Cohen & Company Inc (COHN) 2011 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Institutional Financial Markets fourth quarter and full year 2011 Earnings Conference Call. My name is Paula, and I will be your operator for today. (Operator Instructions).

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 securities 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 under takes 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 it's most recent annual report on Form 10-K filed with the SEC.

Please not also that in the Company's quarterly earnings release for the fourth 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.

Great. Thank you, Paula, and thank you everyone for joining us for our fourth quarter and full year 2011 earnings call. With me on the call are John Costas, Chairman of our subsidiary PrinceRidge and Joe Pooler, our CFO.

This year we have taken a number of important strategic steps forward in 2011, but still the strong headwinds that have persisted throughout our industry, being fixed income brokerage as we all know, over the past year or so remain. Consequently our results, like those of many of our peers, continue to be affected by the deterioration of trading volumes in the fixed income market.

We have made substantial progress to solidify what we've been doing. We hope that will show going forward in the future, and we're starting to see more positive results even in the fourth quarter of 2011.

Although the current year period include revenue from our PrinceRidge and JVB operating subsidiary which were acquired in 2011, the extreme weakness in the current capital markets environment significantly reduced the expected impact of these acquisitions. We did general rate adjusted operating income of $300,000 in the fourth quarter of 2011 as opposed to an adjusted operating loss of $4 million in the third quarter of 2011 and adjusted operating income of $4.7 million in the fourth quarter of 2010.

As I noted, in the fourth quarter results started to show the impact of the significant cost cutting measures we implemented during the third quarter 2011 as total operating expenses declined by more than 10%. While never easy decisions, these cost reductions were necessary and we're confident that bolstering our capital level will make us all the more prepared as market conditions start to improve. Accordingly, we believe that we are well-positioned to advance our growth strategies and deliver enhanced stockholder returns in the months and years to come.

As of December 31, 2011, our total permanent equity base was $77.4 million. Importantly, we are choosing to continue to return value to our stockholders through a $0.02 dividend for the quarter. As always and especially in the context of these challenging markets, we carefully review our dividend policy and will continue to do so in the coming quarters. With that I'm going to turn it over to John to talk about our capital markets business.

Thank you, Daniel. The fourth quarter would really be highlighted by a focus on completing integration of the former IFMI capital markets business and PrinceRidge with a particular focus, I think as we mentioned last time, with regard to cost management. We had I believe -- the management team led by Mike Hutchins had a successful quarter in reducing our cost structure to allow us to compete going forward.

Our non personnel costs within the group of PrinceRidge were reduced by roughly 20% and our personnel costs were reduced by slightly more than that. We also should experience further savings going forward as by the early part of this year we were able to complete the actual merger of the businesses into the PrinceRidge broker dealer thus eliminating some duplicative costs that were associated with running the two broker dealers.

During the quarter we also continued our focus on trying to grow the business. We added an energy banking team in Houston and established an office there. We added a new head of residential mortgage sales and trading and he has endeavored to hire five people into that group. And we're currently in discussions with more than eight banking teams to further build out our investment banking profile across PrinceRidge.

The market by and large had picked up for us a bit in the fourth quarter, particularly in some of the trading volumes, but it was a temporary pickup as, unfortunately, the holiday season intervened as December unfolded. We remain cautiously optimistic that this slightly higher level of activity in the fourth quarter will continue throughout the remainder of 2012, and we're confident that we have the business right sized with regard to expense structure and personnel today to compete successfully vis-a-vis our peer group. We will continueto focus on building out and growing the business throughout the year with an eye on profitability, similarly focused an eye on expanding in an incremental and disciplined fashion the size and scope of the business. So with that I would like to turn it back to Joe Pooler who will go over the fourth quarter period's financial highlights in more detail.

Thank you, John. For the quarter we generated adjusted operating income of $300,000 or $0.02 per fully diluted share. This was an increase of $4.3 million from the adjusted operating loss recorded in the third quarter of 2011. The improvement was primarily the result of significant cost cutting measures that were implemented during the third quarter and to a lesser extent the result of modestly stronger trading and advisory revenue in our PrinceRidge and European capital markets operations.

In the fourth quarter our operating expenses were reduced by $3.5 million from the third quarter, excluding the one time contribution to a non ordinary course legal settlement. An explanation of the calculation of adjusted operating income is provided in the earnings release.

Our net trading revenue of $15.6 million was up $1.6 million compared to the third quarter of 2011 and up $1.3 million compared to the prior-year quarter. Although current year periods include revenue from our acquisitions of PrinceRidge and JVB closed earlier in 2011, the weakness in the capital markets reduced the impact of these acquisitions.

At the end the year we had $66.4 million of net equity capital invested in our net trading portfolio compared to $56.7 million as of December 31 of 2010.

Our asset management revenue decreased to $5.2 million in the fourth quarter of 2011, a decrease of $100,000 from the third quarter of 2011 and a decrease of $1.1 million from the fourth quarter of 2010. The decrease from the prior year quarter was 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 2011.

Again, our total operating expenses for the quarter of $25.2 million, excluding the one time contribution to the legal settlement, were down $3.5 million or 12% from the third quarter of 2011. The change includes decreases of $4 million in compensation and benefits, $600,000 in business development occupancy and equipment and $500,000 in subscriptions, clearing and executions. As Daniel and John mentioned, the decreases primarily reflect the impact of the cost cutting measures implemented toward the end of the third quarter to eliminate duplicative costs arising from the PrinceRidge acquisition and to generally lower our fixed costs in the midst of very difficult market conditions.

These decreases were partially offset by an increase of $1.6 million in professional services and other operating expenses. This increase in professional services and other operating was mostly the result of higher costs associated with strategic and regulatory matters and our convertible debt exchange offer, most of which are not recurring.

In terms of our balance sheet, we had $66.4 million of equity capital invested in the trading portfolio which consisted of assets of $124.5 million of trading securities, $71 million of receivables from brokers, dealers and clearing agents, $130 million of receivables under resale agreements, all offset by liabilities of $24.6 million of payables to brokers, dealers and clearing agents, $99.6 million of trading securities sold not yet purchased and $135 million of securities sold under agreements to repurchase.

Our other investments at fair value line item consist primarily of our seed investments in sponsored and managed vehicles. The $42.8 million fair value includes $37.4 million related to our investment in Star Asia, the remaining $5.4 million represents investments in various other permanent capital vehicles and sponsored investment vehicles.

At the end of the year our consolidated corporate indebtedness was carried at $37.2 million. In the fourth quarter of 2011 we paid off and terminated our credit facility with TD Bank which was set to expire in Mid-2012. We believe that our unrestricted cash balance of $18.2 million combined with the $66.4 million invested in our net trading portfolio as of December 31, along with our ability to borrow up to 30% of our investment in PrinceRidge, is all sufficient to fund our near-term business model.

As Daniel noted, we chose to continue to return value to our stockholders through a $0.02 dividend for the quarter. We will continue to carefully review our dividend policy in the coming quarters especially in light of the challenging market conditions. The dividend is payable on April 3 to stockholders of record on March 20.

And finally, in November and December we did purchase 19,900 shares in the open market of our common stock for $31,000 or an average of $1.55 per share. We expect to file our 10-K no later than this Friday, March 9. With that I will turn it back to Daniel for closing remarks before we take any questions.

Great. Thank you, Joe. As you have heard the capital markets remain difficult. However, we've really made significant progress in terms of cost cutting our operating expenses and putting us in a basis where we strongly believe that we should return to profitability, and from a GAAP basis, and continue to increase our adjusted operating income as we move into 2012. We think the Company has more than adequate liquidity for what it's doing, and we continue to see good performance in our JVB subsidiary as well. So on thatnote, can I open the line up for questions?

(Operator Instructions). We have a question from the line of [Rob Alter of Atlas].

Hi. Can you explain what the legal settlement was related to? That's the first question.

The second question regards to your liquidity. Given the converts that can be put to you in May, will that mean you need to shrink your trading book, and so that will depress earnings going forward. Or will you just borrow and move forward and keep the earnings power going through the trading?

So let me address the second point. I believe the maximum redemption is $10.4 million. Joe, is that correct?

Yes. That's correct, Daniel.

It's $10.4 million. We think that we had, especially at the PrinceRidge excess undeployed funds. Undeployed funds today earn three basis points, or so. I think we're going to be able to not see any fall-off in our performance on the trading side.

As to the first question, can I turn that over to Rachel Fink who's our Chief Legal Officer?

Thank you, Daniel. The contribution to the legal settlement that you asked about was in connection with a lawsuit pending against a CDO, Alesco X, for which we were manager. It related to a letter agreement regarding a possible repurchase of certain trust preferred securities owned by the CDO, by the issuer of those trust preferred securities. The transaction was never completed. They sued the CDO, and in connection with that we agreed to contribute to the settlement.

Okay. So there's no -- that's done? I mean it's not like a pending -- it's $2.5 million out the door, it's not a pending thing or --

Yes.

Settlement is behind you, it's gone and boom?

It was a business decision to put it very much behind us.

Okay.

And continue on enjoying the fruit of the asset management revenue that we have.

Great.

Any other questions?

Your next question comes from the line of Daniel Orlow of Orlow & Orlow.

Hi. Good morning.

Good morning.

Could you just walk through what you think the points of value are given this current share price because there seems to be a real disconnect between some of the assets, their fair value in the market today, and how management seems to be approaching this question with this depressed price for equity. So if you would just walk me through the value realization process over the next two quarters. I think we all agree it's been several years in the making, but at some point we need to see a glide path towards value realization. Thanks.

Well, I think that there are a couple of important elements in what we're doing. We have a number of very good franchises that continue to move forward and that continue to develop in terms of our ability to trade bonds, as well as our ability -- and I will get later to our asset management side. But in terms of the two most important elements of our Company where we deploy capital, JVB, which has grown from a liquidity provider, to smaller broker dealers, to a very significant and growing distribution system in agencies and municipals and treasuries an other areas to the same clientele, continues to develop and create value as we move forward. PrinceRidge also in its areas of expertise while trading volumes and investment banking, which is really where it should excel, fixed income trading and investment banking volumes have been off, and we have been finishing up a substantial merger and cost saving exercise. We expect moving forward that the value of the franchise that we've been building there will be evident.

Furthermore, we continue to have significant asset management revenue, and I think like many people who are in the fixed income space, we've suffered substantially. We probably suffered more because of the big transition that we had beginning in the second quarter of 2011, and 2011 was both a difficult market year and a transition year which hit us doubly. But I think that we're moving forward in terms of creating franchise value for PrinceRidge.

I think that we expect over the next year from our principal investments that while we've grown that book over a period of time, we expect to actually have cash yielding out of that over the next year's period of time, and that we actually do see opportunities for continuing to grow our asset management business. As of quote, "value realization point", we've made no announcements about any strategic initiatives, so I'm not sure besides operating the businesses correctly and trying to maximize value in a difficult environment, how I should respond to that question.

That's not a leading question. It's a complex set of businesses for such a small market cap, and so I'm trying to understand the $1.50 considerably less than book value and considerably less than cash, how it is that you look at this. Because continuing to operate the business and saying that there's headwinds despite the franchise value and the merger and all the pieces coming together, I wasn't sure if there was anything else other than just waiting for the market to turn that can be done to move the process along. It just seems like an incredible discount to fair value for a bunch of different businesses that make sense, but the market is not paying you for it.

Well, I think our first step is to really make sure that the businesses are performing, which was really the work of the fourth quarter of last year and continues into the first quarter of this year. I agree for a small company it has a lot of complex businesses. The key element is to continue our effort to cut costs, reduce overhead, senior management salaries have been reduced by a huge factor. We continue to cut costs at the overhead, push all of our operating expenses down to our operating subsidiary. At that point, once we're a little bit less integrated, we'll be able to address making sure that the simpler company with a simpler base that's able to support its overhead going forward.

(Operator Instructions). Your next question comes from the line of [Stray Natson] of Lazard Asset Management.

Hi. Thanks for taking my question. My question refers to one of the earlier asked questions. My line was not very clear, so this question refers to how you are planning to pay off the convert. You said there was three basis points of undeployed funds. (inaudible -- multiple speakers)Can you please clarify that because my line was not very clear.

Okay. What I said was that our expectation is that we will use funds that are undeployed so that what don't really have to reduce our trading book at any given time, and that we have a lot of availability in terms of liquidity out of our trading book without reducing our trading activity. Carry costs are relatively low, and we earn on unused funds a very low return which I think is about three basis points, not much more than that on daily available funds.

Got it. Okay. So can you put a dollar amount on the undeployed funds that you could use for in general for not only the convert payback, but for other purposes as well? And also, the cash is completely unrestricted, right?

Yes. Our cash is unrestricted. No. I mean I'll point out uses for our liquidity that we've had, which was paying off our credit line down to zero. We'll be paying off our converts. Our expectation is actually we'll increase our financial resources over 2012, and then we'll get what we're doing in terms of opportunities.

But I don't think I can really quantify because of the nature of our businesses, where we could deploy some substantial funds. Opportunistic cash, except to note that we it have the liquidity, or paid back with the line almost $17 million, the sooner we pay off $10.4 million of the convert at this point.

Got it. And then looks look you bought back a little bit of the convert during the quarter. So right now the redemption value is $10.4 million? Can you confirm that you bought back some bonds in the fourth quarter?

Yes, we did. We repurchased about $1 million in notional.

Got it. Okay. Thank you.

Thank you.

At this time there are no further questions. I would now like to turn the floor back over to Mr. Daniel Cohen for any closing remarks.

Okay. Well, I just want to thank everybody for participating in this call, and I'll look forward to talking to you and answering your questions again on our next quarterly call. Thank you very much. Bye-bye.

Thank you. This concludes today's conference. You may now disconnect.