Feb 11, 2014
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 Repetto – Sandler O'Neill Christopher Harris – Wells Fargo Securities Kenneth Worthington – JP Morgan Alex Kramm – UBS Investment Bank Christopher J. Allen – Evercore Partners Inc.
Mike Carrier – Bank of America Merrill Lynch Jillian Miller – BMO Capital Dan Fannon – Jefferies Patrick O'Shaughnessy – Raymond James
Operator
Good morning, and welcome to the ICE Fourth Quarter and Full Year 2013 Earnings Conference Call. All participants will be in a listen-only mode.
(Operator instructions) Please note this event is being recorded. I would now like to turn the conference over to Kelly Loeffler.
Please go ahead.
Kelly L. Loeffler
Good morning. ICE's fourth quarter and full year 2013 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, 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 forward-looking statements, please refer to the company's Form 10-K, which we expect to file this week.
Please note that in addition to the GAAP results presented today, we have also referred to our adjusted operating results. These measures adjust our GAAP results for various extraordinary items, including our acquisition of NYSE Euronext, and we believe they are more reflective of our business performance than our GAAP results.
You will find a non-GAAP reconciliation in the earnings release and presentation, and the explanation of why we deem this information to be meaningful, as well as how management uses these measures. The materials presented today reflects futures volumes that has been restated to include previously cleared swap contract partners.
In addition, net revenue, referred to revenue, net of transaction based expenses. With us on the call 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 A. Hill
Thank you, Kelly. Good morning everyone and thank you for joining us today.
I will begin on Slide 4, where you can see that 2013 marked our eighth consecutive record year, extending our track record of growth each year since becoming a public company. Our net revenues and earnings grew to double-digit rates, and we completed strategic acquisitions that should support our ability to continue to generate growth and solid return.
This performance was driven by growth across our global commodity complex, including strong volume and open interest trends. We closed on the NYSE Euronext acquisition in November, and have already made significant progress on integration.
We also expanded our natural gas business with the launch of ICE Index in March, and we extended our reach in Asia with the acquisition of the Singapore Mercantile Exchange and Clearing Corporation, which closed last week. Our 2014 objectives are focused on extending our track record of growth.
We will continue to focus on serving our customers and generating value for our shareholders through execution of our strategic initiatives and our integration plan. Please turn to Slide 5, where I will detail our fourth quarter results.
I want to start by noting a few special expense items that resulted in a quarterly loss on a GAAP basis in the fourth quarter. First, we recorded a foreign currency driven impairment of $190 million related to our Cetip investment.
This was primarily due to the 33% depreciation of the Brazilian reis, since we acquired our 12% stake in 2011. It is important to note that this impairment reflects a devaluation of the reis, not a revaluation of our Cetip investment.
We continue to expand our partnership with Cetip, and believe that the investment will be a source of value generation in the future. We also had a $51 million expense related to the early repayment of our $400 million in private notes.
And finally, tax affecting these special items and including some foreign tax law changes, we had a net tax impact of $4 million. However, excluding those atypical items, our fourth-quarter adjusted operating results marked a strong finish to a record year.
Net revenues totaled $612 million for the quarter, driven by solid performance across energy, ag, and financial. Adjusted operating expenses were $318 million, and our adjusted operating margin was 48%.
In a moment, I will walk you through our roadmap to draw margins back to more traditional levels. Our adjusted tax rate for the quarter was 27%, in line with guidance.
Adjusted net income attributable to ICE was $192 million, and adjusted earnings per share grew 9% versus the prior year to $2.00 per share, and finally for the year, operating cash flows were $735 million, and capital expenditures and capitalized software, including real estate were $110 million. Let us move to Slide 6, where you can clearly see the track record of growth I mentioned previously.
On a compounded annual basis over the last four years, revenues have grown 14% and net income has grown 20%. In 2013, net revenue was $1.7 billion, an increase of 23%, and adjusted net income grew 16% to $646 million.
Adjusted earnings per share were $8.17, up 8% year-to-year. Volume growth, which for EBIT comparison, includes all prior period NYSE Euronext volume, was driven by strength across our commodity futures contract despite a muted year in the natural gas market.
We achieved records in BRIX, heating oil, RBOB, sugar, coffee, cocoa, canola and US dollar index futures. Average daily volumes in 2013 grew 6% over the prior year.
On the expense side in 2013, total adjusted operating expenses were $715 million. Our disciplined focus on balancing expenses with growth resulted in ICE’s standalone expenses growing by less than 2%, which generated roughly 5% earnings growth on a stand-alone basis.
Now let us turn to Slide 7, where I will discuss our 2013 pro forma revenue diversification. On the left, you can see our pro forma net revenue by business lines for 2013.
On the right side, you can see a view of revenue, excluding Euronext and certain NYSE technology businesses that we plan to divest. Note that our derivatives business expands from 44% to 50% of net revenues, including 32% in commodities, 13% in financial products, and 5% in equity derivatives.
Commodities include energy, ag, and metal futures. Financial products include interest rate, equity index and currency futures, with interest rates comprising nearly 70% of that mix.
Equity derivatives include our two US options exchanges, and UK single stock futures. Post Euronext, cash trading will represent only 6% of revenues on a pro forma basis.
Moving forward to Slide 8 I will discuss our derivatives revenue. Total revenue for the fourth quarter was $287 million, up 24% year-to-year.
BRIX revenues expanded to $50 million and North American nat gas revenues were $44 million. Ag and interest rate revenues were $38 million and $29 million respectively, including seven weeks of contribution from Liffe.
Our fourth-quarter revenue mix is reflected on the left side of this chart. Average daily volumes in the quarter were 9.1 million contracts, an increase of 2% year-to-year.
We saw strength in our oil complex, with daily futures volumes up 8%. This included ICE brent futures volumes up 9% and other oil volume up 22%.
In our natural gas market, in contrast with most of the year, we saw strength in volumes towards the end of 2013, and continuing into the first weeks of 2014, driven mostly by cold weather, which increased price volatility. In our Ag futures market, daily volume increased 12% year-to-year due to shifts in inventory and growing conditions particularly related to sugar.
Daily volume in financial products increased 14% from the prior fourth quarter, with interest rate futures up 15%. Short-term interest rate volume was up nearly 20% year-to-year.
Revenue capture is measured by rate per contract, or RPC, remained steady across Ags, financials, and Equity derivatives. Energy RPC was impacted by product mix shifting towards gas and power at the end of the year.
As of December 31, 2013, total open interest was $116 million with BRIX, other oil and Ag futures each up at least 10% from the prior year and a number of products at record levels. And as we announced last week, we saw continued strength in natural gas and Ags in January, with growth of 9% and 7% respectively versus January 2013.
In addition, as a result of greater volatility in the equity market, equity index futures average daily volume increased 20% over the same period. However, total futures daily volumes declined 8% versus the prior year, driven by lower volumes across our interest rate futures complex in January 2014.
The strength in volumes at January 2013 was due to the start of repayment under the long-term refinancing operation or LTROs in Europe, and changes in expectations for future interest rate levels. Please flip to Slide 9, where I will provide an overview of our interest rate futures.
When we made the decision to acquire NYSE Euronext, we stated our belief that 2012 represented cyclically depressed volume levels. At the time, volume averaged 2.3 million contracts per day, the lowest level since 2006.
During 2013, we saw record interest-rate volume driven by change in expectations and [Indiscernible] actions, which resulted in daily volumes up 25% over 2012. Our flagship, Euribor futures daily volume grew 32% in 2013 over 2012 level, with Sterling daily volume up 25%, and gilt futures up 12%.
This January, Euribor volume declined versus January 2013 level, but was up 9% versus December. Trading activity in our sterling market also grew during 2013, and into the first quarter of 2014, with volumes above 1 million contracts per day in January.
Fourth quarter CDS revenues were $34 million. This included $14 million from trade execution, and $19 million from clearing.
For the year, we achieved record revenues for global CDS clearing of $80 million. Through January, we have cleared $48 trillion in gross notional value, which includes over $4 trillion in client clearings.
We continue to develop new cleared products in our SEF platform to support the CDS market, which is developing stable revenues and profit contribution amid a time of continued uncertainty. Moving next to Slide 11, I will provide an update on our $500 million target for expense synergies related to the NYSE Euronext transaction.
As a reminder, the baseline expense number is roughly $2.14 billion. This means that excluding Euronext expenses of over $300 million, which are not included in our synergy forecast, we reduced combined expenses by nearly 30%.
We are in full execution mode with regards to our detailed integration plan and remain confident that we can achieve at least 70% of our synergies on a run rate basis exiting 2014, and 90% exiting 2015. As you see on the chart, we already improved from $95 million to $108 million of realized synergies during the fourth quarter.
In addition, our first-quarter 2014 expense guidance of $470 million to $480 million reflects run rate savings of over $220 million, or slightly more than double where we ended the year. Let us next cover Slide 12, where you can see that we generated solid cash and returns again in 2013.
Operating cash flows were $735 million. We had just under $1 billion in unrestricted cash and cash equivalent at December 31, including amounts successfully paid out to close our Singapore transaction, and to fund our contribution to the ICE Clear US Guaranty Fund.
And we ended the year with roughly $5 billion in total debt and an adjusted debt to EBITDA ratio below 2.5 times. In terms of capital allocation, we are committed to delevering to get to our debt to EBITDA target of 1.5 times by the back half of 2015.
Also we made our first quarterly dividend payment of $0.65 in December, and this morning we announced that we would again pay a quarterly dividend of $0.65 per share in March. Given the solid cash flow we expect to generate in our strategic divestitures, we expect to be able to continue to pursue growth opportunities and execute share repurchases in a manner that will not jeopardize our investment grade rating.
We remain intensely focused on delivering shareholder value and take the role as stewards of shareholder capital very seriously. For 2013, our ROIC of 9% remained above our cost of capital and that of our competitors.
We will update this important indicator of value creation as a key measure of our 2014 financial performance. Let us turn to Slide 13, and review our current guidance for the first quarter of 2014 and for the full year.
For the first quarter of 2014, as mentioned previously, we expect adjusted operating expenses, excluding NYSE technology, to come in between $470 million and $480 million. We also expect to achieve 70% of our synergies by the time we exit 2014.
It is important to also note though that we will continue to invest in our business. We expect to spend an incremental $40 million to $50 million in 2014, with roughly half related to our normal salary increase program, and restoring our bonus accrual to 100%, and the other half targeted in investment in technology enhancement across our exchanges and clearing houses, in addition to key growth initiatives such as ICE benchmark administration, SMX, and Cetip.
We believe these investments can support incremental revenues of $100 million to $140 million in 2014. As has always been the case if we don’t see the revenue materialize, our pay for performance culture and disciplined approach to hiring will quickly self correct.
For interest expense, we expect roughly $29 million in the first quarter, dropping to $26 million, $27 million per quarter, as we further optimize our bank facility. D&A expenses for 2014 is expected to be between $320 million and $350 million, including $75 million to $80 million in the first quarter.
Finally, we expect an effective tax rate of 27% to 30% for 2014, and expect capital expenditures in capitalized software of $180 million to $200 million, excluding real estate expenditures. While we have good visibility into the first quarter expenses, the timing of synergy realization and related investments during the year make it difficult to provide a precise full-year expense number at this point in time.
However, as always, we remain very transparent and timely in providing additional guidance as the year progresses. Finally, please note that beginning in the first quarter, we expect to begin reporting into segments, an ICE segment and a Euronext segment, and as noted previously, we will report the to be divested NYSE technology businesses in discontinued operations to provide visibility into the performance of our core business.
I will wrap up on Slide 15. We believe we have a roadmap to expand margins by executing on our synergy plan even as we invest in continuing to grow the top line.
We believe this margin progress will be a key measure of our success as it can enable us to deliver double-digit earnings growth over the long term. When we announced the NYSE Euronext deal, our pro forma consolidated margin was 42%.
Less than one year later, and after realizing $95 million in synergies, our operating margin was 45%. We expect that the IPO of Euronext and divestiture of certain NYSE technology businesses will enable margins to reach 48% to 49% during this year.
At a 70% expense synergy run rate we expect our margins to be approximately 54% to 55% entering 2015. As we continue to realize our synergies during 2015, margins should expand further to approximately 57% to 58%, and finally, at full synergy achievement of $500 million by 2016, we believe our operating margin can return to 60%.
We are focused on creating a lean, efficient and growth oriented business, and we have a strategic and financial roadmap to do just that. And with that I will turn it over to Jeff.
Jeffrey C. Sprecher
Thank you Scott, and good morning to everybody on today’s call. I will begin on slide 16 with a recap of our objectives and results, as well as our outlook for 2014.
While delivering our eight consecutive record year, we completed two acquisitions in 2013 and announced the third. I want to thank our team for their focus on serving our customers, while working to complete many strategic initiatives.
These include the transition of Liffe interest rate and other futures contracts to ICE Clear Europe, and our expansion into interest rates and new financial and agricultural products. This was successfully completed in six months time, and it speaks to the quality of the clearing systems we have invested in, together with our dedicated staff, and the relationships with clearing members, who supported our transition.
Just prior to that, we completed our acquisition of a majority stake in ICEEndex giving us our first exchange on Continental Europe, and expanding our reach in the European energy markets for natural gas and power. In the fourth quarter, we completed the migration of trading and clearing for all ICEEndex derivatives contracts, to the ICE trading and clearing platform.
In January 2014, we are pleased to report that Endex’s volume reached record levels for the month. In 2013, we also announced the agreement to acquire the Singapore Mercantile Exchange and the Clearing Corporation, which was completed last week, and I’m going to come back to that transaction in a moment.
We also grew our underlying business despite the headwinds of low natural gas volatility and continued change and uncertainty around financial reform. In our brent crude contract, we reported our 17 consecutive record year for contract volume, and this was in spite of a significant change to the contract as we worked with the industry to transition to a new expiry calendar.
This was the first such change in brent’s 25 year history, and it better aligns the futures to the new physical market calendar, which has been going through its own series of changes. Also in 2013, brent expanded its leadership in market share, and saw a record open interest.
Turning to interest rates, Liffe reported strong double-digit growth in its interest rate futures complex. These include the four year Euribor mid curve option, which was introduced at the end of 2012, and which reached 962,000 contracts per day by the end of 2013.
Our swap note contracts ended 2013 with December volumes being the strongest throughout the year, and activity in 2014 has continued that trend. Based on the demand for new products, we will be developing our swap futures franchise with additional products and programs.
We launched our European trade repository, ICE Trade Vault Europe, which now collects futures and OTC trade facility for energy and credit markets. We also continued our strong commitment to product development and expansion of our clearing services, with roughly 150 new energy contracts launched and nearly 180 credit default swaps instruments cleared.
In the fourth quarter, we introduce buy-side clearing at ICE Clear Europe, well in advance of the European regulatory requirements, and the anticipated rising demand for capital efficiency. Today, we have more than 300 buy-side firms actively clearing on ICE.
All of this contributed to our record revenues for credit default swap clearing. And more recently, we were the first to offer a multi-dealer and client central limit order book trading platform for single names as we continued to participate in the evolution of the credit default swap market.
Within a week of completing the acquisition of NYSE Euronext in November, we detailed our extensive integration and strategic plans. And today we are well into executing on those plans with significant progress just 2.5 months post-close.
Importantly, we are now serving markets in nine asset classes across four continents, up from only one asset class on two continents just seven years ago. Going public on the New York stock exchange in 2005 was certainly a pivotal moment for us.
And on slide 17, I’m pleased to note NYSE’s continued leadership in global listings in its third consecutive record year for IPOs and capital raising. This included a second consecutive record year in technology IPOs, facilitating 30 tech IPOs, and our momentum has continued into this year in January as we welcome 10 IPOs, compared with just six the prior January.
The NYSE’s hybrid market model has engendered confidence as a result of its continuity and performance, and we continue to build on that through innovation to support the capital raising activities for companies around the world. We have strong momentum in our listings business, and we will continue to bring value to our unique visibility and market model, and we will continue to take part in the industry dialogue on ensuring that investors and issuers have confidence in our global equity markets.
Turning to 2014 on Slide 18, we are advancing a number of strategic objectives to leverage our network of exchanges and clearing houses around the world. We have discussed many of these here today, and laid out our road map on our November 19 call.
Today as the only exchange globally with operations in the US, Canada, Asia, Europe and Brazil, we have a tremendous amount of flexibility and opportunity to pursue growth. We were pleased to complete our acquisition of the Singapore Mercantile Exchange and Clearing Corporation last week.
This transaction was completed with a vision for creating a truly global marketplace, where we are serving our customers in their time zone and in the jurisdictions in which they do business. ICE has had operations in Singapore for over a decade as a result of our oil business, and we have seen first hand the importance of building relationships in the region.
Given our existing product sets in commodities and financial markets and the demand for risk management tools, which is growing in Asia, the opportunity to build out these markets is a very compelling one. And we look forward to updating you on our progress in the coming months.
Another major track that is under way is the transitioning of the Liffe products to the ICE futures exchanges and clearing houses over the course of 2014. The transition will entail continuing to move these products to the ICE technology platform.
There are a number of new products that we’re focused on ranging from the ultra long gilt to building on our successful DTCC GCF Repo product, which is currently listed as Liffe US. I want to pause here and thank the Liffe customers for supporting us during the clearing transition.
We have been intensely focused on rapidly integrating our clearing business, and will soon begin integrating our trading markets. We plan to introduce our ultra long gilt futures contract by the end of this quarter, and we are examining other new financial product ideas to support our customers in their risk management and capital efficiency requirements.
Last week, following the approval from the FCA, ICE Benchmark Administration formally launched taking over the administration of the LIBOR Benchmark. ICE Benchmark Administration has worked closely with the British Bankers Association, the industry and stakeholders to ensure no disruption to the calculation and publication of the LIBOR rate.
ICE Benchmark Administration will operate with a robust oversight and governance framework, including an independent board with a majority of non-executive directors. An oversight committee will administer the LIBOR code of conduct, and to expand on this capability, we will look to develop international initiatives around our benchmark operations.
Turning to our integration work on slide 19, we are working to diligently unlock value from our acquisition of NYSE Euronext. We are separating the Liffe and the Euronext operations as a preceding to the eventual IPO of Euronext this year.
We made good progress and we are working with regulators to ensure that we organize the operations in a way that creates a viable, strong, independent Euronext. We have announced our European management team with Dominique Cerutti as chief executive, together with a team of experienced managers.
We will have more information on the timing in the next couple of months subject to our continued progress with regulatory approvals. Completion of the IPO is expected in the second quarter subject to these approvals, and to capital market conditions.
On slide 20, I would like to note that in the US, 2013 proved to be a year of implementation. While the G 20 commitments for mandatory trading and clearing are consistent with the exchange model, we are seeing some issues with the harmonization of global financial reform for those relying on exchanges and clearing house for risk management.
The lack of harmonization is leading to more silhouette operations within our global customer base, where participants wrestle with rules that limit transacting with international counterparts. Our global exchange model is very well positioned to adapt to shift in customer preference as they evaluate their risks and opportunities across regulatory jurisdictions.
Last month, the European commission agreed on final concepts for MiFID II, and while it has not been published, it includes open access provisions, access to certain benchmarks, and increased acquisition of position limits. The specifics have not been defined under the rule-making process, but over the next year, lawmakers will draft the level 2 text.
We believe that implementation will take from 3 to 5 years. ICE has been a leader in creating competition, and we’re also strong advocates for secure and transparent markets.
We are entering the sixth year of the position limit debate in the United States. This was a process that started in 2008 with our OTC energy markets, and today we have position limits on most of our energy contracts following their conversion to futures in 2012.
While our business depends on the health of economies and the health of our customers, which range from leading global commodity producers two financial institutions, to active traders, our focus has been on change, and how economic and regulatory environments are impacting our customers. We have introduced new products and built new businesses to help them adapt.
The initiatives we pursued involve significant complexity and investment. They represent our strategy to build for the future, our markets are increasingly relied upon by regulators and customers for their compliance activity and for managing risk.
I will close on Slide 21, and note that the rate of change and reworking of global markets is really unprecedented. The stress that uncertainty has put on markets has been evident over the last couple of years.
That being said, we are in the business of managing risk, and there is a growing demand for just that. Therefore we have many avenues for growth.
Our strategy for diversifying across asset classes, geographies and revenue stream ensures that we will have the flexibility to lead, where our customers need us to go. In 2014, we are focused on executing our double-digit growth objective, building on our leadership in the global commodity markets, expanding our footprint in interest rates and financial derivative clearing, and on growing our footprint in Asia and abroad.
We are working quickly to evolve and integrate to ensure that we are lean, cost efficient, customer oriented, and anticipating our customer’s needs. So on behalf of everyone at ICE I would like to thank our customers for trusting us with their business in 2013.
We look forward to speaking with you in the coming weeks as we continue to move our business forward. I now like to ask our operator Emily to conduct a question-and-answer session.
Operator
Thank you. (Operator instructions) And our first question comes from Rich Repetto of Sandler O'Neill.
Please go ahead.
Richard Repetto – Sandler O'Neill
Yes, good morning Jeff, good morning Scott. I guess my question is on MiFID II and you did address it in the prepared remarks Jeff, but if it, you know, it seems like they are moving, you know, over an extended period and again the rules are still unclear, but towards open access, but they stopped short of interoperability of the clearing houses.
And could you just say, you know, did you expect this and how you are positioned if, you know, again it is a 3 to 5 -- I agree with the 3 to 5 years as an extended period away, but how you are thinking about your business and how will you transition your business if those are the rules of the road going forward in Europe?
Jeffrey C. Sprecher
Well, thank you Rich. The first thing is as you are aware I believe that MiFID II together with the [new] legislation is part of a very broad package of regulatory change that was agreed to at the G-20, and it is an attempt to harmonize broadly with what we have done here in the US with Dodd-Frank and then other securities regulation and obviously to harmonize with other countries around the world.
So it is a pretty broad package. The trend in clearing also broadly has been for more access.
The most recent clearing houses that we built have been very open access in credit default swap clearings, and I think part of the regulatory compact that regulators and legislators are looking at is as more business is being encouraged to go into clearing through regulation, and the people want to make sure that there is access to clearing and broadly that is a trend that existed even before regulation and one that we support. We have received insurances from very high levels in the European governmental debate, that there is no interest in imparting additional risk into the system by in linking clearing houses in the same way that we are trying to unlink -- the banks were linked and the whole movement towards clearing has been to more isolate and identify risk and not to [re-link] it.
So we have been encouraged and have had a lot of conversation both leading up to the MiFID II and post- MiFID II on how, you know, risk can be managed. You know, I mentioned also in our prepared remarks we have a lot of flexibility to follow our customers where they go, and one of the things that we are seeing is that, you know, for a long time, Europe, particularly the UK enjoyed business that was being done globally, where they could access the east and west time zone, and have the Queen’s [Wall], which people appreciated.
But regulation is increasingly because it is not yet harmonized identically, it is increasingly balkanizing jurisdictions and we are watching our customers react to that. And partly our strategy here has been to make sure that we are in the places where our customers may move business.
So, at the margin there is a lot of unknown about where the next level of investment will be on behalf of our customers in terms of doing their global business. Will they continue to sit in one place and operate east to west, or will they actually put assets in each jurisdiction where they have to manage risk.
And I don’t think we’re going to know that immediately, but obviously ICE positioned itself exactly for this eventuality and it was one of the reasons that months and months ago, I reached out to the owners of the Singapore Mercantile Exchange, and tried to engage them on the idea that we would either work together or actually acquire the business to make sure that we had additional assets in Asia. The last thing I would mention is that in MiFID II, one of the things that you have seen that they have tried to tackle is the preventing of fragmentation of markets, and the Europeans are very [Indiscernible] to the problems of fragmentation, the benefits of competition can be lost in the cost of fragmentation.
And that is acknowledged in MiFID II. So as more access is brought in to clearing and trading, we do believe that there is this overarching knowledge that it should not be something that fragments market to the point that the only way one can participate is through algorithmic trading, which is a natural outcome of people trying to reassemble the market themselves, as opposed to allowing them to naturally come together in networks.
And so, I do take some encouragement from the balance that Europe is trying to strike.
Richard Repetto – Sandler O'Neill
Okay. That is very helpful.
Thanks. I will get back in the queue.
Jeffrey C. Sprecher
Great. Thank you Rich.
Operator
Our next question is from Chris Harris of Wells Fargo Securities. Please go ahead.
Christopher Harris – Wells Fargo Securities
Thanks. Hi guys.
Scott A. Hill
Hi.
Christopher Harris – Wells Fargo Securities
Jeffrey C. Sprecher
Yes, well, you know, honestly we have got – I think there is two levers, and one lever we can control and one we can't. The one that we can control is to continue to roll out new products and services around the existing Liffe business, which we are in a great position to do and have already done since immediately acquiring the business because we do control both the technology and the clearing infrastructure, and that gives us the ability to really focus on customer needs and the risk that they are holding and try to create things that will help them manage that risk.
And I do think there is a lot of opportunity there. The whole financial space broadly has had a large over the counter component to it that increasingly is coming towards organized trading and transparency and clearing.
So those are the issues that we spend a lot of time talking about and working on internally and spending a lot of time with the customer. The other lever is really one that we wanted to position ourselves for which is a recovery or a rise let us say in European interest rates.
The liquidity that’s been put into the system over the last few years in order to stabilize the system in the United States has started to taper and eventually we think some more things will happen in Europe as they are lagging a bit behind us. And I think that will create volatility, natural volatility, in the market that will cause people to want to manage risk and lock-in in these historically low rates.
And so while we don’t control the timing of that, it's certainly has been on my mind to position the company for what we think is probably a natural eventuality.
Christopher Harris – Wells Fargo Securities
Thanks Jeff.
Operator
Our next question is from Ken Worthington of JP Morgan. Please go ahead.
Kenneth Worthington – JP Morgan
Hi, good morning.
Jeffrey C. Sprecher
Good morning.
Kenneth Worthington – JP Morgan
With regard to natural gas, ICE had launched, you know, 800 plus products over the last few years. Many of those I think were in natural gas.
Given what's happening in the gas markets, and particularly the gas – the Henry versus the shale markets, are some of these or many of these new products actually getting to a level of critical mass, which maybe sustainable even after prices fall or if they are not getting the critical mass, how long do you think you will need to see volatility, you know, to get to that point where they are bigger or sustainable contributors to the bottom line.
Jeffrey C. Sprecher
Well that’s the very good question and I think the answer to that is going to be better known as we move through the year, and the reason I say that is that we obviously for those that live in the United States particularly in the Midwest and Northeast have seen extreme cold weather this winter, which has driven natural gas volatility and expanded a lot of trading. And our customers were telling us over the last few years that it was hard to know whether the bases’ location where trading was happening would respond to an extreme volatility condition, given the movement away from historical areas of producing natural gas, and I don’t have any anecdotal information just yet.
This is all happening, you know, these moves up have been relatively short in duration, but what we are going to need to do is survey the customer base over the spring time, and really find out whether their winter hedging strategies work for them. And that’s what's going to drive the uptake.
Again we are positioning ourselves as if that is a likely outcome but I don’t know the answer to it yet.
Kenneth Worthington – JP Morgan
Okay. Thank you very much.
Operator
Our next question is from Niamh Alexander of KBW. Please go ahead.
Unidentified Analyst
Hi, this is actually [Indiscernible]. I am stepping in for Niamh.
I just had a question on energy RPC. So this has been declining pretty meaningfully over the past six months or so, and you acknowledged in your prepared remarks that it's been impacted due to strengthen in former OTC products, which is natural gas, so I guess my first question is, you know, is the decline in RPC completely related to volume mix or there are other underlying market dynamics we should be thinking about?
And then secondly, could you describe your appetite to re-evaluate fees or pricing tiers?
Scott A. Hill
Yes, so I will take that. Effectively, the largest driver of RPC decline over the past couple of quarters had been -- has been mixed.
There has particularly as natural gas volumes have picked up towards the end of the year and continued into January that impacted the RPC and over the course of the year to a lesser extent, the growth in power volumes and the shift towards the smaller power contracts, which are at a lower rate has impacted rates of contract. So there is always a number of moving pieces inside the rate of contract but the largest driver of the decline has been strictly mix.
Just as an example I took a quick look at January revenues given that volumes were down and the rates had declined a little bit on the energy side. And I actually even despite the volume declines and some of the RPC erosion, January revenues were roughly flat versus where we were a year ago.
So it's not really impacting revenue and as we have always said, revenue ultimately is what becomes profit for us, and that’s where we manage not on the mix and, you know, to directly answer your second question, I don’t really see any need to go back and revisit the rates or tiers at this point. I think that the market making programs that we have in place are working.
You know, the other point that I would make to you is as we see in typically volatile time, you do tend to see a little bit higher participation from those who have been at the market making programs, which also affects RPC. So I think we are pretty comfortable to where our pricing fits, and I think we are pretty comfortable with the revenue generation that we are getting out of the trading volumes we are seeing, and I think we like the open interest trend as we look towards the rest of the year.
Unidentified Analyst
All right. Thanks Scott.
It was helpful.
Operator
Our next question is from Alex Kramm of UBS. Please go ahead.
Alex Kramm – UBS Investment Bank
Hi, good morning. I just wanted to talk about the cost guidance a little bit on the trajectory as we go through, step through the year, I think Scott, you said at the end of Q1, you already have 20 realized and I think at the end of 2014 you are looking for 70% which I think is 350 if my math is correct, so that leaves us basically 130 million for the remainder of the year.
So does that mean in the fourth quarter we should be at around 430 million, 440 million run rate in the fourth quarter, and it maybe how do we get there, is it pretty continuous or are there certain big projects that might bring a big drop in let us say the third quarter, for example.
Scott A. Hill
Yes, that’s a really good question. I appreciate you asking it because I think it's important to make sure we are not being too subtle in our guidance.
So the 220 number is basically the first quarter guidance we gave you, that 220 is locked in and done. It is basically the 108 that we had realized through the end of the year plus then the full year affect of the balance sheet revaluation, a number of senior executive departures at the end of the year at NYX, some clearing synergies that we get – where they were clearing expenses [Indiscernible] in the first half of ’13 that won’t repeat in 2014.
So effectively in that guidance we gave you for the quarter, that 220 is locked in and done, and then you asked your math, it's exactly right. 70% of the 500 get you to 350.
The important part to note about that though is there is a lot of work to be done to get those synergies out. That’s integrating the Liffe platform, it's integrating our accounting systems, our finance systems, it is doing the heavy lifting around closing like Liffe US and shifting those products.
Those are going to take time. And so I would – I was going to say caution you, I would tell you, you should not take 130 million and assume we are going to realize that in the year on an absolute basis, we will clearly get to that on a run rate.
And so the way I think about it is with the first quarter it is the run rate for next year. What does it need to be in terms of overall expenses and that’s really how I think you ought to look at it.
So as you get to first quarter next year, that full additional 130 ought to be out of the run rate but it's not going to show up inside 2014. In fact I would tell you, my expectation is, maybe we see 15 million to 20 million yield out of that 130 in the year.
Alex Kramm – UBS Investment Bank
Okay that make sense. So -- but other than that, it's fairly steady than you would say, very year-end loaded, I guess --
Scott A. Hill
No, yes, I think you again you said it right. It's going to be fairly steady through the first couple of quarters, you know, in line with where we have got it now, you know, as we are kind of mixing in investment to generate the synergies and people leaving and getting costs out.
And then as you get to the third quarter, you will start to see a little bit of improvement, as you get to fourth quarter, you will see a little bit more but all the actions will then yield a full quarter’s benefit as you roll into first quarter of 2015. So, I think you are thinking about the exact right away.
Alex Kramm – UBS Investment Bank
Perfect. Thank you.
Operator
Our next question is from Chris Allen of Evercore. Please go ahead.
Christopher J. Allen – Evercore Partners Inc.
Good morning guys.
Jeffrey C. Sprecher
Good morning.
Christopher J. Allen – Evercore Partners Inc.
I wanted to ask about the operating margin evolution chart in the deck. I am just wondering what if any revenue assumptions are built in there, and what is the – what will be the potential upside, and in terms of maybe a better operating environment than what we are currently seeing?
Jeffrey C. Sprecher
I thought it was pretty good that we had ourselves already back to 60% in two years. That notwithstanding, we didn't assume any revenue growth.
So, this is very much, it is exactly what the charts say. We were at 42 when we announced the deal, we were at 45 when we gave you an update that the deal was closed.
If you look at our divestitures, those businesses alone, I mean, it's not, you know, we gave you a guidance that, you don't have this kind of a mid-30s margin and we gave you EBITDA on NYX – or NYSE technologies, you know, 17%, but frankly on an operating income basis, it only makes a little bit of money, and so it is even lower, so you pull those businesses out, you are looking at 48 to 49, and then from there, it's executing on synergies. And again, you know, if you just take the map Alex did the 350 and then the 450 and then the 500, it runs you right through the margin.
Importantly though Chris, as I said in our remarks, we are going to continue to invest to grow revenue, right. So, you know, one thing as we got the synergies coming out, we are anticipating, we are going to invest 40 to 50 million bucks this year to generate revenue growth.
Now clearly if the revenue doesn’t show up, we will dial back on that but we certainly would intend to invest. You know, if you just take the numbers that I gave you in my prepared remark, you know, 40 to 50 of expense, the 100 to 140 of revenues, that gives, you know, incremental margins of 50% to 70% which are right in line with what we are seeing here.
So maybe a little upward help, but not far off what we are guiding to. But this chart specifically didn't assume anything on revenue.
Christopher J. Allen – Evercore Partners Inc.
Got it. Thanks guys.
Operator
Our next question is from Mike Carrier, Bank of America Merrill Lynch. Please go ahead.
Mike Carrier – Bank of America Merrill Lynch
Thanks guys. Jeff, maybe just a question on, you know, the –if anything about the core, you know, energy, oil and nat gas, so when you think about the outlook, you know, in those product areas, I know, you know, in the past, you used to give, you know, some data points on the number of products, the number of users, you know, like what the demand was.
I am just, you know, curious because there is a lot of kind of gives and takes in both of those markets right now. But when you think about the outlook over the next couple of years, you look at, you know, what's happening on, you know, the user level versus demand by customers, and you guys innovating new products and then obviously volatility, but that is a much tougher one to gauge, but you know, more on the product and the user side, you know, just what trends are you seeing, what do you expect, you know, for those areas of the business?
Scott A. Hill
Well, that's a good question, I think you know, for us good news is that we continue to track -- we continue to have an upward track on number of logins, on request per user IDs, on access to data products and that has been, you know, kind of unwavering all through the financial crisis, and it's something that we have come to almost expect around here because it's been so consistently good. And I know some of our peers from looking at their numbers, just we haven't seen that in some of our peers, but at ICE anyway, we continued to see forward-looking metrics that allow us, as Scott said, to plan for future growth.
You couple that with open interest trends that we look at, particularly in certain of our products where open interest is a very good predictor of future volume. That's not the case in all products but in some of our products, that does seem to be pretty highly correlated.
So, a we sit here today, we are – you know, feeling positive about 2014 just in our core business, in our predicting growth, in our predicting that we are going to continue to invest in those business in order to continue to foster and build out that growth. But, you know, it's interesting, the market as I said in my prepared remark, you know, is becoming more complicated.
You know, we change the brent futures contract on the fly. I don't know that this has ever been done before, you know, we change the expiration of a contract that had open interest in it.
And brent like all commodity futures contract has a time component to its valuation, and that time component is particularly manifest in the options market, which is very highly time sensitive, and so sliding that contract forward by a couple of weeks was a material change and one that we didn't even know if it was possible to do, and we could really pull it off, until we completed it. And so there was a lot of noise around brent.
So, yes, we look at it and it continues to grow and do really well. We have right now a lot of noise around our gas oil contract.
Gas oil requirements in Europe are reducing the sulfur content and again, we are working with the industry, who has massive open interest, not just in our futures contract but also in a lot of forwards and swap contracts that are, you know, the bread-and-butter of their physical business. And we are trying to move the industry along to a lower sulfur contract.
So, you know, I say that because our markets are not just as predictable as you would imagine. There are - there are always headwinds and volatility issues and things.
But the parts of the market that we have visibility into look very good to us, and we are, you know, knock on wood, we are very fortunate and proud of being in the position that we are in, and just to kind of add to that merger with the other question, that's about open interest in the new product. I mean the other oil product that we got, open interest in those products, at the end of the fourth quarter was two times where we were two years ago and was up, you know, give or take a little bit, 10% to 15% from where we were a year ago.
So, a lot of the demand for trading the data that Jeff talked about, we are seeing it, not just in brent and gas oil but also in the other oil products that we have launched over the past few years.
Mike Carrier – Bank of America Merrill Lynch
Okay. Thanks for the color.
Operator
Our next question is from Jillian Miller of BMO Capital, please go ahead.
Jillian Miller – BMO Capital
Thanks guys. Just want to get an update on your progress with interest rate swap clearing in Europe.
Just wondering what you had been working on there like how that client reception has been and when we should expect a rollout of that and I guess related to that, I want to see what current expectation is for when client clearings actually going to become mandatory under [Indiscernible], I think the last time you said, you are expecting early 2015 --
Jeffrey C. Sprecher
All right, well, let me take the first half. This is Jeff, Jillian.
Let me take the first half of the other question. Obviously we are working on a broad based interest rate strategy here now, that we moved into that market and as I mentioned in my prepared remarks we have launched the swap note contract, we are very focused on the OTC market as they relate to our particular franchise, we are – maybe a nuance, but we are moving – we are taking the Liffe US products and we are moving them to the UK.
We are putting all of our products together in one environment so that we can get them in the benefits of cross margining and correlation, which we think is going to be very beneficial for our customers and we have certainly seen our competitors have benefited from – in this space from where they have been able to offer great cross margining benefit so there is a lot yet to be built out, and to a certain degree we have one arm tied behind our back because we do need to get off of all of the old Liffe technology, and on to our technology in order for us to, really be able to put the pedal to the metal in terms of and the way we roll things out here. In other words, we don't want to roll out too much on the old technology and then force people to change.
So that has also covered the kind of product we are working on and the rate of introduction that we have planned. Let me ask Scot to --
Scott A. Hill
Sure, yes. So, Jillian I feel that the best information I have got is still that the EU buy-side will become mandatory sometime in 2015.
I guess the interesting thing I would note though is we have launched a number of European indexes for buy-side clients and ICE Cleared Credit, and I looked at the data for January yesterday, and the notional volume, that we have cleared for the buy-side client each week in January on average, has been, you know, somewhere between 30% and 50% higher than what we saw an average week all last year. And that even includes when we were moving into the cap two customers and the cap three customers and the spikes around those.
So, and as you peel it back, what we are starting to see, if there are some European customers who are clearing through US Clearing Members into ICE Clear Credit, so that they can get access to the clearing. So, we have launched buy-side clearing in Europe.
We are hopeful that as it comes in 2015, we will start to see a pickup in volume there but we are seeing some interesting trends in ICE Clear Credit around European CDS embassies that already indicate that you got European customers who are clearing, and it really has led to a fast start to the year for that business. Our credit revenues in January were very solid, and you know, even coming off the year where, you know, $60 million of revenue become $80 million of revenue.
You know, I am hopeful that we can push that closer to 90 as we go through this year.
Jillian Miller – BMO Capital
Okay. Thank you.
Operator
Our next question is from Dan Fannon of Jefferies, please go head.
Dan Fannon – Jefferies
Thanks. You know, Scott just looking at the slide 22 in the debt structure, you guys obviously have a lot of flexibility with cash flow, but just thinking about, you know, looking into 2015, should we expect much delivering ahead of the maturity of the 5.375 notes or should we expect like kind of cash building up till then or kind of gives us a bit of road map.
Scott A. Hill
Yes. That's a really good question.
I think I will focus you on, on slide 22, as in 2016, you see the little dotted bar that says CP 1.80 billion, that basically reflects when the back stop would turn out. We – you know, our current back stop facility on the CP, the revolver, would turn out in 2016.
But that CP is repayable right now. As are the solid, new bars are term loans outstanding.
So, as we generate cash all of that prepayable debt and we really, well, we went to the CP market for two reasons, one, because we knew what the solid cash flows and our desire to deliver, we needed pre-payable debt, and two, you know, I am paying somewhere between 25 and 30 bps in the CP market versus, you know, 2.5% interest on our term loan. So, it's less expensive financing, it is prepayable financing, and so as we generate cash that's kind of, if you will the first area, where we would look to pay down.
And then, you know, to your point that the big, kind of, light blue bar that's out in 2015, that's our Euro bar. And clearly our strategy for repayment of those bonds, will be impacted to some extent, by the timing and the size of the IPOs of Euronext, and, you know, depending on when that flows, you know, we would look to, to either pay that debt down early, or if the penalties were too severe for doing that, you know, I think we set - the euros aside it's a nice natural hedge, we set the euros aside and tell the ratings agencies that money instead of that to pay that down.
And I think we are getting that leverage treatment and effectively see our leverage go down mathematically, if not, actually.
Jeffrey C. Sprecher
And maybe I should mention as a bridge, one thing that I find quite interesting about the debt that Scot has put together to finance our NYSE Euronext acquisition, that it is largely LIBOR-based. And while, there is lot of talk about benchmarks other than LIBOR, the reality is our own experience is that in the markets where we do business LIBOR continues to be the benchmark and it's why are we are very excited to take over the administration and continue to advance the confidence in the market.
Dan Fannon – Jefferies
Thanks.
Operator
Our next question is from Patrick O'Shaughnessy of Raymond James, please go ahead.
Patrick O'Shaughnessy – Raymond James
Hey, good morning. So my question is what the legacy NYSE equities and options businesses, we have seen kind of a slow decline in their market share over the last few quarters.
Can you talk about how much of that money has been due to just to integration and still lot of things going on and how much is from the competitive landscape, and that's more importantly, kind of what are your plans going forward to maybe arrest those declines.
Jeffrey C. Sprecher
Well, it's a good question. And, you know, one of the, we are obviously learning a lot about the US and European cash equities markets, as we were going through the integration planning, and one of the things that I can tell you is that, it is very easy to be the market share leader in that space if one chooses to want to be that, A, you can change your rate structure and almost instantaneously the order routing algorithms will give you market share and so, you know, our strategy around here has never been to run the business for market share or bragging rights.
Patrick O'Shaughnessy – Raymond James
Thank you.
Operator
The next question is a follow up from Rich Repetto of Sandler O'Neill, please go ahead.
Richard Repetto – Sandler O'Neill
Yeah. Hi, just a quick follow-up on the tax rate Scott, so the guidance I guess 27% to 30%, I thought it was a bit low when you initially -- in the initial presentations and stuff.
Scott A. Hill
Well, we haven’t guided on the tax rate, but I think people assume, if you blended the prior NYX tax rate, and the ICE tax rate, that it would and it was a reasonable assumption, you know, by the way. That it would dip below our low end because I think they reported something around the 24%, 25% level.
You may have noticed Rich because I know you pay attention to the details, in the quarter we had a lot of noise in our tax rate. I mean, we mentioned a number of foreign tax impacts and what we are seeing particularly in Continental Europe is we are seeing countries increase corporate tax rates, so as opposed to the UK, we are down, down, down, down, down, and Continental Europe we have seen an example recently in France, where it went from 36% to 38%.
In addition to that, there is legislation that in Continental Europe, that really is attacking certain tax planning strategies that were in place at NYX. Again, it is very legitimate, very common tax paying strategy, they are just under a lot of pressure right now on the continent and so frankly if they had remained a standalone company, their tax rate bias was significantly up based on those factors and we have kind of been able to get in and evaluate those impacts particularly again some things happened as recently this December on the tax rates increases.
It's become apparent to us that it's more likely that we are going to stay in a similar tax range even on a combined basis. I will note though Rich that that is why we have Euronext as a part of the group after the IPO is let out, I would expect that to drift back towards the low end of the range.
Richard Repetto – Sandler O'Neill
So Euronext actually causes the blended tax rate to be higher that is what you are saying?
Scott A. Hill
That's where most of our continental business is, yes.
Richard Repetto – Sandler O'Neill
Okay. That is helpful, Scott.
Thank you.
Operator
The next question is from Alex Kramm of UBS, please go ahead.
Alex Kramm – UBS Investment Bank
Hi, quick follow up on the text business of two things, and I don’t if I have missed it but can you just give us an update where you are with selling some of those pieces. It sounds like, you know, given the uncertainty that has been over the last couple of years this business has been fairly stead declined.
So just I want to see what the appetite is and where the appetite is coming from and then related to this, Scott, I think you gave the trailing 12 months revenue but can you just give us the maybe fourth quarter run rate for revenue in that business, and maybe what you expect the discontinued earnings to be in the first quarter from that? Thanks.
Jeffrey C. Sprecher
So Alex I will take the first part of your question. This is Jeff.
Amazingly strong interest in the market to acquire those businesses where we [a banker] and we are in the process and I have signed confidentiality agreements that people are working through and there just been, you know, dozen and dozens and dozens of inbound request to participate in the progress. So we are very pleasantly surprised.
I think these are fundamentally good businesses for some people just not for us at this moment in time. So -- and they are businesses that we don’t fully understand, and I don’t think the skill sets of the company as it's been reorganized particularly caters to operating those businesses right now.
We may -- we may regret someday not owning them, but we have got to run the businesses for the benefit of our customers and shareholders, and I think we are just the wrong owner right now. But there are a lot of people that I think would be very good owners and fortunately they have shown up and are taking a hard look at the business.
Scott A. Hill
Yes, and just to answer the last part of the question, so roughly speaking, the NYSE technology businesses, the revenues that we kind of see on a run rate basis if you will into 2014 are a little more than 100 million. Expenses are just little less than 100 million on a starting point.
We actually, as you may recall, we had some synergies in our $500 million bucket that we were counting on, and we have actually ended 220, I talked about 40 of that relate to the NYSE technologies business because we have already taken action – while Jeff is absolutely correct there are some very valuable business. There were also some businesses that weren’t making money and we shut those down and we have rationalized resources, and so we have already taken some action that would result, will result in synergies over the course of years.
Those synergies we will be sitting down and discussed, but you will see them. So as a starting point, I tell you again revenue a little above 100, expenses a little less than 100, which would suggest a somewhat negligible impact to profit.
But you should see that profit expand, you know, depending on how long we retain those businesses in that [Indiscernible] line as those synergies start to flow through.
Jeffrey C. Sprecher
And let me finalize by saying and I hope it's not lost on you that -- we are selling a couple of specific businesses that we think are very good businesses that would be better owned by others. We are also internalizing some of the businesses that existed in that segment, prior segment and those will just be part of our typical ICE reporting segment.
So you won’t see them as a technology segment per se but that doesn’t mean they aren’t good businesses, and that we don’t want them. We do.
And then there are certain businesses that are much more closely affiliated with Euronext that are part of the perimeter of the new Euronext that we are defining for which we think we will be appreciated and valued in the IPO of Euronext, and for which I think will benefit the ICE shareholders through that process. So it's really a reorganization of the technology division in various places that we think will maximize value and also allow us to serve customer needs better.
Alex Kramm – UBS Investment Bank
Perfect, thanks again.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Jeffrey Sprecher, CEO, for any finishing remarks.
Jeffrey C. Sprecher
Thank you Emily, and thank you all for joining us today. We will look forward to speaking to you from time to time throughout the quarter and have a good day.
Operator
The conference has now concluded. Thank you for attending today's presentation.
You may now disconnect.