Piper Sandler Companies (PIPR) 2006 Q2 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 second quarter of 2006. During the question-and-answer session, securities industry professionals may ask questions of management.

The Company has asked that I remind you 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 can 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.

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

Thank you. Good morning, everyone. I will start with some comments on the second quarter, and then Sandy will review the financial details.

Overall, we're pleased to report a solid second-quarter results, despite more challenging market conditions in the second half of the quarter. From a Capital Markets perspective, our equities underwriting revenues were up strongly compared to last year. Compared to the first quarter of 2006, our equities underwriting revenue declined due to fewer transactions. That said, our economic fee market share year to date is up 22% over the full year 2005. Our backlog stands at 13 public offerings, of which five are lead-managed, consistent with how we entered the second quarter.

Our Advisory Services revenues were very strong compared to last year, but moderated from the first quarter of this year. The M&A pipeline is strong heading into the second half of the year.

Public Finance reported a solid quarter. Revenues were lower year over year and essentially flat with the first quarter. Issuance in the industry is decreasing following several strong years, mainly due to fewer refinancings. Our Public Finance underwritings will moderate somewhat, but we don't expect a significant decline.

Turning to Institutional Sales and Trading, total revenues were essentially unchanged from last year. Compared to the first quarter, revenues were down 13%, mainly due to low High-Yield and Structured Product revenues.

We were pleased to receive external recognition of our research capability. We ranked sixth in the 2006 Wall Street Journal Best on the Street survey, and six senior analysts ranked in the Forbes/StarMine survey this year.

Finally, during the second quarter, we continued to make strategic investments in our Capital Markets businesses. We added senior investment bankers in our Financial Institutions group and Public Finance, expanded our High-Yield and Structured Products group and opened a new office in Charlotte, expanded our health-care franchise in the UK with additional hires of two investment bankers and two research analysts.

Lastly, we announced this morning a strategic relationship with CIT Group, a leading global provider of commercial financial solutions. Through this relationship, Piper Jaffray will expand its full-service investment banking capabilities to include a complete range of debt solutions, including senior secured and unsecured debt, subordinated financing and mezzanine loans.

The recently announced American Medical Systems acquisition of Laserscope highlights the strength of the partnership between Piper and CIT. Piper Jaffray as the buy-side advisor and CIT together raised a financing package of $805 million for the transaction that included senior debt, subordinated bridge and convertible debt components. CIT is a terrific partner, and we expect the relationship to be mutually beneficial. We look forward to working with CIT to bring equity and high-yield financing to their substantial base of clients.

Turning to Private Client Services, at the beginning of the quarter, as you know, we announced the sale of the PCS branch network to UBS. We are still expecting to close the transaction in the third quarter. The transition is going well, and our advisors are seeing the value of the broad wealth management capabilities of UBS. During the second quarter, 81 advisors left the firm, or just under 10%, which we view as relatively modest compared to other similar transactions.

Now, Sandy will review the quarter in detail.

In light of the pending sale of our Private Client Services branch network, beginning this quarter, our presentation of results has changed. We are now reporting our results as continuing operations, consisting of our Capital Markets businesses, and as discontinued operations, which includes the results of our Private Client business and restructuring and transaction costs associated with the sale of the business.

For the second quarter of 2006, net income, which includes both continuing and discontinued operations, was $4.1 million, up from $1.2 million in the comparable quarter a year ago. Diluted earnings per share totaled $0.21, up from $0.06 in the same quarter last year. The current quarter results include restructuring and transaction costs related to the pending sale of the Private Client Services branch network. The charges and transaction costs reduced net income by $10.6 million after tax or $0.54 per diluted share. The second quarter of 2005 included a pretax restructuring charge of $8.6 million or $0.29 per diluted share after tax, related to implementing certain expense reduction measures.

Now, I will turn to results of continuing operations, beginning with net revenue. In the second quarter of 2006, net revenues from continuing operations totaled $105.3 million, up 11.7% from the $94.2 million in the same quarter last year, and down 22% compared to the first quarter of 2006. The first quarter included a $10.2 million gain on our ownership in the NYSE Group, Inc.

Within Institutional Sales and Trading, revenues were $48.2 million, up slightly from the second quarter of 2005. Compared to the first quarter of 2006, net revenues declined by $7.2 million or 13%, mainly due to lower revenues from High-Yield and Structured Products.

Within Investment Banking, revenues were $61.2 million, up $13.3 million or 27.7% compared to the second quarter of 2005, primarily attributable to higher Advisory Services revenues. Compared to the first quarter of 2006, total investment banking revenues declined $8.5 million or 12.2%, mainly driven by fewer equity offerings, offset in part by higher convertible revenues.

Turning to non-interest expenses, for the second quarter, non-interest expenses were $93.1 million, down 3.1% from the same quarter last year and down 12.4% sequentially. Compensation expense was $60.7 million, up 12.3% compared to the prior-year period, primarily attributable to increased variable compensation driven by higher net revenues and profitability. Compared to the first quarter of 2006, compensation expense declined 16.8%, mainly due to lower variable compensation driven by lower net revenues and profitability.

The compensation ratio for the second quarter was 57.6%, essentially the same as last year, and up from 54% in the first quarter of 2006. The compensation ratio in the first quarter was lowered by 450 basis points, due to the gain related to our ownership of two seats on the New York Stock Exchange.

For the second quarter of 2006, non-compensation expenses were $32.4 million, down 22.9% compared to the second quarter of 2005, primarily due to the $8.6 million pretax restructuring charge recorded in the year-ago quarter. Non-compensation expenses declined 2.7% sequentially. We expect that non-compensation expenses will increase going forward, given the additional investments we are making in our business, such as our London expansion and our new High-Yield office in Charlotte.

For the second quarter, pretax operating margin from continuing operations was 11.6%, up from 7.2% excluding the $8.6 million restructuring charge in the year-ago period, and down from 21.3% in the first quarter of 2006. The pretax margin in the first quarter was increased by 650 basis points, due to the pretax gain of $10.2 million from our ownership of two seats on the New York Stock Exchange.

Now, I will review results of discontinued operations. For the second quarter, Private Client Services recorded after-tax operating income of $6.8 million or $0.34 per diluted share, up from $2.3 million or $0.12 per diluted share in the second quarter of 2005, and up from $5.2 million or $0.27 per diluted share in the prior quarter. In the second quarter, net revenues were $89.2 million, up 4.4% from the year-ago quarter, and down 3.7% from the first quarter of 2006.

In the second quarter, we recorded after-tax restructuring and transaction costs related to the sale of the Private Client Services branch network of $10.6 million or $0.54 per diluted share, primarily for severance costs. We expect to record the majority of the remaining restructuring and transaction costs, as well as the gain related to the sale of the Private Client branch network, in the third quarter of 2006.

That concludes our formal comments, and now Andrew and I will take your questions.

(OPERATOR INSTRUCTIONS). William Tanona, Goldman Sachs.

Just a question for you on the other revenue line. I noticed that was negative in the quarter. What was the driver there?

We actually sold about two-thirds of our position in the NYSE Group as a part of the secondary offering that took place during the quarter. There was a slight loss on the sale of that position.

So more or less, you marked it up when the deal went through and then marked it down on the sale?

Correct. When the actual merger happened in first quarter, we recorded a gain related to our position, and subsequently the price has come down pretty hard on the NYSE Group during the second quarter. But we also participated in their secondary offering and liquidated our shares.

And so, as we think about a run rate for that going forward, is it still kind of in the $12 million range, more or less, or $10 million range?

That first quarter included the $10 million gain on the New York Stock Exchange. So if you back that out, that's more of a normal run rate.

You mentioned you are expecting non-compensation costs to move up because of your investments. Can you give us a sense as to where you think non-compensation expenses are going to be trending going forward? Is this also a pretty good run rate to think about as a base?

I think if you look at this quarter, it's a pretty good run rate for our existing business. So obviously, as we reinvest and redeploy the proceeds from the sale of PCS, we are going to see some increases in that line item. It will depend on the type of investments we make. To the extent we add people into our Investment Banking ranks, that line item would not be impacted unless we opened a new office and things like that.

So, for example, you will see the Charlotte office we opened will have some pressure on the non-comps over time. But we'll obviously have the revenues that go along with that.

Are you targeting any type of growth in that area, like a mid single-digit, high single-digit, low double-digit? Can you give us a sense as to what type of growth you might expect on the non-comp side?

It will depend on the types of investments and the related revenues, so we don't have a forecast related to that.

As you talked about the attrition levels coming out of the Private Client side, are those still within kind of the guidelines of the range in order to get the contingent payments from UBS?

Let me take that. We had approximately 10% attrition in the first quarter. There has been some additional since then. The arrangement allows us to achieve the additional $75 million, based on any pro rata retention between 80 and 90%. So as we ended the second quarter, you're at that threshold for receiving a full payment.

I would remind us that when we went through the pro forma at the time of the sale and the announcement of the sale, the proceeds that we took you all through did not include achieving any of the $75 million. We took a conservative approach to that.

Understandable. Just in terms of what timeframe does that retention go to? Is it even (multiple speakers)?

It's calculated 30 days after the conversion of the advisors and their clients onto the UBS system.

Jonathan Casteleyn, Wachovia Securities.

I was hoping that you could provide some more color on your fixed-income trading. Are there still trace after-effects here? Because it seems like year over year, there is still some negative results coming out of that department.

No, actually, you are probably looking at -- I am thinking you're concentrating on quarter over quarter. In first quarter of this year, we had significant revenues from our High-Yield and Structured Products unit. What is happening is that business is still rather lumpy for us, because it's fairly concentrated at this point into the airline sector. As we continue to build out the product set and get into other industry sectors there, I think that you'll see some smoothing of the results and the revenues from the High-Yield. Obviously, this new office we opened in Charlotte this quarter means we are investing in that business and growing and rounding it out.

That's part of the effort to expand into additional verticals.

So smoothing at this lower level, or meaning a step-up and then a smoothing?

We're expecting to have strong growth in our High-Yield. That's one of our areas that we are focusing on, one of the investment areas. So what we wanted to have is the results of first quarter replicated ongoing.

Can you provide some more color on the CIT transaction? Do you have any projected volumes of either underwritings on the debt side from them, or any potential aftermarket business you can farm from the CIT?

Let me make a couple of comments. We don't have specific targets that we're presenting. Having said that, out of the gate here in the second quarter, you saw some of the benefits, and we had some economics associated to the American Medical transaction, the loan syndications that were done as well as the convertible debt offering.

The opportunity here is important to our High-Yield and Structured Products buildout. We also have the opportunity to have additional business brought to them, based on their very substantial middle-market presence, as well as sharing in the loan syndicate fees. It's also very consistent with our strategy in being the primary advisor to our client in offering the full product suite to our primary clients. We expect additional contribution in 2006 as it ramps up, and to be a material contributor in 2007.

Is there a capital commitment with the partnership?

There is not. This is a strategic partnership, leveraging each of our companies' expertise.

You mentioned the potential earnout, the $75 million. Is there a partial payment if you go below the threshold, or is it all or nothing?

No, it is pro rata starting at 90% retention. From 100% retention to 90% retention, UBS is taking all of the exposure. Pro rata down from 90 to 80, if we end up anywhere between there, we will pro rata achieve some of the $75 million. Once you dip below 80% retention, we won't have any incremental economics.

Can you scale the remaining restructuring charge? Will it be bigger or smaller than today's, the upcoming one for Q3 that will net against the gain?

We are actually on track with the up to $60 million in restructuring charges that we announced at the time of the announcement of the sale transaction. We are on track with that. If you recall, the $170 million gain after tax that we had on our pro formas included and was net of restructuring costs. So we are on track there.

You also basically monetized about $4 in goodwill, correct, to the extent that $85 million in goodwill comes off the balance sheet? So I'm talking about $4 per share in goodwill.

You are correct. The goodwill actually gets written off, so to speak, with the sale of the business. The gain that we reported in the pro forma, the $170 million after tax, again was net of the write-off of the goodwill.

So your tangible book value will actually increase in excess of the gain because of the monetization of goodwill?

That's actually correct, yes.

Let me make an additional comment and clarify something on the capital associated with our CIT. What I was trying to indicate is we are not capitalizing a separate joint venture. However, we will commit capital in individual loan transactions; we intend to syndicate that, but we will be committing capital.

On a transaction basis. But you are not funding -- you're not prefunding the strategic partnership?

Exactly.

(OPERATOR INSTRUCTIONS). Steve Scinicariello, BlackRock.

I just wanted to follow up with you on a couple of things regarding the capital deployment plan. First off, the $180 million buyback that you're on track to do -- I just was wondering how exactly you were going to go about that, given it's like 20% of the shares outstanding, if you're going to tender for that, or what. So that was question one. I have a couple of other ones, but I'll let you answer that first.

Sure. We plan on the $180 million in share repurchases coming in a combination of an accelerated share repurchase, along with other open-market purchases. We don't have the exact details of the amounts and timing and so forth worked out. But once we have that, we will make an announcement of that; we will make that public. It will happen, though, after we receive the proceeds from the sale transaction. So it's a combination of programs, some of it accelerated and some of it open market.

To be announced and to be executed upon the receipt of the proceeds.

Just in terms of deploying further capital, the $180 million, hopefully the additional $75 million that hopefully you guys are on track to achieve -- and I know in the past, Andrew, you said you hoped to talk about that on a quarterly basis. Should we expect to start to see some conversations come through at the end of 3Q and 4Q? Just from a timing standpoint, what should we expect?

Okay. I think I have been consistent on this. What is very important, from my perspective, is that we get the right partners across all of our growth initiatives, whether it's additional products, new geographies or building out our verticals.

I would share with you that there is ample opportunity in the marketplace. It's very clear to us. We are very hard at work at it. But it's also important that we get absolutely the right partner that has similar culture, focus on the middle markets, complementary products and services or geography. I would point to the CIT relationship. We highlighted that as an initiative approximately this time a year ago, spent time with a number of very viable partners and ultimately picked exactly the right partner with the right structure that has already demonstrated results prior to the announcement.

That is my way of saying we will take the time to get to the right partner and the right opportunity. But they are absolutely out there. We are very hard at work.

Lauren Smith, KBW.

Most of my questions have been answered, but I guess just to (technical difficulty) on a couple of things. Assuming -- let's just say the deal closed tomorrow. Pro forma tangible book value would be somewhere around, what, like 35, 30?

I have not done that calculation.

But it's about $9, right?

Okay, yes.

Is that correct? The net gain will be something like $9 to book value?

Yes, $170 million over 20 million shares, approximately.

I know -- just back to Steve's question -- you'll update us on the buyback as it unfolds. But would it be unrealistic to think that the lion's share of the buyback, combination of open market and accelerated, to be done sort of --?

Hello?

Is that better? Can you hear me better?

We didn't get the full question, though, Lauren. You were asking about the buyback.

Yes, just to follow up on the buyback. Obviously, I know you said you would update us going forward. But would it be unrealistic to think that most of it could get done in sort of short order? Or would it take, do you think, a couple quarters?

We're going to announce the details of the plan when the sales transaction closes. And so I don't really want to comment on timing. We just haven't worked out those details yet.

Timing should be part of that announcement.

Yes.

We should have some perspective for you at that time, and what the timing we expect to be.

Just in terms of third quarter, are we still kind of thinking mid/late August? I know that was initial expectations of when this might close. Is that still kind of on track, do you think?

Yes, we do expect it to be in the third quarter.

Then, looking at the comp ratio for the quarter, is that, do you think, sort of a reasonable range that we should be thinking about in the continued operations going forward? Or do you think there might be some upward bias, given that you do have some initiatives to build out and add some headcount in various businesses?

Yes. For the quarter, our comp ratio was 57.6%, and I think we've stated we think the comp ratio will be in that kind of a 56% to 58% range. So we are right smack in the midst of our range. That said, we obviously are going to be investing in the business over time, redeploying the proceeds. There necessarily is generally a lag between when you're hiring folks and when they are producing it full tilt. So there could be some upward pressure, but we are trying to work within the 56% to 58% range.

That's great, that's helpful. That's it for me for now. Thank you.

At this time, there are no further questions. I'll return the call to Mr. Duff for any additional remarks.

Thank you all for joining us. We're looking forward to completing the transition of our Private Client business to UBS in the next quarter, as well as continuing to execute our growth strategy, and look forward to updating you about that in October. Thank you all.

Thank you all for joining this morning's Piper Jaffray Company's conference call to discuss the financial results of the second quarter of 2006. You may now disconnect.