Piper Sandler Companies (PIPR) 2007 Q1 法說會逐字稿

Good morning. My name is Amanda and I will be your conference operator today. At this time, I would like to welcome everyone to the Piper Jaffray 2007 first-quarter financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (OPERATOR INSTRUCTIONS). As a reminder, only securities professionals will be allowed to ask a question. Thank you. Mr. Duff, you may begin your conference.

Good morning, thank you for joining us today. I will provide some opening comments about the quarter, and then Tom, our Vice Chairman and CFO, will provide details of our financial results.

We're pleased to report another quarter of solid revenues and improved profitability. Our growth initiatives contributed in a meaningful way to these results which I will comment on further in a few moments. In addition, we announced the acquisition of FAMCO last week, which allows us to enter the asset management business and deploy capital from the sale of our Private Client business.

Last week's definitive agreement to acquire FAMCO met all of our key criteria -- competitive investment performance, disciplined investment processes, talented professionals with similar values and a reasonable price. FAMCO has $9 billion in assets under management across multiple investment strategies. The deal was structured to incentivize continued growth, paying approximately $66 million in cash at closing and future cash payments from 2008 through 2010 based on financial performance.

Our first quarter results positively impacted by growth initiatives across sectors, products and geography. Our newer sectors completed deals in alternative energy and business services, raising $560 million in capital. We also benefited from significant structured activity and from principal investments in our expanded High Yield and Structured Products Group.

From a geographic perspective, our UK revenues grew over 125% year-over-year and contributed the largest M&A fee for the quarter. Our China team completed its first book run transaction and our largest public offering fee for the quarter.

With those overview comments, I'll turn it over to Tom for the financial review.

Thank you, Andrew. In the first quarter of 2007, we generated $137 million in net revenues, our second strongest quarter of revenues since becoming a public company. In addition, we continued to improve profitability.

For the first quarter of 2007, net income from continuing operations was $14.7 million, or $0.82 per diluted share, down from $18.7 million, or $0.98 per diluted share in the year-ago period and down from $26.7 million, or $1.49 per diluted share in the fourth quarter of 2006.

The first quarter of 2007 was a solid quarter which may not be readily apparent based on some of the items in previous quarters. Let me highlight these items for you. In the first quarter of 2006, net income from continuing operations including 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. Net income from continuing operations for the quarter ended December 31, 2006 included a benefit of $0.73 per diluted share due to a reduction of the reserve related to developments in a particular litigation matter. Therefore, on a more comparable basis, the first quarter of 2007 was $0.82 per diluted share, up from $0.63 per diluted share for the year-ago period and up from $0.76 per diluted share for the fourth quarter of 2006.

For the first quarter of 2007, net income was $13.4 million, which includes a loss of $1.3 million, or $0.07 per diluted share, for discontinued operations. The loss included costs for additional PCS litigation-related expenses and occupancy-related charges that were higher than originally estimated. The loss also includes costs related to decommissioning a retail arrangement back office system.

We anticipate we will incur additional expenses in the second and third quarter of 2007 related to decommissioning this system. We continue to estimate that the total expenses for discontinued operations for Q1 through Q3 would be approximately $5 million pre-tax, primarily for the system-related costs. The caveat to this estimate is that if facts change surrounding litigation-related expenses, we may need to revise the estimate.

Costs associated with implementing a new back office system to support our Capital Markets business are reported in continuing operations.

My remaining comments will focus on continuing operations. Investment banking revenues were $85.6 million, the second highest generated since becoming a public company. Our businesses operated with solid performance. All businesses operated with solid performance. Institutional sales and trading revenues were $50.2 million, or relatively flat compared to the year-ago and sequential quarters. Strong equity financing revenues was the key driver for the increase in investment banking revenue in the first quarter. In addition, as Andrew mentioned, our newer initiatives contributed in a meaningful way to our performance. We generated strong revenue growth in High Yield and Structured Products and we continued to add significant momentum in our UK business across both investment banking and sales and trading.

For the first quarter of 2007, compensation expense was $80.1 million. The compensation ratio for the first quarter was 58.5%, up from 54% last year and down from 60.4% in the fourth quarter of 2006. The compensation ratio in the year-ago period was unusually low due to the gain related to the NYSE I mentioned earlier.

For the first quarter of 2007, noncompensation expenses were $34.3 million, up slightly from a year ago. Noncompensation expenses in the fourth quarter of 2006 were $16 million, which included a reduction in a litigation reserve of $21.3 million. Excluding this reduction, noncompensation expense was $37.3 million in the fourth quarter, representing an 8% decline for Q1 2007 from the fourth quarter of 2006.

For the current quarter, we improved pretax operating margin from continuing operations to 16.5%. This compares to 21.3% for the year-ago quarter, of which 6.4 percentage points were due to the NYSE gain. Pretax margin for the fourth quarter of 2006 was 28.6%, of which 14.5 percentage points were due to the benefit from the litigation reserve reduction.

With that, I will turn it back over to Andrew for some final comments.

Actually, let's move to Q&A if we could, please.

(OPERATOR INSTRUCTIONS). Douglas Sipkin, Wachovia.

Just two questions. First off, I know you guys don't specifically talk around the backlog of business, but just any color on the broader environment, any trend changes I guess after sort of the little bit of turmoil that happened late February, early March, in terms of outlook for equity backlogs, etc.? Any color around that would be helpful.

Sure. We have 15 equity deals in our backlog currently, five of which are book run. That compares to 10 and four, the comparable numbers at the end of the fourth quarter. I would also say that the activity in the equity market is definitely seeing some shift toward the convert product. We have seen some of that in our results as well.

Second question regarding the comments about discontinued ops. I just want to make sure I got the right number. $5 million, including the first quarter through the third quarter pretax, discontinued operations expense, correct?

That is our current best estimate, yes.

And you also mentioned that it's subject to change based on legal -- you know, directionally subject to change higher or subject to change lower?

Well, it could be either one. Obviously, we have reserves reported which we think are adequate per accounting standards for PCS litigation matters that we retained in the sale transactions to UBS, but developments subsequent to the quarter end could impact those estimates either way.

Okay, and then just last question. Can you provide sort of an updated guidance on capital available for investment subsequent, pro forma I guess subsequent to the fiduciary transaction? Because I know I think initially, you earmarked about $150 million in growth capital. Is it as simple as just deducting like $66 million?

No, I wouldn't say that at all. The $150 million was specifically after-tax proceeds from the PCS sale, less specific recapitalization efforts, paydown of the sub debt and repurchase of stock that we undertook immediately. We don't view that as a constraint in terms of resources available to pursue these activities. Our balance sheet is almost completely unlevered, which is an unnatural position for a firm in our business, and so we view ourselves as having significant capacity beyond those specific proceeds that were generated from the PCS sale transaction.

I guess my question is -- how much internal proceeds remain subsequent to the closing of that transaction before you would actually have to go out and access debt capital?

Specifically, you can do the $150 million minus the $66 million in terms of cash -- after-tax cash proceeds generated from that transaction. We delevered our balance sheet almost completely, so you won't see that just sitting on the balance sheet. But again, we think we have substantial capacity given the assets we're carrying and our ability to put leverage into the balance sheet.

And that $150 million minus hypothetically $66 million; in terms of buybacks, is that mutually exclusive, or is that also incorporated into that thought process, or future buybacks?

Well I think those are definitely related. We are conscious of the need to sort of improve our return on equity, and we would continue to look at the opportunity to repurchase our stock really in the context of other capital needs, including our corporate development activity.

Terrific, thanks a lot.

(OPERATOR INSTRUCTIONS). At this time, there are no further questions.

Well, thank you offer joining us this morning. As you can see, we're well underway with executing our growth strategy and we look forward to updating you at the end of the second quarter. Thank you all.

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