Final Transcript

 

 

 

Conference Call Transcript

     ICE — INTERCONTINENTALEXCHANGE INC Conference Call

     Event Date/Time: Sep. 15. 2006 / 8:00AM ET

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mark Lane from William Blair & Co.

Thank you, good morning. Just going back to be the NYBOT products that you may move to your electronic system before the deal closes. You just — you made some mention to the currency pair and the dollar index, but what is the plan? Is the plan to move the entire product set there in any reasonable period of time, over a three to six-month period? Or are we just talking about testing a few products where we have everything on the system before the deal closes, if that is your plan?

Well, let me — since NYBOT has obviously got a plan for their company and part of their plan was to sit down with us, let me ask them to respond to that.

Yes, it’s Harry Falk again. Our plan is to get our financial products up as quickly as possible. That’s one. We also want to take our core commodities and (technical difficulty) then work on them to have them available for side-by-side trading of our open-outcry business. We hope Jeff gets them up as soon as possible. We think we’re in existing markets. We have held off on going after an electronic platform for one major reason; we didn’t want to mirror any potential merger or partner because by (technical difficulty) one platform versus another, you might have (technical difficulty).

So now that we have what we think is a wonderful deal, we are ready to move full speed ahead and take the potential of our dollar index. It’s a trademark product; it is used to right commercial paper. I think when its available on an electronic platform, the volume in that will grow exponentially.

So that is the first one, and then other things that we feel we really need are our pulp — our woodpulp contract, we think has great potential. We don’t have the (technical difficulty). Our ethanol contract, which we believe is going to be the contract that will determine the international part of ethanol. Because ethanol is going to be basically a sugar generated one around the world. It may be corn in the United States, but around the world it is definitely going to be sugar.

And we look at the ethanol market as in a very embryonic stage right now. It reminds me of what the sugar — international sugar trade was back in the early 1960s, and the trade there is not necessarily Futures-oriented and they are going to eventually get that way, and we think we will have the contract that will serve that trade, too.

Okay, and then just a follow-up on the clearing, Jeff. Is the maximum obstacle the one-year notification agreement? Meaning, just practically — and I understand you haven’t sat down with LCH, but it is a big driver — practically, if you gave a one-year notification tomorrow, could you set up the system such that you could move the business in a reasonable period of time following the ending of that one-year agreement, or is that a much more gradual process?

Let me say it this way. I really think that we have a notion of or a vision, if you will, of how to handle clearing that we want to really get in intimate detail with LCH and with the New York Clearing Corporation, which is the NYBOT subsidiary, their management and board. And I think we can derive a value proposition for the industry that is going to be very compelling. And you know, could we walk in, give notice and move? Sure, but that is kind of not thinking big enough as far as I am concerned.

I think we really have an opportunity to sit down and do something that will not just deal with ICE’s energy business as we know it today, but provide a platform for a more global clearing and interesting suite of products.

Okay, thank you for taking my questions.

Chris Allen from Banc of America.

Good morning, guys. Congrats on the deal. Just a couple of quick questions, not to beat a dead horse with the clearing; but just from a scenario analysis if you guys did switch the clearing over to New York Board of Trade clearing, would there be any regulatory implications in who the main regulator would be for ICE Futures?

Well, I guess as the business is existing — as the businesses exist today, the New York Clearing Corporation is, I guess, obviously based in New York, and the London Clearing House is obviously based in the UK. So, you know, if one were to hypothetically do what you suggest, you would technically be moving the clearing between two regulatory venues, but that is not what we are thinking of doing and that is not our plan. An I don’t want people to become alarmed that somehow that may be where we go.

We have been working, obviously, with the global regulators as the space — as the derivatives and commodities space has become global quickly, to work out a common regulatory regime. We are at ICE now regulated, I believe, in 44 different jurisdictions. So it’s a pretty wide regulatory footprint that we operate under, and clearing is a part of everything that goes on in those 44 jurisdictions.

So again, give us some time to work on this, and we will be a little more transparent once we have had a chance to talk to LCH and our customers and the global clearing community, and come up with an interesting idea for you.

Got you, fair enough. As part of the agreement, is there any language that says that the floor has to be maintained, kept open for a certain number of years?

It is not necessarily that. I mean, I think we commonly have a view that that floor is doing really well in some very interesting products, and that one of the advantages of the NYBOT in a competitive landscape is the way they have operated those floors and kept that liquidity there. So, you know, if you start with that appreciation, and you’ve heard NYBOT management themselves say they are anxious to on their own roll out synergistic electronic trading.

You know, we support that vision, and so the agreement recognizes a number of nuances that we think will appeal to both the ICE shareholders and the NYBOT seat holders to drive these two companies together through the approval process.

Got you, and just a last question. You guys are going to be borrowing, as part of the agreement, $250 million from a term loan to fund it. Is that based on your current cash balances, because you guys are generating about $40 million a quarter in cash.

Right.

Obviously, by the time the deal closes, you could have close to $300 million in cash on hand, so I am not sure if you would need that level of borrowing to fund the deal.

Yes, I guess if one assumed we were never going to do anything else, that would be a good scenario. But I bought the Continental Power Exchange, I bought the International Petroleum Exchange, and we are now doing a deal with the New York Board of Trade. So I think the history of us is that we have a buy and build idea that we are looking — we have an idea of how to grow our business and if we can build it, great, and if not, if we can find it in a third party through some kind of other form of transaction, all the better. So I don’t think we want to spend everything.

Got you. Just one quick follow-up. I guess how much cash do you need on hand to just run kind of the core business?

Well, when you’re generating $40 million a quarter, it is a pretty small number.

Got you, fair enough. Thanks a lot, guys. Great deal.

(OPERATOR INSTRUCTIONS) Robert Rutschow from Prudential.

Hi, good morning. I am wondering if you can give us any idea of the overlap between your two respective customer bases, and then weather or not there is — you can gauge any interest between your respective products or each other’s products for your respective customer bases?

Sure. Well, I will let the guys comment on this as well, but I think the overlap is high. We looked at the members of, starting with clearing, let’s say, we looked at 30 of 33 NYBOT clearing members are clearing ICE products right now. So I guess if you know the NYBOT, you know that they actually share space with the NYMEX, which is obviously an energy exchange. So a lot of people that clear and broker and trade energy just be cut really nothing more than the proximity of the two markets physically, have sort of organized in a way that gives the brokerage and clearing and back-office community a lot of common overlap.

Similarly, I am looking here at my notes, I guess 14 of 15 of the top ICE clearers on OTC are also members of NYBOT, so we have a very good overlap in that regard. I think the interesting thing about energy that you all are seeing as ICE has been public and we are sort of educating people about our markets is how global the energy market is. And when we took a look and sat down and were really getting into detailed conversations with NYBOT, it is unbelievable how global their markets are; I mean almost to the point that it’s surprising that the company is in the United States to begin with.

So let me defer a little bit to Fred and Harry, and maybe you could comment on how your customers feel about energy.

This is Fred Schoenhut. I can tell you that to Jeff’s comments about the overlap in customers and clearers, those are factual. And we anticipate a lot of synergy with respect to the client base. But some of the more significant points that I think need to be made today are subcultural synergies. You know, not to overstate Harry’s earlier comments about some of the vertical integration components which we, with the help of our investment banker and negotiating team, from Brown Brothers Harriman and those at NYBOT, identify as good management, good products, an electronic trading platform and a clearing business. And when you add those four components to any exchange, you really have a dynamic ability to compete in the future. And today, as Harry pointed out, there is only one domestic exchange other than this new combination that presents that.

Additionally, we find that the product diversification is also another cultural fit for us. As Jeff alluded earlier, between the business and products of the energy industry and some of our financial futures, which both lend themselves credibly to electronic trading, and then you have our traditional soft [ag] business, which needs an introduction to electronic trading, we are very excited about the opportunities.

And lastly, you know, another component to the culture is really the management synergy between ICE and NYBOT. With our help of those that were a part of this combination, we think that we have partnered with someone who is forward thinking and who has the intelligence and vision to combine to make the end result a very successful business. And you know, we are very happy that Jeff leads the way in that endeavor.

Thank you for that.

I was going to add something. Our sugar contract, to pick up on something that Jeff said, our sugar contract is neither produced nor consumed in the United States. It’s an international delivery contract, and it is the benchmark for sugar prices around the world. You’ve got 177 million tons of sugar produced in the world. And it is used by Japan to set import duties, it is used by the Chinese to do it, the Russians. The Australian sugar industry uses it as a benchmark for registering their sugar contracts.

So our clientele has always been exceedingly international, and Jeff is right, it is the kind of thing that it’s in the United States because people felt they always got a fair shake and NYBOT has always been attentive to what their customers need. And in this growing world, what customers want is the ability possibly to trade on a longer day than what we are trading today, so that is one of the reasons why we wanted to make sure we had that available to them.

Okay, great. Correct me if I’m wrong, but I think NYBOT leases space from the NYMEX? Is that correct?

That is correct.

And what is the duration of that lease at this point, and do you anticipate having to move at the end of it?

2013 is the extent of it. There are terms in the lease that they have to either offer us another five years or give us a payment so there is — that is about it. So we are in that building until 2013.

Okay, and Jeff, would you anticipate maybe reintroducing floor base trading of some of your energy contracts at this point?

There are some interesting things that we are anxious to talk to the NYBOT floor community about, and in terms of — well, maybe just — they have a very interesting options business there. And I am sure as you have been following the space, options on commodities are very immature, I would say, as they trade electronically. And I think there may be some interesting ways to engage that community to help us design the kind of things that they need. So we are anxious to sit down with some of the people that we know about to help us come in and really work that part of the space. Because I think it is going to be a longer-term, but big opportunity, and obviously you have seen the CME have some early success on their Eurodollar options that all of us in the space are looking at it and both praising and also trying to figure out if there are some other wrinkles that one should do to really attract an interesting client base.

Okay, and just my last question is on position limits. Do you anticipate any changes there to try to spur additional trading, or any changes of there at all for NYBOT’s contract?

No, I mean —

Our position limits a product-specifics meaning that if we felt that the contract (indiscernible).

Okay. Thanks a lot, guys.

Thank you, gentlemen. This does conclude today’s question-and-answer session, so I will turn the call back over to Jeff for closing comments.

Great, thank you all for listening. We are really pleased to share the news. I am personally excited about working with our new colleagues at the NYBOT who I really respect and admire very much. I’m and success anxious to introduce you to our staff at ICE, and start collaborating. And I’m really anxious to get out and talk to the membership of the NYBOT about why this deal is really good for them.

And so I appreciate the opportunity to address those of you that were on the phone today. You know, we have a pretty aggressive agenda here, and I hope you see that we are trying really hard to drive shareholder value and continue the growth spurt that we on, and build opportunities for this company that will go on for many, many years.

So this concludes our prepared remarks, our Q&A, and I would really like to thank you all for joining us today.

Thank you, ladies and gentlemen, for your participation in today’s presentation. This does conclude today’s conference. You may now disconnect and have a wonderful day.

Forward-Looking Statements— Certain statements in this transcript may contain forward-looking information regarding IntercontinentalExchange, Inc., the New York Board of Trade, and the combined company after the completion of the merger that are intended to be covered by the safe harbor for “forward-looking statements” provided by the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, the benefits of the merger transaction involving ICE and NYBOT, including future strategic and financial benefits, the plans, objective, expectations and intentions of ICE following the completion of the merger, and other statements that are not historical facts. Such statements are based upon the current beliefs and expectations of ICE’s management and NYBOT’s management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements.

The following factors, among others, could cause actual results to differ from those as set forth in the forward-looking statements: the ability to obtain governmental approvals and rulings on or regarding the transaction on the proposed terms and schedule; the failure of NYBOT members to approve the merger; the risk that the businesses will not be integrated successfully; the risk that the revenue opportunities, cost savings and other anticipated synergies from the merger may not be fully realized or may take longer to realize than expected; disruption from the merger making it difficult to maintain relationships with customers, employees or suppliers; competition and its effect on pricing, spending and third-party relationships and revenues; social and political conditions such as war, political unrest or terrorism; general economic conditions and normal business uncertainty. Additional risks and factors are identified in ICE’s filings with the Securities and Exchange Commission, including ICE’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.

You should not place undue reliance on forward-looking statements, which speak only as of the date of this press release. Except for any obligations to disclosure material information under the Federal securities laws, ICE undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this press release.

Important Merger Information

In connection with the proposed merger, ICE intends to file relevant materials with the SEC, including a prospectus regarding the proposed transaction. Such documents, however, are not currently available. INVESTORS ARE URGED TO READ THE PROSPECTUS REGARDING THE TRANSACTION WHEN IT BECOMES AVAILABLE BECAUSE IT WILL CONTAIN IMPORTANT INFORMATION. Investors will be able to obtain a free copy of the prospectus, as well as other filings containing information about ICE and NYBOT without charge, at the SEC’s website (http: // www.sec.gov) once such documents are filed with the SEC. Copies of the prospectus will also be available, without charge, once they are filed with the SEC by directing a request to ICE at 2100 RiverEdge Parkway, Suite 500, Atlanta, Georgia, 30328, Attention: Investor Relations; or by emailing a request to ir@theice.com.

This communication shall not constitute an offer to sell or the solicitation of an offer to buy the securities, not shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. No offering of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as amended.