Piper Sandler Companies (PIPR) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Piper Jaffray Company to discuss the financial results of the second quarter 2007.

During the Q&A session, securities and 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, 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. Please go ahead, sir.

Thank you. Good morning. Thank you for joining us today. I will provide some opening comments, and then Tom will provide details of our financial results. Our revenues and operating income rose above the year ago period, but did not match the very strong performance in the first quarter of the year. Our Equity Financing and Public Finance businesses were strong, but were more than offset by lower mergers and acquisition revenues. The decline is due to the nature of the M&A business which is lumpy. Our M&A business is solid, and we remain confident as we move into the second half of the year.

On July 3 we were very pleased to execute another step in our strategy to grow our business across sectors, products and geographies with the signing of a definitive agreement to purchase Goldbond Capital Holdings. With Goldbond's Capital Markets capability in Hong Kong, we will have the ability to raise capital for companies and serve institutional clients globally. Piper has established businesses here in the US and Europe. Now we're extending our capabilities to Asia with our presence in China and Goldbond's capability in Hong Kong. We believe having a Capital Markets capability in Hong Kong is strategically important because it is a major center of institutional capital raising and securities trading.

In 2006 Hong Kong was the world's leading exchange in terms of IPO capital raised, raising approximately $44 billion.

Our strategic objective was to establish an Asian growth platform in Goldbond combined with our existing Shanghai Resources does this. Goldbond has the Capital Markets capability in Hong Kong to serve the greater China market. This middle market focus has an experienced cohesive management team with a client focused culture. We're paying a reasonable valuation at two times book value. The deal is structured with approximately $50 million in aggregate purchase price with $46 million in cash, $4 million in equity. We expect it to be modestly accretive to earnings in 2008.

Now I will turn the call to Tom for a financial review of the second quarter.

Thank you. In the second quarter of 2007, we generated $122.6 million in net revenues which were 17% higher than one year ago and 11% below strong results in the first quarter. Equity financing revenues were $40.8 million, which increased 51% above last year's revenues driven by completing more public equity offerings with higher average revenue per transaction. We matched the strong equity financing revenues generated in the first quarter of 2007.

Currently our backlog stands at 16 transactions, and we are book runner on two of these deals. This compares to 14 transactions of which four were book-run deals when we announced our first-quarter earnings.

Likewise, debt financing revenues driven by robust public finance activity generated solid performance in the quarter. Debt financing revenues were $25.2 million, an increase of 25% compared to last year and an increase of 26% compared to the first quarter of 2007. For Public Finance we completed 138 transactions, up 10% from last year and up 47% compared to the first quarter of 2007. These strong results were offset by lower revenues from mergers and acquisitions. We completed fewer transactions in the second quarter, and the average revenue per transaction was also lower. As Andrew commented, this is a lumpy business. Our business remains solid.

On a year-to-date basis, total Investment Banking revenues were $163.4 million and rose 19% over last year. These results were mainly driven by equity financing and public finance. Within equities one of our growth initiatives is focused on building out an alternative energy practice. We're very pleased with the performance of this newer sector, which we estimate garnered an 8% economic feed market share year-to-date and ranked Piper Jaffray third in the sector.

Before I finish my comments on Investment Banking, I want to provide an update on our alliance with CIT. In June CIT announced the acquisition of an M&A advisory firm, Edgeview Partners, which increases CIT's M&A capabilities and creates a significant overlap with our advisory capability. As a result of this acquisition, CIT and Piper Jaffray mutually agreed to terminate the alliance agreement effective July 30.

We believe that providing comprehensive debt solutions for our clients is a key capability. We have been considering several alternatives for providing debt solutions, and we are confident we will find the right strategic approach to effectively address our clients' debt needs going forward.

Now let me turn to sales and trading. Revenues were $44 million, essentially the same as last year and down 12% compared to the first quarter of 2007. The decline was mainly due to lower high-yield and structured products revenues, which were particularly strong in the first quarter.

Now let me turn to operating income. Operating income from continuing operations for the second quarter was $10.4 million, a 31% improvement compared to the year ago period and a decrease of 30% compared to the first quarter of 2007. The decline compared to the first quarter was mainly due to lower M&A revenue and higher non-compensation expenses. Non-compensation expenses were $35.7 million or 10% above last year and 4% higher than the first quarter of 2007.

The higher expenses were primarily in two areas. First, we recorded higher occupancy expenses driven by a $900,000 charge related to relocation of one of our New York offices. Second, we recorded higher expenses for professional fees due to implementing our new Capital Markets backlog system. Our pretax margin was 12.4% for the quarter, which was higher than the 11.6% reported for last year and below 16.5% in the first quarter of 2007. Our compensation ratio was 58.5% compared to 57.6% last year and consistent with the first quarter of 2007.

In the second quarter of 2007, we recorded a loss of $1.1 million after tax for discontinued operations. The loss included costs primarily related to decommissioning a retail-oriented backoffice system. In addition, we recorded litigation-related expenses. As we previously stated, we anticipate we will incur additional expenses in the third quarter of 2007 related to decommissioning the retail oriented system. We continue to estimate that total expenses for discontinued operations for Q1 through Q3 at approximately $5 million pretax.

The caveat to this estimate is that if facts change surrounding litigation related or occupancy expenses, actual results could vary.

I will conclude my remarks with a comment on capital redeployment. We have announced two acquisitions this year aligned with our long-term strategy, FAMCO and Goldbond. Together we will deploy approximately $116 million of capital to close these two transactions. We believe we have further opportunities to deploy capital both from the remaining proceeds and adding leverage to our balance sheet. We will continue to redeploy capital to increase principal activities which is already underway and pursue corporate development opportunities to grow our sectors, products and geographies.

That concludes our formal remarks. Now Andrew and I would be happy to answer your questions.

(OPERATOR INSTRUCTIONS). [Alex Blastein].

I was hoping you could provide a little more color around your backlog, specifically on the M&A front. I understand like you guys don't really give out the exact numbers, but how it compares, let's say, to the end of '06 and the end of last quarter?

What we do provide is just information on announced M&A transactions. Currently we have five announced M&A transactions with $1.7 billion of aggregate transaction value. This compares to one announced transaction at the end of the first quarter.

Okay. On CIT agreement could you guys give a little more color at all on what percentage of your banking revenues came from that relationship and how long did you guys have it in place?

We had it in place for approximately a year. We signed it in July of last year. We had really an insignificant amount of revenue generated. We had some successes with specific clients, but the overall revenue generated was not significant.

I see. Just finally on the share buyback, it did not seem like you guys did a whole lot there this quarter. Could you give a specific number?

Yes, we did not repurchase shares during the second quarter. Because of the Goldbond pending announcement, we determined that we could not be in the market during the second quarter repurchasing shares. So we continued to have $70 million remaining on our authorization.

I see. And once the deal closes, can you be -- is it more like a regulatory --?

The decision to not be in the market was really gated by the pending announcement. So now that we have announced the transaction, that restriction does not apply.

Okay. So you could be back active in the market in the second half?

Yes.

[Tom Conner].

Could you tell me what your fixed-income inventory levels were as of June 30, and if you can kind of break that down between CDO/structured and high-yield?

We don't release balance sheet information until the 10-Q comes out. The majority of our revenues would be in the municipal finance or municipal products category with some high-yield inventory.

In your high-yield inventory, what would your average age be?

Average?

I mean your turnover average age. Do you have any age inventory issues?

No.

Okay. In connection --

(multiple speakers). In the Q we will have the VAR alone.

Yes.

In the Q we will have the VAR, and I cannot tell it -- this is Andrew -- off of the top of my head, but it has been relatively stable in the of 5 to 600,000 range. We support it, and I would expect it to be. (multiple speakers)

And in terms of the M&A calendar, are there any commitments or guarantees on financing at any kind of levels that would expose you guys, assuming difficulty in raising financing for these transactions?

I don't think we have any material commitments in that regard.

Okay. And then finally, I think about nine months or a year ago you had mentioned you had opened a Madrid office. Could you indicate how that office is doing?

Yes, this is Andrew. We entered into a partnership with a group in Madrid who had two businesses, a securities activity and then independent of that but under their Company umbrella, an Asset Management business. That side of the firm that we were unrelated to had some issues with their regulator, and we mutually agreed to exit the partnership. So we were just in the beginning stages when we exited the relationship, the partnership.

[Brian Hegeler].

Good morning. Actually all of my questions have been answered. Thanks.

At this time there are no further questions in queue.

Thank you for joining us this morning. We're very confident in our continued progress in executing our strategy and look forward to updating you in the third quarter. Thank you.

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