Piper Sandler Companies (PIPR) 2010 Q4 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 fourth quarter and full year of 2010. During the question and answer session, securities and 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 [the lease] 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 earnings release and 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 Mr. Andrew Duff. Mr. Duff, you may begin your call.

Good morning and thank you for joining us to review our fourth- quarter and year-end results. We're very pleased with our record fourth-quarter revenues and strong bottom-line results, reflecting solid performance in all of our businesses and aided by improving macroeconomic conditions.

We raised $7 billion of capital for our public company and public finance clients and M&A revenues were the highest since the fourth quarter of 2007. In addition, we successfully navigated a challenging municipal market and had very good performance in our Asset Management business.

Let me start with some highlights for 2010. The macroeconomic environment proved more challenging than we anticipated in the outset of the year. Conditions improved in the back half of the year, delaying the recovery and growth sectors for equity capital markets and M&A. Despite this, we took actions to improve our profitability and return on equity for the longer-term.

We materially diversified our business mix with the addition of Advisory Research and the improved financial performance at FAMCO. For 2010 Asset Management comprised 13% of total net revenues and 28% of pretax operating income. This compares to just 3% of net revenues and a small loss in 2009. In addition, we significantly restructured our European operations. Europe will continue to be an important market for us in distributing US and Asia securities and facilitating global M&A. But we will no longer originate or distribute European securities.

We estimate our actions will improve EPS by $0.30 to $0.35 per share and return on equity by 80 to 90 basis points in 2011. This action allows us to redeploy resources to China where we believe the opportunity for our firm is very compelling.

Now I would like to provide some 2010 highlights for each of our businesses, beginning with equity financings.

The IPO market continues to rebound from the 2008 lows. In the US there were 153 IPOs with greater than $20 million in proceeds versus 58 in 2009 and 30 in 2008. The market showed increasing momentum throughout the year as the economy strengthened. 56 of the 153 IPOs completed in 2010 were priced in the fourth quarter.

For Piper Jaffray, our equity financing revenues significantly improved, aided by a robust fourth quarter. For the full year we completed 96 global equity financings, raising $12 billion of capital, compared to 79 equity financings and $12 billion of capital in 2009.

Our 2010 revenues increased 39%, driven by improved economics. In the US we generated a record 63% of our public offering fees from book run business.

Within our focus sectors for middle-market issuers, our market share increased to the highest level in the past seven years and rose 16% from the average of 2004 through 2009. Our significant gains in the consumer sector were the most noteworthy.

As I mentioned earlier, the actions we took in New York will allow us to invest further in China where we now have a team of 87, an increase of 19, or 28% compared to 2009. We have added resources in investment banking, sales, trading and research.

In 2010 23% of our global capital raise was for China-based clients, up from 9% in 2009. We completed 14 bookrunner offerings for China-based companies on Hong Kong or US exchanges and we will bookrunner on nearly 100% of our Hong Kong transactions.

For 2010 our share of Hong Kong IPO fees from middle-market issuers rose to 4% after averaging less than 1% since we entered the market in 2007.

Turning to public finance, Piper Jaffray increased the number of completed transactions by 8% compared to 2009. Par value declined 25% due to several large transactions in 2009. However, underwriting revenue declined only 9% from the very robust period last year.

Our fee market share was 3.1%, down from 3.5% in 2009.

The municipal market environment at the end of 2010 was challenging with the increase in Treasury rates, the significant new issuance of and uncertainty surrounding the extension of Build America Bonds or BABs, and credit concerns by investors. We navigated these challenges very well and generated solid municipal performance. I will say more about our outlook for the business in a few minutes.

Importantly, in March of 2010 we significantly expanded our Asset Management business with Advisory Research. We are very pleased with ARI's performance in 2010 and assets under management increase from $5.5 billion at the close of the acquisition to $6.4 billion at December 31. And the integration with FAMCO has gone well. Our Asset Management business is profitable and well-positioned with diversified equity and fixed income capabilities.

The blended net revenue yield on assets under management was 60 basis points for 2010, a significant increase from 22 basis points in 2009. Our goal is to continue to increase the revenue yield as the higher growth, higher revenue yielding assets grow -- such as the MLP product, the assets of which grew to $1.5 billion at year-end, or an increase of 46% from 2009.

Also, Asset Management hired two new marketing professionals to support our growth plan for this business.

I will end my formal remarks with our outlook for 2011. Overall, the macro economic environment continues to strengthen. We're cautious about the potential for volatile periods in the capital market in the year ahead, but we believe the level of volatility has generally declined, which should bode well for the growth sectors of capital markets and M&A.

The US industrywide 180-day backlog for public offerings at year-end was 68, the same levels as the year-ends of 2005, 2006 and 2009. The following years of which produced over 150 IPOs. Also we believe that structural headwinds remain in the municipal bond market will likely [be] continuing to cost volatility in this market during 2011.

With that as a backdrop, we are confident that our deep expertise focused on the middle-market is a compelling client value proposition. Our aim is to be the leading middle-market investment bank and public finance franchise with strong, diversified distribution balanced by a quality-oriented, total return investment advisor.

To support our vision we have four five-year strategic growth priorities and successful execution will be critical. First, significantly increase the revenue from Corporate Advisory; second, significantly increase revenues from public finance and distributions; third, grow revenues from Asia; and fourth, grow asset management.

In 2011 we will remain committed to improving our productivity, profit margin and return on equity and growth will be targeted on these priorities. Near-term our goal is to continue to improve our pretax operating margins and achieve upper single digits of ROE.

Within investment banking we are taking steps to increase our capability and profitability over the five-year horizon. As I mentioned, we intend to grow our global M&A practice, which has attractive profitability and returns.

Also we will further invest in the opportunity in China. China and Hong Kong based companies represent approximately 27% of the global equity capital raise by middle-market companies in 2010. And our four focus sectors align well with the activities in China and Hong Kong. We anticipate that these trends will continue into 2011.

We are committed to adding resources in Asia, including industry bankers, distribution and research as we enhance our presence in this market.

Turning to public finance, we believe that the municipal market is working. But we are very aware of the fiscal stress faced by issuers. There may be some select defaults, but we do not expect them to be widespread. With the expiration of the BABS program we could ultimately see a negative impact on our municipal strategic trading revenues. But certainly we're seeing a lot of attractive opportunities.

On balance, with the expiration of BABS we expect little impact on our public finance business because we can serve the issuer client with either tax-exempt or [taxable underwriting].

As we talk with our public finance clients, we're reasonably optimistic about their intentions and ability to issue new debt. And we're encouraged that in some of our key markets, including California, bond referendums were passed in the November elections -- the largest components of which will be issued in 2011.

We continue to closely monitor market conditions. We plan to expand public finance to a more national footprint with the requisite distribution. Historically, our market presence has largely been in the Western US.

In 2009 we entered the Northeast and in 2010 the Southeast. Our goal is to add 30 senior bankers, or nearly a 40% increase over the next five years. In addition, we plan to double our middle-market sales force to enhance public finance distribution and increase secondary revenues. Acquisitions will be a key component in growing this business.

Finally, we are optimistic about the role of Asset Management at Piper Jaffray. This business has attractive productivity, profit and return characteristics and provides a good offset to the more volatile Capital Markets businesses. We have ample product capability and scalability of investment teams to enable us to grow the business without significant amount of investment.

Also, we're adding new products and opening new market channels for our products to continue increasing the revenue yield of our total assets under management. When I look ahead to 2011 I am optimistic about how our business is positioned and our prospects.

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

Thank you Andrew. My remarks will supplement the information already disclosed in our earnings release this morning.

We generated strong topline performance in the fourth quarter, an improving economy, a more stable equity capital markets environment and careful navigation through a volatile municipal market environment also contributed to achieving strong quarterly results.

For the fourth quarter, we generated record revenues of $176 million which exceeded our previous record by 19%. We generated net income of $9.4 million or $0.49 per diluted common share. And our pretax operating margin was 13.1%.

This strong performance included a $9.1 million after-tax restructuring charge, substantially all of which was attributable to the restructuring of our European operations. The charge reduced EPS by $0.48 per diluted common share and pretax operating margins by 5.4 percentage points. So on a core basis, excluding the charge, EPS was the highest and pretax operating margin was the second highest since we became a public Company.

Revenues for the full year of 2010 were $530.1 million primarily driven by significantly higher contributions from Equity Financing, Financial Advisory and Asset Management. 2010 revenues exceeded our previous peak revenues in 2006 by 5%. For the full year we achieved a pretax operating margin of 10.9%.

For the quarter, Capital Markets contributed 86% of revenues and achieved a segment pretax operating profit margin of 10.6% which was reduced by 6.2 percentage points due to the restructuring charges. For the quarter Equity Financing revenue were $42.1 million, the highest level since the fourth quarter of 2007. We're encouraged to see the strong momentum of the fourth quarter in both the USA and in Asia carry through into 2011 in terms of our backlog and client dialogue.

Public finance completed significant new issuance for clients in the fourth quarter despite the elevated new issuance supply in the industry, the volatility in the market and credit concerns by investors.

In addition, we actively managed and hedged our municipal institutional brokerage business during a challenging market, resulting in solid performance.

Asset Management contributed 14% of revenues in the quarter and revenues increased 49% compared to the sequential third quarter. The increase was mainly driven by performance fees, the majority of which are recorded in the fourth quarter if earned, and were $7.6 million compared to $0.7 million in the fourth quarter of 2009.

Asset Management has five strategies with performance-based fee arrangements. The energy fund and the micro cap value funds were the largest contributors.

Finally a few comments on other matters. First, as we disclosed as the third quarter, the restructuring charge increased our consolidated tax rate for the fourth quarter to 59.3%. Approximately 20 percentage points were attributable to the loss in the UK and our inability to recognize a benefit from losses in that jurisdiction at this time.

For 2011 we expect the tax rate to be approximately 40% excluding the impact of any one time discrete tax items, and depending on the mix of profits by business and by geography.

Second, for the quarter, average annualized return on equity was 5.4%, which was reduced by 5.1 percentage points due to the $9.1 million after-tax restructuring charge.

Third, in the fourth quarter of 2010 we repurchased an additional $2.4 million or 84,000 shares of common stock. The average price per share repurchased was $28.62. This brought the total for the year two $47.6 million or 1.5 million shares at an average price per share repurchased of $31.37.

[There's] $57.4 million remaining on our share repurchase authorization which expires on September 30, 2012. Our main goal of share repurchases is to offset dilution from employee stock awards.

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

Operator, we would be happy to take questions.

(Operator Instructions) Matt Fisher, CLSA.

Hi good morning. First, regarding FICC or fixed income trading, what portion, if you could save agency versus principal trading -- and how did mark-to-market impact the results this quarter? I just ask because munis are such a large part of the trading business.

Yes, so you're right. Municipals do represent approximately 60% of our fixed income institutional brokerage revenues, and that was similar in this quarter to our historical quarterly trend. Municipal strategic trading is a significant contributor to our fixed income institutional brokerage and that business has solid performance.

I guess I would say relative to your question on marks overall, which I think you are really getting at ultimately the trading P&L of the business. And we really headed into the fourth quarter anticipating volatility, that that volatility would elevate and ultimately that rates would rise. And so we were well-positioned for what did play out in the market place.

Ultimately we used a variety of tools to hedge our exposure and really ended up having solid business on both the client flow or agency side of our business as well as the strategic trading.

Okay. And then you touched on the backlog and equity for investment banking. The 68 IPOs, what is that -- how is that versus the end of last quarter? And then also if you could give us some cover color on the M&A backlog this quarter versus where it was.

That's an industry-wide number and that is down a little bit at the end of the third quarter. In the context we were trying to give is looking back over a period of time at year-end. And there is a pretty good pattern that if you have that level of backlog, again, the industry, you typically see 150 plus IPOs in the following year. So that was the context we were trying to give.

For ourselves, in the US we have 12 public offerings on file, six of which are book run. We have one announced M&A transaction and that would compare to 15 at the [and one] respectively, when we reported the third quarter. We also have a strong backlog in Hong Kong where we are very active.

Okay, great. Thank you.

Lauren Smith, KBW.

Hi good morning. A couple questions I guess and a follow-up to Matt a little more on the M&A backlog or even the M&A performance in the quarter. Even revisiting Dialogic this morning they still had you guys only earning $12.4 million of net revenues in the quarter and clearly you well exceeded that.

So, if there's anything you can highlight for us there; are you guys more active in maybe doing balance sheet management advisory assignments? Or was there any disproportionate fee where you might have advised a client not to do a transaction? Any additional color there would be super helpful.

Okay, well, I think one of the things that is hard is the amount of information that is publicly available and disclosed on a lot of these M&A transactions, so that does make it challenging.

Compared to the sequential third quarter, if we look at the increase from that, the aggregate transaction value with the M&A transactions we did was up more than 40%. (multiple speakers) Yes, excuse me -- was 140% more than where we had been in the third quarter.

We really had several large deals with higher than average revenue. It wasn't necessarily one very large transaction. Overall we saw a number of transactions that were larger than we have seen in the past from an average perspective.

So were the deals pretty much all public to public company? Or was there any large private to private that maybe we don't capture in these databases and such that we all try to track? (multiple speakers) Or is it really just a combination of bigger deals, bigger fees and there is really nothing more to it than that?

Yeah, I think it is the latter of you said. It is bigger deals with bigger fees, some of which -- ultimately if deal sizes aren't disclosed, it becomes very difficult for some of those reporting entities to be able to accurately predict the revenues.

Okay. And then just one last on M&A at least. What was the mix at US versus international, if you can provide that for us?

Our revenues for all of 2010, which is kind of the way we think about this, was 12.3% were outside of the US. That compares to about 8.9% last year.

And I'm sorry if I wasn't clear, but that's helpful nonetheless, but I was referring specifically to on the M&A and I guess investment banking side in total. Is that anything you could provide for us?

That isn't anything that I have available. I would say we have seen a lot of cross-border activity that has happened and has increased as we have expanded our international presence. So, I don't have specifically what percent of revenues were generated exclusively by the international organization.

Okay, great. And then just switching gears to asset management, any detail on slows versus market appreciation in the quarter?

It was a combination, Lauren. There was some reasonable appreciation from the market. There was some outflow, significant outflow, in FAMCO. That was related to a specific client that changed mandates from an actively managed to a passive index strategy, which is not a product that we offer. So they transitioned those assets.

But if you look at it on a net basis, frankly the appreciation and our higher yielding products outperform that. And we ended up with a very strong quarter with performance fees on top of that.

Great. And if I got your comments correctly, you said you had five funds that have -- are performance fee eligible. And in particular was it the energy and the micro cap funds that I guess it generated a disproportionate amount of the $7.6 million?

Exactly.

Okay and then just one last for me and I will let somebody else get on, but your comments -- I was interested, Andrew, when you were talking about public finance is a focus. You want to be a more national footprint and that acquisitions might play a role in that. Are we talking bolt-on type, small or lift out of teams? Or would something more meaningful in terms of scale also be a possibility?

I think it is less bolt-on, more of what I call small to midsize acquisitions.

If you look at the competitive landscape in the public finance business, there's still a lot of firms and the quality that many of them have is they have a narrow focus. It could be a geography, sometimes even literally a single state or a relatively narrow region, or it could be an industry sector. And that quality creates the opportunity to be highly complementary.

So if a firm has a single state somewhere east of us, [focused in] franchise and high marketshare and few have been able to get in there and penetrate, the probability that that could be quite complementary to us and then take advantage of what is likely to be a broader product set and more distribution. You've got a good set up there for something to work right well.

So we've looked at that very actively for years and we have done some historically throughout the years. Our very substantial Kansas/Missouri business was a firm called Zaner that we did in the mid-to late '90s and it has worked very well. So it's those kind of opportunities, and I stop short of something very substantial in size, say, the size of us or something.

Okay. (multiple speakers) Thanks very much for taking all of my questions.

Okay. Does that complete the question for you?

Definitely. Thanks very much.

Thank you.

Devin Ryan, Sandler O'Neill.

Good morning guys. Looking at the absolute level of the equity under earning activity in the quarter, would you attribute some of that to just pent-up demand for earlier in the year that drove kind of an abnormally strong quarter? Or do you think it is more of a reflection of just marketshare gains at Piper, so maybe you could put up similar results if the environment remains constructive like it was for most of the quarter to try to get some sense there?

It's a bit of both. The environment really did improve in the back half of the year and I think there were capital needs that were [mapped] that had been potentially delayed.

Now, having said that, when you round the corner into the New Year we are -- I think our view is very constructive. If you look at all of the IPOs issued in 2010, on average they appreciated 26% by year-end. And that is a relatively, when you look back over time, pretty strong performance.

I do think there are some, certainly in the private equity community, companies that have been matured maybe longer than they historically would have. Markets feel constructive. The volatility is in a range with the FICCs that usually suggests a pretty good reception to capital raising.

So, our view is there is -- most of the indicators are pretty positive if the markets remain kind of with this tone, that you can infect continue to access it. We ourselves have [to number] on the road already.

Got it. Okay, great. And then asset management, can you give some color on why performance fees were so much higher this year than last year? And then just also regarding the comment on AUM or the decline in FAMCO, I just want to see if you're expecting anymore outflows from clients there or even the advisory side, your Advisory Research side.

Okay, so why don't I take it first. We've got five products in total that have performance fees eligible, the largest of which are at ARI. So the -- our ownership of them began in March of this year, so we did not have them at this time last year. But why don't I try and give you a little more context on both organizations over time?

So, if you look back over the last 10 years, between the two of them at least one product has earned a performance fee each year. There is quite a wide dispersion between the fees earned any given year. And again, much of this often comes in the fourth quarter. But when you look at 2010, the $.6 million, that is above average for those 10 years but by no means is it the high.

Right, okay. That's the way I was trying to think about it relative your new business including Advisory Research, assuming you had that business last year. So, okay, that is helpful.

Yes. Okay, so I think the fourth-quarter performance fee is something on average we would expect.

Again back to the asset flows. We had modest net new assets at ARI for the quarter, the balance of which was market appreciation. And again, we consider that very positive. This was an acquisition completed at the end of February, call it March 1. There's a lot of work to do, to go through with clients and consultants to show that the new organization is performing well, their products all performed well. And we're active in looking at a host of mandates.

Again on the FAMCO side there was a net decline and it really was related to one large mandate switching. The impact for the organization at the end of the day ends up being quite modest because the fee on that large mandate was very, very competitive.

Okay, got it. Thanks for that color.

And then just lastly, given the structural headwinds that you mentioned in the muni market that can obviously drive some volatility going forward. With your large and medium inventories, how do you think about hedging positions? You guys alluded to this I guess on the call that you do some hedging.

And then also, what is the typical turnover on that inventory? Obviously you have a large inventory every quarter at end of quarter. But does that turn over quite a few times during the quarter?

Yes. So the -- we do continue to believe that there will be significant volatility and it really starts there. I think to think of it in this terms, that collectively all of our people that are involved in those markets in multiple ways have a good dialogue and have a market view.

We do use a variety of hedging tools that I would suggest is reasonably sophisticated that goes from Treasuries to MMD rate locks to CDS, and are effectively able to position ourselves accordingly to their view. This is an example of a quarter where they did that very, very well. They anticipated volatility and increasing rates and both of those things happened.

We do have a high turnover in our inventories. We monitor that very closely. That is often a very good indicator, in fact a leading indicator of what is going on in the market place.

One of the challenges in the fourth quarter was many of the municipal bond funds had very substantial redemptions. They started reporting to all of their retail clients and you had declines in NABs and that led to some pretty big withdrawals. Feels like that's stabilizing currently.

We were able to underwrite virtually everything that we had on the calendar all the way through December. There were a couple of non-rated high yield deals that couldn't quite get done.

The start to the New Year I would say feels a little slow. Typically the first two weeks of the year you don't see much on the calendar. We're in the third week and I would call the calendar light this week. It is looking more normal next week and if that goes well I think that will bode well.

Meanwhile the ratios have stabilized a little bit. MMD, which is the indicator of tax exempt market, has actually tightened meaningfully in the last five, seven days. So net all that out, we anticipate additional volatility. But it feels like it is stabilizing and we will start seeing a calendar.

Okay, great. Just one last one, sorry if I missed this. But expense savings that you guys are going to realize as a result of the European restructuring, how much of that or was some of that already reflected in the fourth quarter results? Or is that all going to be 2011 and going forward?

I would say very little was actually being in the fourth quarter, so that really is something that we see looking out into 2011.

Does that scale into 2011? Or is that from kind of the beginning of 2011 you should be realizing the $5 million, $6 million?

It is the latter. Given the restructuring charge that we did take, you should see that now throughout 2011.

Okay, great. Thanks for taking all my questions.

Thank you.

(Operator Instructions) Daniel Harris, Goldman Sachs.

Good morning guys.

Good morning.

Congratulations on a really good quarter. And I want to ask I guess maybe more qualitatively. You guys talked about record revenues here in the fourth quarter and clearly significant upside to what you guys have been delivering and also what the Street was expecting.

How much of that do you attribute to positioning yourselves to take advantage of the opportunities through expanding into new segments and hiring new people versus really, as you mentioned, Andrew, just pent-up demand?

So I would say there are a number of driving factors here. We've been building a global footprint in our four key industry sectors for several years and I think you really saw the benefit of that. Some of it being -- taking longer to effect due to the market environment, so I think those two intersected.

Our capabilities in Asia are really performing very well and we were very active in raising capital for China-based companies, whether it was in Hong Kong or in the US. Just take the Hong Kong piece of that; that was a pretty big share gain from 1% of the IPO people pool there to 4%.

Additionally when you look at our capital raising fee share overall, it was up 16%, so we are gaining some share. There has been some hiring, but I would say that it's just more now harvesting all of that.

Clearly a couple of other things here too, we've really diversified now to have a meaningful Asset Management business. I know you all heard us talk about that for several years. It was always a primary objective post the sale of Private Client Services and we're really there now. And that delivered a lot of value here really sequentially throughout the year. You see it very much in the fourth quarter. So I think it is a combination of those things.

Our public finance franchise, share is actually down a little bit year-over-year. One of the biggest pieces of that is you really have a two-year cycle with our significant California business. Schools come with referendums every two years. When the group joined us they had just done a 2008 referendum and raised capital in 2009.

You're going to see that again. 2010 referendums we had -- our group had $1.9 billion pass, call it $2 billion. That capital will be raised in 2011. So there is an expanded footprint here. It's not smooth quarter to quarter but it is really in place.

Okay, that is helpful. When you talk about the 40 additional bankers, I think that you want to hire a lot of that in the middle market sales force. [Where are] specific products are you looking to grow into?

That was 30 bankers and that was very specifically in our public finance franchise. And there is a geographic opportunity there that I was trying to focus on, Daniel, which is even as recently as three or four years ago really the vast majority of our franchise has been the Western half of the United States. And we have just now begun to grow into other markets.

And you know, that has its own challenges to go to the East Coast despite the fact that we may have a very significant brand in the Western half. Many of the clients really don't know us. And so we had to look for potential for teams and then really get something that's got some significance to it.

And then you get a virtual circle that once you have some visibility in a market -- we've done this in Connecticut. We've done this in parts of the Eastern seaboard in some industry sectors, transportation. And then you can continue to recruit. But you've got very substantial markets in the Western half of the United States that we're not in, in any meaningful way.

We've gotten started in northern Florida. Near to home is Illinois. We have some banking capability there but virtually nothing from a state and local government. There is a lot of available market share to us. And you just need to be really thoughtful about getting a team that can penetrate a market where we have little or low brand visibility with their relationships and [to gather] our capabilities.

And then it lastly gets back to the question Lauren asked. I do think, and we spent quite a bit of time on the corporate development side, there are potentially acquisition opportunities where you can do both at once. Get a brand in a very focused market but a very visible brand and bring it onto the Piper platform.

Okay, thank you. And then last question for me and maybe Deb, this is better for you. If you were to look at 2010 and strip out the charges and think about what the opportunity set is for growing going forward, is there any way that we can look -- you talk about taking out the costs from Europe and we had some other charges in there. What do you think the pretax margins in that capital market segment can be looking forward?

I think if you look at a full -- just trying to look here at a full year perspective, excluding those -- we're at about 9% for the full year from a capital market pretax operating margin. So that has a number of points in it, for sure, related to the restructuring charge. I think if you look in the low to midteens is very doable.

One of the things is our ability over time to grow our Advisory business as Andrew spoke to. It's a very high margin business [that way] we can shift the mix of business as well as grow that international franchise. I think there is obviously opportunity for that to grow even higher.

And a 60% comp ratio in that business still feels roughly the right number?

Yes, that's correct. At least in the near-term here.

Okay, thanks very much.

David Trone, JMP Securities.

Thanks and good morning. I had some questions on the strategic priorities that you laid out. Specifically, any change in mindset about your industry verticals? Any plans to add to your US franchise?

David, that would be a secondary intention. It would be more opportunistic. The balance we're really looking for here is to improve our productivity, profitability and returns in the near-term.

Over time there's obviously a couple of major industry verticals that we are not in. I do not anticipate making modest organic investments in those. If and when an opportunity came along to make a significant move that was compelling and would have a -- we could have a real presence, be differentiated and get some meaningful marketshare we would very definitely look at that.

But nearer term, our focus is the productivity and profitability of our existing industry verticals connected to our ongoing investment in China, where we have a really good match with middle-market capital raising and our four industries. We do have some additions to continue there. The company we bought was a middle-market generalist and it has transitioned to our four industry verticals.

Okay, great. And then you mentioned the 30 bankers in the muni side and shifting that over to the M&A. Did you happen to give any kind of headcount numbers on M&A expansion?

No. And most of that would be -- call it organic. A couple of people in various industry verticals or various coverage sectors, but nothing as significant as developing growing our geographic footprint in public finance with 30 bankers.

So maybe like 10 or something like that?

Maybe even five.

I think a lot of the has to do with the focus that we have internally on that product, ultimately at the same time even transitioning existing resources to focus more on that product.

Got you.

And the discipline of focusing on the product and the practices that get you in position to do that. If you look at our four industry verticals, David, it's pretty uneven in how active the M&A is. Our Health Care business year in, year out has a very substantial -- you know it was a significant part of the fourth quarter again here. And how they approach the market and accomplish that should be available in some of our other industry verticals.

Okay, and then shifting gears to the ROE. We're kind of back of the napkin adjusted operating; we get to about 9% for the quarter. And, obviously, investors typically in this space are looking for something in the midteens and you mentioned your goal.

Is there any consideration of maybe shifting the balance sheet, maybe using more leverage now that it is not as evil as it was maybe a year or two ago?

I guess a couple of things I would say. Overall, if you adjust out for the restructuring charge and look at the quarter, it was about 10.5% from an ROE, so this is with those adjustments. And I think, you know, ultimately it gets to -- you asked about the balance sheet specifically.

I think we did -- we refinanced the debt that we had out there in December with a three-year syndicated bank loan, increased the size of that slightly from [120] up to the capacity to do [150] with the revolver. And I think over time, yes, we would intend to continue to increase leverage. But I think that is really going to be modest. I think the driver is going to really be executing on those five-year strategies that Andrew laid out.

Okay, great. And then the next probably logical question; is there any thing that you kind of -- what is the possibility of something bigger and more transformational in terms of combinations?

There's nothing planned other than what we have reviewed. In some areas quite organic, in a couple of areas corporate development. But again I'd frame those as inside the current size of our current public finance business. Maybe you do something that is half our size, or if you found the right thing, maybe closer to our full size.

Got you, thank you very much.

Michael Wong, MorningStar.

Good morning. Just to get back a little bit on leverage, especially in light of the acquisition, what would be your possible maximum leverage tolerance? And would this leverage be based on your total equity or tangible equity?

I guess I would say if we look at our overall leverage as defined by assets to total equity, right now we're little over 2.5 times. I think going to somewhere in that three to four range would really be the maximum where we would look to. So, again, it's not about significantly increase the leverage on our balance sheet. And typically we do look at that and look at pure leverage and just a full assets to equity basis.

Okay. I believe a couple of quarters ago you mentioned aiming for a $100 million annual fixed income trading run rate. Is that still your goal? And I believe you mentioned that BABs may be a headwind to your fixed income trading revenues. So is that still something you believe is reasonable to hit in the -- I don't know, next year or two?

I think generally our goal hasn't changed since those comments, and as Andrew pointed out, was growing our public finance business. We also look to grow the middle-market distribution alongside of that. So it is our intent over time to grow that and obviously it's -- just like most of the markets, they're volatile and we try our best to manage within that.

Okay. Can you talk about the competitive dynamics of the Chinese investment banking business and the new entrants that have come in? And if you have a strong defensible niche in that market, or your general thoughts on Chinese investment banking market and your positioning in it?

Okay, so I would tier it, first of all, maybe even more so than the domestic US market. The large global wholesale universe of banks certainly are all there and most of them have JVs that allow them to access the exchanges and the mainland.

But when you move past that to the middle-market, it is more splintered than this market and we're arguably developing an even stronger position. We were one of the first to get there.

We had an acquisition with somebody with a significant [gold bond] visibility in that marketplace already, which has allowed us to now transform their middle-market generalist focus to industry verticals that mirror ours in the US, leverage our brand, leverage our resources. Naturally accommodate cross-border activity which many of the clients are interested in on both sides.

And I would integrate that just to say we've got, from a middle-market position, a very strong position there and I do think it is defensible. It's an attractive market and others are showing up. And it will be highly competitive, but I believe our position is very strong.

That's good to hear. Last quick question from me. Were there any large transactions in your investment banking backlog that didn't close in the third quarter that were pushed into the fourth quarter?

Nothing significant at all that I can think of.

Okay, thank you.

Thank you.

(Operator Instructions).

Operator, why don't we take one more question, if there is?

Steve Stelmach, FBR Capital Markets.

Hi, made it in under the wire.

Good morning, Steve.

Just some housekeeping questions at this point. On the buybacks, they decelerated pretty significantly quarter over quarter. Is there anything to read into that other than just lower vesting for whatever reason?

I think ultimately, as we talked about, we look to offset the dilution from employee grants. So it really a nothing more than where we believe we were relative to that target.

Okay. So it sort of is a true up for the full-year perhaps?

Yes.

And then secondly, you mentioned margins on the asset management business. What is the incremental margin on that performance fee? Is it typical like 80/20 type structure? Or is it most of that falls to the pretax bottom line? How should we think about that contribution for the quarter?

In many regards it is similar to the rest of the business. We do share in the performance fee with the dedicated professionals that are in those products.

Okay. So we shouldn't think about a major deceleration in margins in the Asset Management going forward, absent those fees?

No.

No.

Great, all right guys, thanks again and great quarter.

Thank you.

Thank you.

All right, with that, that concludes our call and thank you all for joining us this morning.

Ladies and gentlemen that does conclude our conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day everyone.