CME Group Inc. (CME)

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CME Group Inc. (CME)

Citigroup US Financial Services Conference

March 06, 2013 10:35 am ET


James E. Parisi - Chief Financial Officer and Senior Managing Director of Finance & Corporate Development


Donald Fandetti - Citigroup Inc, Research Division


James E. Parisi

Thanks, Don. And good morning, everyone. Thanks for inviting CME to present at the conference. Thankfully, I have a very thorough executive assistant who made sure that I got out here on Monday evening to beat the snowstorm out of Chicago. And as a result, I didn't have to shovel my driveway, so thank you very much, Don.

Today, I'm going to touch on some background information. Here's the forward-looking statements and Safe Harbor language, take a look at that. Today, I'm going to touch on just some background information on CME Group, for those of you who are less familiar with our company and our business model. Then I'll talk about the performance of each of our product lines, and then wrap up by talking about some of the growth opportunities that we see in front of us.

We are a company that's over 100 years old and very proud of it. And over our long history, CME has innovated a unique set of products and platforms. These assets actually situate us very well as a key component of the U.S.'s, and increasingly, the world's financial infrastructure. The combination of deep liquidity across a broad array of asset classes, as you'll see in just a bit, coupled with our world-class clearing platform and our distribution to over 150 countries around the globe through CME Globex, really translates into a business that benefits from network effects and that also has high barriers to entry.

The nature of our business model is one in which there's a high degree of operating leverage. We basically operate off a fairly fixed-cost base, charging a transaction fee for every contract processed through our markets. And because of this high degree of operating leverage, the very next contract that trades through our market comes to us at a very high margin and enables us to generate high operating margins generally and significant cash flow.

Even in a tough year like last year, where our volumes were down, let's say around 15% versus the prior year, we still posted an operating margin of about 58% and we returned $1.2 billion of cash to our shareholders, and we did that through a pretty novel approach with our dividend policy.

Let me describe that a little bit. Our current dividend policy is one where we are looking to return on a regular quarterly basis, about 50% of the prior year's cash earnings, we returned through our quarterly dividend in the current year. Then at the end of the year, or beginning of the following year, we'll take a look back, we'll say how much excess is now sitting on our balance sheet that we don't need to invest back into growth opportunities, or that we don't need to hold, use on bolt-on acquisition and such, and we'll return that to our shareholders. And we call that our variable 5th dividend, and we've been pretty successful with that, returning $0.60 a share for 2012 and then we accelerated the 2013 dividend into the end of 2012 as a result of tax uncertainty. So what we're doing is returning every dollar of excess capital to the shareholders and we've got a process in place to achieve that year after year. Even while paying this very healthy dividend, we continue to invest in growth opportunities, and I'll describe those a bit later in the presentation.

The overlapping circles on Slide 4 represent the unique product and platform combination that we've built at CME. In particular, we provide our clients with the broadest array of products under one roof. And there's a nice balance, you can see on here, in terms the revenue that we're generating across the 6 major product areas at CME. These product areas include: foreign exchange, equity, interest rate, energy, agriculture, commodities and metal.

So we're not -- we not only offer our customers this world-class liquidity and a broad array of products where they can efficiently transact their business, but this diversity also provides our customers with opportunities to more efficiently operate their business and, increasingly important, allows them to conserve capital as they realize portfolio inefficiencies in the one-stop shop that is CME Group. We continue to focus on providing our customers with the tools they need to optimize their business. This focus of ours improves the customer experience and, hopefully then, their loyalty and provides us with opportunities to generate revenue as we cross sell products and services to them.

On Slide 5, you can see that we faced some volume headwinds in 2012, driven primarily by a lack of volatility across our markets. We view this as a cyclical phenomenon. And there's some early evidence in 2013 that volatility is creeping back into the equation, resulting in growing volumes and open interest. You can just look at the growth in volume so far in 2013 versus the second half of 2012. We've so far 12.5 million contracts a day transacted through the first part of this year versus 10.5 million was the average for the second half last year. In fact, if you look at February, we had a really nice month, as I said, we saw some – a little bit of volatility in the equity markets in addition to some volatility across our other markets, our other asset classes, resulted in about 13.7 million contracts a day in volume in the month of February, so pretty strong results for us.

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