Piper Sandler Companies (PIPR) 2009 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 2009.

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.

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. We are pleased with our improved second-quarter results, which reflect a significant rebound in investment Banking Revenues, continued strong fixed income sales and trading, and importantly the operating leverage we have created in our business model.

Investment Banking revenues increased across equity financing, public finance, and financial advisory. Equity capital market conditions began to improve during the quarter. We were able to develop creative solutions and raise capital for or advise our clients in a number of successful transactions across every one of our focus sectors.

The return on the five IPOs that we participated in during the quarter is up an average of 41% from (inaudible). Also, higher fixed income sales and trading revenues were driven by solid client activity, favorable trading spreads, and improved asset valuation. In addition, we are realizing the incremental benefits from the investments we have made over the past 12 to 18 months.

We are particularly pleased with the momentum in our public finance business. We have an internal calculation for tracking economic B market share for this business. For the full year of 2008, our economic fee market share was 2.8%. At the end of the first quarter of 2009, our market share was 3%. At the end of the second quarter of 2009, it was 3.8%. This is the highest market share we have achieved since we began tracking it in 2004.

It is also worth noting that we were achieving these gains despite the non-investment-grade segment of the public finance market still being essentially closed. This segment has historically generated a significant portion of our revenues. The public finance team has done a terrific job.

Finally and importantly, our second-quarter performance clearly demonstrated the significant operating leverage we have created in our business model. Compared to the first quarter of 2009, our revenues increased 58% while our pretax operating income increased fivefold. We have held the compensation ratio to 60%, and the non-compensation ratio dropped to 26%, yielding a 14% pretax operating margin. We are committed to maintaining the positive leverage.

Looking ahead to the rest of the year, we are optimistic on the outlook for our public finance business. This business will improve further as the non-investment-grade portion of the tax exempt market begins to function.

We are also reasonably optimistic on the outlook for our Equity Investment Banking business. We are in active discussions with clients on many transactions which largely are not reflected in our file backlog. If markets are conducive to underwriting, as we experienced in the second quarter, we can effectively assist our clients in accessing the markets.

We do think M&A will be challenged in the second half of the year, as strategic buyers remain cautious and financial buyers are constrained by a lack of available financing. Furthermore, as trading spreads tighten, we don't expect that we can sustain the robust fixed income trading profit that we achieved in the first six months of the year. However, we have added 19 senior professionals to this business over the past 12 months, and we believe the business will perform well, given this additional distribution capacity and trading expertise.

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

Thank you, Andrew.

In the second quarter of 2009, we generated net income from continuing operations of $11.6 million, or $0.59 per diluted common share, compared to a net loss of $1.5 million or $0.09 per diluted common share in the same quarter last year and a net loss of $2.7 million or $0.17 per diluted common share in the first quarter of 2009.

Second-quarter 2009 net revenues were $132.3 million, up significantly compared to the $97.7 million in the year-ago period and $83.9 million for the first quarter of 2009. Both Investment Banking and Institutional Brokerage contributed to the improved performance.

First, I will comment on revenues, beginning with Investment Banking. For the second quarter of 2009 Equity Financing revenues were $23.3 million, a significant improvement from the comparative period although still below our historical quarterly averages. US, European and Asian activity contributed to the improved second-quarter performance.

From a product perspective, we generated revenues across our product spectrum of IPOs, follow-ons, convertibles, private placement, PIPEs and RDs. Within the US market, there were 13 IPOs completed in the second quarter industrywide, and we participated in five of them, including as sole book runner and Duoyuan Global Water, a leading China-based domestic water treatment equipment supplier.

We currently have no public offerings on file, which is below the 70 reported on our first-quarter call. I would note, however, that the filed backlog is increasingly a narrow slice of the Equity Financing market and not necessarily predictive.

As Andrew commented, our public finance business continued to perform very well. The business generated $20.1 million of revenues, up 32% compared to last year and up 53% compared to the sequential quarter. Activity reflected a significant flow of larger issues, as well as a continuing base of middle-market issues. The majority of the business was governmental high-grade transactions. Issuance activity remains very low from high-yield real estate and development finance.

Our M&A revenues increased during the quarter, mainly due to a higher number of completed transactions, higher aggregate transaction value, as well as increased average revenue per transaction versus the comparative period.

Turning to Institutional Sales & Trading, we generated net revenues of $65.6 million, up 17% from the same quarter last year and up 12% from the first quarter of 2009. This performance was mainly driven by strong results from fixed income sales and trading.

Equity sales and trading revenues were $30.4 million, down 14% compared to the year-ago period, mainly attributable to the US equities business which experienced lower growth cents per share traded and a modestly higher trading loss ratio. Revenues were essentially the same as the first quarter of 2009.

Fixed income sales and trading revenues were $35.2 million, up 69% compared to last year and up 27% compared to the strong sequential quarter. Compared to the second quarter of 2008, the largest contributor to the increased performance was trading gains, which we expect will not be sustained at these levels as trading spreads compress. However, fixed income client activity in taxable and tax-exempt products was solid, and fixed income commissions materially contributed to the increased performance. Commissions were up 45%, compared to the second quarter of 2008, and up 48% for the first half of 2009 compared to last year. Results reflect the additional talent and new products, such as corporate credits and taxable municipal.

Now, I will turn to non-interest expenses. For the second quarter of 2009, compensation and benefits expenses were $79.4 million, up from the comparative periods due to the improved performance. The compensation ratio for the second quarter of 2009 was 60%, an improvement from 62.5% in the second quarter of 2008 and the same as the first quarter of 2009. For the second quarter of 2009, noncompensation expenses was $34.5 million, which included $3.6 million of restructuring charges that were mainly severance-related.

During the second quarter, we reduced net headcount by 3% compared to the first quarter of 2009. This is the second quarter in a row we've been below our goal of a quarterly run rate of $35 million for core noncompensation expenses. We believe this will continue and that we can now achieve a quarterly run rate in the $32 million to $33 million range for the remainder of the year.

This concludes our remarks, and I will turn the call back to Andrew.

Operator, we will now open the line for questions.

Thank you. (Operator Instructions). Steve Stelmach, FBR Capital Markets.

Good morning and congrats on a good quarter.

Just real quick in terms of the Muni side of the business, I know you guys did that acquisition of the Muni team in California, I believe it was 2008. Can you give us some color on that team's production, given California's sort of fiscal crisis? Is there a backlog of deals that have yet to come to fruition there, or just any update would be helpful?

They remain relatively active. It is a lot of K-12 activity. They've continued to be able to access the market.

I would share your observation, however, with the budget deficits. At the state level and often at the local level, there may be challenges ahead, but so far they have been successfully accessing the market.

So you wouldn't characterize it as some backlog now that hopefully California has got their act together, at least as of today?

Yes, they've got an ongoing backlog that I would say is similar to what's in here as they joined us back in '08.

Okay. In terms of the 19 new fixed income professionals that you guys mentioned, what does that compare in terms of percent growth year-over-year, quarter-over-quarter? How should we think about that incremental 19?

I would say probably just think of the total -- for the total fixed income sales business, it is probably almost a 15% to 20% increase, I would say, in professionals, or in total headcount I should say.

Okay, that's helpful. Thank you.

Devin Ryan, Sandler O'Neill.

Good morning. Just another question on the public finance -- you know, the recent additions seem to be paying off, and you announced an additional hire yesterday. Is there still room there or I guess a desire to expand more, or is it now just really about executing with the people you have as the markets open back up?

You know, we've continued to add in that area. We've got a footprint now growing on the East Coast, which we had not previously had. We've got people in Boston, Hartford, New York, I think further down the seaboard and there is plenty of opportunity, so selectively, with the right profile, the individual and their clientele, we would absolutely continue to expand.

Okay. Sorry if I missed this, just some fixed income generally. But can you quantify or even qualify just the overall level of client trading volume in the second quarter, maybe compared to the first? Essentially, what I am trying to do is get some sense of how much of the revenue strength is attributable to trading volumes versus gains on improving valuations in the quarter.

All right, well, let me just start by just saying while a significant portion of the fixed income sales and trading revenues were driven by trading profits, we did see very strong client activities (inaudible) throughout this year coming from the additional talent we added that we had just discussed with the 19 professionals. We are also seeing additional activity in new products, some additional credit products as well as taxable municipals.

Let me just add a thought or two to that. As we commented on, we've been investing in that business fairly consistently in the last 12 months. As it is currently constructed, we would anticipate annual revenues in the $65 million to $75 million range. We are going to continue to invest in the business and that may grow over time. Clearly, our run-rate level is above that. That really does reject the very favorable trading environment.

Okay, so like $65 million to $75 million annual, okay.

In a normalized --

In a more normalized environment, sure.

That's very helpful. Thanks. In terms of equity underwriting, you spoke about being somewhat optimistic there. Do you think this could be a better capital raising summer than we generally just see, given that there seems to be some demand by clients as the windows open, and especially if equity markets remain relatively stable.

Potentially. It's weird, though, that you don't have some of the slowdown in August, which is frequently followed by a very active fall. But I don't see any signs that this would be the unique environment that you wouldn't have some kind of modest slowdown in August. Let me put that -- I share your observation. What's come to the market is typically at the top of the range, in several instances above, and then traded quite well.

Okay, thanks. Can you give some more detail -- sorry if I missed this as well -- but on the earnings allocated to participating stock awards, and how this is calculated and how we should think about it going forward?

So just to clarify, we were required to adopt a new FASB staff position which actually became effective January 1, '09, but because of our loss position in the first quarter, we were not required to adopt it.

Under the new staff position, we are required to allocate our understood net income to unvested restricted shares for participating securities that they're called and then to common shares. So that's where you see the bifurcation of the earnings in the release. So in essence, what you're seeing now for your -- the shares that are reported, both the basic and fully diluted, relate to just the common shares. The slight difference has to do with some small option dilution. The income that you see, the $2 million that is allocated to participating shares, that relates to the income that we would attribute really pro rata between the common shares and 100% of our unvested restricted stock grants.

Okay, so we should essentially think about it as some percentage of the net income before you kind of back out those shares?

Yes, so we are bifurcating the income in the same relation that you would bifurcate the shares, between common shares and 100% of our unvested.

Okay, great. Thank you very much.

Thank you. (Operator Instructions). [Jeff Burston], [A.H. Mezanti].

Just a question on normalization of the fixed income business -- can you just talk about what you see happening that will in fact normalize this business and over what period of time you expect that to happen?

I think the dynamic that we are pointing to is the significant credit tightening of the spreads and the favorable trading environment. It has been relatively unique for the last six months. As that would normalize, I'm not sure I can give you a specific timeframe, but when we just look at it over a longer economic cycle, it has been particularly favorable this spring, to some extent reversing the very, very unfavorable environment of the 12 months preceding it.

I got you. Okay, so not related to volumes of financing but really spread tightening.

It is more spread tightening. We think the volume environment might actually improve.

Thank you. There are no more questions at this time. I will turn the conference back to you.

Thank you. Overall, we are pleased with our recent performance and confident in how our business is currently positioned. We will continue to drive our business forward and work to sustain our improved performance. Thank you all for joining us this morning.

Thank you. Ladies and gentlemen, that concludes our conference call for today. We thank you for your participation and ask that you please distract your lines. Have a good day.