Piper Sandler Companies (PIPR) 2006 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Piper Jaffray Company conference call to discuss their financial results for the third 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 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.

Good morning. Thank you for joining us. I will provide some opening comments about our third-quarter results, then Tom Schnettler, our Vice Chairman and CFO, will provide more details.

Overall, we are pleased with our third-quarter results, given the more challenging equity market during the quarter. We continue to make significant strides in redirecting to a leading international middle-market investment bank.

Importantly, on August 11, we closed the sale of our PCS branch network to UBS. This was a very successful conversion and we were able to simultaneously close and convert, which was a significant benefit to both our clients and our financial advisors, who are both now well-positioned with UBS.

As a result, we have received approximately $500 million in cash for the branch network, approximately $250 million for the net assets. We did not achieve any of the potential $75 million retention bonus. I would remind you that that is consistent with our original estimate of cash proceeds.

Subsequently, we paid off our $180 million of subordinated debt and on August 17 announced a $100 million accelerated share repurchase program to buy back stock. We have now repurchased approximately 1.6 million shares.

Turning to our growth investments, we made significant investments in our capital markets business during this quarter. In July, we announced our strategic relationship with the CIT Group. This significantly expands our investment banking capabilities to include a complete range of debt solutions. Our opportunities are broad-based with respect to industries, include stable financings, buy-side acquisition financings, growth capital raising and refinancing.

We strengthened our international presence by opening offices in both Madrid and Shanghai. These offices will serve our increasing number of European and Asian clients. Additionally, we expanded our UK research capability with consumer and tech analysts. In mid-October, we held our first consumer conference in London. We featured management teams in retail, apparel and footwear companies from both Europe and the U.S. And finally, we added investment banking personnel in health care, industrial growth and our public finance businesses.

Turning to corporate development, we continue to focus on re-entering the asset management business. We're taking the time necessary to find the right partner, with particular attention to investment records, products and culture. I am pleased with the quality of opportunities we are seeing and believe we will find the right opportunity over time.

Going forward, we will also use more capital to facilitate our customer activity. Recognizing that the pure agency model is under pricing pressure, we intend to use capital for principal activities to leverage our expertise and invest with our clients where appropriate. Our High Yield and Structured Products buildout is a good example of where we can be successful in deploying capital on a principal basis.

That concludes my comments, and now Tom will review the quarter in more detail. Tom?

Thank you, Andrew. The more challenging market conditions that began in mid-May continued during much of the third quarter. In the industry, the number of public equity offerings in the quarter declined over 30% both from the year-ago period and the sequential quarter. Likewise, the number of new issue transactions in the public finance market was down 9% and 15% compared to the prior-year period and the sequential quarter. Equities trading volumes were flat to last year, but declined 16% from the second quarter of 2006.

Our financial results held up reasonably well against a more challenging environment, which we attribute mainly to the relevance of our industry expertise, which resulted in higher economic market share; revenues from growth initiatives; and the recapitalization we undertook with the proceeds from the sale of the Private Client Services branch network.

For the third quarter of 2006, net income from continuing operations was $9.5 million or $0.50 per diluted share, down from $11 million or $0.57 per diluted share in the year-ago period, and up from $8 million or $0.40 per diluted share in the second quarter of 2006.

For the quarter ended September 30, 2006, net income from both continuing and discontinued operations was $187 million, which includes the gain from the sale of the PCS business. Diluted earnings per share were $9.79, up from $0.79 in the same quarter last year and $0.21 in the sequential quarter.

Now I will provide a detail of continuing operations, beginning with net revenues. For the quarter, net revenues were $116 million, down 3% from the quarter ending September 30, 2005, up 10% from the quarter ending June 30, 2006. Within investment banking, revenues were $72 million, down 2% compared to the year-ago period. Revenues from equity financing and public finance were strong and were offset by lower advisory services revenues, which reached a record in the year-ago period.

Compared to the second quarter of 2006, investment banking revenues increased 18%. Like the industry, we completed fewer equity financings; however, our revenues improved quarter over quarter due to higher average revenues per transaction. Our estimated economic fee market share year to date is 1.8%, up 30% from the full year of 2005. Currently, our backlog for public equity offerings is 12, of which five are lead-managed.

Compared to the second quarter of 2006, advisory services revenues increased 28%, mainly driven by higher average revenues per transaction. At the end of the quarter, our pipeline for advisory services looked strong. However, this business is lumpy, and we could experience changes, including transactions moving from one quarter to another.

Fixed income underwriting revenues increased 21% compared to the second quarter of 2006. The improved revenues resulted from stronger public finance revenues, mainly resulting from higher revenues per transaction.

Within institutional sales and trading, revenues were $43 million, down 10% from both the same quarter in 2005 and the second quarter of 2006. The main drivers of the decline compared to both periods were more challenging equity market conditions and lower revenues from interest rate products. However, a decline in revenues was partially offset by increased revenue streams from several growth initiatives, including algorithmic and program trading, convertibles, and High Yield and Structured Products.

We continue to build each of these efforts, and these products have added key capabilities that our clients are looking for, resulting in important additional sources of revenue for our Company.

Turning to non-interest expenses for the three months ended September 30, 2006, compensation expenses were $69 million, down 5% from the third quarter of 2005. Compensation expenses were up 14% compared to the sequential quarter, mainly due to higher variable compensation and investments in personnel. The compensation ratio for the third quarter was 59.5%, down from 60.5% last year and up from 57.6% in the second quarter of 2006. For the third quarter of 2006, non-compensation expenses were $32 million, essentially unchanged compared to the prior-year period and the second quarter.

For the current quarter, pre-tax operating margins for continuing operations was 13%, comparable to the year-ago period and up from 11.6% in the second quarter of 2006.

Let me close my review of continuing operations with a couple of comments on the sale of the PCS business and our capital position. First, the transition of the PCS business -- we had subordinated interest expense for half of the quarter, which resulted in lowered pre-tax margin of approximately 1.4%. Realigning expenses for the go-forward capital markets only model has been a significant undertaking. We continue to review our cost structure to ensure that we have the most appropriate resources and expense base to support our new model.

In terms of capital, as Andrew mentioned, we are well into executing our recapitalization of the business. We paid off $180 million of subordinated debt. We in addition completed the ASR program and repurchased approximately 1.6 million shares. We have $80 million remaining under our existing repurchase authorization. We expect to conduct this portion on the open market ending by December 2007.

We expect to redeploy the approximately $150 million of remaining capital from the sale of the PCS business over the next 12 to 24 months. Today we have an unlevered balance sheet. Until the remaining capital is redeployed, returns on capital will be uncompetitive. Redeployment of capital, however, is key to our growth strategy.

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

(OPERATOR INSTRUCTIONS). William Tanona.

I guess starting with the compensation, the expense side, we obviously saw a little bit of an uptick there. How should we think about that rate going forward, or what you guys are managing to?

Well, if you look at our compensation ratio to revenue, year to date, and that would exclude the gain on sale from the NYSE [feeds], about 58.5%. So I would look at that as the more instructive number.

Great. And then the same I guess with the tax rate, using the year-to-date kind of rate, and use that as kind of your go-forward rate?

That is 35.3% on a year-to-date basis. And again, I think that is the more instructive number to use.

And then I guess moving over to the non-comp expense side, you guys are obviously making a lot of investments going into new regions. How should we think about your non-comp expenses as you continue to build out for the future here over the next couple of quarters?

We expect our non-comp expenses to be a point of leverage for us. So as we grow the business, we will have increases in non-comp expenses, but we expect them to increase at a slower rate than our revenues, hopefully.

And in terms of when you expect to see those investments coming to fruition?

From an operating standpoint, we would expect to make those investments over the course of the coming years. From a corporate development standpoint, obviously, there will be larger, hopefully, pieces put in place in terms of capital deployment. But again, we would expect to do that over the next 12 to 24 months.

David Trone.

Congrats on a good quarter here during a tough period. A couple of questions on the fixed income trading -- typically, when you see robust primary, that secondary tends to follow. And I guess I'm a little surprised, with fixed income underwriting up 20, 21%, that fixed income trading was down as much as it was. Can you give me a little color there?

The main impact on the fixed income trading results was a decline in interest rate products for derivative transactions. And that was partially offset by an increase in our High Yield and Structured Products area. The other businesses were relatively constant.

When you mentioned your pipelines, that was good information on the equity. Could you give us an indication on the fixed income pipeline?

I think -- this is Andrew -- it looks pretty similar to previous quarters.

Okay, so flat?

(multiple speakers). Yes.

And how about M&A? You said it was strong. Is that directionally up or down?

Well, it is always difficult to predict how much business will get closed in the quarter. So I would say that we are relatively pleased with the amount of business that is in the pipeline. So we think it is relatively strong.

Any pipe activity?

Yes, we had a number of pipe transactions during the quarter. We'll, I believe, see some additional transactions in the fourth quarter.

Can you -- are you willing to give the number?

We don't break it out to that level.

And I think my other questions were answered. Thank you.

Jeff [Glenn].

You mentioned that algorithmic and program trading helped to offset the quarter-over-quarter decline in equity trading. Can you give any sense as to how far along you are in building out that capability?

Well, we've got, obviously, fully functional products that are being used by our clients. Our revenues are increasing. They're up significantly year over year off a relatively small base. I think it's helping to offset some of the decline in kind of the core cash equities business. But it is not of a scale yet where one increase offsets the other.

At this time, there are no further questions.

Okay, let me wrap up the call and say we are pleased with our solid progress and look forward to updating you on the future quarters. Thank you all for joining us. Have a good day.

This concludes today's conference call. You may now disconnect.