported a GAAP net loss of $350.5 million or $5.70 per share which includes a non-cash impairment charge from June 30, 2007 related to the company’s good will and stock listing rights of $344.7 million and an unrealized loss from the NYSE-Euronext stock of $7.4 million. Excluding these items, the pro forma net income for the 12 months of 2007 was $1.6 million or $0.03 per diluted share compared to the pro forma net income for the 12 months of 2006 of $1.1 million or $0.02 per diluted share.

Our revenues net of interest expense and excluding the gain from the NYX shares increased by $16.2 million to $41 million when compared to the third quarter 2007 operating net revenues, [up] $24.8 million. By comparison, the fourth quarter 2006 operating net revenues were $46.3 million. The revenue increases noted during the fourth quarter were mainly attributable to improved trading opportunities in our specialist and market making businesses as compared to the third quarter.

Our net principle trading revenues were higher quarter over quarter, increasing from $33.3 million in the third quarter 2007 to $38.7 million in the fourth quarter 2007. Year over year, the trading revenues for the 12 months of 2007 increased to $185 million, versus $180.9 million during the same period for 2006 which was mainly due to stronger performance in the market making business other than cash equities, offset by decreases in the cash equity specialist and institutional brokerage businesses when compared to the prior year results.

The commission and other fee revenues were slightly higher in the fourth quarter of 2007 at $11.2 million in the fourth quarter 2007 versus $11.1 million in the third quarter of 2007. The two tiered liquidity provision payment amounted to approximately $5.8 million for the fourth quarter of 2007. The company’s investment in 3.1 million NYX shares increased during the quarter in value by $26.2 million before taxes to $266.9 million at December 31, 2007. This included a valuation allowance of 8.25% on the final one-third tranche of the restricted shares. As a reminder, the final restriction is removed on March 7, 2009.

Stock borrowed interest income was $37.3 million in the fourth quarter of 2007 compared to $58.2 million in the same period last year. The stock borrowed interest income decreased $10 million quarter over quarter from $47.4 million in the third quarter of 2007. The other interest income decreased $1.7 million to $5.8 million for the fourth quarter compared to $7.5 million in the third quarter of 2007.

Margin interest expense decreased to $39.1 million from $63.8 million in the third quarter of 2007 reflecting mainly the decrease in inventory financing costs in the amount of $24.7 million. Other interest costs related to our debt decreased slightly quarter over quarter to $12.2 million in the fourth quarter of 2007 versus $12.3 million in the third quarter of 2007. The $24.7 million decrease in the inventory financing costs for the quarter netted against the $10 million decrease of stock borrowed interest income, noted earlier, results in a combined decrease in the trading finance cost of $14.7 million versus the third quarter of 2007.

Management believes that the stock borrowed income and the margin interest costs are an integral component of our trading revenue and therefore our revenues reported including both of these items.

Overall expenses of $36.3 million excluding taxes and restructuring decreased compared to a year ago quarter of $49.8 million. The compensation costs for the quarter were $18.6 million which increased $5.1 million over the third quarter compensation of $13.5 million. The total compensation cost for the 12 months of 2007 was $80.2 million versus $88.4 million for the same period in 2006 reflecting a decrease of $8.2 million or 9%. The component of our compensation relating to base salaries has decreased approximately 35% compared to the 12 months of 2006, however, our incentive and bonus pay is higher than the prior year, which is reflective of the pay model for the market making compensation plan as well as our commitment to compensate key employees.

Exchange clearing and brokerage fee expense decreased quarter over quarter from $10.1 million in the third quarter of 2007 to $7.7 million in the fourth quarter of 2007. Year over year, the exchange clearing and brokerage fee expense have decreased by 31% compared to $11.1 million of expense reported in the fourth quarter of 2006.

Expenses for leasing exchange memberships and trading licenses of $500,000 were lower year over year when compared to the average cost of $1.2 million per quarter in 2006. As a result of the reduced head count mentioned earlier, we decreased the number of trading licenses required on the NYSE. Depreciation and amortization expenses were relatively flat quarter over quarter at $1 million. Year over year expense decreased by $3.5 million which was mainly attributable to the second quarter impairment of the stock list and related amortization expense.

Other expenses decreased quarter over quarter to $8.4 million in the fourth quarter versus $9.6 million in the third quarter of 2007. Compared to the same period in 2006, other expenses have decreased by $1 million from $9.4 million in the fourth quarter of 2006.

During the fourth quarter the company realized a reduction of communication occupancy insurance and legal expenses as part of a management commitment to reduce legacy cost, especially at our holding company and cash equity business. At the end of the fourth quarter, the company vacated approximately 40% of its office space in New York City, substantially reducing its real estate footprint and related costs. Employee headcount as of December 31, 2007 was 257 compared to 428 at December 31, 2006. The company will continue cost savings initiatives in 2008 with regard to other expenses, specifically, communications, professional fees, occupancy fee and insurance.

The effective tax rate for the fourth quarter of 2007 was approximately 41.6% and was 32.8% for the full year. The 2007 full year effective tax rate included a decrease for non-deductible goodwill impairment, offset by a tax benefit for a rate change from 43.5% to 40% noted earlier in the year. Going forward in 2008, our tax accrual rate is approximately 40%. Deferred tax liabilities, net of deferred tax assets have decreased from $233.7 million at December 31, 2006 to $71 million at December 31, 2007. This change was mainly due to the decrease of the deferred tax liabilities related to non-deductible tax stock list and an increase to the deferred tax asset for deductible portions of the impaired stock listing rights and goodwill intangible assets.

At December 31, 2007, the company is also reporting an income tax receivable of $11.8 million, which is mainly the result of the deductions relating to the goodwill and stock listing right intangible assets that will be currently deductible in 2007 tax return. While the company has realized a significant increase in [preferred] tax assets in 2007, we are confident that these tax benefits will be fully utilized against future operating profits or the unrealized gain on the NYSE-Euronext shares, which is noted as a deferred tax liability. As with our financial balance sheet, the company’s tax balance sheet has become more flexible and liquid and is yielding additional cash flow through this transitional period.

Our total assets were relatively unchanged quarter over quarter at $5.3 billion, however, the receivable from brokers, dealers and clearing organizations decreased from $413.2 million to $343.7 million as a result of the increase in financial instruments owned of $498.3 million. The payable to brokers, dealers and clearing organizations and financial instruments sold but not yet purchases were relatively unchanged quarter over quarter at $104 million and $4.1 billion respectively.

At the end of the period, the firm’s balance sheet continues to be highly liquid with significant cash and cash equivalent balances. Our cash and liquid asset position, including Federal segregated cash and repurchase agreements has decreased from $543 million in the third quarter of 2007 to $506 million in the fourth quarter. The decrease in cash is mainly related to the change in inventory positions at our broker dealer subsidiaries. The company’s free cash available has increased to approximately $269 million at December 31, 2007 from $148 million at December 31, 2006 mainly due to additional free cash from the reduction of regulatory capital at the cash equities specialist and institutional brokerage businesses, offset by scheduled debt servicing payments and interest and maturities.

The NYSE and SEC have approved a proposal to reduce the cash equities specialist regulatory requirement by approximately 75%. The proposal is currently published and undergoing a comment period. Once finalized by the SEC, the regulatory change will allow the holding company of the group to reallocate a significant portion of liquid capital from the specialist subsidiary to the parent. The net liquid asset held for regulatory capital purposes by the cash equities specialist business is approximately $299 million at December 31, 2007.

The working capital employed at our other specialist and market making activities related to the structured products business is approximately $129 million at December 31, 2007. The working capital at our institutional brokerage segment is approximately $33 million. It should be noted that the company utilizes the unrestricted NYX shares as a portion of the regulatory capital noted earlier for the cash equities specialists and the institutional broker.

The company’s book value has increased quarter over quarter to $527.9 million mainly due to the GAAP profit for the fourth quarter. Our December 31, 2007 balance sheet still includes intangible assets of $109.2 million for goodwill and [tradeem]. A portion of the remaining intangible assets are tax deductible and would yield an estimated tax benefit of approximately $25.8 million. Thus the company estimates the tangible equity at December 31, 2007 to be $444.5 million or approximately $7.22 per share.

Michael LaBranche

Thanks Jeff. Before I turn the call over to Q&A I just want to talk about the past year was a big year in transition moving to an all electronic market. We did that, we had a huge reduction in head count. We made significant progress in our trading algorithms. We continue to grow our new businesses. We are growing our businesses in London and Hong Kong. Our derivatives business continue to grow. We have made a lot of progress and rationalizing business to the new market structure and I think that we have a lot of opportunity ahead of us. So I’ll turn the call over to questions.

Question-and-Answer Session

Operator

Thank you, at this time if you would like to pose a question press star then the number one on your telephone keypad. We’ll pause for just a moment to compile the Q&A roster. Once again if you would like to pose a question, press star then the number one on your telephone keypad. Your first question comes from Daniel Harris of Goldman Sachs.

Daniel Harris – Goldman Sachs

I was wondering if Michael you could comment on the acquisition by a broker recently of Van der Moolen and you know there are some publicly traded peers out there talking about wanting to be more involved potentially in the specialist business. Just get your thoughts around what they’re seeing in the model that maybe is changing and more positive going forward.

Michael LaBranche

I can’t really speak for a large firm why they came in the business but I can give you my insight of what I think why it would make sense. We’re moving towards an integrated market making model. I think a lot of the barriers that exist in the business are, for example the way rule 98, which is the Chinese wall rule, exists today, is not actually in keeping with the times and I think there is some anticipation that there will be more interaction across different products and venues. I think that’s part of the thing that’s driving it.

Regardless of whether or not people think that the cash equities business is a good business or not it’s still an important business and there’s also a link to issuers which also would yield positive benefits for a large broker, being close to companies. For example, we are a specialist in 570 companies of which we work very closely with the management of those companies and we have always done that. It think that may be part of it as well.

There’s other things that are in the works too. Changing some of the tic rules, changing some of the capital requirements, all these things should make the business more palatable. As I’ve said before it’s been a big adjustment to the current market structure. There’s no denying the fact that the trading today is purely electronic. There are situations where human judgment adds significant benefit to the marketplace in deploying capital in unusual trading situations but by and large trading is fully electronic.

As a result we are working very hard to develop our algorithms to basically interact in the market electronically in some of the same ways that human beings were able to do before and we’ve worked very hard on it and I think that we’ve made some pretty good progress with that too. But the reason why I think that Lehman Brothers came into the business is they saw these opportunities.

Daniel Harris – Goldman Sachs

Thanks, I appreciate that answer. I’d be remiss if I didn’t ask now that your strategic review is completed, because I know you didn’t want to talk about it while it was going on, can you just sort of walk us through the process that you guys went through, what you looked at, how you thought about what your future options were and then ultimately how you came to the conclusion that you did?

Michael LaBranche

Well we looked at the situation from all different levels. We looked at every different possibility, but the bottom line is that we felt that we needed to take a very liquid balance sheet and deploy the capital in a way that made the most sense and under the previous format the manual market where we had an NLA requirement of something like $449 million, it didn’t make sense for us to be using our capital in that capacity anymore, so that was part of our thinking.

We do see some movement towards a more rational approach to capital requirements so that we can take our capital that we have now and use it better. One of the other reasons that I won’t get too much into it, but, I would just like to note that while we’re open to any possibility, our tangible book value is as Jeff stated, $444 million and our market cap as of last night was $272 million which to me makes no sense whatsoever and so we thought that it made more sense for us to keep the money in our business and people will come to realize that we do have a good business.

Daniel Harris – Goldman Sachs

Okay, great and then just lastly a couple of more quantitative things. First of all, on the employee headcount side, do you feel that you’re at a level now that’s more stable or do you anticipate that that’s going to go further. And then on the participation rate that you guys are seeing in the market these days, can you just comment on that, thanks a lot.

Michael LaBranche

Very quickly on the participation rate, I don’t really have it in front of me but I think it’s stabilized and gone up and I think that the more that we trade electronically the better we do with our participation rate.

Also, in terms of headcount. Our headcount at the specialist division, the LLC, went from a high of 427 people in 2003 down to 97 people today, so you can see that that’s more than a 75% reduction. I’m not sure where our headcount is going to go but I don’t imagine it’s going to go up there and where is our headcount for the overall company has gone down by about 40% during the year of 2007. 428 to 257, a little bit more than 40%, we really reduced our headcount and I can’t tell you where the headcount is going to be but trends are that capital matters, that technology matters, electronic quoting capabilities are what’s important so that you can do a lot more with fewer people and that certainly seems to be the trend and we’re going to keep looking at it that way and we will manage our costs with that in mind.

Operator

Thank you, your next question from Rich Repetto of Sandler O’Neill.

Richard Repetto – Sandler O’Neill & Partners

Hello? Hey Michael, first I guess the first question, not to put you on the spot, but you made some statements so far about the electronic environment and how everything is going electronic in Europe, essentially electronic, it begs the question, do you think we really need a floor then?

Michael LaBranche

Well, I’ve always been friendly to new things I think. But I think that’s it’s good to have a floor. I think it’s good for people to have a place for people to meet and remember I think that when the markets get unusually volatile, it’s good to have a meeting place for people to be able to negotiate trades. I think the vast majority of trades are done electronically and essentially they’re done in electronic systems so it’s not really on the floor.

The floors down substantially, we as a result have reduced our headcount down there from 330 at the peak down to about 60 today, so you can see that that’s a lot less than it used to be. I think that there will be a floor for some time and I think it’s good for the New York Stock Exchange or any exchange, it’s good for the CME to have a floor as well. I do think that we need to reduce costs there and it can’t be something that costs you too much in costs and certainly moving away from the manual market that we have has given us the ability to reduce our costs significantly.

Richard Repetto – Sandler O’Neill & Partners

Understood. I guess the next question is, you’ve seen a market improvement, is what you termed it, inventory financing in this quarter and you know down $24-25 million and is this something that, you know I’m looking at the model, but in quite a while, is this something, has there been a structural change that we could model this level at least on the net interest basis? Any structural changes or is this just something that was market related and it’s going to be volatile quarter to quarter?

Michael LaBranche

Well I think the important thing is that we move to give you a net revenue number and I think that’s more helpful for you and you can see what our net revenue number is, I think it was at $67 million of which some of that was the NYX gain that you can get to our operating net revenues pretty easily.

I think that’s the number you should focus on because you can break out your commissions and you can see what we make trading and when we talk about these numbers, what we’re trying to do for you is just show you our real net trading number, because stock borrow interest and all those kind of things, we believe, are really just a part of your trading because it’s just part of your cost of trading so that’s the reason we do it this way. I wouldn’t go too far into it, just focus on what you think is our net trading number, which I think is pretty clear here and that’s the number I would go by if I were you.

Richard Repetto – Sandler O’Neill & Partners

Okay and then I guess the last question is more of a balance sheet, when yourself and Jeff talked about the tangible equity of 722, you mentioned specifically this tax deductibility, $25.8 million and I believe what you talk about that if say the specialist the acquisitions were written down that you would not have this tax liability with the entire deferred tax liability and the balance sheet being $116 million, is that correct? Do I have correct?

Jeffrey McCutcheon

Well it is associated for the remaining $109 million on the balance sheet, so whatever makes that $109 million move in the future, again it will be deducted eventually for tax purposes. Some portion of it that is deductible for tax purposes will ultimately be taken out of the tax return and the value of that will be $25.8 million of what’s in the $109 million.

Michael LaBranche

It’s sort of like, remember when you used to have these conversations, I don’t know if it was with you particularly but I mean I’ve had it with lots of people, back when we had a stock list on our books we used to have a deferred tax liability against that stock list and I used to either say, either that stock list is worth something or that tax against that stock list will go away. And it couldn’t be both ways, in other words if you couldn’t have that tax against your stock list if it wasn’t worth anything and I think that what I said came evidently pretty true when we wrote our stock list down to zero last July and you can see that our tangible book went way up as a result of that because that just deferred tax liability went away and so that’s how I’d look at this and I think it’s a pretty similar situation.

Jeffrey McCutcheon

I think another thing to realize is that a lot of people look at intangibles as some cost you know because you pay for them in the beginning and then you really don’t get anything from them from an accounting perspective, but from a tax perspective, you have to remember that there’s golden hills and the tax person will always look at what that value is and ultimately the company gets the effect of that. It is a good tax deduction and as we’ve shown in our balance sheet we can use it.

Richard Repetto – Sandler O’Neill & Partners

And just to clarify because Jeff you referred to, on an asset side, the $109 million, but is that $25.8 million actually the deferred tax liability? The liability that would go away if you had to write certain things down?

Jeffrey McCutcheon

Right but it doesn’t actually exist on our balance now. The asset exists on our balance sheet now. But if the asset goes away then the deferred tax assets will go up by $25.8 million or if we can currently deduct it, then you’ll see our tax receivable go up by $25.8 million. It’s really that simple.

Richard Repetto – Sandler O’Neill & Partners

Okay and one last and I’ll be done. The deferred tax liability to 116, the liability, I know there’s some gains, the tax on the gains of the NYX shares in there, could you just give us a ballpark breakout of what’s in there?

Jeffrey McCutcheon

I’ll just say you’ll see it in the 10K when it comes out. We don’t normally give out that information but it’s mainly the NYX position, that’s mainly what’s in there. There’s other things that are in there, we have timing differences for book to tax items, depreciation, what not, but the main piece of that is the NYX, I will give you that.

Richard Repetto – Sandler O’Neill & Partners

And then one last part I guess I’m a little bit, I need to think about this, when you do add that tax deductibility, that’s as if the situation where things were written down but if you did have an acquirer or merger you know there would be some value there as well, so it wouldn’t be written down I guess, is that correct?

Michael LaBranche

Again..

Jeffrey McCutcheon

They would just inherit…

Michael LaBranche

Yeah, depending on the deal they could inherit it, it could get triggered for the seller, it depends on what the deal is and what the mechanics of the restructuring of the company but you know there is value to those tax items.

Richard Repetto – Sandler O’Neill & Partners

Okay, fair enough guys, thank you.

Operator

Thank you, your next question comes from Mike Vinciquerra of BMO Capital Markets.

Mike Vinciquerra – BMO Capital Markets

I want to rewind back on Rich’s question for a second because I’m not sure it got answered exactly as we were looking for, I’m looking for the same thing he is. When I strip out the interest on your debt, let’s just call it $12 million a quarter, your net interest for say last quarter was a negative $8.9 million roughly and this quarter it was a positive $4 million so I guess back to Rich’s question, did market conditions somehow allow you to have kind of a net inventory interest position during the quarter that is either repeatable or again is it just general market fluctuations and then next quarter we could see you back in a negative level just on your inventory.

Michael LaBranche

Again, those numbers are just basically part of our trading so depending on what trades you’re doing you’re going to either have more or less of it but you’re still going to have a net effect and you’re going to have a net profit. So again I would just try to get to our net trading and what you do is you look at our revenues, take away the interest that we may have gotten and take away the commissions and you see what we made trading basically, I think it’s that simple.

Jeffrey McCutcheon

Yeah and then that number Mike’s referring to is actually on our reg G because it takes out the NYX investment, you can see the revenue number on our regulation G which for the quarter was almost $41 million on the regulation G schedule under revenues net of interest expense [one one]

Michael LaBranche

Yeah so Mike that’s the number I’d really go by because that number that you’re talking about is going to move around a lot.

Mike Vinciquerra – BMO Capital Markets

Okay I guess that’s the real question is we should continue to expect some volatility in that just because there’s nothing that really we can point to as a control for that particular factor.

Michael LaBranche

I think what you need to think about with us is that we’ve made a move away from the traditional cash equities business in that we’ve moved [unintelligible] other businesses and that’s what’s driving things as well and we’re fully electronic now. Also just keep in mind that we have been negatively impacted every quarter by what we consider a negative carry on our bonded debt.

That amount, what was it last quarter Jeff, about $10 million?

Jeffrey McCutcheon

It was about 20.

Michael LaBranche

So what I mean by that is we pay interest of a blended rate of about 10 and 3/8ths for our bonded debt on $460 million worth of bonded debt and we get back some of them in that we take the excess cash that we have and we invest it in overnight and that sort of things so you get part of the 10 and 3/8ths you’re paying out by your overnight interest. But it still costs us about $7 million a quarter, $6.7 million a quarter.

We think that’s totally unnecessary and that’s why we’ve been very proactive in managing our balance sheet and making sure our balance sheet is ready for opportunities when they come around, especially with the markets the way they are today with everything in just kind of what I’d call turmoil, I think we’re in an extremely strong position because we’ve been very careful in managing our balance sheet and we have lots of capital right now. And capital is expense in the marketplace right now and we have a lot of it so I think there’s going to be very good opportunities for us right now.

Mike Vinciquerra – BMO Capital Markets

And staying on that front, you mentioned better capital utilization a couple times in this call, with all that excess capital, are there opportunities for you to move into either new or complimentary businesses or to add some tuck in acquisitions that would help you be stronger either in in options or ETFs or your structured products group in general that we might look forward to?

Michael LaBranche

Well, we are. I mean we are expanding quite rapidly in London, we’re expanding in Hong Kong, we’re looking at opportunities there, there’s big growth in ETFs both in Asia and in Europe so that’s an opportunity for us and we’re going to use our capital in those places that are growing and it’s pretty simple. If you look at this company, it’s a completely different company than it was five years ago, we recognized that things were going to change, we didn’t know how quickly they would change but we knew they would change eventually and we’ve really focused on areas that are not the public sees as our traditional businesses.

I think our company’s stock price suffers from the fact that people turn on CNBC and they see the floor empty everyday and I think that it just gives the impression that we don’t have a business there, but we do have a business there and we have businesses other places and that’s why we’re going to take our capital and use it.

Mike Vinciquerra – BMO Capital Markets

I guess just one comment I would say on that is that part of the reason I think people don’t realize the value in these other businesses is because you guys don’t have any statistics available and honestly we don’t know what you’re doing in London and in Hong Kong and even in the options business so if there’s anything you can do and we talked about this before, I guess that would certainly be a benefit I think to investors.

Just one more thing, the AMEX deal with New York yesterday you guys had scaled back your business in AMEX some time ago, they’re talking about combining the floors, are there any opportunities that you could see coming from this combination?

Michael LaBranche

Well we sold our equities business on the AMEX so we have a very scaled down operation on the AMEX now, I think we maybe have a dozen employees there. If there are opportunities we’ll certainly look at them. I think a lot of the trading that is taking place on the AMEX with move to ARCA, I mean I don’t know that for a fact but that’s what it looks like to me and we trade on ARCA quite a lot so I think there’s an opportunity for us there.

Trying to get back to your other point that you were saying that we should try to give you more statistics on what we’re doing in London and Hong Kong, we will do that as we can but generally speaking I’ll tell you that we’re really just focusing a lot on the ETF business there so it’s really, what we’ve done is we migrated our businesses away from the floors to the new market venues and we’re a leader in the new market venues, so I don’t think it’s any secret what we’re doing, we’re just trading electronically upstairs and in London and Hong Kong as opposed to trading on the floors which we used to do five years ago.

Mike Vinciquerra – BMO Capital Markets

Okay, very good, thanks very much Michael, thanks Jeff.

Operator

Thank you, your next question comes from Rich Repetto of Sandler O’Neill.

Richard Repetto – Sandler O’Neill & Partners

Just a follow up. So we’ve been asking about this inventory financing and were looking at it very focused and you keep recommended to us, look at sort of holistically with your trading and then I guess the question is, you’ve seen a [night] in your net revenue if you look at it holistically, you see the nice bounce from 3Q, have we reduced the volatility you know dependence on say the floor where we know the participation rates and so the profitability was going down, in all other things being equally, I know we got market conditions that can vary, but have we hit a bottom now where you’re just not that dependent on the floor and you really can’t be that negatively impacted anymore overall?

Michael LaBranche

Getting back to what I was saying, I think to Mike, five years ago we thought that the business was going to change and we didn’t, as I said, we didn’t know how quickly it was and it turned out to change quickly. The floor, as much as we think it has value, is a relatively small piece of our business today. I’d say it’s a very small piece of our business. We wanted to make it bigger because we want it to grow, there’s still significant order flow going on down there and if we can use our electronic algorithms to interact more and more we certainly are going to do that , so but as it stands today it’s a small piece of LaBranche’s overall business.

So try to answer your question, I would say that the downside of what goes on on the floor is very, very small at this point. I would say that there is opportunities there and I think that that business has stabilized.

Richard Repetto – Sandler O’Neill & Partners

Okay, you know, we talk about it’s a small portion of your business that the bigger business, you’re doing more with ETFs in Hong Kong and London, even if it’s general like less than X percent, 20%, can you give us a feel for what portion of say net revenues is from the floor, what portion of net revenues is from the ETF business in Hong Kong and London?

Michael LaBranche

Remember, we’re doing many different things like trade structured notes, we trade all sorts of things so it’s, I’d just say generally speaking it’s a very small number, you can come to that conclusion as best you can, we don’t break it out, it’s a small minority, significantly less than 50%, much less than that.

Richard Repetto – Sandler O’Neill & Partners

Okay, thanks Michael.

Operator

Thank you, your next question comes from George Walsh of Gilford Securities.

George Walsh – Gilford Securities

Any updates besides the, you know there’s the pool for the change of the regulatory capital debt reduction but how about some other things regulatory wise like the odd lot rule and how that’s progressing.

Michael LaBranche

The odd lots have been a significant problem for us. They still are a problem, although we hear that they’re trying to eliminate the abuse that’s going on there, we’re still very concerned about using the systems in a [violative] nature so that hurt us a lot and I think we’re going to get it fixed and we’re working on fixing it as well but that would be a good thing for us and that would be a good regulatory change.

There are other things besides the NLA reduction which are going to be beneficial, I believe there’s going to be a new kind of order form being introduced, I think that’s more, if you were to ask maybe the New York Stock Exchange about and I think they’re working very hard to make the floor more competitive and the market share which I think is down to something like 39-40% has stabilized but I certainly think it would be better for us if it was higher. But they are actively seeking to change some of the rules that will help the floor be more competitive.

George Walsh – Gilford Securities

Okay and then still is you know quarter to quarter that odd lot rule is having a negative impact, that if that’s changed that would be a noticeable improvement going forward?

Michael LaBranche

Yes it would be.

George Walsh – Gilford Securities

Okay. Now when the debt reduction, you know you mentioned obviously you want to reduce that interest expense but you know the event is the change in the regulatory capital, you will not move on that really until that comes through or are there other things you could do in the meantime?

Michael LaBranche

Well we have lots of excess cash, even beyond the NLA reductions, so the holding company has got quite a lot of money. And so we’re in a very flexible position right now regardless of whether the NLA goes through or not.

George Walsh – Gilford Securities

Okay.

Michael LaBranche

The NLA reduction is just an added bonus for us and I think it’s an important one but we’re in a very flexible position right now.

George Walsh – Gilford Securities

Okay, so we would expect some movement on that within the first couple of quarters of this year?

Michael LaBranche

On the debt you mean?

George Walsh – Gilford Securities

Yeah.

Jeffrey McCutcheon

Well, we’ll let you know in the appropriate regulatory filings but certainly as I said before, the fact that our earnings last year were negatively impacted by about $25 million, if that $25 million went away I think earnings would look a lot better, I mean we showed operating income of about $0.03 per share or $1.6 million and as I said at the beginning of the call including that we’re $16.7 million in non-cash expenses and if you put a reduction if you were able to eliminate that $25 million hit was the negative carry, you could see that this is a pretty profitable company.

George Walsh – Gilford Securities

Right, well that’s what I guess part of the thing has been just that people are, it’s just, it’s something, you would seem you would move very quickly on but it’s just taken a little while to get, you know, you were unliquid, and that’s just something that you would want to move on as quickly as possible to eliminate this cost, the interest cost.

Michael LaBranche

It’s unfortunate is that the bond markets in the situation it is in does not hurt as a bond market where it is right now.

George Walsh – Gilford Securities

Okay. Thanks Mike.

Operator

Thank you, your next question comes from Marc Sulam of Healy Circle.

Marc Sulam – Healy Circle

In response to the last question, do you sort of [insure] there were some other regulatory changes that were going on which would change the rules, I think of the role of the specialist and be beneficial to members or specialists on the floor. What do you think the time frame of those changes could be, that’s the first question.

Michael LaBranche

Marc, I’m hoping months, you know a few months and again that’s really not up to me to be proposing the changes we just kind of look and see what’s going and adapt to it. But hopefully the changes that are going to take place are going to be within a few months, it’s up to the regulators, the SEC to approve those changes naturally.

But as I said also earlier in the call, the worlds changing, the way stocks trade and stocks aren’t going to be traded in the silos anymore, they’re going to be traded as part of a bigger package and I think you’re going to see more integration of different securities interacting in the marketplace and so I think that over time you’ll see that the cash equities business is just one piece of the puzzle and that things are all pretty much integrated so that it’s going to look completely different.

Marc Sulam – Healy Circle

Okay and you said a number of times responding to questions about opportunities, was one of those opportunities taking over the Van der Moolen book?

Michael LaBranche

You know I’m not going to really comment on that Marc except to say that we’ve got plenty of leverage in that marketplace, we have 25% market share currently and so I think that as we’re able to improve that business, if we can improve it, that we certainly have enough leverage as it is to benefit, so I don’t know if we need to go above that 25% number.

Marc Sulam – Healy Circle

Okay great, thank you very much.

Operator

Thank you, at this time I would like to turn the call over to Michael LaBranche for closing remarks.

Michael LaBranche

I would just like to thank everybody for listening and as I said last year was a year of great change and transition, lot of challenges but we certainly made a lot of progress last year. This year we think that there is a lot of opportunities, the market is always unpredictable so I can’t give you any predictions on how we’re going to do other than to say that I think we’re in a much better position than we’ve ever been in the past few years and we’re going to take advantage of those opportunities as they come along. So I’ll look forward to speaking to you in three months and thanks for listening.

Operator

Thank you this concludes today’s conference call, you may now disconnect.

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