Piper Sandler Companies (PIPR) 2006 Q1 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Piper Jaffray Company's conference call to discuss the financial results for the third quarter of 2005 (sic). During the question-and-answer session, management has asked that the media and individual shareholders remain in listen-only mode.

The Company has asked that I remind you that statements on this call that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements that involve inherent risks and uncertainties. Factors that could cause actual results to differ materially from those anticipated are identified in the Company's reports on file with the SEC, which are available on the Company's website at www.PiperJaffray.com and on the SEC website at www.SEC.gov.

And now, I would like to turn the call over to Mr. Andrew Duff. Mr. Duff, you may begin your call.

Thank you. Good morning. I should first clarify this is the results for the first quarter of 2006. As many of you saw last week, we announced the sale of our Private Client Services branch network. And this week, I am pleased to announce our third consecutive quarter of strong financial results. I have some comments on the quarter and then Sandy will provide financial details.

As a broad comment, all businesses contributed to the solid quarterly performance. In particular, Capital Markets continued its strong momentum. From a Capital Markets perspective, equity underwriting revenues were up strongly compared to last year. We completed more transactions and our market share has improved compared to one year ago.

Our backlog stands currently of 12 public offerings, of which for our [lead] managed and three are book run transactions, down somewhat from the beginning of the year similar to the rest of industry. Our financial advisory revenues are up more than 40% from one year ago, but down from the very strong fourth quarter of 2005.

The M&A pipeline is solid heading into the rest of the year. Public finance reported a good quarter. Revenues were stronger year-over-year, including a $309 million municipal under writing for the Baltimore Convention Centre Hotel. Revenues were down 23% from the fourth quarter of 2005 which was particularly strong.

Turning to institutional sales and trading, we also had a solid quarter. We're very pleased with the performance in this business; strongest revenue in two years. Our health-care sector expansion in London and our new initiative in high yield and structured products both enhanced fixed income and equity sales and trading revenues.

Finally, we announced during the quarter that we added a six-member restructuring team in New York. We are pleased to add restructuring capability to our current set of proprietary products and services. It will allow us to deliver strategic advice and analysis to help our clients restructure and recapitalize business for the future.

Turning to Private Client Services, revenues were up modestly year-over-year. Revenues from fee-based accounts continued to increase, up 13% year-over-year, offset in part by fewer financial advisers. Pre-tax margin improved year-over-year to 8.9% from 7%, modest revenue lift with expenses held essentially flat.

As I mentioned at the top of the call, we announced last week that we signed a definitive agreement to sell 100% of our Private Client Services branch network to UBS AG. Now, Sandy will review the quarter in detail. Sandy?

Thanks, Andrew. First, I'll review the consolidated results for the quarter, and then I will provide some details on the segment. For the first quarter of 2006, Piper Jaffray generated revenues of 227.6 million, up 27.1% from the year ago period and up 10% compared to the preceding quarter. We recorded net income of 23.9 million or $1.25 per diluted share, up from net income of 7.3 million or $0.38 per diluted share for the same period last year.

Net income for the quarter included a gain of 6.6 million after-tax or $0.35 per diluted share related to our ownership of two seats on the New York Stock Exchange as the NYSE Group Inc. completed its IPO in March.

For the quarter, compensation expense was 133.1 million, up 21.6% compared to the prior year due to increased variable compensation driven by higher net revenues and profitability. The compensation ratio for the first quarter was 58.5%, down from 61.1% from last year and down from 59.3% in the fourth quarter of 2005.

The gain related to our ownership of two seats on the New York Stock Exchange lowered our compensation ratio by 270 basis, so the pro forma compensation ratio was about comparable to the first quarter of last year.

Non-compensation expenses for the quarter were 57.6 million, down slightly compared to the first quarter of last year and also down sequentially. For the quarter, pre-tax operating margin was 16.2%, up from 6.4% for the year ago period and up from 12.1% for the fourth quarter of 2005. Excluding the pre-tax gain from the NYSE seats, pre-tax operating margin would have been 12.3% for the quarter.

For the first quarter of 2006, annualized return on average tangible shareholders' equity was 21.1% compared to 7.1% for the first quarter of 2005 and 15.4% for the sequential quarter. Excluding the gain on the NYSE seats, annualized return on average tangible shareholders' equity would have been 15.3% for the quarter.

Now, I'll cover our segment results. In early 2006, we completed an analysis of our interest-bearing assets and liabilities to determine how they related to and were driven by each business segment. As a result of this analysis, we have restated net interest of our segment for each of the four quarters of 2005 and the full year 2004. The restatement did not affect our aggregate financial results for those periods. A supplemental schedule showing the restated figures is included at the end of the first quarter earnings release.

Let me review Capital Markets' performance. For the quarter, Capital Markets generated 126.1 million in net revenues, up 35.6 million or 39.4% from the prior year. Segment pre-tax operating income for the quarter rose 137.6% compared to the prior year to 23.8 million and rose 10% compared to the fourth quarter of 2005. All businesses contributed to the increase.

For the quarter, investment banking revenues were 69.8 million, up 21.2 million or 43.7% compared to last year, driven by strong increases in equity in fixed income underwriting and financial advisory services. Within institutional sales and trading, net revenues were 55.4 million, up 34.7% from the year ago period and up 18.8% compared to the fourth quarter of 2005.

The increases compared to both periods were driven by higher revenues in four products -- high yield and structured products, interest rate products, equity convertibles, and equity cash sales and trading. Segment operating expenses for the quarter were 102.3 million, an increase of 21.9 million or 27.2% from the same period a year ago. The increase was primarily attributable to higher variable compensation expense due to increased net revenues and profitability.

For the first quarter of 2006, segment pre-tax operating margin was very strong at 18.8%, up from 11.1% in the same quarter of last year and up from 17.9% sequentially. The increase compared to both periods was mainly due to containing non-compensation expenses on the increased revenues.

Now, I'll turn to Private Client Services. For the first quarter, Private Client Services generated net revenues of 92.6 million for the quarter, up 2.1% compared to the first quarter of 2005 and up 4.8% compared to the fourth quarter of last year. Increased revenues from fee-based accounts were offset in part by fewer financial advisers. Fee-based revenues rose 13% year-over-year.

Segment pre-tax operating income was 8.2 million, up 29.2% from the first quarter of 2005 and up 2.1% sequentially, mainly attributable to containing non-compensation expenses on modestly increased revenues. Segment operating expense was 84.4 million for the quarter, essentially unchanged from the first quarter of 2005. Segment pre-tax operating margin was 8.9%, up from 7% in the same quarter of last year and down from 9.1% in the fourth quarter of 2005.

Finally, corporate support and other pre-tax operating income was 6.2 million for the quarter, a change from a loss of 3.7 million in the year ago period and a loss of 3.6 million in the fourth quarter of last year. The increase was mainly due to a gain related to the Company's ownership of two seats on the New York Stock Exchange as the NYSE Group Inc. completed its IPO in March. Now, Andrew is going to make a few closing comments, and then we'll be happy to take your questions.

Actually, we would like to turn to Q&A at this point if we could, please.

(OPERATOR INSTRUCTIONS). David Trone, Fox-Pitt Kelton.

Thank you and good morning. I had a couple of questions. First, on the equity origination, you had been averaging for several quarters about 20 million and you came up with about 30 last quarter. I know you have Crocs and a few others. Would you be surprised if you were able to sustain the 30 level through the balance of the year?

I think I would encourage you, David, to look at it more on an annualized basis and take a series of quarters and average them out. It is and will remain relatively lumpy for us.

So you believe the 30 was unusual?

I am trying to encourage you to put it into a broader perspective of multi quarters as opposed a single quarter.

Okay. And kind of the opposite on the banking side, you were about 30 over the last couple and then you had 24. You made some general comments about the pipeline. Is the pipeline up, down, or about the same as it was coming into the quarter?

It's strong for the balance of the year I think is the best way to characterize it. Again, lumpy quarter to quarter, but it's in good shape.

On the equity trading side, one of your peers yesterday talked about -- they had a great equity trading quarter and talked about a bunch of block trades. Did you have a similar dynamic in your quarter?

No, our equity area was mainly as a result of higher convertibles, sales revenue and also just volume -- cash trading of equity volumes were up.

Okay. And one final question. You seem to have a lot of FA departures and I'm wondering if there's any kind of stipulation in the UBS deal where there are certain benchmarks for retention prior to the deal closing. And could that be problematic?

There is an additional 75 million available based on retention, essentially. The original compensation is not subject to that and the benchmark in which that is calculated started at the end of the quarter.

Okay, thank you.

Jonathan Casteleyn, Wachovia Securities.

Obviously nice headline number today on the EPS line. I'm just trying to drill down into the remaining segments, meaning the Capital Markets. I'm just trying to understand why you didn't have operating leverage in the segment quarter to quarter. Obviously, 3% upside on the revenue side, just trying to understand; what really drives that operating leverage? You have it about 50% of the time. Is there a function of buildout as you hire people and facilities, etc.?

Are you looking from fourth quarter to first quarter? Because we did have quite a bit of leverage.

Sequentially, I believe you were operating -- the absolute operating margin was -- absolute operating profit was flat at 23.7 versus 23.5 quarter to quarter. And you had a jump in revenues.

Fourth quarter of 2005 was 21.6 million. Operating income was up 10%. Margin improvement 17.9% to 18.8, so think we did see the leverage from higher revenues. Revenues were up about 6 million quarter over quarter, linked quarter.

Got it. Okay. I'll just have to check that. And then as far as -- if I look at your pro forma ROE including the booking on Capital Markets, it's coming in around -- just under 10%. There was a [period] yesterday about 17%. How do you close that gap as you deal with the additional capital? What sort of -- obviously we talked about some specific initiatives, but can you invest at your pre-tax margin in Capital Markets?

Let me just start with the reported annualized return on tangible equity was 21.1. Pro forma was 15.3. So again, still a gap to some of the competitors, which we're going to work to close through our investment in the business. But I just wanted to point out that it was 15.3.

I'm actually adjusting -- I'm adding back -- I'm adding the booking upcoming in Q3 and just isolating Capital Markets. I am trying to understand, stand-alone, what you're left with after the asset sale.

Sure. Maybe I should go back to the comments last week at the announcement, which is that we expect an after-tax gain of approximately 500, 510 million. We are going to completely pay off 180 million in [sub] debt and intend to buyback approximately 180 million in shares, and that leaves, round numbers, 150 million. And we do believe that could be deployed thoughtfully over time against our current strategies of new geographies, new products, and potentially new businesses; for instance, asset management.

Right. So do you think the pre-tax margin of the Capital Markets unit is sort of a return on invested capital per se on your new capital? Is that something that's reasonable to think about or --?

Yes, obviously we would hope it would be even better than that because it's marginal investment. But yes, I would think that would be a good starting point.

Okay. And going forward, how do you think about the cyclicality of your business? You are basically left with Capital Markets which, as we all know, can -- is very in environment specific versus annuity based businesses like asset management, private client, etc. How do you downside measure this business or protect for potential volatile environments?

That's consistent with the articulated growth strategy, is we need to diversify as a way to mitigate that over time. It is, in fact, volatile. You are absolutely correct. But as we add additional products, new geographies, and potentially asset management business, you can reduce the volatility over time. That is what we intend to do.

Okay. And lastly on fixed income, obviously a nice headline deal with the Baltimore Convention Centre. I am trying to understand; the breadth I think of the underwritings was down from 107 last quarter to 90, and I believe the revenue number was down slightly too. Can you talk about the backlog there or is there any reason to worry about upcoming fixed income underwriting?

Backlog remains in reasonable shape on kind of an annualized basis, and if you look at the industry volumes for the quarter, I think we look favorable. It was a substantially down quarter for the industry.

Okay. Appreciate your time.

There are no further questions at this time. I would like to turn the call back over our Chairman and CEO, Andrew Duff, for a closing comment.

Thank you all for joining us. A couple of final comments. As result of the sale of the Private Client businesses, we clearly have significant resources to invest into our Capital Markets business and accelerate the momentum we have in this segment, as demonstrated by another strong quarter of financial results. We are very confident in our firm's direction, leveraging our leadership position in investment banking, and believe we have a very genuine opportunity to be the leading middle market investment bank. Thank you all for joining us today.

Ladies and gentlemen, this concludes the Piper Jaffray earnings conference call. You may now disconnect.