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BGC Partners (NASDAQ:BGCP)

Q3 2012 Earnings Conference Call

November 2, 2012, 10:00 am ET

Executives

Jason McGruder – Head of IR

Howard Lutnick – Chairman, CEO

Shaun Lynn – President

Graham Sadler – CFO

Sean Windeatt - COO

Analysts

Rich Repetto – Sandler O'Neill

Patrick O'Shaughnessy – Raymond James

Jillian Miller – BMO Capital Markets

Niamh Alexander - KBW

Operator

Good day, ladies and gentlemen, and welcome to third quarter 2012 BGC Partners Incorporated earnings conference call. My name is (Chanelle) and I will be your operator for today.

At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Howard Lutnick, Chairman and CEO.

Jason McGruder

This is actually Jason. I'm going to read the (disclosure) first. Good morning. Our third quarter 2012 financial results press release was issued this morning. This can be found either at the News Center or investor relations section of our website at bgcpartners.com.

During today's call, we will be also referring to a presentation that summarizes our results, which includes other useful information. This too can be found in the investor relations section of our site.

Throughout today's call, we will be referring to results only on a distributable earnings basis. Please see today's press release for GAAP results. Please also see the section of today's press release entitled Distributable Earnings, Distributable Earnings Results Compared with GAAP Results and reconciliation of GAAP income, distributable earnings for a definition of these terms and how, when and why management uses them.

Unless otherwise stated, whenever we refer to income statement items such as revenues, expenses, pre-tax earnings or post-tax earnings, we are doing so only on a distributable earnings basis.

Unless otherwise stated, all the financial comparisons we will be making today will contrast the third quarter throughout the third quarter of 2011.

I also remind you that the information on this call contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended.

Such forward-looking statements include statements about the outlook and prospects for BGC and its industry as well as statements about our future financial operating performance.

Such statements are based upon current expectations that involve risks and uncertainties. Actual results, performance or achievements could differ materially from those contemplated, expressed or implied because a number of risks and uncertainties that are included are not limited to the risks and uncertainties identified in BGC's filings with the US Securities and Exchange Commission.

We believe that all forward-looking statements are based upon reasonable assumptions when made, however, we caution that it is impossible to predict actual results or outcomes or the effect of risks and uncertainties or other factors on anticipated results or outcomes that accordingly you should not place undue reliance on these statements.

Forward-looking statements speak only as of the date when made and we undertake no obligation to update these statements in light of subsequent events or developments.

Please refer too the complete disclaimer with respect to our forward-looking statements and risk factors set fort in our most recent public filings on Forms 8-K, 10-K and 10-Q which we incorporate today by reference.

I would now like to turn the call over to our host, Howard Lutnick, Chairman and CEO of BGC Partners.

Howard Lutnick

Thank you, Jason. Good morning and thank you for joining us on the third quarter conference call. With me today are BGC's President, Shaun Lynn; our Chief Operating Officer, Sean Windeatt; and our Chief Financial Officer, Graham Sadler.

BGC's third quarter revenues were up 17.1% year over year, driven largely by Newmark Grubb Knight Frank, which produced $141.1 million in revenues and $16.1 million in pre-tax earnings.

Our diversification into commercial real estate is proving a significant contribution to BGC's results as conditions in the global financial markets continue to be challenging.

I'd like to comment on the impact hurricane Sandy is having on our business. While they have proved devastated, New York area and other parts of the country, we are open for business thanks to the tireless efforts of our partners and employees who have shown incredible dedication and we are deeply grateful for their commitment to the company.

Although our main North American financial brokerage office in downtown Manhattan is temporarily closed, we continue to serve our customers from other officers here in the New York area and around the world supported by our global electronic trading infrastructure which includes eSpeed, Volume Match, BGC Trader and Kleos, our co-location facility.

In addition, Newmark Grubb Knight Frank is assisting its clients in finding temporary space and with other recovery efforts.

Given the lower volumes and volatility in the financial markets, BGC's dividend per common share will be $0.12 for the third quarter which accretes to a 10% annualized yield at yesterday's closing price.

We expect to maintain this dividend for the foreseeable future. With that, I am now happy to turn the call over to Shaun.

Shaun Lynn

Thanks, Howard, and good morning, everyone. In our financial services segment, (inaudible) well below historical averages across most asset classes during the quarter resulting in low volumes industry-wide in rates.

Activity's been muted due to cost division undertaken by the US Federal Reserve and other central banks. The Fed alone has over $2.2 trillion worth of long dated treasuries and agencies on its balance sheets which are not being traded or hedged.

In addition, with the beginning of (inaudible) three, the Fed is adding another $40 billion per month. While revenues in our rates business declined by 13.5%, it is much less than the 30% decline in interest rate volumes for CME, (URX) and (UNX) combined.

Our performance was also better than the 20% drop in the Federal Reserve US treasury bonds. We believe that central bank positions eventually will be unwound when the economy improves, which will provide us with future (inaudible).

We also believe rates markets will become more active over time as high levels of government debt around the world drive volumes upward and are voiced in the electronics rates business.

BGC's volumes and fully electronic brokerage have interest rate swaps and other interest rate drifting products also improved substantially. They're a relatively small percentage of our overall rates revenues.

Global credit markets, however, has declined as banks adjust the new capital requirements for corporate bonds under (BASL) three and because of uncertainty surrounding recently enacted rules for the clearing of credit derivatives in the US.

This is reflected in the Federal Reserve corporate bond volumes being down by 19% year over year and by ice clear credit derivative motion volumes increasing by 47%.

In comparison, our credit revenues declined by 18.7% as the uncertainty surrounding these rules diminishes. We expect credit market volumes to rebound. Global FX volumes have been muted so far in 2012 largely because of major central banks intervened to keep their currencies from appreciating and because low interest rates in major economies may carry trade strategies less appealing to traders.

As a result, (inaudible) average FX volumes declined by 16% for the (NYSE:CMA), 23% at (Thompson Realtors) and 43% at EBS. While our overall FX revenues were down by 20%, BGC's fully electronic FX revenues increased by 77% driven by strong performance in our FX spot and auctions business.

Global equity markets also continue to be challenging in the quarter. Equity derivative volumes were down between 25% and 41% according to the OCC, (URX) and (NASDAQ:CME). BGC's overall revenues from equities and other asset classes decreased by 42.5%.

We expect to benefit from the new rules regarding OTC derivatives once they are finalized. Our understanding is that the rules being discussed will continue to allow for trading to a variety of means including (voice) and we believe the net impact of these rules and the new bank capital requirements will encourage the growth of fully electronic trading for a number of products we broker.

Total financial services segment revenues from e-broking, market data and software are $42.5 million or 14.5% of segment revenues in the quarter compared with $44.3 million or 12%.

We now offer e-broking on over 100 of our financial services desks compared with approximately 80 a year ago. We expect this to continue – sorry, we expect this to continue to increase and we invest in technology to drive electronic trading over our platform.

Over time, we expect the growth of our technology-based businesses to further increase the company's profitability. Our overall financial services segment generates revenues of $292.6 million and $44.2 million of pre-tax earnings.

Revenues in this segment would have been approximately $7 million higher but for the impact of the dollar strengthening versus the Euro on a year-to-year basis.

In the third quarter of last year, this segment generated $368.6 million in revenues and $86.2 million in pre-tax profit.

With respect to commercial real estate, industry metrics remain generally positive compared to last year. For example, the most recent data from (Co-Star) indicated the commercial property resale prices grew by 11.4% year over year in August.

According to Real Capital Analytics, commercial property sales volumes were up by 18.9% year over year in the third quarter of 2012. On the leasing side, the vacancy rates, asking rates and net absorption rates also improved in most of our key markets.

Newmark Grubb Knight Frank generated revenues of $141.1 million consisting of $101.6 million in brokerage revenues and $39.5 million in management services and other revenues resulting in pre-tax earnings of $16.1 million.

NGKA drove BGC's 44.4% increase in front office headcount to 2562 brokers and sales people as of September 30, 2012. This included 1735 in financial services and 827 in real estate.

Average revenue per front office employee was approximately $154,000. In financial services, it was $169,000 and it was $122,000 in real estate services. In comparison, BGC had 1774 brokers and sales people and generated approximately $209,000 per front office employee in the third quarter of last year.

With that, I would now like to turn the call over to Graham.

Graham Sadler

Thank you, Shaun, and good morning, everyone. BGC generated revenues of $445.7 million, up 17.1% compared to $380.5 million. Our revenues from the Americas were up 107.7% to $233.1 million due to the addition of real estate.

Europe, Middle East and Africa decreased by 21.2% to $161.2 million. And Asia Pacific revenues decreased by 19.4% to $51.4 million. Our European revenues were negatively effected by approximately $7 million due to the impact of the US dollar strengthening versus the Euro year on year.

Excluding the real estate services segment, our global July 2012 revenues were down by approximately 13% to $99 million. August was down by approximately 31% to $93 million while September was down by approximately 15% to $112 million all when compared with a year earlier.

Turning to expenses, compensation and employee benefits were $266.7 million or 59.8% of revenues. This compares with $203.2 million or 53.4% of revenues. Our compensation ratio increased mainly due to the addition of NGKF since the commercial real estate services industry generating us higher compensation ratios but (inaudible) compensation expenses as a percentage of revenue.

Non-compensation expenses were $133.2 million (inaudible) 9.7% of revenues. This compares with $114.7 million or 30.2% of revenues. The increase in non-compensation expenses in absolute terms was due largely to the addition of real estate and higher interest expense as a result of the June 2012 issuance of senior retail notes and the July 2011 issuance of convertible senior notes.

At the time, we are working to (inaudible) our non-compensation expenses down to 25% of revenues, which (inaudible) pre-tax profit improvement of over $50 million annually.

BGC's pre-tax earnings were $46.7 million or $0.16 per fully diluted share compared with $62.6 million or $0.24. Our pre-tax distributable earnings margin was 10.5% compared 16.4%.

Our effective tax rate for distributable earnings was 14.4% in the third quarter of 2012 compared with 15% a year earlier. BGC's post-tax distributable earnings were $38.6 million or $0.13 per fully diluted share compared with $52.3 million or $0.20.

Our post-tax earnings margin was 8.7% compared with 13.7%. Our fully diluted weighted average share count was $325.7 million for the third quarter of 2012. This included a weighted average of 39.4 million shares associated with our convertible senior notes.

A year earlier, our fully diluted weighted average share count was $291.6 million. In both periods our GAAP fully diluted weighted average share counts were (in line) with those distributable earnings because certain share equivalents were diluted with distributable earnings but net for GAAP.

(Until) September 30, 2012, our fully diluted share count was $328.9 million assuming conversion of 39.5 million shares underlying the convertible senior notes.

With that, I am happy to turn the call back over to Howard.

Howard Lutnick

Thank you, Graham. Excluding real estate services, our revenues for October 2012 were $107 million, which was down approximately 4% compared to last year but included one additional trading day and obviously the last couple of trading days of October were deeply impacted by hurricane Sandy.

Given the continuing and uncertain impact of the storm, we are not providing an outlook for the fourth quarter of 2012. We do, however, expect to resume providing guidance next quarter.

So, Operator, we'd now like to turn the call over for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Rich Repetto – Sandler O'Neill.

Rich Repetto – Sandler O'Neill

I guess, how -- the first question is on the dividend reduction. Can you just go through the thought process and how you came up? I see where the earnings level is. Was that the main driver? But I also see a good amount of cash on the balance sheet, so how did you come up with the – I believe it was a $0.12 dividend?

Howard Lutnick

Well, the key for us was to look at October. October is really – provides reasonably good visibility historically to the first quarter and the beginning of next year. And so while our numbers (technical difficulty) because it had an additional trading day, if you do that math out and we just do it relatively simply, we had about a 9% decline year over year and then taking that out into the first quarter it seemed that if our first quarter visibility was not going to be sustainable at $0.17 we should pick a number for a dividend that we think we can maintain and feel comfortable maintaining throughout the year next year.

So we had the $0.17 was for six quarters and we'd like to have a stable dividend, so we felt that given just our market visibility today we'd move to $0.12 and we feel comfortable given our visibility going forward, which stems from October freestanding – I guess would be the best way to say it. That had us feel comfortable, that $0.12 was a sustainable number for us going forward.

Rich Repetto – Sandler O'Neill

And then I guess on the guidance, I certainly understand the market is a lot of uncertain things right now. But I guess the point – that's an acknowledgement that you're up and running. But we really just don't know where the market is or what the impacts are going to be at least in early November. Would that be correct or fair?

Howard Lutnick

Yes.

Rich Repetto – Sandler O'Neill

And then last, on the headcount and your comment, Howard, that you see more as regulations get formed and Dodd-Frank gets implemented, you see more electronic – a shift toward electronics, again, higher capital requirements for the bank pushing it that way as well.

So I guess would you foresee meaningful headcount reductions over the next year as that shift occurs? How are you planning for this idea that more stuff will be traded by the dealers electronically rather than voice?

Howard Lutnick

Well, we see a – there's a macro change going on now and it's going on I think more slowly than some people anticipated. But it starts with Dodd-Frank (inaudible) three and ultimately ends up on decisions like UBS dramatically cutting their workforce.

There are tremendously talented people at UBS who are now going to be looking for other places to work and those talented people (technical difficulty) overall capital requirements for these big banks.

The economics of certain businesses or the economics of running massive businesses might change. But the talented individuals within those areas will find other places to work and that will fragment the business and so the business concentration which we have seen over the past 10 years will start to dissipate and you will start to see a new version which will be fragmentation, meaning that the big guys will do better at big guys and there will be many, many more little guys and less in the middle.

So it will sort of barbell if you will but the opportunity to both hire talented people and the opportunity for our sales people to cover talented people I think go to smaller financial institutions. It will provide the capital for them to do their business that don't have the (inaudible) three capital will create a changed market environment that I think over time will be beneficial for our company.

And so we do expect that as products go fully electronic that we will have a marginal increase in those businesses and a headcount reduction in those particular businesses that go electronic. That will happen.

Whether we can and what is the timing for us to cover these new people, it is not going to take years for the talented people of UBS to find other jobs, right. It may take them months but it won't take them years and, therefore, those – we know those people. We know who they are and what are their phone numbers and we'll call them up and talk to them.

So I don't think this is a long-term issue but I think it is not a next quarter issue, either. And so you will see us have less headcount in certain product categories but you will see us also extend our client base to broader financial institutions who hire these talented people.

That coupled with the fact that with those low volume and low volatility environment, it is incumbent on us to cut our costs and Graham has stated we will cut our costs and we are very much focused on driving down our fixed costs and getting our costs down over time to that 25% number which is a dramatic improvement in our bottom line.

And so we do expect to stay the course and hold our compensation ratio and not add a creep up or move materially from where it is today. Certainly there will be some bouncing up and down as we hire people in real estate and we hire more people in financial services. That will bounce around but not much. But we do expect to get our costs lower and, therefore, increase our margins and defend our business overall.

Operator

Your next question comes from the line of Patrick O'Shaughnessy – Raymond James.

Patrick O'Shaughnessy – Raymond James

Question about your share count – as I calculate it, it looks like your fully diluted share count grew at about a 15% annualized pace in the third quarter. Is that a pace that you think is sustainable over time, both in terms of your potential dilution to EPS as well as just the mount of additional dividend you have to pay out when you increase your share count?

Graham Sadler

Included in that number actually is an element of issuance relating to the acquisitions that we made. There's actually quite a high issuance relative to what we normally expect. I think also there is a run rate for some of (inaudible) growth is probably around $6 million.

We are expecting to continue to issue shares where we can hire and acquire accretively we will continue to do that. And then we are looking at ways of reducing the share count issuance for existing staff and our partnership in (inaudible) has now been in existence for some years and we're going to look to fully have them reduce the share issuance related to that.

Patrick O'Shaughnessy – Raymond James

So Howard, in terms of the impact of hurricane Sandy, is your concern right now more about just industry-wide trading activity and guys at JPMorgan and Goldman Sachs aren't at their desk or is it about your broker has not been able to operate as effectively as they might be able to normally because your primary operations are being relocated?

Howard Lutnick

I think basically it's difficult to forecast for you what our revenues will be for any of those topics. So I think the answer for us is normally what I do is we take our management's experience and knowledge base.

We give you our revenues basically up until when we're talking to you and give you our insight going forward from our experience and knowledge base. And the problem we have today is nothing about my experience and knowledge base that prepares me to help you for the next end weeks.

I don't know when the power comes back on for many people downtown Manhattan, the gas lines – all these things and do they have any impact on us? I don't know. So I think the answer for us is this quarter will be different because of hurricane Sandy and I don't think it will have a – I don't think, with respect to my first quarter guidance, it will have an impact, meaning when we get to our first quarter, we will have a view then.

Sandy will have passed and we will be able to guide in a manner that is helpful to you going forward. So I think this quarter is just not going to be helpful for having a long-term view of the company because of the impact of hurricane Sandy.

Patrick O'Shaughnessy – Raymond James

So maybe to put it another way, are you – did you see a lot lower activity on Wednesday and Thursday this week than you saw last week?

Howard Lutnick

Yes. That's why we said the last couple days in October were – I don't know – difficult. You can pick any word you want. It was, look, there was a holiday. Effectively – using one of the holiday is certainly (well) words used but the market was closed on Tuesday which has the mathematical effect of the equivalence of a holiday although it was anything but a holiday to anybody who lives on the East Coast. So it had that effect but it was the opposite of that. It was a nightmare.

Patrick O'Shaughnessy – Raymond James

Switching gears to ELX, as we track the trading volumes on ELX, they continue to dwindle down. At what point do you reach the decision to just shut it down?

Howard Lutnick

Yes, I think there is a misunderstanding about ELX at its core, which I appreciate the question. ELX is a structural asset of a fully approved futures exchange that is, I think, extraordinary asset for the going forward world into Dodd-Frank.

It is an exceptional asset that we own a piece of along with a number of banks because as the market addresses how and why and if certain products will trade as futures contracts, certain products will trade as OTC products, certain products may go back and forth between the two, having a futures exchange that is operationally able to meet the needs of our clients in a much more customized fashion than any of the traditional futures exchange I think is an extraordinary asset.

So it was a pleasant idea to try to get together during the interim time before Dodd-Frank, to try to come up with a model that competes with the (CME). Make no mistake about it, the asset value of this exchange is prospective in our view.

And so I think the asset is very, very valuable. That's why we invested in it and that's why we think it is very valuable going forward. So as Dodd-Frank's rules come into place and as ELX sits and addresses with clients the things that they want to achieve with their customers, I think you will find over time we are excited and optimistic about the place ELX will place in the marketplace.

But it clearly will be different than just a competitor from the (CME) but the idea is to be a customizable, customer-friendly futures exchange in a different model than those gigantic, monopolistic enterprises that exist.

Patrick O'Shaughnessy – Raymond James

So basically to summarize, you guys have a really valuable futures exchange medallion and volumes aren't great right now but you expect that over time you can capitalize on Dodd-Frank evolution to the industry.

In the meantime, can you reduce the cost structure of ELX because basically at this point you're bleeding $2.5 million, $3 million per quarter?

Howard Lutnick

ELX has the funds within it to last for a couple of years, is my recollection. So I think from our perspective, from BGC's perspective, we are receiving our fees for servicing it and it is an excellent – from BGC's perspective it is a paying client using our technology and so it's (inaudible).

From ELX's view, which BGC has an equity interest in, it is a great asset auctionality for future equity value, so it is currently funded adequately. So from BGC's perspective, it's a good technology client and we continue to service it and whether it does more volume or less volume, they pay their bills and that's fine for us and from a BGC perspective we like ELX a lot.

And from an equity ownership of ELX, we are optimistic that it will product equity value for us over time and we work on that all the time. And it is an idea to create a different type of futures exchange than those we've seen before in more customizable, a more individual, an exchange that serves the needs of its clients in more dispersed fashion and I think that is what we signed up for and that is what we work for.

Operator

Your next question comes from the line of Jillian Miller – BMO Capital Markets.

Jillian Miller – BMO Capital Markets

Just a follow up on share count, so I understand that you're still recognizing some of the real estate deal-related increases. Those deals closed earlier in the year, so I guess I'm trying to figure out how much longer we're going to be at this higher level of share adds related to those deals. When do we get back to that $6 million run rate that you had referenced – or 6 million share run rate?

Shaun Lynn

Basically, it's periodic when the hit triggers, so it's not annually (inaudible) next couple of years. We hope the …

(CROSSTALK)

Howard Lutnick

… they hit the trigger because things have gone well. So we don't mind the issuance because our real estate business is obviously performing very, very well, so we're happy about that and we'll have – we think the full cost of these acquisitions taking – if all triggers are met – is wonderful, accretive and very positive and it is only really that the financial markets, because of the low volatility and the low volumes, have masked the real extraordinary asset value of our real estate business.

And we think those acquisitions are quite great and those share issuances with respect to those have been accretive.

Jillian Miller – BMO Capital Markets

So the reason we saw the larger share jump in the third quarter is because the real estate business did better than you expected, hit a trigger and then you had to pay out those shares.

Howard Lutnick

Yes.

Jillian Miller – BMO Capital Markets

And then the fourth quarter I know is seasonally the strongest quarter for real estate. But that's a vague just understanding. Can you give us an idea for what type of seasonal uptick you would typically see in real estate broking revenue for the fourth quarter? Is it typically 10% higher than the mid year level, is it 20% higher?

And then also, is there any seasonal impact on the real estate management services revenue or is that pretty much just stable constantly?

Howard Lutnick

The real estate management services generally tests these things. With respect to the brokerage business, historically where we've studied it we note that deals tend to happen just before the end of the year because people try to get them done.

That is as anecdotal as I can get it. We do not have the kind of empirical evidence that we have for our business and the combination of Newmark Knight Frank and Grubb and (Ellis), really does not lead us to have the kind of empirical evidence that we could guide on that topic with the kind of precision that you've asked for.

That coupled with – we do not know what the hurricane Sandy has done to that. Basically New York is difficult for people in the real estate business. It may be putting off meetings. And if you put off a meeting for two weeks or three weeks, does that move the whole process back a couple of weeks or does that mean that the deals slip over from the fourth quarter to the first quarter?

I don't think it consequentially effects the business of real estate over time. I think the fact is that from our perspective, we don't know if it changes timing. So I think our lack of empirical evidence leads me to say I just don't have the fundamental experience and detail to guide at that level of specificity other than historically anecdotally that is true.

However, we have had a better second quarter than we anticipated in real estate. And then we had a better third quarter in real estate than we anticipated. I don' know if that means things are moving forward or that we're just doing much better than we anticipated. All of those may well be true. But we are very happy with our real estate business and we are building.

Jillian Miller – BMO Capital Markets

And then just one final one for me on the non-compensation expense ratio, the plan is to get to 25% but I wasn't sure what revenue type of a run rate that was based on. So I guess my question is if what's going on in the third and the fourth quarter continues for an extended amount of time and volumes remain very depressed, is that 25% goal still achievable or is there a place where going below that threshold becomes a lot more difficult?

Shaun Lynn

Well, what I actually said was we're expecting savings of around $50 million a year, which is coming over $50 million a year, so that's really the target that we're aiming for. We're obviously conscious of the revenues are obviously somewhat lower now than the last (inaudible).

Operator

(Operator Instructions) Your next question comes from the line of Niamh Alexander – KBW.

Niamh Alexander – KBW

Can you give me some color on the electronic business? I think we saw something in the release as well but it seems like we're getting – competitors are seeing definite uptake from the dealer community and their clients on doing more electronic in the cash markets as well as on derivatives. Is there any more color you can share with us that BGC traders get benefit in there?

Shaun Lynn

BGC traders and Volume Match had success after success. The markets are challenging, as you know, but we continue to take more and more markets electronic. We recently had some great success in Paris and European governments. We've had (inaudible) interest rate auctions.

It's very positive. But as you know, it's a challenging landscape at the moment but we are converting more and more of our revenue to fully electronic.

Niamh Alexander - KBW

And then just on the capital distribution, so you've lowered your dividend in light of the structural market changes but just your earnings outlook here, have you – are you eating the same cooking here as your shareholders? Have you changed the distribution formula at all for the private partnership units or have you kind of – because a big part of the dividend goes to the employees and it's considered maybe part of the compensation structure.

So is there an offset for them that maybe public shareholders aren't getting or has the formula not changed, are you getting higher payout or are you able to exchange more or less than they were before in terms of the private partnership units?

Howard Lutnick

We look at the model consistently across our stakeholders. So the partners and the public matter to us. And so the model stays the same, which is if our distributable earnings drive both the distribution to partners and drive our dividend to our public shareholders.

So if those numbers are going to go down or are lower than have been in the past, then we have to change our dividend. We try to give the dividend more balance. Once upon a time when we started this process we had a variable dividend for the public because we had a variable distribution to our partners and that seemed to not be aligned with how public shareholders do dividends.

So we went to a stable dividend trying to estimate effectively what that level would be for the course of the year and picked a sustainable number and that would generally be fair and consistent and that's what we continue to try to do and so by moving to $0.12 we're saying given what we see now that is a sustainable number for us for the foreseeable future.

Obviously if our distributable earnings were to go up and the low volumes and volatility that we see today were to pass and things were to become more normalized than they had been, then obviously it would be our pleasure to raise that. But as we see right here, right now, this is a sustainable number going forward and reasonable and consistent with how we will distribute to our partners as well.

Niamh Alexander - KBW

So I guess when we see the cash flow statement, we should see that, too. There won't have been a spike in exchangeability or there won't have been a spike in the distribution from the dividends going down, right, or anything like that. So that should come out with the Q probably.

Howard Lutnick

Now, wait a sec. So exchangeability is a non-cash factor, meaning if they had units of a partnership and they owned public shareholder units – exchangeability proves the point, which his if the employees have partnership units and it's earning them X and the public shares are earnings X and they exchange one from the other, obviously it's because the return from the public shares are – it's effectively satisfactory for them to switch from one to the other, right.

Obviously there would be no exchangeability if the yields on the public stock were substantially different, right, because now you've suddenly switched.

Niamh Alexander - KBW

Well, they could sell the stock. They couldn't sell the partnership units, right.

Howard Lutnick

They can but the value of it obviously would be consistent with (inaudible). The value is the value. So I don't think exchangeability is the point. I think cash distributions is the point and that's the point exactly right. But I would not say exchangeability where they hold units that are already in our share category whether they exchange them to public or not I think is a different equation.

Niamh Alexander - KBW

Then, (inaudible) is a sister company, it's a separate company but we sell some downgrades during the quarter. They own a portion of BGC stock. You own a portion of (Cantor). Can you just remind me? The downgrades, the capital, is there any kind of issue there that they might be interested to exit some of their BGC position or anything like that that we should be concerned about?

Howard Lutnick

No.

Niamh Alexander - KBW

Then on the acquisition side, I guess with the dealers shrinking so much it's hard to think why should you be growing at this point but you certainly grew through the crisis the last time around. But are you seeing more appetite of sellers? Do you think you're closer to – in the core financial services area, do you think you're closer to getting some deals sealed or whatnot from here?

Howard Lutnick

(With the difficult winter) of an acquisition, it's simply a matter of sellers have to align themselves of us viewing the acquisition as accretive and because of that nature, we are a certain kind of buyer and we say, look, our stock is trading X and we have technology and we have scale and we have scope and we have all these things and you're a smaller company and you have less.

So we want the transactions to be accretive. We want the employees to take public stock. I think the low volume and low volatility world makes companies reach reasonable decision making more quickly.

So we think the current market is going to produce acquisition targets for us that make us happy and attractive. So I do think the market in front of us bodes well for us as an acquiring entity. So I do like that. So we do think there's plenty of opportunities out there.

Operator

Your next question comes from the line of Patrick O'Shaughnessy – Raymond James.

Patrick O'Shaughnessy – Raymond James

Just in terms of the (inaudible) review over in the UK, can you update us on the progress of that and does it still look like it's probably going to wrap up maybe in the first half of next year?

Howard Lutnick

In fact, we are happy to tell you that the things that we have talked about have ramped up. The company is officially informed that we are no longer on the watch list and that we are in good stead with the (NYSEARCA:FSA). So we did an enormous amount of work.

We told you we would do that work and we have done that work and that is happily in the past and we are – we're going to have a standard review process which is rigorous but every now and again we are continuing to have another one of these standard reviews but that all financial services companies go through, probably starting at the end of this year.

But thereafter I think we should be on an ordinary cycle. So I’m happy to report that part of our relationship with the (FSA) is done.

Operator

And there are no further questions. I'd now like to turn the call back over to management.

Howard Lutnick

Thank you very, everyone, for joining us today and we look forward to updating you again next quarter. So thanks very much and have a good day today.

Operator

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.

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