Cowen Inc (COWN) 2015 Q1 法說會逐字稿

Good morning ladies and gentlemen and thank you for joining Cowen Group, Inc.'s conference call to discuss the financial results for the 2015 first quarter. By now you should have received a copy of the Company's earnings release which can be accessed at Cowen Group, Inc.'s website at www.cowen.com.

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 the risks 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 the call. A more complete description of these and other risks and 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 these measures to GAAP is consistent with the Company's reconciliation as presented in today's earnings release.

Now I'd like to turn the call over to Mr. Peter Cohen, Chairman and Chief Executive Officer.

Thank you, operator. Good morning and welcome to Cowen's first quarter earnings call. With me are Jeff Solomon, President of Cowen Group, and Steve Lasota, CFO of Cowen Group.

This morning Cowen Group reported the strongest first quarter since the Cowen / Ramius business combination in terms of revenue and economic income. Economic income revenue was $162 million, a 46% increase from the first quarter of 2014. Economic income was $24 million or $0.20 per diluted share compared to $10 million or $0.08 per diluted share in the prior-year period.

The capital raising environment was favorable in the first quarter in the segments we bank and it was especially robust in the areas such as health care. Conversely the overall market volumes for equity trading remain challenging. Nevertheless, our equities business performed solidly and was up year over year.

In our asset management business, our funds generally performed well and we have continued to attract more assets under management. Even as our business delivered strong operating results, we continue to invest in and optimize our operating businesses and capital base to help ensure we are in the best possible position to generate attractive long-term returns for our shareholders. We believe our strong balance sheet and solid capital position distinguishes us from our less well-capitalized peers.

With $902 million in total capitalization, we believe we have the ability to evolve in ways that are difficult to replicate while we insulate the organization against economic adversity. We have a very robust operating platform that can support both accretive acquisitions and organic growth opportunities to meet our primary mission of delivering consistent alpha capabilities for all our clients.

Finally, as always I want to thank all of our colleagues for making our first-quarter 2015 as strong as it was. Without their help it would never happen and we love the culture of the firm and applaud everybody in it.

I will now turn the call over to Jeff who will review our individual business units. Jeff?

Thanks, Peter. I will begin with a review of Ramius.

In recent years we have developed institutional quality products and sophisticated distribution capabilities for our differentiated alpha generating strategies. As one of the few platforms operating those strategies across a number of products we have experienced strong investor demand across a variety of distribution channels for the products we offer. This interest again was reflected in the first quarter of 2015 where assets under management increased by $362 million and we ended the quarter with $12.8 billion in assets under management.

To give some additional color on our established investment strategies, our hedge fund strategies, including activist strategy and the event-driven products, received positive inflows from a combination of new and existing mandates. Real estate strategies also saw an increase in assets under management as we closed on a new product.

The Ramius Alternative Solutions business benefited from increased mandates by existing clients and we've been working with our partners State Street Global Advisors as they ramp up their marketing efforts for the State Street Ramius managed futures strategy where assets under management have grown significantly since we entered our partnership with them in 2014.

Management fees grew 18% in the quarter primarily due to increases in AUM, in activist and the healthcare royalty business.

The average management the first quarter of 2015 was 53 basis points compared to 55 basis points for the full-year of 2015. Incentive fees saw strong year-over-year growth due to performance in both the activist and Ramius Alternative Solutions businesses.

Now for an update on our new investment strategies, we continue to focus on our fundamental global macro strategy as we announced last fall and currently expect to see it close this quarter. During the quarter a large public plan announced its intention to invest an initial amount of $50 million in a new fundamental global macro strategy. This one is an important validation of our efforts to scale this new capability.

During the remainder of 2015 we are planning new product launches from the established investment strategies on our platform as we look to scale our capabilities in the various distribution channels we have developed. We also plan to continue broadening our platform of capabilities by developing new partnerships and products with talented teams both emerging and mature.

To that end we have signed a memorandum of understanding with another strategy team with respect to a product we expect will expand our platform significantly. We hope to announce the initial details of this in the coming months.

As we have mentioned in the past we meet with a large number of managers in order to find the right teams with the right strategies that we think can meaningfully scale on our platform. We continue to see an increasing amount of talented individuals and teams who are desirous of joining an institutional quality platform with a strong brand identity in the marketplace. We are quite excited by the potential of the teams that we have identified thus far.

Their success over the long term will play an important role in our future growth. However, near-term revenue contribution from these teams will be modest as their businesses scale. We remain confident that we can continue to invest going forward with emerging managers even as we grow our more mature strategies.

Now turning to Cowen and Company, we had a solid operating performance in both investment banking and brokerage as we continue to provide alpha generating capabilities in research sales and trading as well as in banking and capital markets. New issuance during the first quarter of 2015 was decidedly skewed towards follow-on offerings rather than IPOs.

For the industry as a whole there were 38 IPOs in the United States raising $6.4 billion which is considerably less than the prior-year period which saw 73 IPOs and raising $12.7 billion. Conversely there were 262 follow-on offerings in the first quarter of 2015 representing total proceeds of $74.7 billion compared to 233 in the first quarter of 2014 for $43.7 billion.

Mirroring the market trends, healthcare experienced a significant pickup in follow-on activity. There were 107 healthcare follow-ons in the quarter which is up 49% over the prior-year period. Proceeds raised were up over 160% year over year.

As an active participant in a new issuance calendar, our banking and capital markets businesses were quite robust in the first quarter. At Cowen we participated in 47 equity transactions in the first quarter of 2015 compared to 41 in the prior-year period.

Similar to the market's overall strength the majority of the transactions we completed were follow-ons and healthcare related. Our average fee per transaction was up 16% year over year. In addition to serving the corporate banking needs of our clients, we're also generating positive alpha for buy side clients through our capital markets activities and many of our capital markets activities have actually outperformed the market.

In the DCM market, we closed on one transaction and our strategic advisory business closed two transactions in the quarter. Our equities business performed well in what will continue to be a challenging volume environment overall. In the quarter equity market volumes in the United States were down 3% year over year; however, our brokerage revenue was up 3% year over year underscoring our ability to improve our value with commissions and clients despite the decline in volume.

Contributing to the overall growth in our equities business was the continued growth in our electronic revenue and improvements in our options business. We believe our key differentiator is our focus on high-quality alpha generating equity research product and we have shown significant improvement in our ability to deliver that product which measurably helps clients make better investment decisions.

The latest market research shows that we gained marketshare with both hedge fund and long-only clients and our largest gains were made with the top commission paying clients where we have focused our energy and efforts over the past few years. We continue to look for ways to innovate our products and make it more relevant as we gear specifically to the needs of active managers.

I will now turn the call over to Steve Lasota who will review our financials. Steve?

Thank you, Jeff. In the first quarter of 2015 we reported GAAP net income of $16.7 million, or $0.14 per diluted common share compared to GAAP net income of $9.8 million, or $0.08 per diluted common share in the prior-year period. In addition to our GAAP results management utilizes non-GAAP financial measures which we term as economic income to analyze our core operating segment's performance. We believe economic income provides a more accurate view of the operating businesses by excluding the impact of accounting rules that require us to consolidate certain of our funds, certain other acquisition-related expenses, reorganization expenses and taxes and goodwill and intangible impairments.

As a reminder, with the release of our deferred tax valuation allowance in the fourth quarter of 2014 our GAAP results going forward reflect an increase in income tax expense. However, given the size of our deferred tax asset we do not expect to be a cash taxpayer for several years. As we mentioned a moment ago, economic income excludes the impact of taxes.

The remainder of my comments will be based on these non-GAAP financial measures. In the first quarter of 2015 the Company reported economic income of $23.6 million or $0.20 per diluted share. This compares to economic income of $10 million or $0.08 per diluted share in the prior-year period.

First quarter of 2015 economic income revenues were $161.7 million compared to $110.6 million in the prior-year period. Investment banking revenue was $65.2 million, up 32% year over year from $49.6 million. Brokerage revenue rose 3% year over year to $35.5 million.

Management fees were $16.6 million versus $14.1 million in the prior-year period. Incentive income was $15.4 million compared to $4.6 million in the prior-year period. We generated $28.9 million in investment income compared to $8.2 million in the prior year.

Comp and benefits expense was 59% of economic income revenue compared to 61% in the prior-year period. Variable non-comp expenses were up 38% year over year to $13.2 million. This increase in variable non-comps is attributed to an increase in client services, business development and other expenses.

Fixed non-comp expenses were up 11% year over year to $25 million. The increase was primarily due to higher legal and other professional fees and an increase in costs from equity method investments.

Stockholders' equity increased by $158 million from March 31, 2014 to $690 million at March 31, 2015 which is primarily related to the release of the valuation allowance against deferred tax assets in the fourth quarter of 2014. As of March 31, book value per share was $6.21 per share. Invested capital stood at $614 million as of March 31.

Finally moving to our share repurchase program, in the first quarter we repurchased approximately 1.4 million shares in the open market and 530,000 shares as a result of a net share settlement related to the vesting of equity awards at an average price of $5.28 per share and a total cost of roughly $10 million.

As of March 31, $17.8 million remained available under our share repurchase program. Since we announced our original repurchase program in July of 2011 we have repurchased 19 million shares in the open market and an additional 5.9 million shares as a result of a net share settlement related to the vesting of equity awards. The total cost of all buybacks through the first quarter of 2015 was $87.9 million which represents an average price of $3.53 per share.

I will now turn it over to Jeff for closing remarks.

Thank you, Steve. As Peter mentioned earlier, we're in a strong capital position and are well-equipped to adapt to the changes in market conditions. As we consider our outlook we see the US macroeconomic environment is uncertain.

Interest rates and global currency and political issues are among the things that we consider when we look at new businesses and they may inject periods of volatility into the markets over the course of the remainder of the year. We have all seen what short-term volatility can do to markets but in the wake of such pullbacks we believe there is great opportunity for organizations with staying power. Our goal has always been to be one of those firms that has created a focused platform that will perform well over an extended cycle regardless of market conditions.

Our banking and capital markets businesses, which we know can be cyclical in nature, are focused on key sectors of the US economy that we believe exhibit characteristics of sustainable growth over the next decade. And our asset management business offers a broad range of differentiated investment capabilities that we believe are highly relevant in the current environment and should prove helpful if current market conditions change.

Before we take questions I just want to echo what Peter said earlier. The efforts of our colleagues and their outstanding efforts in the past quarter cannot be overstated. You all did an amazing job and making a positive difference in the lives of our clients and in the lives of each other.

I would now like to open up the call to questions. Operator?

(Operator Instructions) Mike Adams, Sandler O'Neill.

Can you hear me now? Great, congratulation guys really a standout first quarter.

So first just in light of the impressive investment banking results in the first quarter I'm curious were there any sectors that outperformed other than healthcare? I'm just trying to figure out if there are any other verticals that could maybe buoy your performance if there is a slowdown in healthcare?

Well I think healthcare was a large part of the story for the first quarter as it was for almost well for the entire industry. If you look at the number of equity offerings across the board in other sectors they were down pretty remarkably across the board in just about every sector other than healthcare.

What I can tell you is that our backlog going forward for opportunities outside of healthcare is pretty strong. And certainly in both equity capital markets transactions, debt capital markets transactions as well as M&A which we're starting to see a pickup in some of our businesses there, almost all those are inclusive of are strong, inclusive of healthcare. So I think we continue to see the same kind of dynamics and we're certainly seeing that the backlog is beyond just healthcare.

Got it. So I'm glad you touched on healthcare there at the end. So just in light of the recent correction you're saying that clients aren't really getting more cautious with a pickup in market volatility so the pipeline remains in place for healthcare?

It remains strong. We've had a pretty strong April. The deals that we've done are public records so I think it's pretty easy to check on that.

I'm not saying that it will be -- that the entire quarter will be the same as the first quarter but the demand that we're seeing for the deals that we're doing remains pretty strong. I think again as always these have to be high-quality companies and we're being extremely selective with the kind of companies we bring so that we end up in a situation where we have successful completed transactions which is actually all that matters.

Right, okay. And you've been very consistent for several quarters now several years that you will be buying back stock when it's below tangible book value.

And now you're finally in a position where the shares are trading right around tangible book. Could you update us on the capital return policy? Should we expect you to continue to remain active with the buyback?

This is Peter. I think it's going to be a function of the stock price in and around here based on how we see the future.

We're probably going to be selectively continuing to buy back. What we're very, very careful and conscious of is not spending cash over our real tangible book value and husbanding our capital resources. So if the stock performs we'll probably be out of the market and if the stock is around here or lower we're going probably continue to be in there.

Okay, understood. Thanks, Peter.

And last one for me in terms of the commission revenue in the quarter, Jeff I think you mentioned that you continue to pick up marketshare with a number of top paying clients. But in some of the commentary, the printed commentary you mentioned that I think there was compression on the average commission. Just trying to better understand what's driving the average commission down?

I don't think I mentioned that. I don't think there's compression on the average commission. I think it's been pretty steady.

It's volume compression.

I would say where I think so we are seeing in our business mix more people choosing to do business in electronics. And so by definition when you're growing your electronics business I think you can see that the average cost per share will come down simply because electronic commission is less expensive. So I would expect that trend to continue for us but we take a look at our clients holistically and we have ideas of how much they should be paying us in aggregate dollars.

We're agnostic, frankly, on how they pay us as long as they are paying us commensurate with what the resources we're commissioning or permissioning them for. So I don't really look at execution cost per share as a metric that we manage to.

Okay, makes sense. Thank you. Congrats again.

(Operator Instructions) Doug Doucette, KBW.

Hey guys, so just noticed the little sequential bip in the brokerage line despite the strong equity underwriting quarter. And I know those are links so I was just wondering if there something else driving that line or is it just sort of the decline in overall market volumes?

So we closed our securities lending business at the beginning of this year. So when you look at year-over-year comparables there's probably about I would say $6 million, $6.5 million of revenue that is attached to that securities lending business that is no longer at in the brokerage line.

Okay. That makes sense.

I think that's it for me. Thanks, guys.

(Operator Instructions) Mike Adams, Sandler O'Neill.

I hope you guys didn't miss me. So just following up on that, Jeff, what are the costs connected to that sec lending business? I'm assuming it's maybe like a breakeven.

I think the issue for us is we're starting to look a lot more carefully at return on equity. And that's a business that requires a capital deployment in order to have counterparties and we just looked at the return on equity in that business on a net basis relative to where we can deploy that capital elsewhere at less costs, it just makes sense for us not to be in that business.

These are the things that we think about now that the business is of scale. And I think in years past we were looking at ways to scale businesses and scale revenues to cover our fixed costs. And listen the securities lending business is not a bad business, it's just we have other things to do with the capital that are more efficient and we continue to look at ROE as a metric to drive shareholder value and that one just didn't make the cut.

Got it, okay. And then looking at Ramius solid asset growth, do you mind breaking that down between flows and performance? I didn't catch it in the release.

Let us get it for you, just a minute.

And while you guys are digging for that one, last one I promise is on some of the non-comp lines here, fixed non-comps specifically up a few million dollars year over year, I think you highlight some legal and professional fees. Where should we expect that over the balance of the year? What is the run rate?

Well I think lower than the first quarter. The first quarter tends to be loaded by we have a lot of conferences in the first quarter. So those expenses are in there and frankly we spent a little bit more than we anticipated on the conferences.

We had this extra charge in the quarter related to litigation. And I think -- you should not expect that kind of increase in the fixed non-comps on a go-forward basis for the year.

Okay, great. So more in line with the run rate we saw last year?

Yes.

There were two other factors also I would say are important. First of all we had a couple of busted deals where we wrote off the expenses associated with those. Those are legal costs.

I don't think that -- I have nothing else that looks that way going forward. And then the volume of deals that we did in the first quarter there are just expenses associated with managing those deals.

Some of the subscriptions that we have that are specifically tied to use and utilization of software when you're doing the number of deals you're doing, we're higher. So I view the increase in variable cost is very much commensurate with the fact that we're driving more revenues.

Without question. I don't think anyone's complaining about a 46% increase in net revenue. And Steve did you have any chance on those flow numbers?

Yes, actually so the flow $362 million were inflows. We had for positive performance but we also had an FX loss that basically took away a lot of that performance. So the performance came in different funds but in one of our funds we did have an FX loss that took that performance away.

So basically it's all new money.

Yes.

Just like an accounting translation loss as you bring it back into dollar?

Correct.

Okay good. Thank you, guys.

(Operator Instructions) Keith Rosenbloom, Cruiser Capital.

Hey guys, great progress, just really impressive to watch it.

Thank you.

You're welcome. A quick question, first a clarification. Your book value of $6.21, that includes no value attributable to your Starboard interests. Is that correct?

We do not mark our management companies to market. It just includes our investment in those companies.

At cost.

At cost, correct.

So it's a value at cost?

Correct.

Got it. Okay, and on the share repurchase can you give us a flavor for the pace at which you see you're repurchasing stock? You still have some opened some availability as you talked about in the press release on the share repurchase program?

Well, again, it's going to be a function of the market. But let's say putting that aside we certainly want to buy back as much stock as is best for compensation during the quarter.

In this quarter we bought back about 300,000 shares through net settlement. We're actually going to be buying back more, Steve, 350,000. But 1.4 million we bought in the open market, we'll be buying more stock in the second quarter from vestings.

That's net settling for to pay the taxes for everybody. And again it depends on what our view of where book value is going, it's going to guide just how aggressive we'll be in buying back stock.

Okay thanks a lot guys. I appreciate it.

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to management for any further remarks.

Well, ladies and gentlemen, thank you very much for dialing in this morning. We're quite pleased with the results of the quarter but of course what we did is we just raised the bar for ourselves. And I would say the pace, frenetic pace, of this place has accelerated because everyone now sees what kind of leverage we have in the operating side of the Cowen Group pieces and this is a very charged-up a place.

If the environment cooperates we hope that this portends well for the future. More than that I really can't say.

Thanks everybody.

Thank you ladies and gentlemen for your participation in today's conference. This does conclude the program.

You may now disconnect. Good day.