BGC Group, Inc. (BGC) Earnings Call Transcript & Summary

Good morning, and welcome to the BGC Partners, Inc.'s. 2020 Stockholders Meeting. At this time, I would like to turn the call over to Mr. Howard W. Lutnick, Chairman of the Board and Chief Executive Officer of BGC. Please go ahead, Mr. Lutnick.

Thank you. Good morning, and welcome to BGC's 2020 Annual Stockholders Meeting. I am Howard Lutnick, I'm Chairman of the Board and Chief Executive Officer of BGC. On behalf of our entire Board, our officers and employees, I would like to thank you for attending our annual meeting of stockholders. This year, we are conducting our first virtual annual meeting in light of COVID-19 pandemic. This virtual meeting also enables increased stockholder accessibility, improves efficiency and of course, it reduces costs. At this time, I would like to announce that the polls are now open. Any stockholder who hasn't yet voted or wishes to change their vote may do so by clicking on the voting button on the web portal and following the instructions there. Stockholders who have sent in proxies or voted via telephone or Internet and do not want to change their vote don't need to take any further action. [Voting] I would now like to introduce you -- to you to the independent directors, all of whom have joined us for this call: Linda Bell; Steve Curwood; Bill Moran; and David Richards. Also with us today is our President, Shaun Lynn; our Chief Operating Officer, Sean Windeatt; Steve Bisgay, our Chief Financial Officer; Steve Merkel, our General Counsel; and Caroline Koster, our Corporate Secretary. Also on the call are Christopher Jensen, who is with our asset counsel, Morgan, Lewis & Bockius; and David Stollow, Amy Nielsen and Todd Valenti from Ernst & Young, our independent auditors. We'd like to open the meeting with official business. I will be serving as Chair of this meeting. After the formal meeting has adjourned, we will provide some time for questions. [Operator Instructions] We will attempt to answer as many questions as time allows, but only relevant questions will be addressed. Please note that while this meeting is being recorded by the company and an audio replay will be available on our Investor Relations website, no one attending via the webcast or telephone is permitted to use any audio recording device. I'd like to thank you for joining us today and for your continued support of BGC. With that said, I will now turn this virtual meeting to -- I will call the virtual meeting to order, and I appoint Caroline Koster, BGC's Corporate Secretary, to act as Secretary of the meeting. The Chair now recognizes Ms. Koster.

Thank you, Mr. Lutnick. I have received the affidavit of Broadridge Financial Solutions, Inc., attesting to the mailing on April 28, 2020, of the notice of Internet availability of proxy materials relating to this meeting to holders of record of the company's Class A common stock and Class B common stock as of the close of business on April 14, 2020, which is the record date for this meeting. I have received from American Stock Transfer & Trust Company, the company's transfer agent, a list certifying the names, addresses and stock ownership of the holders of record of the company's Class A and Class B common stock at the close of business on the record date. At this time, I would like to introduce Mr. Peter Descovich, a corporate representative of Broadridge Financial Solutions, who is qualified to serve as the inspector of elections, and who delivered the inspector's oath earlier this morning.

I direct that the affidavit, the oath, the notice and the other documents be filed with the minutes of the meeting and that the list of stockholders be filed with the records of the company. In addition, I hereby appoint Peter Descovich to act as the Inspector of Elections.

At this point, I'd like to announce that the online polls are closed, and I will now report the preliminary results of the voting. First, we will determine whether a quorum is present. The Inspector of Elections has advised me that there are present in person or represented by proxy the holders of at least 249,231,531 shares of the Class A common stock of BGC, out of a total of 310,993,162 outstanding shares of Class A common stock, each of which is entitled to 1 vote per share, and 45,884,380 shares of the Class B common stock, each of which is entitled to 10 votes per share, which represents all of the Class B common stock outstanding at the record date. The shares represent adequate voting power, and a quorum is present for purposes of transacting business.

I direct that the proxies and any substitution of proxies submitted via the virtual meeting portal be filed with the records of the company.

The first order of business is the election of directors. The Board of Directors has previously nominated Howard W. Lutnick; Stephen T. Curwood; William J. Moran; Linda A. Bell; and David P. Richards as directors of the company, each for a term expiring at the 2021 Annual Meeting of Stockholders. The Board of Directors of the company has recommended that the stockholders vote in favor of the proposal to elect each of the nominees. I am pleased to report that I've been advised by the Inspector of Elections that the stockholders represented at the meeting have cast at least 573,191,646 votes for each of Dr. Bell and Messrs. Lutnick, Curwood, Moran and Richards for the election of each as a director of the company, which is at least a plurality of the total voting power of the shares of common stock present in person or by proxy and entitled to vote. All nominees have been reelected.

Congratulations to each of you.

The second order of business is the ratification of the appointment of Ernst & Young as our independent registered public accounting firm for the fiscal year ending December 31, 2020. The Board of Directors and Audit Committee of the company have recommended that stockholders vote in favor of the ratification of the appointment of Ernst & Young. I'm pleased to report that I have been advised by the Inspector of Elections that the stockholders represented at the meeting have cast at least 705,574,930 votes in favor of the ratification of the appointment of Ernst & Young as our independent registered public accounting firm for the fiscal year ended December 31, 2020, which is at least the majority of the total voting power of the shares of common stock present in person or by proxy and entitled to vote.

The vote on the ratification of our independent registered public accounting firm is noted.

The third order of business is the advisory vote by stockholders on executive compensation. The Board of Directors and the compensation committee of the company have recommended that stockholders vote in favor of the compensation paid to the company's named executive officers as disclosed in the company's proxy statement for the 2020 Annual Meeting of Stockholders, including the compensation discussion and analysis, compensation tables and narratives. I'm pleased to report that I have been advised by the Inspector of Elections that stockholders represented at the meeting have cast at least 537,260,553 votes in favor of the compensation paid to the company's named executive officers, which is at least the majority of the total voting power of the shares of common stock present in person or by proxy and entitled to vote.

The advisory vote on executive compensation is also noted.

The fourth order of business is the advisory vote on the frequency of future advisory votes on executive compensation. The Board of Directors and compensation committee of the company have recommended that the stockholders vote for every year as the frequency with which stockholders are provided an advisory vote on executive compensation. I'm pleased to report that I've been advised by the Inspector of Elections that the stockholders represented at the meeting have cast at least 615,175,510 votes in favor of every year as the frequency with which stockholders are provided with an advisory vote on executive comp, which is at least the majority of the total voting power of the voting share, outstanding shares of Class A and Class B common, in person or by proxy and entitled to vote.

The advisory vote of every year as the frequency for a stockholders' advisory vote on executive compensation is also noted.

Please note that the final tabulations of the votes on these matters will appear in BGC's Form 8-K, which will be filed with the Securities and Exchange Commission.

There is no further business to come before the meeting. The meeting shall be adjourned. Thank you for your participation and your support of BGC. We will now address stockholder questions related to the meeting that are entered today on the web portal. Though we may not be able to answer every question, we will do our best to provide a response to as many as possible, and we may be able to post other responses to some generally applicable questions later today in the Investor Relations portion of our website.

Thank you, Mr. Lutnick. Before we begin, and while any questions are entered, I would like to remind the attendees that the information delivered during this question-and-answer period may contain forward-looking statements within the meaning of Section 27A, the Securities Act of 1933 as amended, Section 21E of the Securities Exchange Act of 1934 as amended. These may include statements about the effects of the COVID-19 pandemic on the company's business, results, financial position, liquidity and outlook. Any forward-looking statements involve risks and uncertainties. Except as required by law, BGC undertakes no obligation to update any forward-looking statements. For a discussion of additional risks and uncertainties, which could cause actual results to differ from those in the forward-looking statements, see BGC's SEC filings, including, but not limited to, the risk factors and the special note regarding forward-looking information, which is in our public filings, including our most recent 8-K and any updates in our 10-Q or 8-K filings. Any references to financial results, which are provided in response to questions, will be on an adjusted earnings basis, unless we otherwise state. We may also refer to adjusted EBITDA. Please see BGC's financial results press release dated May 5, 2020, for GAAP results. Please also see certain sections of that press release, including those entitled timing of outlook for certain GAAP and non-GAAP items, non-GAAP financial measures, adjusted earnings defined, reconciliation of GAAP income or loss from operations before our taxes to adjusted earnings and GAAP fully diluted EPS to post-tax adjusted EPS, also fully diluted weighted average share count under GAAP and for adjusted earnings, and then also adjusted EBITDA defined, reconciliation of GAAP net loss to common stockholders to adjusted EBITDA and the liquidity analysis, including any footnotes for the complete and updated definitions of these non-GAAP terms and how and when and why management uses them as well as for the difference between results under GAAP and non-GAAP for the periods discussed. And unless otherwise stated, whenever we refer to income statement items, such as pretax earnings or post-tax earnings, we're doing so on an adjusted earnings basis. With that, I'm happy to turn the meeting back over to Mr. Lutnick to answer your questions.

Thank you. I will now ask Jason McGruder, our Head of Investor Relations, to read the applicable questions from the web portal, and then we will try to respond.

Okay. I'm going to read 4. Here's the first one. Why is our stock price under $4? And why has it been like that for a while?

Well, our stock price was well above $5, in fact, just around the $6 level prior to the COVID-19 pandemic at the end of March, which changed an enormous number of stock values. And while the company performed admirably in the first quarter, and in fact, exceeded pre-COVID projections, the stock, unfortunately, has traded, along with a number of other companies in the Russell 2000, have not traded particularly well. So the stock is now just above $3. And our focus is to cut costs, to try to perform well as a business. As a general business, BGC's businesses have been able to perform in the COVID era and been able to -- we are an essential business, we've been able to be operating our business, granted many people from home. But I think that the performance of the company over time will show well, and our stock will recover and perform well over time. But these are trying times. And I think our company's employees have done an admirable job of doing well with our business, and we hope to continue to perform well going forward.

Okay. The next question, I'm splitting a 2-parter into 2. First, when will BGC change from a partnership to a corporation? That's one question. And then the second question from the same investor is, when will the Board buy back stock in the open market?

The first question is the company is examining closely the conversion from our current partnership and Up-C corporate structure to a fully -- a more simplified corporate structure. We are examining that. And we hope to be in a position to consider that as a company toward the very end of the year. We are aware that this is an election year, and our company is very tax-efficient in its current form. Now with the Jobs Act and the way taxes were changed over the past couple of years, it made our ability to convert to a corporation and not have significant tax friction, meaning we could simplify the corporate structure and not have significant cost. That -- it made that possible. Now we are going to reexamine what we think will happen at the end of the year with this election, and take advice then as to whether it is the smartest thing for us to convert to a corporation. But it is the objective, I think, of the company to work hard, to try to put us in a position to be able to make such a determination at the end of the year. But we're working hard at that. And we will see how things change. So that is ongoing work by a large group of people in the company. With respect to buying back stock, the company has reduced its dividend as we went into the pandemic in order to strengthen our balance sheet. We did so with a view. We also drew on our revolver. And we have been in the process of paying that down as we earned operating cash flow. We're going to use that operating cash flow to pay down our revolver, and that will then, of course, strengthen the balance sheet of the company. The current view of the company and the Board will always reexamine it on a quarterly basis. But the idea is, we will strengthen our balance sheet through the balance of this year, taking our operating cash flow and paying down our revolver. We will also refinance our May 2021 bonds. And when both of those things are behind us, we have strengthened our balance sheet and refinanced the bonds, then we will return to a return of capital policy. We will examine the return of capital policy, and that will include an examination of the dividend, increasing the dividend and an examination of buying back stock. So that's sort of the timing the company has considered, which has strengthened the balance sheet over the course of this year, drew down the revolver, but pay that back with operating cash flow. So obviously, the balance sheet will strengthen, refinance the May 2021s, the bonds of the company, keep the company in a strong fiscal position, and then do a capital return policy, which will include the Board considering buying back stock and increasing the dividend. And so that's our process, and we expect to strengthen the balance sheet over the course of the year, but then look to capital return thereafter.

Okay. And then here's another question. When will carbon become bigger volume business for BGC?

So BGC has a carbon business, an emissions credit business. And it is a nice business, but it is comparatively small. And for it to be larger, it would entail basically more counterparties trading the market. It still is a relatively niche business, meaning that the largest players in the world don't play it. It is both a regional business in certain states. And the U.N. runs a larger business as well, but that -- which is global in nature. But that, I think, is a growing market over time and as it becomes more and more part of the common thinking of people and the common investing model, then carbon will continue to grow. But we have a nice business in that space, and I would expect over time that business to grow. Although in the world of bonds now, I mean, you've got the world's largest issuance of bonds coming, driven by this -- the deficits driven by the COVID-19 and the incredible scale that so many companies have suffered through this pandemic, and they are making up that difference in their business by issuing more bonds. So the scale of bond issuance is so great that comparatively, I think, while carbon can grow as a business, I think the scale of the fixed income business from the world is going to grow more rapidly. So I wouldn't say that carbon will become an ever more important business. I think it will grow over time. But I think the bond business -- the credit bond business from corporate bonds and the government bond business will grow over time now more quickly. So I think it will become a relatively smaller portion, albeit in a big growing business.

All right. I'm going to -- we're just going to pause here for about 30 seconds. I have to refresh the screen here, so I'm going to see if there's any more questions. Just hold on for 30 seconds, guys. All right. We have one last question. And this is -- and if there's any more that I've missed, we'll endeavor to answer it on the website, as Caroline said. Now the last question is, BGC Partners, like other financial institutions, is going through redundancies, especially senior managers. What is the view on forward vision with that loss of experience?

When something like the COVID-19 pandemic occurs, it's important to take a very clear-eyed view of your business, those areas that you're investing in, and to really take stock in what is fundamentally important to the business, where do you think you'll be successful because things have changed. The pace of change will increase for some areas and decrease in others. So as we reset the business, we reset the business with an eye towards increasing our investment in those areas that are being most successful and decreasing our investments and reducing our headcount in those areas that we felt would not receive the same kind of reception in the current environment. So systems -- new electronic trading systems that are installed and that it had a nice uptake, like our U.S. Treasury business, like our Fenics Global Options business, like our Fenics Foreign Exchange business, and like Lucera, those businesses are rolled out, and they have already good traction. So we are increasing our investment in those areas. And then other areas where we had systems that just -- we were planning on rolling out, we had been rolling out, but now they were just beginning, and it just didn't seem like when people are working from home, when our clients are just -- have the stress of this, the current times, it just didn't seem like the right timing, and we think that timing may well be extended. So what we've done is we've focused more resources on those businesses that are doing well and are growing and are out and released and less on others. So while we have had a number of redundancies for sure in the number of senior managers, it was really on which businesses are they focused on and which areas are we going to be more successful. And I think we feel very good about the managers we have and the businesses that we are running and operating. And I think we are very optimistic about our new systems and our electronic trading systems and how they are growing and growing their market share.

All right. Howard, there's 2 more that came in. They are questions that you recently answered at the SAMA conference, so they should not be difficult. One, I'll just read them. I mean I'll summarize one and -- because you talked about bonds already. And this question is, what's going on with COVID-19 and reopening the offices? Are there any downside risks related to that and also related to emerging markets? That's one question.

Let's just do one question at a time. So the question is -- the first question is opening the offices. So we -- our greatest asset are our people. We are -- and we care deeply about the health and safety of our people. And that they're comfortable and excited about the firm. And we also know that many of our people are more successful when they're in the office environment. They've got -- they just have better technology around them, better communication around them. It's just a bigger, more robust infrastructure than, obviously, you would have in your home. So our employees, a number of them would like to come back to the offices and they're coming back to the offices. Granted, they're going to be -- an overall percentage will be relatively -- it will be light, meaning that we will not be at 100% anytime soon. Our offices are designed to be -- to embrace the social distance and best practices of how far apart and the proper way to handle entry to the business -- entry into the company in our biggest locations. We have -- we're either on low floors where they can walk up the stairs or we have our own elevated bank in London, which is very helpful. And so I think we'll have a number of people coming back, a number of our producers are coming back. And we're excited for that. We think it will -- we think they'll become more productive because we have better infrastructure around them. And that's something we're excited about. And we're excited about being together again, although, of course, all in the -- with the overview of we need to be safe and we need to be socially distant. And let's say -- and that's the way the world is currently and we are embracing that. Next question?

So that was -- this is an unrelated 2-part question. So the second question is, any geographic risk or anything you're doing differently with respect to emerging markets and with respect to the U.K.?

Well, the business -- so the question is about the business of emerging markets in the U.K. or the location?

Any risk -- any risk around emerging markets because we talked about that previously? And then any risk around Brexit, basically?

Well, the emerging market businesses, over the -- since the pandemic, have been -- they've been very volatile. And now they've seen some volume declines, basically, with the volatility and the opportunity in the big economies, that is going to compete for the investor dollars as compared to seeking yield in emerging markets. So I think emerging markets, marketplaces generally, will see a reduction in investing dollars from the larger countries because, obviously, there are plenty of opportunities to take high risk, high reward in their domestic economy rather than to seek emerging markets. I think emerging market volumes will decline, and that will stay for a while through this. And I think with respect to Brexit, I think that just creates volatility, which is good for our business. I think the uncertainty around Brexit, it's been overwhelmed with the pandemic, but it's still out there. And I think that uncertainty, while it will cause people, at least initially, to reduce volumes, eventually, it will increase volumes. Because uncertainty and movement of markets is -- and volatility is a friend of the company. And so we think that overall, it will be good for our business, although I can't -- I don't really have the knowledge of how that will literally impact us other than to say it will be -- I think it will add to volumes that we broker. And it's not a risk for us. It's a -- I mean there are things associated with it that are a lot of work. But in terms of -- we're not exposed to a market risk with respect to Brexit. We are -- I think we will help our clients deal with it, and therefore, I think our volumes will improve because of that.

Okay. So now here is the real final last question. Can you comment on the current growth of the insurance business? And your view on the continued opportunity in this business?

So the insurance business, remember, we are an insurance broker. We are a brokerage company. Meaning, we're not an insurance company. We don't take losses and that kind of thing. We help clients get the best coverage and the best rates and help them find the right insurance company for them, and we are in a commission. So the -- and that commission is generally a percentage of the underlying insurance cost. So the current market for insurance has a term called hardening. Hardening means that price of insurance is going up. As an example, the average insurance in the Florida hurricane market was up 26% this year. That's just an example of what a hardening market means. It means the cost of insurance is going up. Basically, the way insurance companies work is that, if they take losses, eventually, they need to get that back over time. And they get that back over time by raising the rates that they charge everybody. And so there were substantial losses. For example, there was a kind -- insurance company that was covering event risk like the Tokyo Olympics, as an example, or -- and these kind of things where some insurance companies took significant losses. Now remember, we're just a brokerage company. But increasing rates is good for the business, meaning we will earn increased commissions because rates are rising. So I think our business is good. We have interesting businesses, meaning we have Disney as one of our clients. That's very -- Disney's just going through a very -- their amusement parks are going through just a very unusual time, to say the least. We have a new and growing aviation business, and that obviously is going through interesting times, where many of the planes are on the ground. But all planes still need insurance, and the amusement parks still need insurance. They're just -- they just need more advice, more clever thinking and smart people to be on their side, which increases the value and shows the value of our brokers, our knowledge and our experience. So I think the business is growing nicely, and we'll continue to grow nicely. We have invested in first-class people. And as those first-class people come online, I think their revenues will bode well for the insurance business and its value to the shareholders of BGC.

There are no further questions at this time.

Well, I want to thank everybody for joining us and for attending the annual meeting of BGC Partners. We wish you and your families health and safety in these difficult times. And we really do thank you for your support of BGC. And we look forward to speaking to you again. Thanks, everyone, for being on the call this morning. We appreciate your support. Thanks.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.