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LaBranche & Co. Inc. (NYSE:LAB)

Q1 2008 Earnings Call

April 22, 2008 09:00 a.m. ET

Executives

Stephen Gray - Investor Relations

Michael LaBranche - Chairman of the Board, President, CEO

Jeffrey McCutcheon - CFO, Senior Vice President

Analysts

Chris Donat - Sandler O’Neil & Partners L.P.

Richard Repetto - Sandler O’Neil & Partners L.P.

Mike Vinciguerra - BMO Capital Markets

John Cirigliano - Clearbrook & Company

Marc Sulam - Healy Circle

Peter Horan - Yates Capital

Operator

Good morning, my name is Nelson and I will be your conference operator today. At this time I would like to welcome everyone to the LaBranche first quarter earnings conference call. (Operator instructions) It is now my pleasure to turn the floor over to your host, Steve Gray. Sir, you may begin your conference.

Stephen Gray

Good morning and welcome to the LaBranche & Co. 2008 First Quarter 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 web site at www.labranche.com.

Before we begin formal remarks this morning, I would like to remind you that 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 first 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. This 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 formal remarks. With that, I’ll turn the call over to Michael.

Michael LaBranche

Good morning everybody. Today we showed a loss of $40 million that was due to our NYX stake. Our operating profit was $0.13 a share or $7.8 million. All of our businesses did better this past quarter. Our specialist business has its best quarter since the introduction of the hybrid.

We also announced that we are going to redeem our 9.5% bonds, which is a $169 million. We are doing that to cut costs; we are in a very good position to managing our balance sheet with respect to that.

We have authorized the buy back of $40 million worth of our common stock, which we are doing for many reasons and our stock right now is trading at a very significant discount to its tangible book value, which we think is a good reason to buy the stock back in addition to the fact that this company continues to generate significant cash.

At this point I’ll turn the call over to Jeff, and then I will come back.

Jeffrey McCutcheon

Thank you Michael. Good morning everyone. As reported, our first quarter GAAP net loss is $40.2 million or $0.65 per diluted share, which includes an unrealized after tax loss of $47.6 million related to our investment in the NYSE-Euronext stock position and a $500,000 after tax loss on early extinguishment of the $80.8 million of public debt.

Excluding the after tax effects of the unrealized NYX loss, and the debt extinguishment loss the company had a pro forma net income from operations of $7.8 million or $0.13 per diluted share.

The comparable pro forma net loss from operations for the first quarter 2007 was $3.2 million, or $0.05 per share as noted on the Regulation G reconciliation attached to the press release.

Similarly, the comparable pro forma income for the fourth quarter 2007 was $2.2 million, or $0.04 per share.

Our revenues, net of interest expense, and excluding the unrealized loss from the NYX shares increased by $15.6 million to $56.6 million when compared to the fourth quarter 2007 operating net revenues, up $41 million.

The revenue increase noted during the first quarter was mainly attributable to the improved trading opportunities in our specialist and market making businesses as compared to the fourth quarter 2007. By comparison, the first quarter 2006 operating revenues were $42.1 million.

Our net principle trading revenues were higher quarter-over-quarter, increasing from $38.7 million in the fourth quarter 2007 to $60 million in the first quarter 2008.

Year-over-year, the trading revenues for the first quarter of 2008 were $11.1 million higher than the $48.9 million reported in the first quarter of 2007. This increase was mainly due to stronger performance in our market making business.

Our cash equities specialist business also noted strength in the revenue from net principal transactions by exceeding results in every quarter since out fourth quarter 2006 when the hybrid system was implemented.

The commission and other fee revenues were lower first quarter 2008 at $10 million versus $11.2 million in the fourth quarter of 2007, as well as, when compared to the first quarter of 2007 of $12.8 million.

The two-tiered liquidity provision payment amounted to approximately $5.3 million for the first quarter of 2008 versus $5.8 million in fourth quarter of 2007.

The company’s investment in 3.1 million NYX shares increased during the quarter in value by $79.2 million before taxes to $187.7 million at March 31, 2008 including the valuation allowance of 8.25% on the final one-third tranche of the restricted shares.

The closing price of the shares was $61.71 at March 31, 2008. The final tranche of restrictions is scheduled to be removed from the shares on March 7, 2009.

Interest income was $29.9 million in the first quarter of 2008 compared to $64.7 million in the same period last year. Of this amount, $26.4 million represents a component of our trading revenue in our market making transaction.

The trading interest income decreased $10.0 million quarter-over-quarter from $37.3 million in the fourth quarter of 2007. Other interest income, mainly generated by our short-term investment of our excess cash balances, decreased $2.3 million to $3.5 million for the first quarter compared to $5.8 million in the fourth quarter of last year.

The decline in the other interest income is mainly due to the sharp decline in the federal funds rate by 200 basis points since January 2008.

Margin interest expense, which is mainly used to finance our market making inventory, decreased to $30.8 million from $39.1 million in the fourth quarter of 2007. Other interest costs related to our bonded and subordinated that decreased quarter-over-quarter to $10.9 million in first quarter 2008 versus $12.2 million in fourth quarter 2007 mainly due to our repurchase of $80.8 million of our public debt during the quarter.

The $8.3 million decrease in the inventory financing cost for the quarter netted against the $10.9 million decrease in the trading interest income noted earlier results in a combined increase in the trading finance cost of $2.6 million to $4.4 million versus the fourth quarter of $2.7 million.

As noted in prior conference calls, the management of the company views stock borrowed interest income and margin interest expense as an integral component of the net principal transaction revenue for the market making division.

Although, not reported for our GAAP financial statements our management generally refers to the net trading revenue as net gain on principal transactions less the net cost from financing of the inventory, which is the result of the stock borrowed rebate interest income less the margin interest expense.

Thus, if you take our net principal trading revenue of $60 million this quarter less the net cost from the financing inventory of $4.4 million which is derived from the $26.4 million of the stock borrowed interest income less the $38.8 million of the margin interest expense, the trading income for the company is $55.6 million for the first quarter of 2008.

By comparison, the same amount for the first quarter of 2007 would be $48.9 million less the net inventory financing cost of $14 million, which is derived from $56.4 million of stock borrowed interest income less $78.4 million of margin interest expense. The trading income for the company in the first quarter of 2007 was $34.9 million.

Overall expenses of $48.7 million excluding taxes increased slightly to the comparable quarter of the year ago by $1.8 million. Quarter-over-quarter, the total expenses excluding taxes increased $12.4 million from $36.3 million.

The increase in total expenses was mainly attributable to the increased compensation and trading expenses which were anticipated to offset the more robust trading results in the first quarter of 2008.

The compensation costs for the quarter were $28.5 million which increased $4.4 million over the first quarter of 2007 compensation of $24.1 million. Quarter-over-quarter the compensation cost increased $9.9 million from $18.6 million in the fourth quarter of 2007. The component of our compensation, relating to base salaries, have decreased approximately 32.6% compared to the first quarter of 2007 due to headcount reductions. 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. It should be noted that the restarting of our benefit plans and payroll taxes for the new calendar year contributes to the higher first quarter costs as well.

Exchange clearing and brokerage fee expense increased quarter-over-quarter from $7.7 million in the fourth quarter of 2007 to $10.7 million in the first quarter of 2008. Included in the first quarter expenses was approximately a $1.1 million charge for contested fees with one of the exchanges. Year-over-year the exchange clearing and brokerage fee expense less the contested amount just noted before had slightly increased when compared to $9.1 million of expenses in the first quarter of 2007.

Depreciation and amortization expenses decreased in the first quarter of 2008 by $100,000 to approximately $900,000 compared to the fourth quarter of 2007 depreciation expense of approximately $1 million. Year-over-year expense decreased by $2.6 million which is mainly attributable to the elimination of amortization related to intangibles.

Other expenses decreased quarter-over-quarter to $7.3 million for the first quarter versus $8.4 million in the fourth quarter of 2007, compared to the same period in 2007 other expenses have decreased by $2.2 million from $9.5 million in the first quarter of 2007.

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 specialist business. Employee headcount as of March 31, 2008 was 232 compared to 372 employees at March 31, 2007. The company will continue cost saving initiatives in 2008 with regard to our other expenses.

The effective cash rate for the first quarter of 2008 was approximately 43.7%. Going forward in 2008, our cash accrual rate is 40%. During the quarter, we recognized a $1.4 million tax benefit for a decrease in our FIN 48 contingent tax reserve as a result of the assessment period closing for a tax year.

Deferred tax liabilities, net of deferred tax assets had decreased from $71 million at December 31, 2007 to $40.9 million at March 31, 2008. This change is mainly due to the decrease of the unrealized tax gain on our NYX shares. The company has proactively filed for an annual carry back claim with the IRS in April and anticipates an expedited refund of approximately $11 million within the next week or two.

Our total assets decreased quarter-over-quarter from $5.3 billion in the fourth quarter of 2007 to $4.1 billion in the first quarter of 2008. The decrease of approximately $1.2 billion was mainly a decrease in the financial instruments owned at fair value related to a decrease in the current trading assets employed in the specialist and market making segment.

As such the liability is related to the trading operation, decreased by $1.1 billion, specifically to financial instruments sold but not yet purchased. There also was an $80.8 million reduction in public debt. 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 have decreased from $506 million in the fourth quarter of 2007 to $458 million in first quarter. The decrease in cash is mainly related to repurchase of our public debt.

The company’s free cash available at it is holding company has increased to approximately $363 million at March 31, 2008 from $269 million at December 31, 2007 mainly due to additional free cash from the reduction of the 75% of regulatory capital at the cash equity specialist business, offset by dead extinguishment payment during the first quarter.

The company’s book equity has decreased quarter-over-quarter to $489.1 million mainly due to a GAAP loss of $40.2 million for the first quarter.

Our March 31, 2008 balance sheet still includes intangible assets of $109.2 million for goodwill and trade name. A portion of the remaining intangible assets are tax deductible and will yield an estimated tax benefit of approximately $25.8 million. Thus, the company estimates the tangible equity at March 31, 2008 to be approximately $405.7 million.

At March 31, 2008, our trading subsidiaries had approximately $258 million of liquid working capital, mainly composed of $227 million for the specialists and market maintained segment and $31 million at the institutional brokerage segment. These amounts exclude any value for NYX shares.

Finally, by taking the free cash of $363 million at the holding company and the pending tax refund of $11 million, we have available free cash of $374 million.

Also, we have $258 million of working capital at our trading subsidiaries as noted earlier. These amounts added to our fair market value of the NYX position constitute a majority of our highly liquid assets of over $800 million equity trading and represents flexibility of our company -- to not only reduce that and but back shares but also concurrently operate and grow our business.

Now I will turn the call back over to Michael.

Michael LaBranche

Thank you, Jeff. I would just like to note that our stake in NYX as a successor asset to our seat. And our seats are now basically mark to the market every quarter we always own seat as our business made sense to own it. They always went up and down in price, they were always very volatile. Our NYX shares seemed to be also volatile. Over time our seats did prove to be a very valuable asset to us and so that is dominating our earnings now, but we are focused on generating cash.

As Jeff noted, we are also very focused on reducing legacy cost. Our effort to buy the bonds back is a very significant part of that cost cutting strategy; we are making significant progress on that. We are also focused on operating cost as well and we are making progress on that as well.

We also are now in a position to reallocate our resources much more effectively. The business is changing dramatically, if you look at our shareholder letter we’ve noted that the auction market that we once knew is permanently changed, we recognize it, we are building other businesses. Our specialist and market making businesses outside of our traditional cash had strong performances and they continue to represent an increasing percentage of our total company revenues.

The fact is that we have done a lot of good things in last two years, we are starting to reap the benefits of that now and that’s why we are in a position to reduce our debt from an excess of $500 million about a year-and-a-half ago to $210 million going forth from May 23rd.

We will have $210 million of our 11% notes outstanding, they had maturity four years from May 15. We will look at that, we’ll be flexible about it and we will maintain all of our options with respect to that.

So at this point, I’d like to turn the call over to any questions if there are any?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is coming Chris Donat of Sandler O’Neill

Chris Donat - Sandler O’Neil & Partners L.P.

I guess the first question that I am trying to get my arms around is on the trading revenue, the net principle gains -- can you give us more color on what drove that, was it more volume and I know we don’t use the participation rates and realization rates, but just any color you have would be helpful to us understanding it?

Michael LaBranche

Well we are trying to move away from participation rates, because you probably can gather and we have been doing that for several quarters now because of the nature of the way the stocks trade today. We have made some good progress in our technology. We continue to build technology to allow us to quote an electronic market. It’s not just on our cash business but the other businesses as well.

There was an exceptional amount of activity in the marketplace over the first three months of this year; basically related to a lot of things that were going on the financial community I would say. The other part of it is that our technology, as I said, is allowing us to trade more effectively. We have been able to grow our businesses both in London and Hong Kong. We are doing well in our EPS and options trading and we are doing much better in our traditional cash business, at the same time, as we are effectively lowering our cost.

So this is an environment where we try to do better and we showed revenues of -- what Jeff described is what we call net revenues, real trading revenues of $56 million, against the number of I think was $34 million a year previously.

As I said before I can’t give you guidance in what the trading is going to be like for the next year but what we are really going to do is make sure that we are able to manage our cost so that if things slow down, we can still generate cash.

Chris Donat - Sandler O’Neil & Partners L.P.

Okay, and then just thinking about volatility and some of the other factors in this market, with the volumes, are you doing say more small trades or more large trades, or are you taking chunkier positions or how does it compare to say a year ago or pre-hybrid?

Michael LaBranche

Well in terms of the cash business, the trading in the cash business has changed over the last few years, where it’s really electronic messages trading in very small increments at high frequency rates.

So the block trading on the floors of the exchanges it doesn’t really exist anymore, so it’s really just small trades being generated using electronic recording capabilities. In terms of our wholesale business, we are doing plenty of that but we do most of that off floor today and that’s not related to our specialist business. We are allocating more capital to our institutional brokerage group which we are providing liquidity in that marketplace to the wholesale community today.

So as I said before in my previous remarks what we are doing is we are reallocating our capital and when I say resource that also means capital to businesses that are trading in a more fragmented market. We no longer have a central auction market, it’s a fragmented marketplace where prices are set on multiple venues; very often they’ll set off the exchange floors and so we are able to participate in that market, and I think that’s driving part of our revenues here or a good piece of them.

Chris Donat - Sandler O’Neil & Partners L.P.

Okay, then one for Jeff just in terms of buying back the 9.5% debt, can you give me the quick reason why you won’t be doing the 12 debt or is it in terms of when you can buy back or does it affect the covenants on the share buyback, is that one factor also?

Jeffrey McCutcheon

You mean the $11 million debt.

Chris Donat - Sandler O’Neil & Partners L.P.

Sorry, yeah, 11 not 12.

Jeffrey McCutcheon

Basically as Mike mentioned earlier, it’s a question around flexibility. Obviously, the 11% debt is due four years from now whereas the 9.5% debt is due May 15 of next year. So a lot of thought was given around the flexibility of the firm as well and since that debt is in place it made more sense to take out the one that has a shorter life.

Chris Donat - Sandler O’Neil & Partners L.P.

Okay, and again you have a limit on how many shares you can buy back until you buy back all of the 9.5%, is that correct?

Jeffrey McCutcheon

Well, as described in the press release there is a restricted payment allowance and then there is also the actual fixed coverage ratio and right now we’re restricted to $15 million but when the buyback occurs that amount will be raised and it will be in excess of the $40 million.

Chris Donat - Sandler O’Neil & Partners L.P.

One month from today.

Jeffrey McCutcheon

May 20. That limit will change on May 23.

Michael LaBranche

But just to call up on what Jeff said - the reason why we called the shorter term debt is that because that obviously we are going to pay back anyway a year from now. We were going to cut our cost immediately, we still have the flexibility to do what we want with the 11% and with capital the way it is on Wall Street we just want to keep our options open, it is that simple.

Chris Donat - Sandler O’Neil & Partners L.P.

Okay, and just to follow-up though, keeping the NYX shares at the point because you are able to sell most of it or two-thirds of it I guess, that’s part of the flexibility?

Michael LaBranche

Yeah, if we want cash we could sell it, we could sell two-thirds of it. There is a lot of reasoning that goes into our ownership of that and as I described before on the call it is a successor asset to our seats, it’s generating a dividend, it also is a company that generates cash and it’s got earnings. So they are like see-through earnings to us the way that Buffett [ph] describes those.

And then there are tax implications that we take into consideration as well. If we had just participated on the secondary that the exchange did when they first went publicly we could have sold the stock at $60.22. We made the determination not to do that, we are certainly free to do what we want with it now but we are going to take tax under consideration for obvious reasons.

There are times when we might not have the same tax implications that we have today so we’ll take that into consideration and we also have to think about what we would do with the money and it made no sense at all to sell the shares while we couldn’t call the debt for example and now we can call the debt, we can do what we want, so we’ll keep an open mind about it.

Operator

Our next question is coming from Rich Repetto of Sandler O’Neil.

Richard Repetto - Sandler O’Neil & Partners L.P.

Are there any other improvements, your principal trading revenue increase sizably, are there other improvements that the NYSE-Euronext can do to more level the playing field. Are they still rule changes that set for that you’d opt for that could further level the playing field?

Michael LaBranche

Well, the big thing for us quite frankly is fixing the odd lot problem and we had a very, very adverse situation where we fully believe that people are using violative behavior to unlawfully take money from us.

So we worked with the regulator to try to eliminate those abuses and that’s made a significant difference and we said that was a material impact in our business and we can believe that, that is gone today, so that’s a plus. We have improved our algorithms, we’ve done a bunch of things with regard to that, but again, as I reiterate we are growing our businesses in different directions and the vast majority of our income is coming from our non-traditional businesses and we will continue to be focused on those.

So we are going to continue to focus on London, we are going to continue to focus on Hong Kong. The ETF business is growing, the other parts of it we are going to grow our institutional equities business, with a lot of things that are taking place on Wall Street, we think that’s a good time to focus on that. So those are the things that really are growing our revenues and we are cutting costs. So if we have a good quarter for example we are going to still try to generate significant cash because we cut our costs.

So I think that the things we’ve done over the last five years grow in a way from our traditional businesses had allowed us to do well in this past quarter, and I think that our team should be commended for having a foresight to see the changes that were going to take place.

Richard Repetto - Sandler O’Neil & Partners L.P.

And then one quick follow-up, is there anyway even to ballpark quantify the percentage of revenues that are outside the NYSE specialists now?

Michael LaBranche

I use the term vast majority, so you can take it from there. I mean I really don’t break it out as a business segment for reporting purposes.

Operator

Our next question is coming from Mike Vinciguerra of BMO Capital Markets.

Mike Vinciguerra - BMO Capital Markets

Back to this redemption, am I correct in just looking at this, the only cost that will really would be involved in this is the two-and-three-eighths premium you are paying and then you will pay 53 days of interest through on May 23, and that’s essentially it?

Michael LaBranche

Yeah, it’s a $4 million premium for $169 million, just about $4 million exactly. The interest has already been accrued so that’s already in our earnings statement so there won’t be a -- it is earnings other than the $4 million which is the premium; that is tax deductible. The interest which has already been accrued and we are accruing right now in the current quarter is, what, approximately $11 million for those 9.5%. Yeah, $8 million, so it has got $11.5-12.0 million total outlay, but $8.4 million of that has already been accrued or will be accrued this current quarter.

Mike Vinciguerra - BMO Capital Markets

Got it okay, Thank you for the clarification and then can you give us an order of magnitude Michael as far as -- you mentioned the contribution from outside the US and we have heard this from a number of US brokers so it is really nice growth story I think general, but contribution outside the US versus inside, order of magnitude versus maybe last year?

Michael LaBranche

Well, it is still a minority. It is not a majority, but it is growing from a very small percentage to what we consider a material amount at this point and those businesses are growing. There is a lot more interest in derivative trading in Europe today as you know and that is adding to it. Again, I am not going to going to break it out, but it has gone from non-material to material at this point.

Mike Vinciguerra - BMO Capital Markets

Can you give us more color though I guess on the mix of your business; you just mentioned derivatives and I wasn’t sure, is it majority derivatives or is it mostly the equity supplemented by derivatives trading?

Michael LaBranche

It is a lot of the ETF trading and that is one of the areas we really focused on and that is what we are focusing on internationally right now.

Mike Vinciguerra - BMO Capital Markets

And then Rich kind of asked this question, but equities versus options in the US in terms of -- I think those are two categories that primarily are driving principles or does ETF also factor into that?

Michael LaBranche

ETFs as well.

Mike Vinciguerra - BMO Capital Markets

Is the options business growing nicely; obviously, the market itself is growing but I don’t know if that has been an area of focus for you, if you move more of your attention to the ETF in the international market?

Michael LaBranche

The option business is a significant business for us, but that business has changed. When we used to talk about listed options that business is not the same at all that it once was. We are no longer a specialist on the AMEX on listed options. We are a specialist in Index’s and ETFs, but not in listed options so that business is really done. And our office is using our technology today so it is different today than it was when we had floors the way they were. We do have a listed option business in Philadelphia and Chicago, but it is definitely different, but it is definitely a wholesale market and one that is significant to us.

Mike Vinciguerra - BMO Capital Markets

Is there a reason why Index’s and ETFs are more attractive to trade?

Michael LaBranche

On the floors?

Mike Vinciguerra - BMO Capital Markets

Yeah. That does not stay on the floor basically it is more --

Michael LaBranche

We are just seeing how things work out because we don’t know what is going to happen with the AMEX being bought by the New York Stock Exchange, for example. So we don’t know if those products are just going to go to Arco, we are not just sure. We are just keeping our options open.

Operator

Thank you. Our next question is coming from John Cirigliano of Clearbrook.

John Cirigliano - Clearbrook & Company

If I have calculated this right, if I take out the NYX $81 million loss on investment and take out your extraordinary expenses and your non-cash expenses, it looks like your EBITDA income is close to $18 million. Or is this using cash expenses and putting the $81 million below the line and --

Michael LaBranche

You are not far off on that number.

Operator

Our next question is coming from Marc Sulam of Healy Circle.

Marc Sulam - Healy Circle

Michael three issues; I think the last quarter you touched upon some regulatory changes that may be impacting the specialist business, can you give us an update on where those are?

Michael LaBranche

They are current proposals in Washington to really get the traditional cash specialist business more in line with the current market structure. So there is talk of allowing the business to become more integrated with other parts of our business and that would be true for any of the specialists that have other trading businesses and that would be something that we would welcome. It makes a lot more sense and it really -- in today’s world when you have multiple products, multiple venues, multiple pricing where market share has gone from 80% to, whatever it is, 30 something %.

It really makes sense to be able to integrate your businesses with your other market making features and so we think that there is going to be some relief with regards to that. There is talk about changing the specialist name to integrated market makers which would also reflect the changes that are necessary there. The reduction in NLA was a big change because it certainly with the way stocks trade today, you don’t need the same amount of capital there and it makes more sense to be able to use that in other places.

Those are big things that are making a difference in that business but they are not just making the difference, in that business they are making a difference to our overall business because we can now more affectively use out capital. We are no longer tied to having bonds with a negative carry, for example. Those are the big changes. Then the Rule 98 which is the Chinese wall rule would be an important thing for us.

Marc Sulam - Healy Circle

What do you think the timetable is on that Rule 98 issue?

Michael LaBranche

It’s for me to say that. I can tell you what I hope it would be, and I would hope it would be a matter of months, if not less but it’s not up to me to make that determination.

Marc Sulam - Healy Circle

Secondly, you’ve reduced headcount pretty dramatically, but you’ve recently made a couple of hires of individuals who are from the sell-side. Can you speak about how your business is going to change in terms of those hires and how you are going to build out your business?

Michael LaBranche

The fact is that a lot of the pricing that used to be done in the central auction is taking place at other places which you know Mark. And there are also a lot of good people out in Wall Street that are looking to get into a business that’s growing.

So we are talking to a lot of good people and a lot of good people are interested here. As a result there is a lot of turmoil going on in the Street in the business that you are involved in, for example.

So we are just looking to get good people and we focus on taking care of our customers and a lot of people still want that business and I think that’s where we are going to focus and growing giving capital to it.

Operator

Thank you. Our next question is coming from Peter Horan of Yates Capital.

Peter Horan - Yates Capital

Do you hedge your NYX holdings on the principal side of your business?

Michael LaBranche

No, you mean just on the mark to the market on our NYX shares?

Peter Horan - Yates Capital

Yeah, or do you have a position that perhaps gains on the principal side when the NYX falls in value or anything at all puts or calls?

Michael LaBranche

No we don’t have that position hedged.

Peter Horan - Yates Capital

Okay. What I am struggling with really is that, and I definitely appreciate that it is a successor asset and that we should be somewhat sensitive to that, but what I am struggling with really is just simply being subjected -- given the material size of the position relative to your overall business, being subjected to the volatility of it -- and I am not suggesting that you would sell the entire positions if you think -- obviously it is the cheap equity. Have you considered slowly leaking it out, if at a certain stock price you can clearly redeploy the capital or you can even buy back the 11’s. It would give us, as an investor base, a lot easier ability to understand your business and not have to have an opinion on the NYX necessarily as well.

Michael LaBranche

Well, it’s a fair question. As I said before, there were certainly constraints in what we could do with those NYX share proceeds if we were to sell them, for example. There are tax considerations, and while we are own a specialist business there are tax considerations with regards to our NYX, for example, that’s one thing.

The other thing is that we had to take into account what would we do with the proceeds? If we had sold the NYX shares before, we couldn’t call our bonds the same way, and that would have been a constraint because then we would have had choices of putting the money into overnight or making a purchase of another asset, and you know quite frankly, what’s gone on in the last years, any asset we purchased, probably wouldn’t have done very well.

It means we were smart enough to have bought some oil or gold or something, but if we had bought a financial services asset I don’t know what that would have done. We couldn’t really use the money effectively and we had to also consider tax considerations.

Peter Horan - Yates Capital

Okay. So when we think about the next intermediate long-term, we should obviously think about LaBranche with a semi-permanent position of the NYX on the balance sheet, is that a fair statement?

Michael LaBranche

It’s fair in that we are not locked into it.

Operator

There appear to be no further questions. I would now like to turn the floor to Mr. Michael LaBranche for any closing comments.

Michael LaBranche

Okay well, I would just like to thank everybody for listening today and we look forward to speaking to you in three months. So, thank you very much.

Operator

Thank you. This does conclude today’s LaBranche’s First Quarter Earnings Conference Call. You may now disconnect and have a wonderful day.

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Source: LaBranche & Co. Inc. Q1 2008 Earnings Call Transcript

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