IntercontinentalExchange (ICE) Q2 2012 Earnings Call August 01, 2012 8:30 am ET Executives Kelly L. Loeffler - Vice President of Investor & Public Relations and Corporate Communications Scott A. Hill - Chief Financial Officer, Principal Accounting Officer and Senior Vice President Jeffrey C. Sprecher - Founder, Chairman and Chief Executive Officer Analysts Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division Howard Chen - Crédit Suisse AG, Research Division Kenneth B. Worthington - JP Morgan Chase & Co, Research Division Jillian Miller - BMO Capital Markets U.S. Christopher J. Allen - Evercore Partners Inc., Research Division Alex Kramm - UBS Investment Bank, Research Division Matthew S. Heinz - Stifel, Nicolaus & Co., Inc., Research Division Roger A. Freeman - Barclays Capital, Research Division Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division Kenneth M. Leon - S&P Equity Research Christopher Harris - Wells Fargo Securities, LLC, Research Division Gaston F. Ceron - Morningstar Inc., Research Division Brian Bedell - ISI Group Inc., Research Division Presentation Operator
Today's call may contain forward-looking statements. These statements, which we undertake no obligation to update, represent 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 annual report on Form 10-K and quarterly report on Form 10-Q, which was filed with the SEC this morning.With us today are Jeff Sprecher, Chairman and CEO; Scott Hill, Chief Financial Officer; and Chuck Vice, President and Chief Operating Officer. We'll conduct a question-and-answer session after our prepared remarks. I'll now turn the call over to Scott. Scott A. Hill Thanks, Kelly. Good morning, and thank you, all, for joining us on the call today. We're pleased to report our 12 consecutive quarter of double-digit earnings growth. This solid second quarter performance continues the momentum from the first quarter and reflects solid top line growth enabled by record futures volume and disciplined expense management that delivered increased operating margin. I'll begin this morning on Slide 4 of the presentation with an overview of our performance in the first half of the year. Healthy volumes across our futures and OTC energy market yielded revenue of $716 million, up 9% compared to the first half of last year. Net income attributable to ICE was $291 million, up 16% year-to-year, and operating margins expanded to 62%. Diluted earnings per share rose 18%, and operating cash flow grew 14%. Our focus on identifying and solving the challenges facing our customers gives us confidence in our ability to deliver double-digit earnings growth and strong returns on invested capital over the long term. Moving to Slide 5, I'll detail our second quarter results. Consolidated revenue rose 8% over the prior second quarter to $351 million. With expense growth of just 1% over last year's second quarter, operating income grew 13% to $215 million, and operating margin expanded 2 points to 61%.
Diluted earnings per share increased 19% to $1.95. Finally, capital expenditures and capitalized software totaled $18 million, and cash flow from operations rose to $180 million in the second quarter.Turning to Slide 6. You can see the revenue and expense components of our second quarter results. Futures revenues rose 14% to a record $169 million on record volume and ICE Futures Europe. OTC energy revenue decreased 3% to $101 million, while OTC credit revenue declined at $36 million. Taken together, our consolidated transaction in clearing revenues increased 6% to $307 million. Market data revenue grew 21% to a record $37 million, demonstrating continued demand for our globally relevant commodity market and related market data services. ICE's second quarter consolidated expenses are summarized on the right side of Slide 6. Operating expenses were $136 million, up just 1% from the prior year and down from the first quarter. Our disciplined expense management, coupled with solid top line growth, drove our operating margins to 61% compared to 59% in the last year's second quarter. During the second quarter, comp and benefits expense rose 4%, and we recorded $4 million of acquisition-related expense. We expect ongoing M&A expenses of $1 million to $2 million per quarter as we continue to evaluate a range of strategic M&A opportunity. And we continue to forecast full-year expense growth in the range of 3% to 6%, which we believe will enable investment in key growth opportunities, operating efficiency and solid earnings growth. Next on Slide 7, I will highlight the record performance of our Futures segment during the second quarter. Record revenue was driven by record average daily volume of 1.6 million contracts, up 11% year-to-year. ICE Futures Europe and ICE Futures U.S. posted record revenue in the quarter. This strong performance was once again led by our Brent Crude contract, which despite prices declining more than 20% during the second quarter, while volumes rise nearly 30%, as it's ascendant as the global benchmark continues.
This global readership is evident by the diverging trends in volume and open interest relative to WTI and ongoing deepening dollar premium of Brent. You can also see the growing preference for ICE Brent options, which resulted in our volume quadrupling year-to-year in the second quarter.Also in the second quarter, our Gasoil contract grew 7% year-to-year, and European emissions contract volume rose 11%. The EU commission on climate change recently confirmed the U.K. government's up-tail option platform for Phase III, where ICE Futures Europe will provide that platform. We believe this will support our leading position for the third phase of the European Emissions Trading Scheme beginning in 2013. While Brent, Gasoil and Emissions are our largest revenue contributors, our energy futures complex grew strongly, with U.K. natural gas, coal, heating oil, and oil and gasoline futures all posting more than 20% revenue growth over the prior second quarter. Moving to ICE Futures U.S. Rising open interest in our agricultural contract translated into 14% volume growth in the second quarter. Sugar volumes continued to improve, writing 7% year-on-year, while cotton volume increased 31%. Also, during the quarter, we successfully launched new contracts for corn, soybean and wheat. We're seeing encouraging levels of volume and participation, and we will continue to develop these markets based on customer feedback. Open interest across our Futures exchanges increased 30% year-to-year and reached 9 million contracts at the end of June. Tomorrow, we'll report July average daily volume for our Futures markets. Month-to-date volumes reflect continued momentum for 2Q and are up more than 17% year-to-year. Turning to Slide 8, our bureau OTC business for the second quarter. OTC energy average daily commissions grew 3% to $1.6 million. North American natural gas revenues were up modestly to $62 million despite tenure loads in natural gas prices.
Volatility, driven by warm weather conditions, natural gas option and the launch of new products supported modest growth in trading activity.Global oil revenues rose 23% to $40 million, primarily due to the demand for our clear global oil contracts. Revenue from OTC energy products launched since the inception of ICE Clear Europe, contributed $13 million in the quarter. We currently estimate that OTC energy commissions in July will average around $1.4 million a day and a relatively low volatility environment during what is typically the seasonally slow months. Read the rest of this transcript for free on seekingalpha.com