Piper Sandler Companies (PIPR) 2011 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Piper Jaffray Companies conference call to discuss the financial results for the first quarter of 2011.

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 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 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. 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 the first quarter. Our Capital Markets and Asset Management businesses generally performed well during the quarter. Our results reflect lower equity financing activity from China-based issuers and were negatively impacted by historically low municipal underwriting levels industry-wide. The municipal market remains very challenging, and we believe it will remain so further into 2011.

On our fourth-quarter conference call we outlined our four five-year strategic growth priorities. During the first quarter we made solid progress on each.

First, we plan to significantly increase revenues from public finance and fixed income. In February we entered the Pennsylvania market with 12 seasoned professionals -- six public finance investment bankers in Pittsburgh and six middle market sales and trading professionals in Philadelphia. Pennsylvania is one of the top four states in terms of par value issuance for middle market issuers.

Despite a difficult municipal market the new public finance team completed four negotiated transactions in the first quarter, with the Philadelphia sales team contributing to a placement of the bonds. Also, we opened new fixed income sales and trading offices, including adding a team in Charlotte. All of these new offices expand our franchise beyond the established footprint in the western half of the United States.

We are actively looking for additional hires and acquisition opportunities to further extend our public finance and middle market fixed income franchise.

Second, our aim is to significantly increase corporate advisory revenues. With the completed restructuring of our European business at the end of last year, our London-based investment bankers are focused exclusively on providing M&A advisory services to our European clients in our areas of industry expertise.

With this narrowed focus the European team is demonstrating significant momentum against this key objective. To date in 2011 the team has announced seven M&A and private capital transactions in health care and [TMT] sectors. The business was a solid contributor to our first-quarter results.

The M&A product is a top priority for our senior bankers and both selectively add banking resources with M&A expertise, such as the new head of West Coast Technology Investment Banking will be announced in March.

Third, we intend to grow revenues from China. Our revenues from China-based issuers are very soft in the first quarter. We hadn't expected a lot of activity from this market in Q1, and it was further muted by factors such as uncertainty created by the earthquake in Japan; however, we remain committed to this compelling market.

We have built a team of 85 in Hong Kong and Shanghai and plan to make hires in sales, research and investment banking, which we will pace with revenues. In 2010 our marketshare of Hong Kong equity capital markets fees significantly increased and our brand awareness is growing.

Also, we have increased our presence in the market and enhanced the leadership of our teams through recent additions of key investment bankers in our TMT and consumer industrial growth groups. These steps are in concert with our commitment to building a leading middle market platform for China-based companies.

Fourth, we plan to grow our Asset Management revenues. We have key expertise in the MLP product, which is a high-growth and high-return product for our asset management businesses. Assets under management in this product grew 46% in 2010. Entering the first quarter of 2011 we won client mandates which totaled $774 million in assets, including $509 million related to the Nuveen Energy MLP Total Return Fund, on which FAMCO will act as subadvisor.

In addition to the execution against our four growth initiatives, we expanded our European equity distribution with the hiring of four seasoned sales professionals in the new office in Zurich.

The team will initially focus on further penetration of key Swiss and German institutional accounts, with our US research product complementing our existing team in London. In time we will develop additional distribution for our Asia research product.

I believe we laid some solid groundwork in each of our areas of key focus. The new MLP assets provide immediate revenue. The new hires will need to ramp before we realize their full contribution to results.

In terms of our outlook, we are positive on our asset management business, given the performance in the advisory research strategy and the new MLP assets. Our US equity financing backlog is very solid, and if the capital markets remain constructive, we are optimistic on this business.

Also, we continue to improve our US market position. In the first quarter we were bookrunner 52% of our US equity financings compared to 40% in the first quarter of last year.

In terms of Asia, we expect the Capital Markets activity will be weighted towards the second half of the year. Our M&A backlog is solid. As I stated earlier, the municipal market remains very challenging.

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. First, I will address consolidated results, and then I will review each business segment.

In the first quarter of 2011 our net income was $7.2 million or $0.38 per diluted common share on net revenues of $125 million. Compared to the first quarter of last year our performance improved from net income of $500,000 or $0.03 per diluted common share on revenues of $110 million.

In the first quarter of 2011 we generated a pretax operating margin of 9.1% compared to 8.4% in the first quarter last year. The improvement was primarily driven by a full quarter of results from ARI this year versus one month in the first quarter of last year. Our results were below the very strong sequential fourth quarter.

Our compensation ratio was 60.5% in the first quarter. This compares to a 60.4% ratio for the full year of 2010, excluding the reversal of performance award amortization, and in line with our expectations for the full year.

Non-compensation expenses were $38 million for the quarter, up 7% compared to the first quarter of last year. Three components drove higher expenses. First, an additional $1.1 million for a full quarter of intangible amortization expense related to the ARI acquisition. Second, approximately $1 million for writing off expenses for deals that were not completed due to the volatility in the capital markets. Third, approximately $800,000 of additional expense to fund the majority of our 2011 charitable contribution commitment, as we donated appreciated stock to the Piper Jaffray Foundation.

Finally, as a result of the restructuring in the fourth quarter of 2010 our European operations were profitable in the first quarter. We are tracking in-line with our targeted $0.30 to $0.35 full-year EPS improvement for Europe.

Now I will turn to our segment results. For the quarter Capital Markets generated 85% of revenues and 62% of pretax operating income. Compared to the first quarter of 2010 US equity financing revenues and M&A revenues increased; however, these results were offset in part by lower revenues from China-based equity financing and lower revenues from public finance.

As Andrew stated, municipal issuance industry-wide reached historical lows during the first quarter. For the industry par value of new issuance dropped 55%. Piper Jaffray fared better with a decline of 39%.

Capital Markets generated a pretax operating margin of 6.6% compared to 7.4% in the first quarter of last year. The decline was attributable to lower results in Asia and a lower contribution from the higher-margin public finance business.

Asset Management generated 15% of revenues and 38% of pretax operating income. The segment pretax operating margin was 23.5%, up 440 basis points compared to the first quarter of last year. The improvement was mainly driven by an additional two months' results from ARI this year.

As Andrew highlighted, we had significant client inflows in the MLP product, which represented 18% of total AUM as of March 31. The new mandates contribute toward our goal of increasing the revenue yield on assets under management.

For all of Asset Management net cash flows were $200 million, as institutional clients changed investment strategies and reallocated assets. With market appreciation of assets, including the out-performance relative to benchmarks of key strategies at ARI and the MLP product, we more than offset the impact of client outflows. A majority of the exiting assets were in lower yielding asset strategies. Management fees rose 2% compared to the fourth quarter of 2010.

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

That concludes our formal remarks. Operator, we would now like to open the line for questions.

Ladies and gentlemen, we are now going to proceed with the question and answer session. (Operator Instructions). Devin Ryan, Sandler O'Neill.

So the first quarter obviously had some fits and starts in Investment Banking, and you guys spoke about that a bit. It sounds like, at least in equity underwriting and M&A you have a pretty solid backlog. Can you just talk a little bit about what issuers are thinking currently? What is the appetite to do deals? And on the M&A front characterize the level of dialogue of your bankers and what their -- the level of dialogue with their clients, I guess.

So it is really very active. And I would say that we believe from here there is a fair amount of activity that is going to come. The perspective is that capital markets are in pretty good shape. They are receptive to issuance and capital raising. The dialogue on the M&A front has similar qualities -- very active. Revenue growth -- while earnings have improved dramatically, revenue growth less so. That is a pretty good setup for acquisitions as well.

So, again, when you look at our quarter, I would just point to two things. It was really the municipal market volumes industrywide dropping very dramatically, like 55%, ours less so. Then, secondly, a very slow quarter for China-based issuers.

Okay. Thanks for the color. Just on the municipal side, you spoke about the outlook and you expect that should continue to be pretty tough. It doesn't sound like your appetite for doing acquisitions in that area has really changed much. Do you expect to see more opportunities going forward just as maybe some of the smaller players are struggling in this environment?

Yes, I would say with these kind of crosswinds, and there have been cycles in public finance, as well as the pretty dramatic one, but there certainly have been cycles historically, and those typically have created opportunities, whether it is an individual or a team, you know, larger firms deciding to refocus and narrow their focus. Or even other firms that are wholly dependent on public finance revenues, that is obviously pretty challenging.

So, yes, our experience is it does create opportunity, and we are thoughtful about that and actively looking and engaging in conversations where appropriate. We certainly -- another way to say it, Devin, is we believe in the viability of the business long-term, and it is a very good franchise for our firm.

Okay, great. Then, just lastly, I apologize if I missed this, but what drove the increase in the share count from last quarter?

The share count is really more of a flip between our participating shares into our fully diluted shares that you would see as we bifurcate our earnings. And we had a grant that vested -- a large grant -- the [employee] grant from a number of years ago had just vested. And then the first part of the acquisition shares related to ARI vested as well, so it moved those from restricted shares into nonrestricted.

Got it. Okay, so the amount of earnings going to, I guess, the participating stock [ords], that should be lower as a percentage going forward now that you will have, I guess, a higher share count?

Correct.

Okay, got it. Okay, I will hop back in the queue. Thanks a lot.

Joel Jeffrey, KBW.

Just to follow up a little bit on Devin's question, was the increased share count the primary driver behind the decline in book value quarter-on-quarter?

That is exactly right. It is the same dynamic of moving from the participating to the fully diluted that drove that.

Okay, great. Then I know you guys had said you guys -- you know, the restructuring has been a positive on the European business from a profitability standpoint. Can you quantify though in terms of the amount of expense reductions that were attributable to the restructuring in the first quarter?

So we had initially talked about around a $5 million to $6 million reduction. I think we are ramping into that. I think the important part that we are seeing is we're definitely on track for the EPS, $0.30 to $0.35, that we had projected.

Okay, so it looked like stripping out the $9.5 million restructuring charge that quarter-on-quarter non-comp expenses did go up a little bit. I am just trying to get a sense for was there something in there that offset the reduction -- that $5 million to $6 million reduction that you had talked about for the full year just on a runrate basis?

Yes, a lot of that had to do with the deal expenses that we talked about writing off, which were approximately $1 million, as well as what would really be more of a timing-related expense item with the donation of stock into our foundation and taking the full expense for that.

You're fully comparing to the fourth quarter, I think, as you're looking at that, correct?

Yes.

Those were two items that were offsetting it.

Okay, and just lastly, I know you had said the muni business appears to be challenging for the remainder of the year, but it looks like the trading side of the business was apparently okay. Are there two different dynamics at work there, and should we expect trading in munis to remain decent even though underwriting appears to be weaker?

So, yes, I think there is a correlation there. Some of the challenges in the municipal market and the withdrawal of customer flows we anticipated to some degree, and we have been thoughtfully training and providing liquidity to clients in a successful manner.

When I talked about it being challenging, we do expect the new issuance volume to improve from here. But still when you think of last year it was $430 million in new issuance, and take the runrate of the first quarter, it was about $190 million. So where do we think it ends up? Maybe $250 million, maybe a little north of here.

But there is a relationship with that volatility that if you're able to, you could have a pretty good trading results, which we did in the first quarter.

Great, thanks for taking my questions.

(Operator Instructions). This is for the securities industry professionals to ask questions of the management. (Operator Instructions). David Trone, JMP Securities.

Good morning. A couple of questions on some comments you had in the press release. And if you spelled this out, I apologize, I missed it. You mentioned on the equity side sequentially lower revenues from Asia distribution. Is that just general secondary activity or are you talking about secondary associated kind of in the aftermarket after deals?

We are talking about in the aftermarket after deals. Fourth quarter was very strong, as it was for a lot of our businesses, so it was related to that aftermarket trading.

So linked on the equity underwriting activity levels, okay.

Right.

Then on the -- you talked about munis strategic trading, strategic meaning some like proprietary positions?

Correct.

Can you maybe size that up for us or just give us some context around how much of that would typically happen in a quarter?

Maybe a way to say it, it was a significant contributor in the first quarter to our fixed income institutional brokerage. And if you look at the quarter-over-quarter delta from fourth quarter to first quarter, it was the primary driver of that change.

Okay, great. Then moving to a 10,000 foot level, if you look at 2012 what do you think -- if you have topline growth, what do you think are the top growth drivers for next year?

I would say it is a number of things. It tracks the growth priorities. I would anticipate that we would certainly come out of a slower new issuance volume in public finance. We are making share gains in our equity capital raising in the US. I am still a very firm believer, David, in the opportunity for China-based issuers. There are really hundreds and hundreds of middle market companies that will come to the capital markets here in Asia or here every time.

And our asset management business, which continues to perform well. And then, lastly, we've got a strong focus on M&A advisory. That tends to be very lumpy for us, but it is our intention to grow that business throughout the year and into 2012.

Okay, thanks. I don't know if you ever mentioned this, but in the China business that you bought, what has been the retention rate of the staffers there since that acquisition?

I would say in some regard it mirrors the broader franchise. We have some turnover. We have net added staff successfully. And there was a reorientation to it, so maybe a little bit of an apple and orange. They were a generalist middle market investment bank and actually had retail too. And we wound down the retail component, other than a corporate client services aspect to it that are executives of companies. And then reoriented from generalist to our industry sector.

So some of that was, if you will, kind of natural attrition that we needed to accomplish to get it synced up with our global presence. It is not unlike here, it could be very competitive. Many others now are growing their Asia presences and we've got a strong initial start. So you do have some turnover, but I don't think it has been unusually challenging.

Okay, great. Then one last question. Any other industries that you might enter here in the US just to boost US growth outside of the cycle?

Yes, we talked to you about this for some time. There are some others that we are not in that are attractive, but the priority there would be some kind of opportunity to go in in a scaled manner and feel like you could have an impact in the marketplace credibly -- you know, sales, research, trading and banking at one time. And I would say that is not a number one priority. We always are looking, however.

Okay, great. Thanks a lot.

It appears that there no further questions from our audience. I will turn it back to you, Mr. Duff, once again. Thank you.

That concludes our call. Thank you for joining us this morning.

Thank you. Ladies and gentlemen, that does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect. Thank you once again. Have a great day.