CME

CME Group Inc. (CME)

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CME Group Inc. (CME)

Q1 2009 Earnings Call Transcript

April 23, 2009 8:30 am ET

Executives

John Peschier – Managing Director, IR

Craig Donohue – CEO

Jamie Parisi – CFO and Managing Director

Richard Redding – Managing Director, Products and Services

Analysts

Roger Freeman – Barclays Capital

Rich Repetto – Sandler O'Neill

Niamh Alexander – KBW Financial

Mike Vinciquerra – BMO Capital Markets

Ken Worthington – J.P. Morgan

Howard Chen – Credit Suisse

Chris Allen – Pali Capital

Donald Fandetti – Citigroup

Edward Ditmire – Fox-Pitt, Kelton

Presentation

Operator

Good day everyone and welcome to the CME Group’s first quarter 2009 earnings call. As a reminder, this call is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to Mr. John Peschier. Please go ahead sir.

John Peschier

Thank you and thank you all for joining us. Craig Donohue, our CEO, and Jamie Parisi, our CFO, will spend a few minutes outlining the highlights of the first quarter, and then we will open up the call for your questions. Also joining us for participation in the Q&A session are Sir Richard Redding, our Head of Products and Services, Phupinder Gill, our President, and Terry Duffy, our Executive Chairman.

Before they begin, I will read the safe harbor language. Statements made on this call, and in the accompanying slides on our Web site, 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 may be found in our filings with the SEC, including our most recent Form 10-K, which is available in the Investor Relations section of the Web site.

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 Web site that provides detailed quarterly information on a GAAP and pro forma basis.

With that I would like to turn the call over to Craig.

Craig Donohue

Thank you John and thank you for joining us this morning. I am going to spend some time addressing our first quarter highlights and then turn the call over to Jamie for a more detailed discussion of first-quarter financial results.

Against ongoing macroeconomic challenges, I am pleased to report another highly profitable quarter. On a pro forma basis, we achieved revenues of $647 million and operating income of $395 million. Earnings per share were $3.20 for the first quarter, and operating margin of 61% reflects the strong leverage inherent in our business model. A tight focus on expense management allowed us to keep pro forma operating expenses to $252 million, a reduction of 9% from the first quarter of 2008 and 2% from the fourth quarter.

Since the beginning of the financial crisis, our message has been that while we can’t control the macroeconomic environment, we are well positioned to leverage opportunities highlighted by current market conditions. We believe that first quarter results reinforce the diversity and resiliency of the CME Group business model, which continues to generate significant cash flow throughout a variety of economic conditions. Currently, overall market conditions remain tentative and uncertain, but we do see indications of improvement, which I would like to discuss.

On a macroeconomic level, we have seen improvements in investment grade corporate debt issuance from the $73 billion in the fourth quarter of 2008 to $200 billion in the first quarter 2009, approximately equal to first quarter last year. Fixed mortgage rates are near historic lows and are expected to drive increased mortgage origination and refinancing activity. The LIBOR-OIS spread was largely constant over the first quarter, indicating increasing stability in credit markets.

All of these factors are positive indicators of the capital markets’ return to more normal functioning. As general markets stabilize and holders of capital seek to deploy it in the corporate and mortgage debt markets, their need to manage interest rate and foreign exchange risks drives potential usage of CME Group products.

Another positive factor for CME Group volumes is the increased treasury issuance. It is difficult to predict volumes based on a single factor, but with 2009 issuance projected to be $2 trillion, we expect to see increased demand for CME Group’s treasury futures and options contracts as tools for hedging treasury holdings. The longer term duration of treasuries also means that risk related to Treasury holdings needs to be managed over the life of the instrument and thus creates multiplier effect driving demand for CME Group products.

Moving into the specifics of our first quarter performance, as I mentioned previously, while there are no indications of improvement in the overall market, we can’t predict the timing or impact on our volumes. The volume environment remains challenging. First quarter volume was down 33% versus a very difficult comparable of record high volume in the first quarter 2008.

However, with the diversity of our asset classes, we did have some areas of strong performance in the first quarter. CME ClearPort achieved a record in both average cleared volume per day and in average revenue per day. Average daily volume for the quarter was 629,000 contracts, up 33% from last year, and average revenue per day was $1.1 million, up 24%.

Crude and petroleum products continued to show robust growth, with crude revenue increasing 55% year-over-year to $16 million for the quarter, and petroleum more than tripling to $10 million for the quarter. These growth trends are a continuation of what we saw over the past several quarters, and indicate the increased traction of central counterparty clearing in the over-the-counter markets.

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