Piper Sandler Companies (PIPR) 2011 Q2 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 second quarter of 2011.

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 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.

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 second-quarter results. We are pleased with our improved revenues and profitability despite challenging market conditions that persisted during the second quarter. Stronger asset management and investment banking revenues more than offset lower institutional brokerage revenues.

In Asset Management, year-to-date performance in our key fund strategies have outperformed benchmarks. The more consistent and profitable results of Asset Management continue to boost the overall performance of our firm.

In Investment Banking, all products improved compared to the sequential first quarter. In Public Finance, we nearly doubled the par value of new negotiated issuance. Similar to the first quarter of this year, we significantly outperformed the industry.

In the first six months of 2011, our par value of negotiated issuance was down 10% while the industry was down 47%. As a result, our economic fee market share increased 150 basis points or 50% compared to the first half of 2010. We attribute our results to stronger middle-market volume compared to larger issuer volume; our strong position in certain active sectors like California school issuance; and our investments in new markets over the past couple of years.

US Equity Financing revenue increased compared to the first quarter. We were book runner on 42% of our equity financing. Our year-to-date economic fee market share in 2011 is the highest in the last seven years. Also, advisory services revenues increased.

We were most active in the health care sector, but also completed transactions in TMT and clean technology. Our institutional brokerage revenues declined, reflecting lower client volumes, which lowered commission revenue and created challenging trading conditions. In terms of our outlook, we are positive on our asset management business, given the performance of the advisory research strategies and the new MLP assets. We are encouraged by the pickup in our public finance activity in the second quarter and our market share gains. We feel good about our strong Capital Markets and M&A backlogs. As always, deal completion will be dependent upon a good capital markets environment.

Now I will turn the call over to Deb to review the financial results in 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.

For the second quarter of 2011, our revenues, profitability and earnings improved compared to the year-ago and sequential period. On $136 million of revenues, we generated net income of $10.7 million or $0.55 per diluted common share. The improvement compared to the sequential first quarter was driven by stronger asset management and investment banking revenues and lower non-compensation expenses.

In the second quarter of 2011, we generated a pretax operating margin of 12.6% compared to 9.2% in the first quarter of this year. Our compensation ratio was 61.3% in the second quarter and 61% for the first half. Given the investments in public finance and fixed income sales, we expect that we will be at this level for the year. The ratio will ultimately depend on our mix of business and our overall performance.

Compared to the sequential first quarter, non-compensation expenses declined 6% to $35.4 million or 26% of revenues. We anticipate that the absolute amount of non-compensation expenses will likely be in this quarterly range for the second half of the year.

Our tax rate for the quarter was 34.9% compared to 35.7% recorded in the first quarter. The lower rate was mainly driven by improved results in Asia.

Now I'll turn to our segment results.

For the quarter, Asset Management generated 15% of revenues and 29% of pretax operating income. The segment pretax operating margin improved to 24.2%, driven by higher revenues. Capital Markets generated 85% of revenues and 71% of pretax operating income. The segment generated a pretax operating margin of 10.5% compared to 7.9% in the second quarter of last year and 6.8% in the first quarter of 2011. The improvement was primarily attributable to higher investment banking revenues and lower non-compensation costs.

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

Operator, we would be happy to answer questions.

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

Good morning. Just on the equity sales and trading, can you give us a little bit of additional details on how much of the decline at least sequentially from last quarter was driven by slowdown in client volumes versus just losses from committing capital on trading desks?

It was almost exclusively lower client volumes. And as we look at everyone else who's reported so far, it looks like we are pretty much right in line with on average everybody's decline.

Right. Okay, got you. I just wanted to clarify that. Okay, great.

And then, on fixed income underwriting, the revenues there rebounded strongly. Would you say that we are back to a normal range for the level of activity there? Or do you see things changing one way or another from the trends that we saw in the second quarter for that business?

A couple of comments. Still, the run rate, if you just take the first half, is down dramatically from the last three- or five-year average. In fact, you have to go back about 10 years. So we are headed towards, if you annualize the first half of the year, about $200 billion.

Our belief is that is improving, and the year ought to come in at maybe $250 billion, $275 billion. The trend is up from the first quarter, but in no way will this look like the last couple of years.

Okay.

We're confident that we are trending in a favorable way, as you saw first quarter to second quarter.

Okay. And then just lastly for me and I will hop back in the queue, so you guys touched on the Investment Banking backlog a bit, but could you just give a little bit more color there, by product would be helpful, and then just any qualification on the size of the backlog; has it continued to grow? And I guess did it continue to grow throughout the second quarter since I know the environment was choppy there?

Yes, let me just say this. It's very strong. It is continuing to grow and it's one of best backlogs we've had going into a new quarter. It's in very good shape.

Okay, thanks.

So all we need is constructive markets and we shall do well.

(Operator Instructions). Matt Fischer, CLSA.

Just again on the pipeline, so your comments on it being very strong and one of the best, is that in each product? Or is there -- is M&A or equity specifically strong?

It's more weighted to the equities' capital markets, IPOs, follow-ons, but it's got a nice diversity and, again, it's continuing to build. But more weighted there than M&A.

Okay.

And then also with regard to Asia, I guess last year, you saw kind of a pickup in the second half. Is that starting to develop? Is that part of the strength in the equity backlog?

Yes, it is; and I do believe there's actually a cyclical nature there. We see it improving into the third quarter and being substantially stronger in the fourth quarter and potentially into 2012.

Okay.

And then on -- in Asset Management, I wonder if you can give us some color in terms of flows and how that is progressing?

So we had modest outflows coming from a couple institutional clients that are essentially reallocating, most typically, our experiences into alternative assets, which we don't offer. Again, the performance in all of our key products is really very strong. We are also in the early stages of developing some retail products. We've got four mutual funds now that are up and running, a couple of which are coming up to critical benchmarks, like three-year track records, significant marketing resources added. So we are in an early phase there, but the potential to have meaningful retail distribution along side of historical institutional is very much there. And our MLP flows continue to be strong, which you saw substantial inflows in the first quarter; that continued in the second quarter.

Okay, great.

And then last question, just on the tax rate actually, I guess with the Asian pipelines picking up, it looks like the second half could be stronger. Do you see that tax rate trending down further? Or should we kind of think about 35% as a reasonable rate?

You should think more about 35% as the rate. There's many factors, obviously, that go into that besides just Asia, so 35% would be more in line with what you should be thinking about.

Okay, great. Thank you very much.

Lauren Smith, KBW.

Good morning. A couple questions -- I guess first on the comp ratio, it jumped up a little bit in the quarter, and so I guess the six months as well is running a little bit ahead of what has been a trend. Any commentary there, or is it more mix of business for the quarter that drove that number higher?

It was less about mix of business, although that always impacts our comp ratio. It's more about the investments that we are making in our strategic initiatives. And as we highlighted, primarily we're seeing a lot of those investments in public finance and in fixed income sales.

Okay. And, you have made a fair amount of investments thus far on that side of the business. Should we expect that to continue? Do you kind of feel like you are maybe halfway through what you want to achieve? Or where are you in that progression?

Lauren, we're going to keep going. That's a multi-year effort. And as I think we talked about last fall, we would like to double the size of that business by 2015. There's a balance to it, of course, in light of the major decline in volumes. But as we see through that and we're in the marketplace, the challenge that that creates for all of us is also creating some employment opportunities. So we will keep going. And again, multi-year so that you can get the benefit of ramping some of what you have already done as opposed to trying to do it all at once.

So it's reasonable to assume that a comp ratio north of 61-ish% is likely -- a decent run rate going forward versus you had been sort of steady at 60% for awhile.

The rate of 61% should be more consistent going forward in the short term here. We [won't] see that ramping significantly.

Okay. And apologies if I did not pick up on it in the press release, but was there any share repurchased during the quarter? And what remains on your authorization?

We did not purchase any shares in the quarter. We have just over $57 million remaining on our authorization and that runs through September of 2012.

Okay, great. Thanks very much.

(Operator Instructions). Mr. Duff, there are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks.

That concludes our call. Thank you, all, very much for joining us this morning. Good day.

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