Piper Sandler Companies (PIPR) 2009 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 first quarter of 2009. During the question and answer session, securities industry professionals may ask questions of management. 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. As a reminder, this call is being recorded Wednesday, April 15, 2009.

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

Thank you and good morning. I would like to update you on the two top priorities for our firm as we navigate the near-term environment. Our first priority was to appropriately adjust our cost structure. The actions we took in 2008 and additional expense discipline in the first quarter had the intended effect. We achieved a pretax profit of $3.5 million for the first quarter of this year. Our revenues were 12% below the year ago period, yet we were able to generate a pretax profit compared to a $1.1 million pretax loss last year.

Our second priority is to make sure that we are well-positioned to capitalize on the turmoil in the competitive landscape. We have several examples of early progress. In the first quarter, we selectively added senior talent to strengthen our fixed income services, investment banking and equity businesses. We are in active dialogue with a number of potential hires that would bring experience, client relationships and be a strong cultural fit. We are keeping a close eye on our costs and will continue to add talent judiciously.

I have remarked on our last couple of calls that I believe we have a real opportunity to gain business in the current environment. We are seeing early evidence that bears this out.

First, our municipal teams are demonstrating their ability to differentiate themselves to clients and grow our business. We served as the lead manager on a $476 million issue for the city of Houston, Texas. This transaction marked our largest senior managed long-term negotiated issue to date. We completed a $250 million general obligation bond offering for the city of Chandler, Arizona. This was the largest competitive issue underwritten by our firm.

As the direct result of new talent we added last year, so far in 2009 we have priced over $260 million in new issues in the state of Connecticut. This is a new market for us, and as a result of this increased activity, we were the top underwriter of local government obligations in New England in the first quarter.

Finally, we executed a $58 million issue for the University of Minnesota, marking the first time the university has used a non-New York investment bank as a lead underwriter.

On the investment banking front, we advised Lionsgate in their acquisition of TV Guide. This deal was executed by our media, entertainment and telecom team, which was a new vertical we added last year. We also added new fixed income trading talent and restructured this business, scaling back high yield and discontinuing our tender option bond program. All of these actions have led to significantly improved results. Overall we are very encouraged by these early successes.

Looking ahead, equity investment banking activity remains soft, and we expect activity will remain so for some time. While the markets have recently trended upward, they are still volatile, and we remain cautious on the outlook. We anticipate that equity sales and trading will remain solid. We have confidence that our renewed focus in fixed income and trading is working. We do believe the very favorable trading environment we experienced in fixed income in the first quarter will moderate.

Now I would like to turn the call over to Deb to review the financial results in more detail.

Thank you, Andrew. In the first quarter of 2009, we recorded pretax income of $3.5 million compared to a pretax loss of $1.1 million in the same quarter last year. On an after-tax basis, we reported a net loss from continuing operations of $2.7 million or $0.17 per diluted share.

In the first quarter of last year, continuing operations generated a net loss of $1.4 million or $0.09 per diluted share. In the first quarter of 2009, we recorded tax expense of $6.3 million, which moved us into a loss position. The amount of tax expense compared to the earnings was due to the distribution of results between US and non-US entities and approximately $3 million of one-time items.

First-quarter 2009 net revenue were $83.9 million compared to $95.7 million in the year ago period and $59.4 million for the fourth quarter of 2008. As we anticipated, industrywide equity market conditions remained weak in the first quarter as reflected in our continued low revenues and equity financings and mergers and acquisitions.

In the US just one IPO was completed industrywide. Likewise, USMA transactions of less than $500 million for the quarter remained well below the average level of the last two years in terms of both the number and value of completed deals.

Industry backlogs continued to be very light. Industrywide there have been just 10 IPO transactions filed within the last 180 days, on one of which we are a co-manager. We have two announced M&A transactions.

Public finance underwriting revenues improved compared to the same quarter last year and the fourth quarter of 2008. As Andrew already mentioned, we had a number of successes with new business in the quarter, which drove the increase versus the comparable quarters. A material portion of our public finance underwriting revenues have historically been driven by non-investment-grade issues. This segment of the market is still not functioning well, but we were able to more than offset it with business from new clients and markets.

Compared to the year ago period, we recorded lower revenues in taxable underwritings and public finance remarketing and actuary securities and public finance interest rate derivatives. For the quarter ended March 31, 2009, institutional sales and tradings generated net revenues of $58.5 million, an increase of 74% from the same quarter last year and up 105% from the fourth quarter of 2008. This performance was mainly driven by strong results from fixed income sales and trading.

Equities, sales and trading revenues were $30.7 million, essentially flat with the year ago period and up 9% compared to fourth quarter of 2008. Compared to both periods, revenues improved in convertibles and electronic tradings. We've refocused the convertible business to an agency-oriented model, and results have improved. Performance in US equities was solid, but revenues were lower compared to both periods.

Fixed income sales and trading revenues were $27.8 million, a dramatic improvement compared to $2.3 million in the same period last year and $0.4 million in the fourth quarter of 2008. The dramatic improvement was due to scaling back high yields, discontinuing our TOB programs and also strong performance across municipal and taxable products. We think it is unlikely that we can replicate these very strong results going forward, however.

Now I will turn to non-interest expenses. For the first quarter of 2009, compensation and benefits expenses were $50.3 million, down 15% compared to the first quarter of 2008, driven by lower salaries and benefits expenses. Total compensation expenses rose 3% compared to the fourth quarter of 2008.

The compensation ratio for the first quarter of 2009 was 60%, an improvement from 61.9% in the first quarter of 2008 and 81.9% in the fourth quarter of 2008. For the first quarter of 2009, non-compensation expenses were $30 million, down 20% compared to the first quarter of 2008. All expense categories showed a significant decline over essentially the same level compared to the year ago period.

The improvement was primarily due to the actions we implemented in 2008. In addition, business activity was low, and we exercised even stricter cost discipline in the first quarter. We continue to try to reduce costs.

That said, we still believe that a quarterly run rate closer to $35 million is more realistic going forward in 2009 as business activity increases.

In summary we have successfully reduced our cost structure with the near-term market realities of depressed equity investment banking. That concludes our formal remarks, and now Andrew and I will answer your questions.

(Operator Instructions). Steve Stelmach, FBR Capital.

Congratulations on a pretty decent quarter given a pretty tough environment. With regard to the redemption and the high yield, how should we be thinking about that? Is that a reduction in terms of staffing capacity, or is it less capital being committed on the desk? What did you do to reduce that exposure?

Yes, I would say it is a little bit of a combination of a couple of things. One is just reduce capital associated with that and then really changing the emphasis of where the staffing does spend their time and where their emphasis is placed. For example, there is taxable municipal products, which has been increasing in the marketplace. So it is really shifting those resources to where we feel it is more tied in with our core municipal business and other project finance businesses.

Okay. That makes sense. And then demand on the media side, I sort of hit on this every quarter, but it sounds like there is always a pipeline developing, and it seems like you got some of that in this first quarter. Would you characterize the first quarter as sort of seeing the benefits of that pipeline, or is it simply just you are doing business in more places?

It is really a combination, Steve. On the one hand, a significant amount of our business historically looking back over years has been lower grade and/or non-rated, non-investment-grade, and that part of the marketplace is still essentially frozen. There is very little activity as the thaw continues.

Having said that, what you saw is our ability to fully make up for that and grow the business by the expansion we have taken in essentially new areas and new geographies.

Okay. So if we think about the volume of deals in the first quarter, is that pretty indicative of what you expect for the balance -- I'm talking industrywide here, not necessarily Piper specifically -- but industrywide is that what you would expect for the balance of the year, or do you still expect things to improve from here in terms of (multiple speakers)?

I think they can improve over time. Again, what we saw last fall, let's say, November/December was almost a complete freeze in the municipal markets as well and at the turn of the year very high grade access to market, AAA, AA. We have now done things even as BBB charter schools, BBB minus I think it was actually and successfully got that done in the marketplace. As that continues over time, I think you can see even higher volumes. And also the marketplace has largely digested the significant restructuring of the auction rate securities. Not all of it but a large part of that is actually now done, including our -- (multiple speakers).

And then the last question and I apologize if you hit on it in your prepared remarks. I missed it if so. The income tax expense, could you just explain it? It seems a little high here.

There's a couple things going on there, so let me address each of them. Really if you look at two components, one was the income tax on the income for the quarter, and what we saw there was income in the US -- that we had positive income in the US, and we had losses in our non-US entities. And so what we have a couple of situations going on there.

One, you have a higher tax rate in the US versus in some cases lower tax rates internationally. But then specifically in the UK, we recorded a valuation allowance of 100% of our deferred tax asset at the end of last year. So in essence, we wrote off our deferred tax asset.

The impact of that is that we now in the current environment can not recognize any tax benefit from the operating losses coming from the UK, and so that combination of the distribution of results between US and non-US has caused part of that.

The other piece was about $3 million of really one-time items that were unrelated to the income for the quarter. To just give you an example, there's a number of things in there, but an example of one would-be tax law changes in the state of California required us to make adjustments between our tax expense and our deferred tax assets.

Got it. Okay. And then is it fair to say that that $3 million is not going to come back in future quarters Those are just one-timers, right?

Yes, it is something that is not specific to the earnings for the quarter. There could be situations in the future where you have to make adjustments to your deferred tax assets, but I think what you stated is correct.

(Operator Instructions). David Trone, Fox-Pitt Kelton.

My question was just answered on the tax side. I guess while I am queued here, any thoughts on maybe you have already commented, but staffing? I know you're obviously -- do you have a strict hiring freeze or maybe if some opportunities arise for the right people in the right spots, are you still potentially willing to bring on some folks that might be coming from the bulge bracket?

David, it is really a lot like where we were towards the end of last year. We went through several rounds of downsizing at the first part of the year just to get ourselves into the right position. And now it is a balance of adding, and the additions would typically be quite senior, principal MD, experienced client relationships that fits in one of our verticals where we have not fully covered some part of the marketplace.

But I would also add we are still looking at ways to make sure we are as efficient and effective as possible, and we did have some downsizing during this quarter even abroad. So we are continuing to balance. I would expect that you might see modest headcount growth between now and the end of the year, but really truly modest and very selective.

Okay. Great. Thank you very much.

Daniel Harris, Goldman Sachs.

I was wondering if you can go back to some of the comments you made on the fixed income business, specifically around your view that second quarter or maybe the next few quarters would not be quite as positive as we saw in the first quarter. Is that reflective of spreads or activity in certain areas that we should be focused on as we think about that?

Yes, I think if you look at that business, there's a couple of different components. There is our municipal business and taxable middle-market sales, which are significant pieces of that business which we do believe will remain solid going forward. I think exactly what you said, we could see some volatility and fluctuations given where credit spreads may move on our taxable business.

Okay. So it is really -- I'm sorry, go ahead.

Yes, the thing I was going to add is just really where that may impact us is in our aircraft business for example, and that is an area that we have been deemphasizing as we mentioned, reducing capital exposure in that area.

Do you guys do much in the way of investment-grade trading even on the agency side? And then secondly to that, are you participating much in all of the issuance going on for the financial firms in terms of secondary trading?

As to the agency market, we are actually very active in that, our middle-market coverage. Middle market taxable sales have been very active in that area. Less so in the new issue investment grade. We are not a big participant in that.

And then looking over at the equity trading side, obviously volume has been very good, but I think most indications are that fundamental equity trading is lower. Are you seeing a shift of market share to firms like Piper from firms that either are not as active as before or people just want to spread their commission dollars around more than they used to?

We are seeing early signs of that. I think it is premature to come to a significant conclusion. But just like I think we have spoken to in previous calls, we have taken a very detailed look at the competitive landscape and what potential share might be available in the areas where we are focused, both on an investment banking public finance basis, as well as institutional investors. And we do see early signs of that, that some of the consolidation that has gone on in the industry is not being captured by the new combination, but in fact, they are spreading that business out, and we think we can capture some of that. There are early signs of that. The measures are not totally solid. We are relying on AutEx at this point. (inaudible) tends to lag by at least 90 or 120 days and has fewer and fewer participants. So really AutEx and the early indications to your question are yes.

Okay. And then shifting over to banking, I know you guys have talked about adding a couple of people in restructuring over the last year or so. Have you added any more people in the first quarter, and are you actively engaged in any assignments at this point?

We have not added anything additionally in the quarter, and I believe we have just a couple of assignments, and we are really viewing that as directly connected to our industry verticals. Not a broad restructuring practice across the US economy into autos or what have you, but tied much more closely to our industry verticals, consumer, etc. where there (multiple speakers) activity.

And then just two number questions for Deb. One, when you strip out all the noise on the tax rate, is something like a 28% rate the number we should be thinking about going forward?

And then on the non-comp, I think you guys had talked about a target of something around $35 million, but is $30 million where we think you guys should be able to hold that?

So okay, first on the tax rate side, I think you should think of a number a little closer to the mid-30s for the US tax rate. Again, the international components as we just mentioned to the extent that those results are going to skew it based on my comments on the tax question answered earlier.

Okay.

And then on the non-comp side, I mean at this point we still believe a number closer to $35 million is more realistic as certain costs such as travel and entertainment were low in the quarter. We continue to work on cost savings obviously as we move forward. It is just that some of these expense categories are dependent on business activities, and so we view something closer to $35 million as more realistic.

Lauren Smith, KBW.

Just a quick one on FAMCO. You know, AUM continues to decline Q on Q. Was it again pretty much a function of market depreciation, or how were the slow trends looking like the past couple of months?

They are really relatively flat. They offset each other quite closely. It is almost exclusively market.

Okay. That is great. (multiple speakers) And then just a quick one. In your comments you mentioned Connecticut being a new market for Piper. I'm just curious, how did you enter that market? Was it just hiring people? I mean you got into California and the higher education through picking up some folks out of UBS. I was just curious the new entry into Connecticut is a function of something similar?

It is, and historically the bulk of our franchise has really been on, if you would call it, the western half of the United States. We do have some people in New York now, as well as Boston and open an office in Hartford. So we are beginning to build a presence, and I think that can be self-fulfilling over, time. As we start to get share, I think more share becomes available, and we have more people approaching us for whatever reason thinking about leaving where they are, and our visibility in the marketplace is helping us with that. So yes, Connecticut really came from opening a small office in Hartford and having someone join us.

So New England, at least from your public finance business, we should think about as a growth opportunity for you guys?

We believe so absolutely.

Brian Hagler, Kennedy Capital.

Most of my questions have been addressed, but just to go back to the tax rate I guess one more time. You mentioned the 35% in the US and then the non-US will lead to some volatility around that. I mean what is your best guess as kind of a combined tax rate the rest of the year?

No, that is really not a number that I can compass because it is very dependent on the distribution of the results between US and thus the international non-US entities.

Okay. Then just back to the prior question real quick. You entered California, Connecticut. It sounds like you may have also recently opened offices in Boston, New York. Can you just talk about other geographies or territories you have either entered or are looking to potentially enter?

It is really a combination. So you covered a lot of areas that we are growing. New England would be a very significant opportunity over time.

Additionally the example I gave with Houston, which was actually a water and sewer issue, is the other opportunity which is marketshare. That is an account that had been led, managed by one of the companies going through a merger transition, and we had long been a co-manager and created an opportunity to become the senior manager. So we are seeing both those opportunities, not only new areas and new geographies but moving up cap and going from a modest co-manager to the senior manager and close to a $500 million issue.

Right. Okay. I think that is it for me. Thanks.

(Operator Instructions). [Tom Collins].

Congratulations on a nice quarter. I had one question that goes back to your 10-K. You indicated that you had a reimbursement guarantee, and your exposure there was $88 million mitigated by some underlying bonds, which had a market value of $84.6 million at the time. As of March 31, had that exposure changed, and is your P&L related to that?

Yes, so this is related to our tender option bond portfolio, which we have filled substantially more. We have discontinued that business. So there has not been any P&L impact. That exposure has been reduced.

So is there still an exposure of $3.4 million, and was that $3.4 million recognized in the quarter ending 12/31, or is it just an exposure and not accounted for as P&L?

The $3.4 million you are referring to?

This is in your 10-K, the reimbursement guarantee and with the difference between -- (multiple speakers)

Okay. Yeah, the differential. Yes, ultimately that program has been, as I mentioned, discontinued. We ultimately had sold the municipal bonds associated with that. We do have two what are called total return slots, which still are under that reimbursement guarantee. In that case we do not have any exposure from an underlying collateral perspective, and those are both transactions that we are also attempting to liquidate. And based on the structure of those transactions, there is not actually market exposure on those.

Okay, thank you. One other question. In your 10-K you referred to concentration of credit risk, and you said you had some fixed counterparties totaling $42.4 million, and it was unsecured type of arrangements. I guess the mark-to-market. Is that something that gets where the collateral changes hands on a quarterly basis so that exposure gets reduced, or is that something that continues outstanding for the life of the contract?

So from a market perspective, those are hedged, but you are exactly right. It relates to the underlying collateral. In those particular interest rate swaps, we do not have an agreement whereby we receive collateral from those counterparties, which is very typical in the municipal interest rate derivatives business when you're dealing with the issuers. So that is something that is going to continue for the length of the contract. The exposure has been reduced in the first quarter just due to market movements, and we do believe that all of those credits are very solid credits.

We have no further questions. At this time I will turn the call back to you.

Thank you for joining us this morning, and we look forward to updating you after the second quarter. Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.