NYX » Topics » Michael Geltzeiler, NYSE Euronext, Chief Financial Officer

This excerpt taken from the NYX 8-K filed Aug 5, 2008.

Michael Geltzeiler, NYSE Euronext, Chief Financial Officer

Thank you Duncan, and good morning. I joined the company in mid-June as Group EVP & Chief Financial Officer. I am pleased to be part of such a reputable organization during a period of significant transformation and have jumped in with both feet.

In my remarks, I will briefly review our financial performance for the quarter; provide financial transparency on our integration efforts and other strategic initiatives; and discuss our debt position, as well as several initiatives involving our capital structure.

The company reported second quarter net income of $195 million or $0.73 per share, which is 21% above the second quarter last year. The NYSE Group and Euronext merger closed on April 4 last year, so these figures represent a full quarter for both years. However, this year’s quarterly figures include a $38 million pre-tax charge for merger expenses and exit costs, related primarily to staff downsizing initiatives, as compared to a $16 million pre-tax charge in the comparable period a year ago; and a $36 million pre-tax

 

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or 7 cent per share benefit from termination of litigation relating to our former Chairman and CEO. On a pro forma non-GAAP basis, excluding merger expenses and exit costs and other non-recurring items, net income for the quarter would have been $200 million or $0.75 per diluted share, a 17% increase versus the adjusted prior year figure.

On a non-GAAP basis, pro forma revenues for the second quarter were $1.1 billion, up $137 million or 14% versus Q2 last year. Revenues, net of activity assessment fees, acquisitions and dispositions, and the impact of foreign exchange, rose $114 million or 12%. This growth was driven primarily by higher cash and derivative trading revenues. Although volumes were generally lower than the record levels achieved during the first quarter, global transaction volumes increased year-over-year for both cash and derivatives.

Overall, reported costs were higher as a result of the weak dollar, incremental restructuring costs, and increased outlays for liquidity payments and routing & clearing fees. On a normalized basis – that is taking the pro forma non-GAAP results and excluding the impact of exchange rates as well as the impact of acquisitions and dispositions—fixed operating expenses were $19 million below second quarter last year and approximately $5 million below the first quarter of 2008. The latter is favorable, considering that the second quarter is typically a seasonably higher expense quarter. Second quarter operating income on a normalized basis was up 10% versus prior year.

Our effective tax rate for NYSE Euronext on a non-GAAP basis was 27% this quarter versus 32% in Q2 2007. This was a result of a favorable mix of foreign versus US income and fully affecting some tax synergies realized as part of the merger. We are updating our full year effective tax rate guidance to 29%.

We continue to make progress on our cost savings initiative. As we have previously stated, our commitment is to realize at least $250 million in run-rate technology related savings and $25 million in non-technology run-rate savings related to the NYSE and Euronext merger by the end of 2010. The baseline for this savings is the pre-merger expense base. As reported last quarter, we exceeded our interim goal having achieved $70 million of run rate technology savings by Q1 2008.

The next milestone is an incremental $50 million of savings by the end of Q1 2009. This $50 million will include initiatives such as eliminating approximately 230 or nearly half our non-stop systems, versus the 17% we had reduced as of April 2008; and insourcing AEMS.

In addition, as indicated when the NYSE merger was first announced, we plan to incur considerable transitional costs to implement the new technology platform and affect synergy savings. Severance and termination costs are being classified as merger expenses and exit costs; however, integration related costs are reported with our normal operating expense. These include consultants, dedicated integration teams, and overlapping data center and parallel processing costs until we fully migrate on to the UTP, into the new data centers and on the unified global network.

 

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For the second quarter we have spent approximately $5 million on integration costs and expect the integration activity to accelerate in the second half of the year. We are also investing in capital expenditures and operating leases to increase systems capacity to handle increased volumes and reduce latency for our global cash equity customers.

Of our proposed 2008 capital expenditure budget of $66 million for excess capacity outlays, we have spent $21 million through June 30th . The incremental operating costs associated with these capacity expenditures was $4 million for the quarter.

In addition to the capacity investments, we also have plans for the second half of this year to deploy our SFTI network in Europe, establish a technology platform for NYSE Liffe, our US futures business, and to respond to larger broker/dealer client requests to co-locate their trade processing on site with our applications. These value added services will increase our cost base but also generate incremental revenues.

On the non-technology front, we have exceeded the $25 million synergy figure initially targeted at the time of the merger. Beyond the headcount and other reductions realized during fiscal 2007, we have accelerated the non-technology reengineering efforts in the first half of 2008. During the second quarter we concluded a voluntary resignation program in the US which resulted in over 200 staff agreeing to terms, nearly 50% of those eligible for the program. About 75 of these individuals left at June 30th , with the remainder scheduled to depart over the next 18 months. A number of these individuals are in the IT and operations area, where we have timed their departure with completion of transformational initiatives such as UTP and other technology integration efforts. We expect the voluntary program to save us $6 million in 2008, over $20 million in 2009 and in excess of $30 million by 2010 and beyond.

Additionally, European headcount is also lower and additional integration opportunities will arise as we merge AEMS with the European IT organization. These savings are in addition to the occupancy, marketing and insurance synergies, totaling approximately $19 million, which we discussed on the previous call.

On the strategic initiative front, we felt it would be beneficial to provide some additional color on the financial implications for this year and next.

 

  1. AEMS transaction: In July we filed an 8K upon finalizing the commercial terms to purchase the 50% of AEMS that we do not currently own. Today we account for AEMS on an equity accounting basis. Once the transaction closes, which we anticipate to be in August, we will be consolidating AEMS in our financials. The purchase price will be Euro 282 million, less the expected cash balance of around Euro 130 million, so net cash out is approximately euro 152 million or $240 million. Once consolidated, we will save the margin AEMS previously charged on NYSE Euronext for system support, realize integration synergies, and benefit fully from external development performed for over 15 non-NYSE Euronext cash and derivative exchanges around the world. The current external revenues baseline at about $80 million, with target margins of 10 to 12%.

 

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  2. Amex transaction: Having received overwhelming approval from the Amex members, we await regulatory approval from the SEC before proceeding with what we believe will be a September close. As previously reported, AMEX was in a substantial loss position, attributed to declining market share and relatively weak infrastructure. Integration plans are in an advanced stage and we are confident we will realize the targeted $100 million in run rate savings enabling this purchase to be accretive by year-end 2009. However, given the transition period necessary to realize the staff, systems and occupancy cost savings, we expect losses following closing to approximate $4 to $5 million a month for the remainder of this year.

 

  3. Wombat: The Wombat acquisition closed in March 2008 and this quarter represents the first period we have reported full financial results. Revenues of $9 million this quarter were in line with expectations and considerably above their pro forma levels of last year. As part of the transaction and in an effort to retain key personnel, one time restricted stock grants were provided, which together with the amortization of intangibles arising from the transaction and some one-time transitional costs, we incurred additional costs of $6 million in the quarter. These costs were expected, which is why, upon announcement, we estimated that the transaction would not be accretive until 2009.

 

  4. NYSE Liffe / metals complex – As Duncan explained earlier, these items are related, and together provide the cornerstone for our new US futures business called NYSE Liffe. We will not begin reporting financials related to the precious metals complex until the CFTC approves our DCM application, which we expect will be the third quarter. Meanwhile, we will continue to invest in personnel, products and in particular technology, to establish a broader presence in this arena. It is early in the process but we expect to spend approximately $15 million over the course of this year on this initiative.

Finally, I would like to comment on our debt position and some initiatives involving our capital structure. Total debt at June 30th was $3 billion, relatively flat from the March 2008 balance. Cash on hand was $1.3 billion, about $300 million below the March level.

During the second quarter we purchased the remaining minority stake in Euronext N.V. for $385 million and completed the acquisition of a 5% stake in the Multi Commodity Exchange of India for $50 million. We also refinanced approximately $2 billion of floating rate commercial paper with 7 and 5 year bond offerings of euro 750 million and $750 million, respectively.

These offerings enabled NYSE Euronext to lengthen the maturity profile of its debt and to fix approximately 65% of its total debt at a very attractive weighted average interest rate of 5.1%. The variable interest rate on our commercial paper averaged 3.7% for the second quarter. Thus, the decision to fix our interest rates and control future interest rate volatility is costing the company approximately $7 million a quarter from today’s variable rates but was the prudent course of action.

 

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As Duncan indicated, we are confirming our intentions to execute the authorized $1 billion stock buyback subject to strategic and credit considerations. This buyback cannot commence until the AMEX deal closes, which again is estimated to be in September.

Yesterday, our board approved a resolution to remove the lock-up restrictions on the remaining 41.8 million shares issued as part of the transaction between NYSE and Archipelago, effective upon the closing date of the AMEX transaction. These shares were previously restricted until March 2009. We expect to be in the market acquiring shares at the time the share issuance is made to AMEX shareholders and the ARCA share lock-up is removed.

I will turn the call back to Duncan and then we will take your questions.

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