CME

CME Group Inc. (CME)

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CME Group Inc., (CME)

Q4 2008 Earnings Call

February 3, 2009 8:30 am ET

Executives

Craig S. Donohue - Chief Executive Officer

James E. Parisi - Chief Financial Officer and Managing Director

Richard H. Redding - Head of Products and Services

Phupinder S. Gill - President

John C. Peschier - Managing Director, Investor Relations

Analysts

Richard Repetto - Sandler O'Neill

Roger Freeman - Barclays Capital

Niamh Alexander - Keefe, Bruyette, & Woods

Howard Chen - Credit Suisse

Michael Vinciquerra - BMO Capital Markets

Mike Carrier - UBS

Kenneth B. Worthington - J.P. Morgan

Daniel T. Fannon - Jefferies & Co.

Robert Rutschow - Deutsche Bank Securities

Donald Fandetti – Citigroup

Brian Bedell - Bank of America

Presentation

Operator

Welcome to the CME Group’s fourth quarter earnings conference call. As a reminder, today’s call is being recorded. At this time for opening remarks and introductions, I’d like to turn the conference to John Peschier.

John C. Peschier

Thank you for joining us today. Craig Donohue, our CEO, and Jamie Parisi, our CFO, will spend a few minutes outlining the highlights of the fourth quarter, and then we will open up the call for your questions. Also joining us for participation in the Q&A session are Rich Redding, our Head of Products and Services, and Phupinder Gill, our President. Terry Duffy, our Executive Chairman is unable to join us today as he is in Washington, D.C., testifying before Congress.

Before they begin, I will read the safe harbor language. Statements made on this call and in the accompanying slides on our website that are not historical facts are forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any forward-looking statements. More detailed information about factors that may affect our performance can be found in our filings with the SEC, including our most recent Form 10-K and forms 10-Q, which are available on the Investor Relations section of our website.

During this call, we will refer to GAAP and non-GAAP pro forma results; a reconciliation is available in our press release, and there is an accompanying file on the Investor Relations portion of our website that provides detailed quarterly information on a GAAP and pro forma basis.

Now, I would like to turn the call over to Craig.

Craig S. Donohue

Good morning and thank you for joining us this morning. 2008 was a year marked by unprecedented dislocations in financial markets. Against this challenging backdrop, CME Group continued to effectively operate our core businesses, execute on our growth strategy, and deliver solid financial performance. I am pleased to tell you that on a pro forma basis, 2008 revenues increased 11% to $3.1 billion, and operating income increased 20% to $2 billion compared to 2007. Additionally, operating margins grew to 65% compared with 60% for 2007. These resulted in earnings per share of $16.17 for 2008, representing growth of 16% from 2007. Jamie will discuss our financial performance in greater detail in just a moment.

In terms of volume, 2008 was a year of immense challenges, and CME Group was able to achieve annual volume growth of 4% despite these challenges. Getting into individual products, we saw outstanding performance in our E-mini products which achieved 37% annualized growth. Within E-minis, we are really excited about the growth we have seen in our E-mini Dow product. For the first 8 months of 2008, Dow Jones average daily volume of 192,000 was 74% of Russell average daily volume. For the last quarter of 2008, Dow average daily volume of 264,000 contracts is now 144% of Russell ADV. The Dow has become established as the number three product in the US equity futures market, and we believe that this speaks to the strength of CME Group’s overall equity franchise including the benefits of our extensive Globex distribution network and our deep liquidity across multiple benchmark equity index products.

CME ClearPort saw annual growth of 43%, with particular strength during the third and fourth quarters. CME ClearPort has been a promising addition to our capabilities, and I’d like to spend a few minutes discussing what we see happening there. A key strength of the CME ClearPort is its flexibility which allows new products to be listed very efficiently. To that end, we listed a total of 141 new products on CME ClearPort in 2008 with 97 added in the four months following the completion of the NYMEX acquisition. We also listed Ethanol Swaps on January 26th, the first non-NYMEX product to be available on CME ClearPort. We have a strong product pipeline and will continue to build on this success by introducing new products rapidly throughout 2009.

Getting into specific products, in the energy products, we have seen some very positive open interest trends in the Brent contract. The Brent market share as measured by open interest was 27% at year end 2008, up from only 11% at the end of 2007. Our Brent market share continued to grow in January and is now at 38%. We believe this growth is driven by the benefits of the security and flexibility of CME ClearPort coupled with CME’s robust exchange traded energy platform.

Our PJM power contracts which just recently launched on December 8th grew to average daily volume of 88,000 in January which is a tremendous success for a new product launch. Another noteworthy trend on CME ClearPort has been increased interest from our global non-US customer base. We saw an over 400% growth in Q4 in European and Asian-specific petroleum products, and we are now clearing approximately 8000 contracts per day.

CME Group energy products grew 19%. Here again, we saw favorable open interest trends, this time in the WTI complex, where open interest increased 13% from year end 2007 to year end 2008, and from 3.2 million contracts to 3.7 million contracts. CME Group Metals Products had an outstanding year, with annual volume growth of 40%. The percentage of metals contracts electronically traded grew to 86% in December, up from 79% in January. We see this growth in electronic trading as an indication of significant growth opportunities ahead.

To give you some additional insight into our volumes, I want to provide some detail about trends within our major customer segments. Currently, we can segment information for combined legacy CME and CBOT products. We can track our member activity fairly closely, which we categorize into four segments: Bank proprietary trading, large hedge funds which include approximately the top 25 hedge fund participants, buy side proprietary trading firms, and finally our smaller member firms and active individual traders. In addition, we have a fifth segment, the nonmember customer category which is composed of buy side customers.

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