Cowen Inc (COWN) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for joining the Cowen Group Incorporated Conference Call to discuss the financial results for the second quarter 2006. By now, you should have received a copy of the Company's Second Quarter 2006 Earnings Release, which can be accessed at the Cowen & Company website at www.cowen.com. If you do not have Internet access, and would like a copy of the press release, please call Matthew Mortellaro at 646-562-1796.

Before we begin, the Company has asked me to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are subject to risks and uncertainties described in the Company's earnings releases and other filings with the SEC. Cowen Group Incorporated has no obligation to update the information presented on the call. A more complete description of these and other risks, uncertainties and assumptions is included in the Company's filings with the SEC, which are available on the Company's website and on the SEC web site at www.sec.gov.

Now, I would like to turn the call over to your host for today's conference, Mr. Kim Fennebresque, Chairman and Chief Executive Officer, who is joined today with Mr. Tom Conner, Chief Financial Officer. Gentlemen, you may begin.

Good morning, and thank you for joining our conference call. I will start with some comments on the second quarter, and then turn it over to Tom who will review the financial details of the quarter. I am pleased to report that we had a strong second quarter with net income of $5.6 million, an increase of $7.6 million, compared to a net loss of $2 million in the second quarter of 2005, as all aspects of our business other than M&A performed better in the second quarter 2006 than during the prior year period.

The quarter's results were driven by a strong performance in our investment banking business, specifically in our capital raising activities. We view the second quarter results as being healthy, particularly considering the slowdown in activity during the second half of the quarter. Results were balanced across our industry sectors including healthcare, TMT and consumer, and we acted as lead manager in over 40% of our public equity transactions. We believe our innovation, creativity and focus will continue to result in a high percentage of lead managed business, which we believe is already the highest among growth-focused investment banks. Our filed backlog consists of 21 offerings. We are lead manager on over 40% of those deals.

Turning to institutional sales and trading, we had a solid quarter with total revenues up approximately 27.6%, over the prior year period. The increase was primarily attributable to improved trading results associated with the convertible bond trading business and an increase in over-the-counter equity activity. While we are pleased with our results during the quarter, we are particularly excited about certain strategic personnel investments we made during the quarter, as we began to build out our business in anticipation of becoming an independent public company.

In that regard, we added a team of options professionals during the quarter that is focused on leveraging idea generation and option strategies with new and existing clients. We also added a senior level soft-dollar professional who is focused on increasing natural trading flow with new and existing clients. We believe that the addition of these two businesses will allow us to serve better our institutional clients and provide them with additional avenues to pay us for our sector expertise.

Furthermore, we continue to strengthen our middle-market funds initiative that was established in the first quarter of the year through the hiring of three additional sales people in the second quarter.

During the first half of the year, we also continued to build out our research platform by making several key additions to our TMT team and our healthcare team. As part of our ongoing strategy, we have focused on optimizing our resource allocation, and we continue to explore additional opportunities to extend further our subsector expertise in our key industries healthcare, TMT and consumer. Our strategy has proven very successful to date and we have seen terrific results on how our clients view our products.

In addition, we are excited about several recent hires, including the former Head of UBS Equity-linked Origination for the Americas, who has joined our Equity Capital Markets team to lead our Equity-linked Origination effort, as well as the former Head of Technology Trading at Credit Suisse who now leads TMT trading for us. We intend to continue to expand selectively our existing platform by adding new products to serve our existing clients, adding additional professionals to our existing sectors, adding new sectors that fit our growth focus, and adding new complementary business lines, building out our subsector capabilities within TMT, healthcare and consumer will continue to be a focus.

I would now like to turn the call over to Tom Conner, to review the financial results in more detail.

Thank you, Kim. As you all know, subsequent to June 30, 2006, Cowen Group, Inc. completed its initial public offering and separation from SG. The financial results for the six months ended June 30, 2006 and 2005, relate to the periods prior to the IPO, the separation from SG, and the completion of related transactions.

Turning to the quarter, for the second quarter 2006, total revenues were 83.6 million, up 56.4% from the 53.5 million in the same quarter last year. Investment banking revenues for the second quarter 2006 were 39.5 million, up from 18.8 million in the same period in 2005.

The increase reflects significant improvements in our underwriting and other capital raising activities, partially offset by a decrease in the number of strategic advisory transactions. Revenue from sales and trading for the second quarter of 2006 was 37.5 million, an increase of 27.6% compared to the same quarter last year. As Kim mentioned, this increase was primarily attributable to improved trading results associated with our convertible bond trading business and an increase in our over-the-counter equity activity.

Revenue from interest and dividend income for the second quarter of 2006 was 5.5 million compared to 3.9 million in the same period last year. The increase of 1.6 million resulted from higher average interest-bearing assets, and higher interest rates in the second quarter of 2006. In connection with our IPO however, we returned capital to SG Americas. We will now have significantly lower interest-bearing assets, and our interest income in the future will be meaningfully reduced from historical levels. Turning to expenses, our compensation and benefits expense of 48.8 million in the second quarter of 2006 was up 64.6% compared to the same period last year.

This increase was directly attributable to an increase in compensation accruals due to increased total revenue in the second quarter of 2006, compared to the second quarter of 2005. For the second quarter of 2006, excluding revenue and compensation expense associated with deferred compensation plans that were terminated as a result of our IPO, we accrued compensation at 58% as if we were already a public company. Non-compensation expenses for the quarter, 28.9 million compared to 25.8 million during the same quarter last year.

Approximately one-third of the increase relates to non-recurring expenses resulted from moving expenses, attributable with our relocating employees within our New York office, double rents and other related expenses paid in connection with the relocation of our new office in London, certain professional fees associated with becoming a public company, and the termination fee paid to SG related to a performance guarantee that we had in place. In addition, approximately one-fifth of the increase related to increased business activity expenses.

Provision for taxes was 0.3 million in the second quarter of 2006, which equals an effective tax rate of 5.8% compared to a tax benefit of 0.1 million for the second quarter of 2005. As a result of the IPO, we expect the effective tax rate to increase significantly as we will no longer have the benefit of the net operating loss carry-forwards. For the second quarter of 2006, net income was 5.6 million, an increase of 7.6 million compared to the net loss of 2 million in the second quarter of 2005.

This concludes our formal remarks. Kim and I will now take questions.

[OPERATOR INSTRUCTIONS]

And your first question will come from the line of Guy Moszkowski from Merrill Lynch. You may proceed, Guy.

Thank you, good morning.

Good morning, Guy.

Just a question really with the forward-looking cast to it, maybe you can tell us a little bit especially given current conditions since the end of your quarter as to how your pipelines are looking, maybe you can segment the discussion into M&A versus both public and privately placed underwritings?

Well, Guy, we are a little bit constrained on that. I will say this that the -- that I have been actually on the road a lot the last several weeks, speaking to clients, and I would say our backlog in most respects is as strong as it has ever been particularly on the public underwriting side. But backlog is backlog, and the question then is what happens to these markets? The markets still are a little unsettled as you know.

And so, I think if we do have any kind of a lift post Labor Day, I think we are going to have a very, very active third and fourth quarter. But, it is, as I said, we have 21 companies' transactions on file right now, which is as large as it has been in recent memory. On the private equity side, it is not as robust as it has been. There has been general falloff in that -- typically in the pipe area, generally in the marketplace. In the M&A side, the backlog has picked up some, but it's not at last year's level.

And just as a follow-up in terms of sales and trading, we're about halfway through the third quarter at this point, can you give us some sense for what we have seen in terms of trading conditions, for sales and trading?

Yes, I would say they have been okay. I think, July 4th weekend was not a weekend, it was about seven days, because of the way it fell. And the rest of July kind of picked up fine, and August has been okay.

Okay, that's great. Thanks, very much.

You are welcome.

Thank you, gentlemen. And at this time, your next question will come from the line of Susan Katzke from Credit Suisse. You may go ahead ma'am.

Hi, this is actually [Jennifer Huang]. How are you?

Good, thank you.

You mentioned in -- you mentioned the build out of your options in middle-markets team in the release. And we were wondering if you could also give us an update on your other new business initiatives like high yields, [special] products, asset management and merchant banking, and also whether there has been any new hires in those areas?

Those were new business initiatives that we discussed on the road show that we said would be things we will be looking at in the coming six months to 18 months, and there has been no development in any of those.

Okay. Okay, thank you.

[OPERATOR INSTRUCTIONS]

You have a question from Jeff Harte from Sandler O'Neill. You may proceed, Jeff.

Good morning. In the press release in other revenue, you mentioned the new equity research fee income, and a little bit about kind of what the year-over-year was. Can you give us a little more color to what's driving that, and maybe on a sequential quarter basis, how significant that was?

Sure. Jeff, this is Tom Conner. They're two components that are in that line, it's management fees related to some investments that we manage on behalf of some outside parties, and the 2005 numbers, we had a different agreement in place that was a little more significant. The agreement we have in place for 2006 is a little reduced, as we mentioned in the release. That reduction is offset by some research payment fees related to unbundling. We have two of those in place at this point in time, and we have no -- and we don't anticipate adding any more of those any time in the future.

Was that -- was the unbundling fees -- I mean was that the significant driver of this sequential increase in the other revenue, or is that something else?

Yes, that was the main driver.

Okay. And you talked a little bit about the outlook for investment banking and kind of the pipeline stuff, can you give a little more color on the private equity side, assuming kind of [let’s] generically say markets don't get better? Is private equity something you would see staying fairly resilient in a more equity, in a more challenged equity environment relative to public, or are those typically going to kind of trend together?

No, they can be somewhat counter-cyclical. I mean, sometimes, obviously, one of advantages of the various private equity portals into the capital markets is, that they provide an alternative when public markets are not as receptive. So, for a number of our clients, you could imagine scenarios in which the public markets remain somewhat closed is probably an overstatement, but when they become somewhat less open, that the private markets continue to be an avenue for them.

Okay. And one final one on compensation expense, 58.5% I think the comp ratio came out to be -- that's kind of at the bottom end of the range you had guided for, any kind of update on what we should be looking for for comp expense ratio going forward? Do you think it is going to stay toward the bottom of the range or is the guidance the same?

Our anticipation is to stay bottom end of the range.

Okay, thank you.

You are welcome.

[OPERATOR INSTRUCTIONS]

At this time, sir, you have no further questions.

Thank you all, very much.

Thank you, ladies and gentlemen, for your participation in today's presentation. You may now disconnect and have a wonderful day.