Piper Sandler Companies (PIPR) 2012 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Piper Jaffray Company conference call to discuss the financial results for the first quarter of 2012.

During the question-and-answer session, security 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 and involve inherent risk 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, on the SEC website at www.SEC.gov. As reminder, this call is being recorded.

Now I would like to turn the conference over to Mr. Andrew Duff. Mr. Duff, you may begin your conference.

Good morning and thank you for joining us to review our first-quarter results.

In early 2012, the overall operating environment generally improved. All of the major indices rose, volatility remained low, credit spreads tightened, and US economic data showed continued signs of improvement. However, we believe the markets are still in an early stage of recovery as Capital Markets volumes remained well below historical norms.

Against this more positive backdrop, we were pleased with our improved first-quarter results. Compared to the fourth quarter of 2011, our net revenues increased 19% and excluding the goodwill impairment charge, our pretax profit on a non-GAAP basis increased sevenfold.

Fixed income sales and trading revenues significantly improved from the difficult fourth quarter. During the quarter, credit spreads tightened, which benefited our strategic trading business and our new Municipal Opportunities Fund. Also, an improved municipal trading environment and new hires in the middle-market sales group contributed to the increased revenues.

During the quarter, our capital raising businesses performed well. Across the platform, we had good deal execution and we gained market share. We generated solid public finance revenues.

For the industry, our volume of senior managed negotiated issuance increased 83% compared to the first quarter of last year. New issuances were dominated by refinancings driven by historically low yields. Our negotiated issuance increased 127% resulting in higher market share which we attribute to our expanded platform.

Compared to the difficult last half of 2011, the equity financing environment also improved, including four IPOs. In the US, there were 40 IPOs that priced in the first quarter, which was the highest number since the first quarter of 2007. IPOs were challenging to price as investors demanded steep discounts to comparables given poor IPO performance in 2011. Through March, however, IPOs have returned 32% in the aftermarket. Against an improved environment, our equity financing revenues increased 38% compared to the sequential fourth quarter and all of our sectors contributed to the results.

Similar to Public Finance, we gained equity underwriting market share compared to the full year of 2011. We attribute the improvement to the increased risk appetite for growth IPOs in our focus sectors, capturing more follow-on transactions and book run mandates.

Asset Management performance was in line with our expectations. At the end of the first quarter, Assets Under Management were $13.3 billion, up from $12.2 billion at the end of 2011. The improvement was driven equally by positive net cash inflows and market appreciation.

In the first quarter, we had certain businesses that were soft, mainly in line with industry trends. Within equity sales and trading, US client volumes for the industry and for us remained low and declined from the fourth quarter. Also, IPO activity in Asia remained low and, as we had expected, we sustained a loss there. However, it was reduced compared to the year-ago period due to the cost reductions we made last year.

Finally, M&A revenues were well below the fourth quarter. This was due to the uncertain market conditions in the last half of 2011, which led to fewer completed transactions in the first quarter of this year.

Looking ahead, we believe that an improving market environment will continue to be positive for our capital raising businesses and fixed income sales and trading. The market fundamentals for M&A are strong and we are confident in our mature healthcare M&A franchise which represents a majority of our advisory revenues. We continue to work to ramp our M&A capability in our other sectors and this will take time. So we are reasonably optimistic about our business, but we know that market conditions can change rapidly. We are focused on executing against our growth strategies while being disciplined in cost management, improving profitability, and productivity.

Now, I would like to turn the call over to Deb.

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

In the first quarter of 2012, we generated net revenues of $118 million and net income of $2.9 million, or $0.15 per diluted common share. Results included $3.4 million, or $0.18 per diluted common share, of additional income tax expense for writing off equity-related deferred tax assets. I will provide more detail on this in a moment.

After excluding non-controlling interest, we generated essentially the same pretax operating profit as the year-ago period but with 6% lower revenue. The improved profitability was mainly due to the cost reductions we implemented last year.

For the first quarter, our compensation ratio was [62.4%], down 50 basis points from the full year of 2011. As we generate higher revenues, we can return our compensation ratio to our goal of approximately [60%].

For the first quarter, non-compensation expenses were $32 million, down 16% from $38 million in the year-ago period and down 6% on a non-GAAP basis from $34 million in the fourth quarter, which excludes the $120.3 million goodwill impairment charge. We don't believe $32 million is a sustainable run rate without additional reductions. As T&E expenses and legal fees were lower than in recent quarters. We expect these to return to more typical levels in Q2 and beyond.

We are committed to continuing to improve our productivity and profitability. Within that context, we are assessing our staffing needs to reduce our fixed compensation expenses and further reviewing our non-compensation expenses with the goal of sustaining the $32 million we reported in the first quarter.

In the second quarter, we expect that we will have a headcount reduction of approximately 2% to 3%. Also reviewing our office space -- we are also reviewing our office space to make sure it is appropriately sized for our current needs. Our analysis is not yet complete, but we expect that our actions will result in a restructuring charge in the second quarter in the range of $4 million to $5 million for both severance and non-compensation expenses. We expect these actions can improve our ability to further increase the margin of our business.

Turning to taxes, as I noted earlier, our income tax expense increased by $3.4 million for writing off deferred tax assets, the additional expense related to equity grants that either vested at share prices lower than grant date share price or were forfeited.

Looking ahead to the second quarter, we will have a significant tax benefit as we reverse a tax reserve due to a successful outcome on a state tax matter. The positive impact of the reversal is a tax credit of approximately $7 million.

In the first quarter of 2012, we repurchased $7 million, or 288,000 shares, of our common stock at an average price of $24.46 per share. We have $44 million remaining on our share repurchase authorization, which expires on September 30, 2012.

In addition, we acquired $8.4 million or 353,000 shares related to employee tax obligations on vesting of equity awards. Under our three-year bank credit agreement, we have a covenant that limits our total repurchases to the amount that we issue for employee equity grants. The aggregate of $15 million that we repurchased in the first quarter is very near the covenant limit for this year. We are starting the process with our bank group to seek some relief under this covenant.

Now, I will turn to our segment results. For the quarter, Capital Markets generated $100 million of net revenues and $8 million of pretax operating income. Capital Markets generated a pretax operating margin of 7.9% compared to 6.8% in the first quarter of last year. The increase was mainly attributable to lower non-compensation expenses. Capital Markets pretax operating margin improved from the negative 3.1% on a non-GAAP basis, excluding the goodwill impairment charge in the fourth quarter of 2011, when the fixed income sales and trading revenues were particularly low.

Asset Management generated $18 million of revenues and $4.5 million of pretax operating income. This segment's pretax operating margin was 25.1%, up from 23.5% in the first quarter of last year and 24.1% in the fourth quarter of 2011. The improvement was mainly driven by lower non-compensation expenses.

In summary, improved business activity and actions we have taken to reduce our cost structure helped us to improve our performance in the first quarter. We are very focused on continuing to improve our productivity and profitability as we move forward.

This concludes my remarks. I'll turn the call back to Andrew.

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

Thank you, sir. (Operator instruction). Joel Jeffrey of KBW.

Good morning, guys. Can you possibly give us a little bit more detail in terms of the breakdown of your fixed-income trading revenues, particularly how much was driven by muni finance versus, say, taxable?

So our municipal finance portion is around 55% to 60% of the total fixed income institutional brokerage.

And the remaining is just the taxable fixed?

It's taxable, which ranges across multiple products. You think of our middle market sales force, which has some of the more plain-vanilla such as the agency investment grade corporates as well as our institutional fixed-income business with preferred and some other products.

Okay, great. And then sticking with the muni finance issue, in terms of issuance and the outlook for the remainder of the year, can you give us a little bit more color in terms of what you are hearing or seeing from the market at this point?

Yes. I would expect that we, when the year is done, will have an up year in issuance over last year, again looking historically coming off of '10 at $340 billion in issuance to $290 billion last year. Our best read at this point is it might be more like $310 billion, $325 billion. Year over year, the first quarter here was stronger and I think underscores that perspective.

A lot of what got done in the start of the year here was refinancing because you have historically low yields. But in looking at what we're working on and across sort of the 30-day visible supply, I do think you are going to have increased volume year over year.

Okay, great. Then just lastly, in terms of the $4 million to $5 million in restructuring charge you are talking about, is that essentially what you are talking about in terms of trying to keep you at $32 million in terms of the non-comp line?

Yes, that is correct.

Okay, great. Thanks for taking my questions.

Thank you.

Devin Ryan with Sandler O'Neill.

Good morning. How are you? So appreciate some of the investment bank color that you guys gave, but I don't know if we can just dig in a little bit more into maybe across each of the businesses, what the tone of conversations are currently like with clients? Then just maybe some sense of what pipelines look like across products today versus maybe three months ago when the markets were a little bit more choppy?

Okay, so let's start with equity financings. There's an improving environment there, as you saw in the indices, very stable on the volatility, or relatively stable. I think there's a reasonably clear succession in the risk appetite, pretty good discounts at the beginning of the quarter, and difficult pricings that ended the quarter stronger, more in the range, even some above the range. As a group, they all performed well by the end of the quarter. So I think you can see a trend there for an increased risk appetite. I would say we have certainly got a lot of dialogue going on about potential capital raises looking at that marketplace and believing there's an improving environment.

From an M&A perspective, our backlog is improving, very good dialogues. There was something of an air pocket based on the markets in the back half of 2011 but there was less closure here at the beginning of the year. I think you see that essentially across the industry. But, again, the fundamentals for the M&A market are in pretty good shape.

Maybe lastly, I would comment -- or wait a minute -- last on equities would be early recover in the Hong Kong market which was anticipated by us but now see signs of an improving environment, an improving risk appetite and the ability for us to bring some things to market here in the second quarter and the back half of the year. I guess we commented already on the Public Finance, which looks like also an improving environment.

Okay, all right, that's the color I was looking for. And then in terms of Asset Management, you mentioned some positive net flows in the release. I apologize if I missed this on the call, but what products drove those flows and I guess are you seeing more traction in the products that did drive the flows?

Yes, I think it looks a lot like the industry where the flows field is oriented toward yield. So we saw it in some of our fixed income and we continue to see inflows into our M&L -- MLP, excuse me, our MLP product, which obviously is a yield product. I think that would really mirror the industry. Less so in the equity products. Again, I personally believe there will be a shift in that at some future point. It is a multi-year trend not into equities but into fixed income.

Great. And just also in terms of the buyback, you gave some comments about the covenants that you currently have with the banks. So love to get your thoughts on deep -- is there a level of appetite that you have for buybacks, or assuming that you can have those covenants loosened a bit, do you have any sense of how much more aggressive you would like to get on a buyback, assuming the stock remains at the current levels?

Ultimately, it is going to depend on what we do negotiate with the banks and our ability to do that. Like I mentioned, we are in the early stages of doing that. We do have $44 million remaining under our current authorization. Ultimately, once we -- once and if -- if we get approval from the banks, we will file an 8-K. So that will be then more apparent in terms of what ability we have to buy back stock.

I got you. And then just lastly, in terms of the comp accrual you mentioned, I know that 60% or in that range is kind of the target and this quarter was a little bit higher than that. I mean how would you characterize your thought process for the comp accrual this quarter? How much was maybe being a little bit conservative to start the year, given kind of the uncertainty of revenues for the full year? Maybe just lastly, is there a revenue level or an annual revenue level where it you feel like the 60% is reasonable?

Okay, so first, starting with the first-quarter accrual, we are being very mindful of the volatility in our business and trying to make sure that we stay current with our compensation accruals, relative to what might happen later in the year.

In terms of what revenue level we need to see to reach close to that 60%, it is around $130 million to $135 million. Really what happens there is then you get the leverage on the fixed expenses that are within our comp ratio.

Okay, got you. Okay, great. Thanks for taking my questions.

Yes, Devin, I guess the last -- it's Andrew -- comment I would make is I do think you have characterized that correctly. We don't want to get caught having to accrue a lot at the back end of the year, so we are just being mindful throughout the year.

Got it. Okay, great. Thanks.

Thank you.

Matt Fischer with CLSA.

Good morning. Just I guess real quick, to touch back on the restructuring charge, the $4 million to $5 million, how much of that or what portion of that is severance?

We don't have that detail at this point as we are still working through our plans across both the non-comp and compensation.

Okay. Then you spoke about some of the trends. I appreciate the color. But as you move through the quarter and you start to -- as you get through the end of March and into April, were these trends still intact? Did we -- has the -- has anything changed in terms of chatter and general activity levels?

So, I would say the trend is directionally the same, obviously some volatility. In the last, call it, five, seven trading days, the VICs did move up, but I would say none of that takes us off trend as of now.

Okay. Then just to touch on the book value, the decline in tangible book and book value, you're purchasing shares below book value. Could you explain the dynamics there, why it's declined?

The reason that it has declined is the way we calculate our book value and tangible book values using our basic share count at the end of a quarter. This excludes any restricted or participating shares that we have that is weighted into the EPS. So, we had a number of shares that vested relative to the employee grants that we have made in prior years during the quarter. That more than offset the amount of shares that we repurchased. So that basic share count increased at quarter end. So then it was really that share count that drove the decrease in book value, intangible book value per share.

Okay. Got it. I guess that is it. Just I guess the one thing to touch back on the buybacks to -- I guess you did roughly $15 million and the $8 million to offset the equity awards plus the $7 million repurchase. I guess when you do get this, is that $30 million, is that kind of a reasonable target if you can get these covenants lifted, or would you look to expire at the full $44 million by the end of -- within two quarters?

I think the best way to answer that is just to say we are going to seek an additional authority, but we are disclosing that we are in that process, but until it is complete, I think it's just inappropriate to comment. As soon as we are through it, we will file an 8-K. Clearly, our intention is to increase our share repurchase, and we have been limited now for some time.

Great. Thank you very much.

Thank you.

No further questions at this time.

Okay. Maybe I would just wrap up and say that I think we are making solid progress here. The non-comp efforts that we really engaged in and we have been talking to you about started about this time a year ago. When you have got a run rate improvement from $38 million to $32 million, which we ought to be at by the end of the second quarter, entering the third and fourth, that is essentially $24 million of additional margin. We've done that kind of really across the business and mindful of what resources we need to maintain the business in the future. But we are able to accomplish it with a lot of hard work and in a parallel path continue to make the selective investments in our growth that we think are appropriate in our higher ROE higher-margin business. The Public Finance franchise continues to evolve and grow and build in the East Coast with a middle-market salesforce following behind some additional trading capacity built with that. The Asset Management investment in a set of retail products by mutual funds and distribution that can complement the very high quality institutional products that have been built over the years. Lastly, when you get to our equities business adding M&A resources so you can build out the other three verticals to the degree of our M&A franchise and our healthcare. Finally, to work to get to a sustainable margin in our Asia business.

So I just conclude by saying I think we continue to make very good progress on exactly the right things. Thank you very much. That concludes our remarks.

Thank you, sir. This does conclude today's conference call. Thank you for your participation. You may now disconnect.