Cohen & Company Inc (COHN) 2011 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Institutional Financial Markets' second-quarter earnings conference call. My name is Julianne and I will be your operator for today. At this time all participants have been placed in a listen-only mode. Following formal remarks the call will be opened to a question-and-answer session, and instructions will be provided at that time. As a reminder, this conference call is being recorded.

Before we begin, IFMI would like to remind everyone that some of the statements the Company makes during this call may contain forward-looking statements under applicable security laws. These statements may involve risks and uncertainties that could cause the Company's actual results to differ materially from the results discussed in such forward-looking statements.

The forward-looking statements made during this call are made only as of the date of this call, and the Company undertakes no obligation to update such statements to reflect subsequent events or circumstances. IFMI advises you to read the cautionary note regarding forward-looking statements in its earnings release and in its most recent annual report on Form 10-K filed with the SEC. Please also note that in the Company's quarterly earnings release for the second quarter of 2011, the non-GAAP measures have been reconciled to GAAP measures in accordance with SEC regulations.

I would now like to turn the call over to Mr. Daniel Cohen, Chairman and CEO of IFMI.

Thank you, Julianne. Thank you, everybody, for joining us for our second-quarter 2011 earnings call. With me on the call are John Costas, the chairman of PrinceRidge, and Joe Pooler, our CFO.

Before we discuss the financial results for the quarter and the progress that we have made in terms of integrating our institutional capital markets business with PrinceRidge, let me first comment on our progress with our strategic -- the transaction itself. On the first of June we were pleased to announce the closing of the PrinceRidge investment, and our second-quarter results include one month of PrinceRidge's operating results.

Since that time we have been working hard to integrate the two platforms, including combining offices, evaluating asset class performance, reducing redundant costs. Although we are happy to have passed the first milestone with PrinceRidge, the work really has just begun.

Additionally, we have really entered a difficult and interesting stage in the market for fixed income. We will work hard to be effectively positioned. However, as Joe will describe, we have continued to have good liquidity, continue to generate net cash in the business as reflected in our adjusted earnings, and feel that we have a great team who will be able to develop our business and take advantage of opportunities for the overall difficulties in the financial sector.

Turning to our results for the second quarter, we did experience year-on-year decreases in our revenue line items. Our net trading revenue was down by $3.5 million from the prior year. In addition, our principal investments did not generate meaningful year-over-year revenue.

That said, we were pleased that we did earn $4.4 million in incentive fees in our asset management business in the second quarter from the successful and orderly liquidation of one of the Deep Value Funds, Fund I(A). We continue building other areas in our Asset Management business and believe there is great latent value in that business line.

In addition, though we were disappointed by the decline in the year-over-year revenue, adjusted operating income was essentially breakeven for the quarter. As of June 30, 2011, our total equity was $89.2 million. Notably, our performance after considering the impact of the transaction and the transition costs, along with our solid capital position, has enabled us once again to return value to our stockholders through a $0.05 dividend for the quarter.

Overall, there is clearly much work to be done in IFMI. You should know, however, that we are keenly aware of what we must do to drive stronger results and believe that we have taken the steps to create long-term value in the Company.

To this end, one initiative we are taking is the implementation of numerous cost-saving measures aimed at eliminating duplicate expense and focusing the combined IFMI-PrinceRidge on the most profitable business lines. John will describe more the combined entity; and Joe will describe our financial results, our liquidity, and our balance sheet.

Looking ahead, we believe that with our new colleagues at PrinceRidge we have the foundation and team in place to advance our strategies and deliver enhanced stockholder returns in the months and years to come. With that, John, can I turn it over to you to talk about our Capital Markets business?

Yes, thank you, Daniel. As Daniel has already alluded to, we made it through a couple of milestones during the second quarter. The first was the interim regulatory closing of the transaction; and we continue to interact with the regulators. The review for the transaction is on track for final closing later this year.

Importantly, the two businesses now are co-located in our headquarters in New York, and in Chicago, and the other regional offices in the US. We have integrated the businesses from a personnel point, which has led again, as Daniel has alluded to, to cost rationalization across the businesses. We have experienced cost savings so far as we have integrated the middle and back offices; and we are working with service providers to also consolidate our contractual obligations for the underpinnings of the business.

All in all, we are on track. We are striving to drive down the breakeven cost of the business. And we believe in the space that we are operating in, the size and scale of our business -- that being one of the low-cost providers in terms of infrastructure costs and non-personnel costs are an absolute priority.

The market environment, as no one needs to really emphasize, is extremely challenging. It has led us to closely manage risks of the business. So far as we can comment on the second quarter, the business, although revenues are not where we would like them to be, the business operated in roughly breakeven fashion during the initial period.

Third quarter and the current state of the business will have continued focus on consolidation from a cost standpoint. But interestingly and importantly we want to expand our capabilities in a number of activities that are in the business portfolio.

We are focused on expanding our coverage platform within the investment banking franchise, and then opportunistically adding trading and sales capability across our structured products and credit businesses. There have been a number of opportunities to do so over the last couple of months, and they continue to rapidly present themselves as consolidation among the smaller broker-dealers in the fixed income and equity sales and trading space is accelerating due to the market turmoil that we are experiencing.

We will continue to break down costs and add personnel; and our business plan and focus will be along these lines for the remainder of the year, again with our focus on migrating through the remaining issues and parts of the regulatory closing process. With that, I will turn back to Joe and happy to answer questions later in the call.

Thank you, John. First for our statement of operations, we did continue to generate positive adjusted operating income. For the quarter our adjusted operating income was $3 million or $0.18 per fully diluted share, and we are pleased to announce a quarterly dividend of $0.05 per share.

As Daniel noted, our net trading revenue decreased about 17.5% from the prior-year quarter to $16.2 million, primarily due to our prior-year period benefiting from gains on certain leveraged credit products in our trading investments as well as the global market conditions resulting in lower activity in the second quarter of '11.

As a reminder, with the closing of PrinceRidge, our second-quarter consolidated results include one month of PrinceRidge's results, including $1.4 million of trading revenue.

We continue to deploy some risk capital in our Capital Markets trading business. At the end of the quarter we had about $57 million of net equity capital invested in our net trading portfolio.

Our Asset Management revenue decreased from $6.2 million in the prior-year quarter to $5.3 million in 2011. The decrease is primarily the result of reductions in revenue due to the sale of our Strategos Fund management contracts, as reported at the end of the first quarter of '11.

Our principal transactions in Other revenue for the second quarter of 2011 was only $800,000. It is worth noting that in the prior-year quarter we had significant principal transactions in Other revenue of $8.5 million, primarily from gains on our investments in Star Asia, our Deep Value Fund, and a certain asset-backed principal investment. In the latter half of 2010 the first Deep Value Fund was liquidated, and the asset-backed principal investment was also sold.

Our total operating expenses for the second quarter of '11 of $31.6 million were up $500,000 from the prior-year period. The change includes a $1.8 million decrease in compensation and benefits expense, despite the current-year quarter including a one-time compensation charge of $4.6 million related to the amendment of the employment contract of the former CEO of our Capital Markets segment. Chris is scheduled to leave the Company at the end of August.

Otherwise, the decrease in comp and benefits is primarily related to the year-over-year decline in revenue. Deducting the $4.6 million one-time compensation charge, comp and benefits as a percentage of revenue was 72% in the current-year quarter.

The decline in compensation and benefit expense was offset by operating expense increases of $500,000 in the business development, occupancy, and equipment line item; $1.1 million in the subscriptions and clearing and execution line item; and $900,000 in the professional services and other operating expense line item. About $0.5 million on these combined increases were related to the PrinceRidge transaction and transaction or transition costs.

We continue to focus on controlling all discretionary operating expenses. As John and Daniel have noted, as part of the PrinceRidge combination we are exploring cost-cutting initiatives. The measures are expected to result in substantial savings and a reduction in the breakeven point for our broker-dealer business.

In terms of our balance sheet, again we had $57 million of net equity capital invested in our net trading portfolio at the end of the quarter, which consisted of assets of $167 million of trading securities; $158 million of receivables under resale agreements; and of $1.9 million of restricted cash. Offset by liabilities of $38.5 million of payables to brokers, dealers, and clearing agents; $52 million of trading securities sold, not yet purchased; and $179 million of securities sold under agreements to repurchase.

The other investments at fair value line item consists primarily of our seed investments in sponsored and managed vehicles. The $42.6 million fair value includes $35.9 million related to our investment in Star Asia.

At June 30, our consolidated Corporate indebtedness is carried at $42.1 million. And just to recap the timing in the PrinceRidge transaction and the accounting for the PrinceRidge transaction, we closed the transaction on June 1. We contributed our equity interest and our Cohen & Company Capital Markets operating broker-dealer into PrinceRidge in exchange for an approximate 70% interest in PrinceRidge.

As a result of our majority interest, we began consolidating PrinceRidge in our financial statements as of June 1. The portion of the equity in PrinceRidge that was retained by the pre-close PrinceRidge partners is reflected as a $15.5 million redeemable non-controlling interest between the liability and equity section on our consolidated balance sheet.

We believe that our unrestricted cash balance of $50 million, combined with the $57 million we have invested in our net trading portfolio, is sufficient to fund the near-term business model. Our operating performance, after considering the one-time nature of the PrinceRidge transaction and transition costs combined with the solid capital position and our continued focus on expense control, has contributed to our decision to continue the quarterly dividend of $0.05 per share. The dividend is payable on September 6 to stockholders of record on August 23.

Finally as announced in mid-July, we completed an exchange offer for our outstanding 7 5/8% convertible senior notes. Of the $19.5 million of previously outstanding old notes, $7.6 million were tendered for exchange. We now have $11.9 million of 7 5/8% convertible notes and $7.6 million of 10.5% convertible notes. In exchange for the higher interest rate, the new notes have an initial holder optional redemption date of May of 2014 instead of May of 2012.

We expect to file our 10-Q no later than Friday, August 12. And with that, I will open it -- or I will turn it back over to Daniel for some closing remarks before questions.

Great. Well, thanks, Joe; and thanks, John. I think we have made progress in the previous quarter, despite more difficult market conditions, in terms of diversifying our business in fixed income and investment banking, in terms of moving forward our platform and making it much stronger platform. We continue to see some possibilities moving forward in the specialty Asset Management businesses that we are in, as well as continued revenue from there.

We need to cut costs and reduce our breakeven point. The PrinceRidge transaction allows us to do that. It adds strong management in order to do that, and I think that over the next 12 months you will see the positive impact of those efforts.

So on that basis, Julianne, can I open it up for questions?

(Operator Instructions) [Mark Jesse], [MMD Hudson].

You guys have done a lot of talking about cost-cutting, and I know you (technical difficulty) yourself, what, $5.2 million last year basing in total comp. I was wondering how (technical difficulty) your compensation this year, given the fully diluted market cap. The stock is down to what? About $30 million or something, and there hasn't been a really been a plus tick since 2009 almost. So thanks for the question. Bye.

Great. Well, thank you for the question. Actually, on a going-forward basis since the beginning of the PrinceRidge transaction, I have reduced my base compensation to $200,000 per year and a participation in the profit for moving forward with the PrinceRidge organization. So I think that that -- now, I myself own over 5 million shares equivalent in the Company, and I think that it was both the right thing to do for outside shareholders and the right thing to do for myself.

With the replacement of -- or with the change in management of our Capital Markets business, we brought base salaries substantially lower and focused people specifically on cash results in the broker-dealer and institutional Capital Markets subsidiary. So I think that is one element of the cost savings that you will see moving forward in terms of cost savings relatively quickly.

And I think it is the right attitude, because I think we have a great platform to make money in the long term. And, hopefully it sends the right message to everybody.

(Operator Instructions) Rick Sherman, Oppenheimer.

Yes, hi, Daniel. I was going to ask that same question because last year the total compensation just for the top three people was like $12 million, which would have added $0.50, $0.60 a share to the stock. And after a 66% decline in the stock from the time that this got started, it just seemed excessive. So I am very happy to hear what you just said.

I would like to see -- it seems like you said you are the largest shareholder; you certainly can create wealth through share appreciation that would benefit everybody, not just senior management. So that question has been answered. I am happy to hear that.

I would like to know about Star Asia, which I think is one of the issues that wasn't really touched much in your press release, but is of great concern to most people because of the unknown nature of the nuclear issue, what properties are -- what is the current status of that? I know on the last call you mentioned that it only affected -- I don't know; I don't remember the exact number -- like 7% of the properties over there.

But clearly I see you didn't have to really do much in the way of a writedown or anything. But is there any generation -- it seems like that is not generating anything anymore, where that used to be a huge driver the previous year like of $8 million. So could you give a little bit of some clarity as to what your situation is with that and how you feel about that situation at this time?

No, that's great. Let me just reiterate that I did the change in my compensation before this substantial market decline in the share price. So I think that we can generate a lot of wealth here.

As far as Star Asia is concerned, the last quarter was putting things in place that we'll see the positive benefits of in the next few quarters going forward. We do believe that the nuclear meltdown/earthquake/tsunami impact on us was minimal. We do see especially in Tokyo signs of a vibrant financing market for properties in our portfolio, and we do believe things are moving forward well.

We do believe that over the next two quarters the most important element is that we will eliminate the senior secured and senior indebtedness the which the Company owes -- the underlying vehicle owes to JPMorgan and to Credit Suisse, and a number of transactions that we do have visibility on.

This quarter was relatively stable, but we still work hard to do two things; and we think that at the end of this year and in 2012 we will see monetization of part of our investment in Star Asia.

Okay, thank you. If I could follow up on the four-point-something million that came in from one of the other vehicles that is winding down. I assume that that is basically going to be nonrecurring. So what, if anything, is going to replace some of that income?

Well, we do have -- we manage separate accounts and other vehicles, some of which we believe have substantial embedded gains. So I do think that we will continue to see incentive fee realizations as well, not only on those vehicles but also on Deep Value Fund II. We exchanged our bottom line and profits participation for top-line revenue share.

And we continue to move forward on -- in some of the very narrow areas where I can say that we really are world experts in terms of creating value for third-party accounts.

Thank you.

Dwight Emanuelson, Merrill Lynch.

Hey, Daniel. How are you? I have been a pretty large shareholder for a year or two now, and obviously even maybe back from the Alesco days. Obviously, Christopher leaving and this merger occurring leaves a pretty big question mark in my opinion. He's got -- Christopher leaves with -- I don't know how many shares he has, but it is substantial.

A stock that is trading at $2.00 that is very illiquid, no research behind it etc. I obviously, he is leaving. I don't have any idea why and maybe you could address that and his intentions of getting liquid. Do you believe he's a long-term player with your management as an amicable departure? Because obviously there is no ability to get him liquid, in my opinion.

So also one last little comment. We have talked the last year or two about getting your story out, and obviously a lot of the story has changed. Are you going to do anything about trying to get some research to follow this, your microcap, or something to stem this decline?

And/or a stock buyback? If it is so cheap here, trading well below book value, would some of this cash be better off buying back the stock and/or you guys buying more stock? So that is really my comment.

Okay, so just -- obviously we have all worked together for a long time, and I think that this departure really resulted in taking the Capital Markets group in a different direction. No one -- many people have equivalent esteem that I have for Chris Ricciardi. It was simply a matter of repositioning our Company.

As to Chris's stock position, he is still a substantial shareholder in the Company. I know that obviously he wants us to do well and create value for him. He, as do I and I am sure as does Joe and John, feel that our stock is substantially undervalued.

As to whether or not it creates an overhang on the stock, it probably does. But I am not an expert in that trading situation. So that's primarily the case.

We do have tremendous value in our net loss -- so switching to the last portion of your question, we do have tremendous value in our net loss carryforwards and other net losses on securities that don't show up anywhere on our balance sheet. But that we believe that working to create value there has historically overshadowed our ability to repurchase shares without triggering a change of control for tax purpose event. That is something that is constantly shifting.

We do have an authorization to repurchase stock. Certainly the timeline for us doing so is getting shorter. We do want to continue creating -- we believe that our job is to distribute earnings from the Company as well as build the Company.

We have made our substantial investment in the PrinceRidge Capital Markets business going forward, and we do believe we have liquidity, and reassess how we should move forward in terms of doing things like stock buybacks or other situations like that. So I hope that -- did that answer your questions?

It did. I guess I mean Chris has obviously been a big part; and him leaving, and then John coming in and doing the PrinceRidge transaction, obviously it is a very difficult time in the market. I think anybody in their right mind will see this stock go from $5.00 to $2.00, and no real liquidity. You are sort of stuck in it any way.

Obviously we are getting a little bit of a cash dividend to placate those of us who can't really vote with our feet to leave. I mean, to say that we are disappointed in the performance would be a drastic understatement.

I think you guys obviously are trying to do something about it. Your compensation has gone dramatically down. Maybe everybody is aligned.

But until the stock performs, having been with Merrill Lynch for a long time, you are judged on your stock performance as a CEO. Obviously you are doing everything you can; you are a big shareholder. But obviously the guys before me that asked questions, nobody who has been long this equity has made any money, all the way back from the Alesco days.

So maybe it is just whether -- the question is whether you guys are ever going to make any real money in this is a big question. And you have got to prove it.

So I don't know if that answered that, but I know anybody who is long this equity -- and I have got one or two clients that are in it, and I know nobody is happy to be in it. So let's -- you guys need to change the persona of the Company and start making some money and start making some good decisions. And until that (multiple speakers) go.

I think we have changed the persona of the Company in terms of the PrinceRidge transaction. I think we do have strong leadership there that is incentivized to create value from the Company.

I do think that we put the things in place for medium-term and long-term shareholder value and creating value for people. So -- and I agree with you; we will be judged on whether people make money in this situation in the end.

Certainly as an owner of more than 5 million share equivalents -- I just don't have the number at the top of my head -- the opportunity for me to make money is clearly aligned with the shareholders. And that is the only way I will make money in terms of moving forward.

Clearly we are -- anybody who owns the stock is betting that you can create value at some future time. Obviously good communications with the shareholder base and just trying to do everything you can to make this a good, long-term investment, and obviously the last couple weeks in the market I don't know anybody who has been long any equities other than gold has made any money. So you are certainly not to blame for that.

But we certainly would like to see some of the things that you have been talking about, which is sort of telling the story of IFMI. You have changed it from Alesco to your name to now Institutional Financial Markets. I don't think -- I think you are running out of names to change it to.

Let's start changing it to -- let's try to make some money in this. That is kind of my concern, is it has been a pretty long road and I am sure everybody who is a shareholder here is getting kind of tired.

Well, I believe that we are near the turning point in this, and I believe that the strategies we put in place will allow us to make money.

Good, thank you.

John Lydecker, M.J. Whitman.

Yes, good morning. I was wondering if you could take the $42.1 million debt on the balance sheet as of June 30 and just break that down between senior and junior, both in terms of face amounts and carrying values.

Joe?

Yes, there is $50 million of junior trust preferreds that are carried at $17 million. Then the senior, the convertible that we guess just did the exchange on, is still carried at approximately $19.5 million. So that is $19 million and $17 million.

Then there is about $3.5 million of senior bank debt. Then there is a subordinated -- there is about $2 million of stub notes left outstanding at the operating company.

All right, so -- and carrying value $19.5 million, $17 million, $3.5 million, and $2 million. Yes. That would add up to the total. Okay, thanks a lot.

Susan Switzer, Salus Advisors.

I guess not surprisingly my questions are not hugely different than some of the others that have been asked, but maybe I can put a different tone on it. You alluded quite a number of times to the change in your compensation structure; and obviously you own stock.

I guess I am just curious. Other than your stock ownership, so that there is not room for misunderstanding six or nine months down the line, if you could talk about the other members of the management team.

And then just maybe to get cash bonuses of some sort this year or incremental stock, what are the hurdles that the Company has set out for itself in terms of operating performance and value creation?

Well, you know, we publish -- I can talk directly about my own compensation. We publish in the proxy materials and in the 10-K information relating to the highest compensated people and executive positions. In terms of the senior management team of PrinceRidge, the key operating officers and including myself, compensation and cash bonuses are related to the actual profitability -- net income -- of PrinceRidge, and very closely related to it, and approximately as a group a 25% profit share in the net income of PrinceRidge.

Beyond that, I would refer you to the materials that we put out. Senior management including our Chief Financial Officer have contractual obligations. Certainly the metrics we are going to use has been published in our materials relative to discretionary compensation. As to my viewpoint, discretionary compensation really will be based upon shareholder return and the creation of value for shareholders.

I guess, I mean, maybe another way of asking this is people have asked about stock buyback. You have indicated that there are issues with the NOLs and I guess the deferred tax asset and whatnot. I mean, what about a special dividend?

I mean, paying a $0.05 dividend is pretty paltry. I think there is obviously very broad concern about what is going to happen to the cash that is currently at the Company given the history of compensation.

You have talked about bringing in a lot of people. You have talked about bringing in investment bankers. Can you talk about your plans to structure compensation for anyone that you would bring in, and then about the Company considering a special dividend or something else to give some of the cash back to the shareholders?

As we have said, first of all, nobody would be a bigger cash beneficiary than I would be if we made a special dividend. It is something that our Board -- obviously we will consider all ways of returning value to shareholders.

That having been said, at the point where we feel that it's appropriate, which we think will be over the next six months, we would anticipate being in a position to start using some of our ability to buy back stock, if not doing it in the short term.

So in terms of looking to bring people on, I think our philosophy is very much to align people with their own revenue production. The opportunity that we have as a platform is really to give people the opportunity to be in a commission-based environment where they are able to get a percentage of revenues. It is really that kind of player with that kind of mentality that we are looking to bring on. John, do you have any other comments on that?

I would only reinforce the message Daniel has put forth. Within PrinceRidge's activities, we really are aligning management's focus on creating a bottom line above a return rate for shareholders.

The senior producing professionals that we would add to staff all have a similar characteristic in terms of a low fixed cost commitment by PrinceRidge, and marginal cost that is associated with performance. So the environment that we see is not reducing our opportunity to attract those types of professionals, but actually it is expanding.

So I tried to allude to the fact that we are seeing fairly rapid consolidation among the 200 or so small boutique investment banks and trading operations. We are seeing no less than one of these institutions every two to three weeks come through our doors with the opportunity to pick the more attractive elements of their businesses.

So, we are trying to do that within the context of a very disciplined cost management overlay that drives down our breakeven costs, drives down the compensation costs that are not associated with performance. And management compensation is completely aligned to creating a bottom-line return that hopefully would be attractive to shareholders in addition to creating a management bonus pool for our management team.

Well, I think it would be -- I guess my only comment is that all sounds good. I think that it would be nice if there was some indication of -- if we can't buy back stock in the next six months, we will pay a special dividend. Something that people could hang their hat on a little bit, given how smoked they have been as equity shareholders being asked to go through another reconfiguration of the business.

Obviously not everybody there is responsible for the history. But I think it would be nice to know that there is a specific time frame to look at. What is going to be done with the cash to help generate value for the shareholders?

Okay. I certainly anticipate that within the next six months we will be in a position to repurchase stock. We have an authorization available and certainly we find it to be cheap.

Okay. That's it from me.

I mean I just want to emphasize that any reduction in share count would go disproportionately to my interest. So, we are very much aligned with that.

Okay.

There are no further questions at this time. I will turn the floor back over to Mr. Cohen for any final comments.

Thanks. Thank you. Obviously, we appreciate the shareholders' feedback, as direct as it was, and anticipated not that -- but really moving our business forward to create two things. One of which is the continuing Asset Management business, and the other one of which is really a world-class institution with the leadership and the management team that PrinceRidge really brings to us.

So I would like to thank everybody and hopefully share positive news on our next conference call. Thank you very much. Bye-bye.

Thank you all for participating in today's conference call. You may now disconnect.