Piper Sandler Companies (PIPR) 2010 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 first quarter results for 2010. 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. As a reminder, this call is being recorded. And now, I would like to turn the call over to over to Mr. Andrew Duff. You may begin your call.

Thank you and good morning. As our results show, we had a slow start to the year in equity and public finance underwriting. However, fixed income institutional brokerage rebounded from the lower sequential fourth quarter and financial advisory revenues improved. Also we closed on our acquisition of Advisory Research on March 1.

We believe our first-quarter results understate the strength of our firm and momentum in our equity financing business. We remain committed to our ROE goal and confident in our prospects for 2010.

Let me provide some context for the equity financing backdrop. The decline in equity markets in the US, Europe and Asia early in the quarter negatively impacted capital raising for growth companies. The uncertainty was particularly evident in the pricing of our IPO transactions.

In mid-March Piper Jaffray was a co-manager on the US IPO for Financial Engines which priced above the filed range. Prior to Financial Engines however, 16 out of the 19 IPOs in the US market price at the low end of the range or well below it. Since mid-March and into April pricing has dramatically improved, which should be constructive for our strong backlog.

Currently our US filed backlog, mainly comprised of IPOs, 19. The backlog has increased from 13 when we reported our year-end results and just seven when we reported our third quarter.

Of our US filed backlog, seven transactions are book run. All of our sectors are represented in the backlog with technology, media, telecom comprising the largest number of transactions. Healthcare is showing some signs of life. For the first time in three years we have a filed IPO in the medical device sector, historically our strongest, with the 150 million book run IPO for Dynavox. We're also encouraged by the increased activity in Asia.

Now, let me turn to our key objective, increasing our return on equity. We believe we have a clear path for getting from 4.6%, where we ended in 2009, to our goal of 10 to 12% in 2012. Despite our slow start, we believe we can achieve meaningful progress this year.

There are three main drivers for achieving our goal. First we have significant operating leverage in our business model and improvement in certain areas can substantially contribute towards the ROE target. Importantly, we need to increase the scale and profitability of our international franchise. We're encouraged that with the improving market environments in each of the UK and Asia. Our results in both of these geographies are showing early trends of marked improvement compared to the last two years.

Equally important, improved US equity financing levels and an improving M&A environment will significantly contribute towards our ROE. Additionally, maturing the hires that we have invested in over the past couple of years to full productivity will contribute to improved ROE.

Generally, we estimate it takes 18 months for a senior hire to reach full productivity with some variability by business. We hired approximately 50 senior revenue producers in 2009. For 2010 our goal is approximately 30 and in the first quarter we hired 25.

The second key driver is the contribution and growth of asset management. We're very pleased to close our acquisition of Advisory Research on March 1. Their financial performance for the month was somewhat ahead of the run rate we disclosed in mid-December.

Going forward we expect that the Asset Management will contribute approximately 25% of our pretax operating income, which will provide a good complement to our more cyclical capital markets business. We expect Asset Management to contribute approximately 130 basis points towards our ROE target.

The third driver is including leverage on our balance sheet over the next few years. Outside of corporate development, we intend to increase our gross leverage ratio as measured by total assets divided by shareholder equity. Our leverage ratio was 2.6 at the end of the first quarter. Likely beginning in 2011 and over the ensuing couple of years, our goal is to increase the ratio to 3 to 4.

We intend to add debt to our balance sheet and buyback equity to remix our debt to equity structure. We need constructive debt markets in order to raise the debt. However, even if we're not able to increase the leverage, we would be able to meet our ROE goal.

It is important to note that if we achieve 100% success in each of the fronts that I just described, we would in fact exceed our target of 10 to 12%. So we believe our goal is realistic and achievable.

Corporate development opportunities would be additive to achieving our goal, but aren't required for us to meet it. We're committed to executing against the plan to provide a competitive return. Now I would like to turn the call over to Deb to review the financial results in more detail.

Thank you Andrew. I will supplement the information already disclosed in our earnings release this morning with a few additional comments.

For the first quarter public finance revenues were $15 million, below the near record sequential for the fourth quarter, above the year ago period, and about the same as the quarterly average for the last four years. At this point we believe the lower activity was due to many of our issuers having completed their deals before the 2009 year-end rather than a trend for 2010.

We're seeing increased activity and some of the noninvestment grade public finance segments including senior living, hospitals and charter schools. Realistically, however, budget and economic issues are creating stress on municipal credits and we're watching closely how those dynamics may impact their capital plans going forward.

Moving to expenses, I want to provide some additional color on our 59.4% compensation ratio for the quarter which was below the 60% reported for the first quarter and the full-year of 2009. The lower ratio for the quarter was mainly attributable to lower leadership team incentives which are based on pretax operating profits. We still anticipate the full-year compensation ratio will be very close to 60%.

I also want to provide comment on the tax expense. As we disclosed in our 10-K, approximately 500,000 shares of restricted stock vested in the first quarter of 2010 had value significantly less than the grant date fair value of $70 per share, resulting in a $5.2 million tax expense or $0.26 per common share. We have a complete description of this tax expense on pages 37 and 38 of our 2009 annual report but let me just provide a summary.

We record deferred tax benefits for future tax deductions expected upon the vesting of share-based compensation. If deductions reported on our tax return for share-based compensation exceed the cumulative cost of those instruments recognized for financial reporting, we record the excess tax benefit as additional [paid in] capital.

Conversely, if deductions reported on our tax return for share-based compensation are less than the cumulative cost of those instruments we offset the deficiency first to any previously recorded excess tax benefits recorded as additional paid in capital, and any remaining deficiency is recorded as income tax expense. In the first quarter we did not have any available excess tax benefits within additional paid in capital.

The vesting of 500,000 shares in the first quarter of 2010 at values less than the grant date's fair value resulted in $5.2 million of income tax expense in the first quarter of 2010. Looking forward, our outstanding annual incentive restricted stock grants have grant date fair values of approximately $41, $28 and $44 and which vest in 2011, 2012 and 2013 respectively.

Finally, we closed on the Advisory Research acquisition on March 1 and consolidated one month of results including approximately $400,000 for intangible amortization. On an annualized basis, intangible amortization related to ARI will be in the range of $4.8 million to $6 million based on our preliminary valuation, which is below our estimate of $8.1 million at the time of the announcement in mid-December.

Our estimate of intangibles was based on our experience from our acquisition of FAMCO. However our preliminary valuation indicates a lower allocation to two intangibles and a higher allocation to goodwill based on ARI's business. We expect to have this valuation finalized and included in our first quarter 10-Q.

Beginning in the second quarter of 2010 we will provide segment results for capital markets and asset management. Lastly I want to review how shares issued related to the ARI transaction impacted our EPS calculation.

We issued a total of 1,051,907 shares related to the acquisition. All except a very small amount are restricted. For a full quarter the restricted shares will increase the percentage of earnings allocated to participating stock awards to approximately 23% from 18% prior to the acquisition.

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

That concludes our formal remarks. Operator, we will now open the line for questions.

(Operator Instructions) Devin Ryan, Sandler O'Neill.

How are you guys thinking about the comp ratio in the quarter? Is that the level that is appropriate just given the revenues you reported in the quarter? Or is that what you believe is kind of the right level for the year just given your full expectations for the year?

I think ultimately we've talked about what did impact it from the 60% that we had been reporting last year, and we do think that that level is really consistent with where we think it will be for the year.

Okay, got you. And just on the fixed income financing business, just trying to take your comments and think about the outlook for that business. Is it fair to say that the fourth quarter was maybe as close to as good as it gets and maybe the first quarter was not a great quarter? So it was a more normal quarter or something in between that, or how should we think about that business going forward?

So let me make a couple of comments there. We have a very broad and diverse public finance franchise that I've got a lot of confidence we can grow over time. We've talked a fair amount in the last couple of years about our growth in California. We now have an increasing but pretty modest presence on the East Coast. We did add some bankers this quarter in New York. We now opened our first office in Florida, relatively a new area for us in the Southeast.

You do have cross currents there to some degree. On the one hand there's pretty significant infrastructure needs and budget issues. The budget issues cut both ways. Some of that you see financing through the capital markets. Other municipalities probably are experiencing constraints on the debt they can actually issue.

When you look at it, though, any given quarter is going to reflect the business mix -- the type of financing, the size of financing, the structure. So, that was a great quarter in the fourth quarter. Do I think we will see those kind of numbers again over time? Yes, I do.

Okay, got you. And then lastly here, the interest expense on the note from Advisory Research related to that deal, is that netted out of the asset revenues management revenues or does that come out of other income? I'm just trying to figure that out.

That's shown in the interest expense line separately. It's not part of that.

Right. But when you show your results on a segment basis, I'm trying to (multiple speakers) where it's coming out of the net revenues on a segment basis.

That is actually in is in the other category.

It's is being netted out of other, not -- (multiple speakers)

Other, right. We just viewed that as overall capital for Piper Jaffray. Although it was done in conjunction with that acquisition, we are not explicitly allocating that debt to that business.

Sam Hoffman, Lincoln Square Capital.

Good morning. I just wanted to ask if you could provide an update on how the integration with Advisory Research is going and whether you're seeing or expect any natural disruption in net flows. Or are you retaining the key people you would like to retain?

We're off to a terrific start and I attribute some of that to the leadership of Brien O'Brien, who built the company and is very engaged with the leadership team at Piper as well as ensuring the business continues to perform well and our clients are well taken care of. We have no attrition in the business, don't anticipate having any. The performance remains strong.

What we'd anticipate in 2010 is the historical growth of net new assets, which is actually very strong over the past decade, would moderate -- there is a fair number of clients in the consultant community that would want to watch for quarter or two and make sure you've successfully made the transition.

Okay. My second question is, you had commented that the acquisition would contribute 130 basis points to the ROE target in 2010, so two parts of that. Is that the run rate ROE target beginning in the second quarter or is it for the full year? And then also, do you anticipate any additional our ROE improvement beyond what comes from that acquisition in 2010?

So, okay, first of all I would say what we commented on the 130 basis points that was the impact of Advisory Research to ultimately our goal of the 10 to 12%. So it wasn't a specific comment about 2010. And I think as you see in the Asset Management business with an acquisition like that where you do have a significant amount of intangibles that are put on your books, that actually over longer periods of time can contribute even more significantly to the ROE.

I guess your second question was really more around sort of the ROE for 2010. And I think our comments really talk about the fact we believe we can make significant progress in 2010, even though that wasn't there in the first quarter, as a path toward this all ultimate goal of our 10 to 12%.

And that even includes the performance in the first quarter?

Yes.

Okay, thank you.

(Operator Instructions) Steve Stelmach, FBR Capital Markets.

I just want to touch on the international business a little bit. It seems the past couple of quarters have done relatively well, relative to the rest of the franchise. Can you give us a little more color around that? Is that macroeconomic related? Or is that simply you guys realizing the benefits of the hard work you've done over the past couple of years here? And I'm speaking specifically to the advisory services revenue. (multiple speakers)

I think from my perspective it is just part of our [plan of] continuing to build out those franchises to be very focused on particular sectors. So in Europe it is expanding the number of sectors from just health care to a broader group, clean tech and technology.

In Asia it was really taking the acquisition we made a couple of years ago and really structuring that to be more focused on these industry sectors which really is our expertise. I think over time that is continuing to show results through the earnings and deals we've been able to do.

I would add the market environment in both of those, capital markets has improved fairly significantly. And while both of those businesses ran at a loss in 2008 and 2009, they are essentially breakeven in the first quarter. So there is a trend change here.

Okay, that's helpful. And is it -- is headcount generally flat from a year to 1.5 years ago? Or have you begun to bolster that up again as you feel better about the macro environment?

We've added like 50 senior hires last year. We thought about doing a similar number this year. We're moderating it slightly and remixing it. And that really reflects a decision to keep driving the productivity that those have joined us. We think it takes approximately 18 months depending on the business they're in and the market environment.

And then number two, is the competitive landscape has changed fairly significantly. So we're going to moderate that and, if you will, kind of mature what we've done and then remix and hire some more junior than we had originally planned.

And those headcount like 50 is --

Global. (multiple speakers) It's not just international.

Not just international, got it. Perfect.

In fact maybe the last comment I would make is, of the 25 we hired in the first quarter, almost one-third of them were in Europe and Asia, just continuing that build out that Deb referred to around the key industry sectors.

Perfect, thank you.

Christopher Nolan, Maxim Group.

Quick question on the increased leverage that Andrew referred to earlier; the 10-K indicates a $61 million outstanding share repurchase authorization. Should we be anticipating this will be increasing going forward?

Our authorization runs through June of 2010 and we do intend to seek a new share repurchase authorization to replace the existing one. I think some of that gets to Andrew's comments about our longer-term desire. I think there's two things.

One, to offset dilution from employee stock grants over time, and secondly, to -- short of any corporate development activities -- really remix our balance sheet with some stock buybacks and increasing long-term leverage. So due to those factors in our long-term plan, we do intend to enough to seek a new share repurchase authorization.

Great. And Deb, you were mentioning intangible amortization. Could you rehash those comments again? You sort of went through it quickly and my notes couldn't keep up.

Yes. So for the -- what we have recorded in the first quarter, which was one month, was $400,000 of intangible amortization. We're still finalizing, as GAAP allows you to over a period of time after an acquisition, the allocation of our purchase price to of course both tangible assets which are fairly small in an acquisition like this, and then intangible and goodwill. What we're seeing from the work we've done is that intangible -- on a full-year basis the allocation to intangible assets should be between $4.8 million and $6 million.

Below the $8 million?

Below the $8.1 million we had announced, exactly.

[Jason Harbs], Goldman Sachs.

Hey good morning guys. Just wanted to quickly follow-up on the headcount plans. So it sounds like you pretty much hired most of the people that you plan to for the year. I'm just kind of curious what outstanding holes are you looking to fill with the remaining five slots.

It's really anticipated that we would get a lot of the hiring done in the first part of the year if you just think about bonus cycle and etc. It's a logical time to try and accomplish as much as you can. The remaining balance is really in two areas. It's continuing on the sectors in Europe and Asia. So when I say that I think a large amount of the banking is done, but we have some research and distribution to finish. And then our middle-market sales force we're going to continue to add to and increase the distribution there. Those are probably in fixed income, the head of the pack.

Okay, thanks. And just to drill down on the equity underwriting, obviously kind of a like quarter due to some of the more choppy market conditions we saw. Just curious if you can give us sort of an update on how the pipe landscape looks, and just your general outlook for the next couple of quarters.

So in my comments earlier it was a very slow start. In fact not only January and February but the first part of March, and that environment is really improving pretty significantly, so we've got a backlog that is just under 20.

But just to give you a more current feel, we've got six financings that ought to price in the next 2 days, a sole managed convert in the solar space, our led managed book run IPO for Dynavox, and then four co-managed transactions this week. Meanwhile we are actually going to file a couple more to the backlog. So I would say the environment is really as good as we have seen it for quite some time. As long as the capital markets remained relatively stable here the outlook is very positive.

Just to try to quantify the impact of that, would that mean going back to something like what we saw in the fourth quarter or is it maybe too early to tell?

Yes. I think given the robust activity that Andrew was just talking about, I think that is definitely something we could see.

[David Petro, Blue Jay Asset Management].

I've a couple of questions, but number one is with asset management becoming so much more important going forward, will that be broken out as a separate segment?

Yes, that absolutely will. In the second quarter we do intend to do that. We're not prepared to do it in the first quarter.

The other one goes to kind of your long-term goal of getting 10 to 12% and employing a lot of -- a decent amount of leverage, which you have had trouble with in the last two or three years, recognizing that a lot of that leverage was off balance sheet in some of those vehicles that you all were involved in.

But just looking at your goodwill, you seem to go out of your way to isolate the original goodwill from the UBS -- excuse me, the USB acquisition. Why do you still have that goodwill when you have basically low single digit ROEs and you only plan on getting to 10 to 12% ROE? Why not just write that off?

The other thing is kind of as a rule of thumb for analysts, generally if you had a 10% ROE, historically that means you would trade at one times book. If you had 20% or 30%, i.e. a Goldman Sachs or a Merrill Lynch during the prime, you would get two or three times book. I mean, 10 to 12%, are you saying you should be trading at one times book? The numbers are not making sense.

Let me just start out with a couple of things. First of all, you had some comments on leverage. And we have, as we look back over the last couple of years, first of all, difficult market to raise the debt. On the flipside that we actually were in a position where we had excess capital. Some of that was deployed in the Advisory. So we were not actively out seeking to put leverage on.

In terms of the goodwill, especially the piece you're referring to, which was part -- actually spun -- we took that with us when we spun out of US Bank in essence. That is something we do, a goodwill impairment testing at the end of every year. We did it at again at the end of November and that testing concluded that we would not write any more off. We had written some of that off at the end of 2008 based on that same annual testing we go through.

So, from that perspective, it is there because the value of our company as we look forward and project that, number one. Number two look at market comparables, etc. That is a value that we do believe is justified.

The last part of your question really, I think we look at -- a multiple of tangible book is one factor that is looked at as a convention for valuing firms. I think for us going forward we really look to a multiple of earnings as being a better driver, especially as we continue to improve and have the asset management business be a larger part of our business overall, that that may be a better multiple for us to look at going forward. Andrew, do you have any other comments to add?

I just had an observation. Our sense is that the multiple on book is related to how much you use your balance sheet. I would remind you we are largely and an agent business and don't have particularly large balance sheet, nor use it to drive our business. The vast majority of what is on there is inventories that are finance-able and those are, again, principally driven by our flow activity to support our client activity.

I think you might on another end of the continuum take a much more developed look at the relationship to book value if that was a big driver in the business model. Or depending on the economic cycle, when it's very challenged; you certainly saw that in 2008. I think there was a lot of attention back to the balance sheet.

But if you go back to '07 and '06 and you say you don't have leverage, the leverage wasn't on the balance sheet but you did have it in your TBL program. Even back then, your ROE was rather low.

Again to remind you, we had sold our private client business in the fall of 2006 and paid off all of our long-term debt, bought back $100 million plus in shares and then retained some very significant equity capital, arguably over capitalized with the intention of redeploying it to build out the business. Two primary objectives to make some asset management acquisitions which we've now completed, and then build out our franchise globally which was an acquisition in Asia.

So I believe we've done what we intended to do and said we would do, and did go through a long period up being over capitalized. We did have an off balance sheet program in TLB which we collapsed and sold back in the market place.

Okay, thank you.

Lauren Smith, KBW.

Just -- I guess most of my questions have been answered, but on AUM, could you give us a breakdown of the $12.8 billion into Advisory Research and FAMCO? And then any detail on flows in the quarter and going forward as you guys breakout into segment, will we get more consistent detail on that regard going forward say flows, market appreciation and that -- those sort of metrics?

Yes. Let me start first, Lauren, with the AUM breakdown. So FAMCO was $6.9 billion, which was consistent with where they were at the end of the year. Advisory Research added $5.9 billion to that number. So it's a combination of those two. Your second question on flow (multiple speakers)

On flows, they were relatively flat. We completed the consent process with Advisory Research that went through into February and settled out. It has been essentially flat from then, which really honestly is what you would anticipate. We did have some good market appreciation in March as you would expect. At FAMCO it was relatively flat for the quarter as well. We do intend to do exactly what you asked. When we move into segment of reporting in the second quarter you can expect us to report on that net flows, market appreciation and performance.

Great. As far as -- I know it's early stages. The transaction just closed. But how were you thinking about your marketing effort? Or is that going to be revamped, taken to another level? Or kind of how are you thinking about putting these two businesses together and growing it?

They're going through a process to think about that thoughtfully. The number one focus is to maintain attention to the performance of the products and the client service.

There should be an opportunity in marketing and those discussions are well underway. It's slightly premature and we can update you certainly at the end of the second quarter. I would tell you our intention is to add resources to the combined effort. (inaudible)

They are sorting through how and where you might appropriately cross market. Some of the products were complementary and quite different. Advisory Research is essentially a value shop, bottoms up valuation. Several of FAMCO's products are top-down macro view. So those don't naturally necessarily complement each other. Having said that, they both have very substantial high performing energy products, and those have similar bottoms up dynamics and strong performance and might well consider that.

Great. Thank you very much.

Mr. Duff, it appears there no further questions at this time. I will now turn the conference back to you. Please continue with your presentation or closing remarks.

Thank you all for joining us this morning. We will look forward to speaking with you in July.

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