Cowen Inc (COWN) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for joining the Cowen Group, Inc. conference call to discuss the financial results for the second quarter 2007. By now you should have received a copy of the Company's earnings release, which can be accessed at the Cowen Group, Inc. website at www.cowen.com. If you do not have Internet access and would like a copy of the press release please call [Delone Lee] at 646-562-1846.

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 risk and uncertainties described in the Company's earnings release and other filings with the SEC. Cowen Group, Inc. has no obligation to update the information presented on this call. A more complete description of these 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 website at www.SEC.gov.

Also on today's call our speakers will reference certain non-GAAP financial measures, which the Company believes will provide useful information for investors. Reconciliation of those measures to GAAP is consistent with the Company's reconciliation as presented in today's earnings release. I would now like to turn the call over to Mr. Kim Fennebresque, Chairman and Chief Executive Officer who is joined today by Mr. Tom Conner, Chief Financial Officer. Please go ahead, sir.

Good morning, and thank you for joining our conference call. I am going to start this morning with our results for the second quarter and then spend time discussing a number of positive developments that are indicative of our continued execution of our long-term growth strategy. I will then turn the call over to Tom who will review the financial information for the quarter in greater detail before we take your questions.

For the second quarter revenue decreased to $71.2 million on weaker investment banking results. Net income for the period was $0.2 million, down $5.4 million from net income of $5.6 million in the second quarter of 2006. Please keep in mind, however, that the results of 2006 included $3.6 million of additional interest and dividend revenue associated with capital returned to SG in connection with our initial public offering.

As mentioned in previous earnings calls, our conversion to a new clearing agent has helped us decrease our non-comp expenses and we remain on track to reduce those expenses of between $5 and $6 million in 2007. I would now like to focus on some highlights from the second quarter that I believe underscore both the strength of our existing platform and our progress towards transforming this firm and ensuring our long-term growth.

I am pleased to announce we've hired a team of experienced asset management professionals. This London-based team spent seven years working together at Swiss Life asset management where they had a successful track record managing long, regional and global equity funds. The three principles will manage five specialist long equity funds focusing on the UK, the US, Europe, the Far East and global equities. The addition of this team represents a significant step towards launching our asset management business.

We also continue to focus on building out our asset management business in the US. With regards to our alternative asset management business we remain pleased with the continued progress of Cowen Healthcare Royalty Partners. During the second quarter we continue to develop our leveraged finance business which represents an important enhancement to the existing platform of both financing and strategic alternatives that we offer our clients. In this second quarter Cowen closed its first leveraged recap, a modified Dutch auction tender offer repurchase of shares, amounting to $110 million of senior credit facilities, in which Cowen was lead placement agent.

Cowen rendered a fairness opinion in its M&A business in a $10.6 billion sale of Huntsman Corporation to Hexion Specialty Chemicals, a portfolio company of Apollo Management. We believe we can build a meaningful fairness opinion business within our M&A practice given the growing number of conflicts of interest in that market. The Huntsman transaction is an excellent example, not only of the opportunity, but of our ability to capitalize on it, as well.

We also continue to strengthen our existing investment banking franchise through the selective addition of skilled professionals that complement our existing growth sector platform. As we announced last week, we've hired Jon Biele as cohead of equity capital markets. Jon has extensive capital markets experience in two of our target growth sectors of healthcare and technology and joins Cowen from Lazard where he had served as head of equity capital markets.

David Ketsdever has joined Cowen as head of technology investment banking. Prior to joining Cowen, Dave was President of SVB Alliant, a leading technology advisory firm and a subsidiary of SVB Financial Group where David was a member of the group executive committee. Previously, David had served as head of global software investment banking at Merrill Lynch and at managing director in the information technology group at Montgomery Securities. David's proven track record as both a strong manager and a highly productive software investment banker will undoubtedly prove to be great assets for our firm.

We also recently hired Jamie Streator as a managing director focusing on life sciences companies within the healthcare investment banking. Prior to joining Cowen Jamie was a managing director and head of healthcare investment banking at Susquehanna. Prior to that Jamie was with Thomas Weisel Partners where he founded and ran the healthcare investment banking group. Jamie also served for many years as a managing director and cohead of healthcare investment banking at Hambrecht & Quist.

We have established two new industry sectors for the firm, Aerospace & Defense and Telecommunications. In addition to dedicating existing professionals throughout research, investment banking and sales and trading to these new verticals, we have hired two senior professionals to help lead our investment banking efforts for these sectors. We hired John Nelson to cohead Aerospace & Defense investment banking with Charles Preusse. Most recently, John was managing director at Friedman, Billings, after their acquisition of Legacy Partners, a boutique advisory firm where John was head of Aerospace & Defense. John is a leading expert with a strong transaction record in this sector.

We also hired Aaron Hill as head of Telecommunications Investment Banking. Aaron joined Cowen from UBS where he was a managing director at leading the firm's telecom banking effort. Aaron brings a wealth of expertise in the telecom vertical and an impressive transaction record including equity and debt offerings, private placements, M&A and restructuring for many industry-leading companies.

In the equities division we expanded our middle markets coverage initiative, opening an office in Dallas and hiring a team of professionals covering the Southwest, Florida and Tennessee. Building out our middle markets coverage remains an excellent opportunity to continue leveraging our asset allocation strategy to drive sales and trading performance. These recent developments underscore our continued focus toward transforming this firm into a leading diversified growth investment bank.

I am encouraged by the positive actions we continue to take, both to strengthen our existing franchise as well as to expand our footprint. I am confident that we are taking the necessary steps each day to ensure our future growth and success as a stand-alone company. While I am disappointed with our results for the quarter, I believe the actions we are taking today will enhance our platform in the near future. We continue to demonstrate our ability to execute for our clients, as well as generate new business.

We closed 20 public capital raising transactions in the second quarter, our file backlog remains robust at 15 transactions, of which 8 are lead managed. I would now like to turn the call over to Tom Conner to review the financial results in more detail.

Thank you, Kim. For the quarter ended June 30, 2007 total revenue was $71.2 million, representing a decrease of 15% from $83.6 million during the same quarter 2006. Investment banking revenue for the second quarter was $30.2 million, a decrease of $9.3 million compared to the same period in 2006. The decrease primarily reflects lower average transaction sizes in both public and private capital raising activities, partially offset by an increase in our strategic advisory fees.

Revenue from sales and trading for the second quarter was relatively flat at $37.4 million compared to $37.5 million in the second quarter 2006. Interest and dividend income for the second quarter was $1.9 million compared to $5.5 million in the same period last year. The decrease of $3.6 million resulted from lower average interest-bearing assets, partially offset by higher average interest rates during the second quarter of 2007. The reduction in our interest-earning assets was a result of our return of capital to SG. in connection with our IPO.

Turning to expenses, our compensation and benefits expense was $43.8 million in the second quarter compared to $48.8 million in the second quarter 2006. The decrease was attributable to the application of our compensation to revenue ratio to lower revenue in the second quarter. Compensation and benefits expense in the second quarter 2007 included $2.5 million of expense associated with the initial grant of equity to employees in connection with our IPO. Excluding the expense associated with the initial grant of equity, compensation and benefits expense represented 58% of revenue in the second quarter 2007.

Non compensation expenses for the quarter were $27 million compared to $28.9 million during the same quarter last year. The decrease resulted primarily from a reduction in service fees resulting from our separation from SG, a decrease in brokerage in trade execution expenses related to our new clearing agreement with National Financial Services and a decrease in other expenses related to a reduction in insurance premiums and consulting related expenses. These decreases were partially offset by increases in business development expenses and depreciation and amortization expense.

We expect non compensation expenses to increase slightly during the remainder of the year. However, we continue to believe that we will reduce our aggregate annual non compensation expenses by approximately $5 to $6 million compared to 2006.

For the second quarter 2007 we recorded a provision for income taxes of $0.2 million which equals an effective tax rate of 40.9%. Based on available information our current projected effective tax rate for 2007 is 43.6%.

For the second quarter we recorded net income of $0.2 million compared to net income of $5.6 million in the second quarter of 2006. Excluding the compensation expense associated with the initial grant of equity to our employees in connection with the IPO, and the deferred compensation expense in the second quarter of 2006 related to SG plans that were terminated at the IPO, our adjusted operating income for the second quarter was $2.9 million compared to $6.2 million in the corresponding period of 2006.

Diluted earnings per share for the second quarter was $0.02. Tangible book value per share at the end of the period was $13.33. This concludes our formal remarks. Kim and I will now take questions.

(OPERATOR INSTRUCTIONS) David Trone, Fox-Pitt.

Is there any way you could give us some details on the weakness in commissions and principal transactions? I guess together that was down about $7 million in the quarter?

Historically our customer volumes have tended to decrease in the second quarter. In the second quarter this year we also experienced lower OTC volumes as a result of lower volatility in our sectors. In addition, there was a decrease in gains from firm security positions but so far we are pleased that in July we've seen an improvement in these volumes as a result of increased volatility in the market.

I would also say, David, that we have in our business, we put our warrant positions into -- from private placement or pipes that we do -- we put our warrant positions into our principal transactions book and in the first quarter the number was relatively high. In the second quarter it was relatively insignificant. So that accounts for a several million dollar change, too. So it is not all fundamental to the secondary equities business.

Jeff Harte, Sandler O'Neill.

Good morning. A couple of questions. One, looking at kind of private equity in pipes and I guess I am looking for some kind of outlook here as well, we've seen an awful lot of volatility in the credit markets. There are equity markets jumping around a bit. Does that typically have an impact on your pipes business or your private equity business and kind of how have conversations been going over the last four to six weeks as the environment has become more volatile?

I would say it does not have an effect on our pipes or private equity business, Jeff. I will say that one cannot confuse busy with results, okay? We certainly don't. But I will tell you that our pipes and private placement activity group is extremely active right now, whether that leads to transactions or not the results will tell that, not my opinion.

And as we also look forward the comp rates show X the IPO or it keeps coming in around the 58% that we keep looking for, though the press releases have been fast and furious lately about hires specifically in investment banking. Do you envision that turning into any kind of pressure on your comp ratio? Or are the recent hires do you think you'll still be able to maintain that 58% despite the recent hires?

What I have said consistently is that our comp ratio will be between 58 and 60, and we have sought to maintain the 58% level. What I have also said is the better the results, the lower the comp ratio. So that is really in some ways dependent on how the year goes. My hope is to stick to 58. My intention is to stick to 58. But obviously it is not a guarantee because I don't know what the year is going to be like. But we did certainly not make any hires anticipating increase in the comp ratio. That was not part of the calculus we made.

Okay, and I think kind of a housekeeping issue. Tom mentioned operating income of $0.4 million and adjusted operating income of $2.9 million. Those are pre-tax numbers you're referring to, correct?

Yes.

So with that $2.9 million, should we assume there is a tax expense and we are trying to come up with an adjusted operating number; should we take that $2.9 million and apply tax expense rate to it?

Yes, you can apply the 43.6.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) Lauren Smith, KBW.

Good morning. Could you give us please book value and tangible book value at the end of the quarter?

Book value per share was 17.03, and tangible was $13.33.

On the book value, what share count are you using? Because book value was 14.25 in 1Q '07 using period end. Are you using fully diluted?

Based on the diluted shares at the end of June those are the results. If you look at total shares outstanding, which will be on the face of the Q, book value per share is 14.50, and tangible will be 11.36. That will be based on 15.9 million shares.

Okay, great. And then ROE for the quarter?

ROE for the quarter on a GAAP basis was 0.4%.

Okay, great. Thank you.

There are no other questions in queue at this time. I will turn it back to management for any closing remarks.

I would like to make a couple comments. About the quarter, which is obviously the results are disappointing. Our business, as you know, is volatile. And I know these results are disappointing to you. In my tenure as CEO both of Cowen as a public company and beforehand I've never made forecast as to the future results. What I can say, however, is this a better firm than it was a quarter ago and a year ago. In banking we've added three sectors; alternate energy, aerospace & defense and telecom. And we have first-rate professionals in each of these groups from all areas of the firm.

Our M&A business continues to develop; just this morning we announced an advisory on a $300 million M&A transaction. I think our first-half revenues this year are relatively comparable to last year's revenues. So we continue to make progress in that area. Our asset management business, both traditional and alternative, is no longer a promise. These businesses are launched and I am extremely pleased with the progress we're making and the continued progress we look to make.

In a highly competitive market we are continuing to attract first-rate professionals throughout the firm. So while I wish we could have delivered better results for you, I will stick to my philosophy of no guidance but I am happy to tell you, our owners, that I've never been more ebullient about the state of our firm. Thank you all for your support and interest. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.