Intercontinental Exchange Inc. (ICE)

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IntercontinentalExchange (ICE)

Q2 2011 Earnings Call

August 03, 2011 8:30 am ET

Executives

Scott Hill - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Jeffrey Sprecher - Founder, Chairman and Chief Executive Officer

Kelly Loeffler - Vice President of Investor & Public Relations and Corporate Communications

Charles Vice - President and Chief Operating Officer

Analysts

Brian Bedell - ISI Group Inc.

Alex Kramm - UBS Investment Bank

Niamh Alexander - Keefe, Bruyette, & Woods, Inc.

Matthew Heinz - Stifel, Nicolaus & Co., Inc.

Michael Carrier - Deutsche Bank AG

Christopher Donat - Sandler O'Neill + Partners, L.P.

Kenneth Worthington - JP Morgan Chase & Co

Richard Repetto - Sandler O'Neill + Partners, L.P.

Howard Chen - Crédit Suisse AG

Jillian Miller - BMO Capital Markets U.S.

Christopher Harris - Wells Fargo Securities, LLC

Daniel Fannon - Jefferies & Company, Inc.

Jonathan Casteleyn - Susquehanna Financial Group, LLLP

Christopher Allen - Evercore Partners Inc.

Daniel Harris - Goldman Sachs Group Inc.

Roger Freeman - Barclays Capital

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the IntercontinentalExchange Second Quarter 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Kelly Loeffler, Vice President of Investor Relations and Communications.

Kelly Loeffler

Good morning. ICE's second quarter 2011 earnings release and presentation can be found in the Investors section of our website at theice.com. These items will be archived and our call will be available for replay.

Today's call may contain forward-looking statements. These statements, which we undertake no obligation to update, represents our current judgment and are subject to risks, assumptions and uncertainties. For a description of the risks that could cause our results to differ materially from those described in the forward-looking statements, please refer to the company's Form 10-Q, which is filed with the SEC this morning, as well as the company's Form 10-K.

Please note that the numbers discussed today refer to our adjusted operating results. We believe these are more reflective of the performance of our business. You'll find the non-GAAP reconciliation in the earnings release and presentation. With us on the call today are Jeff Sprecher, Chairman and CEO; Scott Hill, Chief Financial Officer; and Chuck Vice, President and Chief Operating Officer. I'll now turn the call over to Scott.

Scott Hill

Thanks, Kelly. Good morning, everyone, and thanks for joining us today. The second quarter, which included monthly volume record with ICE Futures Europe and ICE Futures U.S. was the best second quarter we've ever had following the best first quarter in our history, all adding up to a record first half of 2011. These results were achieved despite economic and regulatory headwinds and were enabled by our drive and determination to meet the continuously evolving needs of our customers in the markets we serve.

The result for our investors is consistent growth on top of growth, solid margins and strong cash flows and returns on investments. I'll begin this morning on Slide 4, which shows our strong performance in the first half of this year. We delivered record revenues, up 14% year-to-year; record net income, up 19% year-to-year; margin expansion and record cash generation. This was enabled by strong volume growth in both futures and OTC Energy, as well as continued progress in CDS clearing. We also continue to bring greater efficiencies to our markets well ahead of Dodd-Frank implementation, and we launched 181 new OTC and futures products during the first half.

Let's move now to Slide 5 where I'll review our quarterly results. Second quarter consolidated revenues rose 10% to $325 million, driven by 11% volume growth in futures and OTC Energy, and a 7% increase in CDS clearing revenues. Adjusted net income attributable to ICE grew 11% to $125 million, and adjusted diluted earnings per share in the quarter increased 12% to $1.69. Our tax rate continues to improve as our European business continues to grow. And CapEx and capitalized software were $17 million, and cash flow from operations increased to $166 million.

Let's turn to Slide 6 to take a closer look at the components of our consolidated revenues and expenses for the second quarter. As I've just mentioned, consolidated futures and OTC Energy volume grew 11% to 191 million contracts. This resulted in transaction and clearing revenues growing 9% to $289 million. Futures revenues rose 15% to $149 million as a result of the relevant of our oil contract in the addition of our emissions market. Ag Futures benefited from higher revenue capture per contract. In our OTC Energy business, revenues increased 7% to $99 million while OTC Credit declined 5% to $41 million. Our CDS clearing business however, delivered a solid quarter, up 7% year-to-year to $17 million. And increased alliance ICE's data services produced a 13% increase in revenues to a record $31 million.

Shifting to the right side of Slide 6, you can see our second quarter expense detail. Second quarter adjusted operating expense rose 10% to $128 million, driven in part by the Climate Exchange, which is not included in last year's second quarter. Adjusted operating margin was 60%. Operating margin, excluding our CDS brokerage business, was 67%. We continue to expect full year adjusted operating expense growth of 4% to 6%, which will support double-digit revenue growth, margin expansion and net income that grows faster than revenue.

Moving now to Slide 7. I'll walk through the performance of our Futures business segment. Average daily volumes increased to 5% from the prior year to 1.5 million contracts while revenues rose 15% due to the Climate Exchange acquisition and solid revenue capture trends. Open interest in our futures markets stood at 7 million contracts, an increase of 18% year-over-year. Volume and revenue at ICE Futures Europe continue to grow strong growth in our Brent and Gasoil futures. Average daily volume for Brent and Gasoil grew 26% and 18%, respectively, from the second quarter one year ago. Volatility in crude oil prices was driven by strong demand from emerging economies, concerned about the recovery of Western economies and the release of inventories from the International Energy Agency. These factors, combined with the increased reliance on ICE Brent and Gasoil futures as benchmark contracts to the global energy markets, served as catalysts for continued volume growth. We believe this trend, which is already in its 14th year could continue to play out for several years as emerging economies continue to increase their risk of hedging. Demand for energy resources is only increasing and our platform provides the products, the transparency and the confidence required by our customers for managing their risk.

I'd like to spend a moment on the Climate Exchange acquisition, which has now reached its 1-year anniversary. Integration is complete and our expected synergies have been achieved. While emissions volumes, early in the quarter, were soft as a result of spot market issues in Europe, revenues from emissions futures and options improved 51% to $15 million in the second quarter. Emissions revenue have increased sequentially in each quarter since closing the acquisition. We're very pleased with the transaction and our positioning in this early-stage markets. We think the business will continue to be a strong positive force, particularly as some of the Phase 3 catalysts come into play in Europe next year.

Turning to ICE Futures U.S. We recorded record ADV during June. Our sugar contract volume grew 13% year-to-year in June, following a muted start for the year, and our cotton contract volumes continue to grow amidst the very volatile markets. Our FX product continue to demonstrate healthy growth, and we again set volume records in our U.S. Dollar Index contract in June.

Finally, yesterday, we reported a 14% increase in ADV for our consolidated futures market, and we are pleased with the healthy performance in revenue capture trends during the summer months.

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