Piper Sandler Companies (PIPR) 2012 Q2 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 second quarter of 2012. During the question-and-answer session, securities industry professionals may ask questions of management.

The Company has asked that I remind you, statements on this call that are not historical or current facts, including statements about beliefs and expectations and forward-looking statements that involve inherent risks and uncertainties, factors that could cause actual results to differ materially from those anticipated or identified in the Company's earning release and reports on file with the SEC, which are available on the Company's Web site 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. This morning, I will provide remarks on three areas -- our performance in the quarter; our decision to exit the Hong Kong market; and our outlook. In the second quarter, Hong Kong capital markets results continued to weigh on our overall performance as the business generated a $4 million pretax operating loss. I will come back to our decision in a moment.

Setting aside the impact from Hong Kong, our main businesses performed reasonably well against more difficult operating conditions. Total investment banking revenues held up well, led by very solid public finance revenues, which rose 57% compared to the sequential first quarter. Given the low interest rate environment, public finance refinancing activity continued to represent a large percentage of the issuance during the quarter, both for us and the industry.

We had several notable transactions during the quarter, including our California school short-term note program, which this year totaled just over $800 million; a $180 million sole-managed lease transaction for Rowan University in New Jersey; $104 million sole-managed bond issue for a new senior living project in Minnesota; and a $300 million lead-managed general obligation issue for the city of Phoenix. Our public finance market share is 4.8%, up 100 basis points, or 26%, through the first six months of 2012, compared to the full year of 2011. Also, for the first half of 2012, we were ranked number 10 nationally in par value of senior-managed negotiated issues. Both metrics are evidence of our growing national franchise.

Turning to corporate advisory, we were encouraged that we closed more transactions compared to the sequential first quarter, reflected in higher revenues. Our health care and TMT groups were more active in the quarter and consumer also contributed. We still expect that a significant portion of our corporate advisory revenues for 2012 will be generated in the second half of the year.

The more difficult operating environment negatively impacted our ability to raise equity capital for our clients, particularly through IPOs. Within the industry, no IPO was issued for 39 days following the Facebook IPO in mid-May and, until the last week of June, when there were just six IPOs issued. The difficult conditions had a negative impact on our sales and trading business as well. Fixed income institutional brokerage revenues decreased from the strong sequential first quarter, but were still solid. We performed well in our strategic trading business and in the municipal opportunities fund, but results were lower. Offsetting some of the decline was increased revenues from our expanded middle-market sales group, which made a very solid contribution to the quarter. Equity sales and trading revenues were weaker as a result of lower client volumes and trading results. Asset management fees held steady compared to the first quarter of 2012.

Now I would like to turn to our announcement this morning to exit the Hong Kong market. We provided a supplemental schedule with our earnings release this morning that shows the financial results for the business. The losses for the second quarter, year to date and for 2011 have been significant. We have devoted considerable time and resources to evaluating and pursuing alternatives for the Asia business. We will exit the market by the end of September, either through ceasing operations or a sale of the business. The decision to exit allows us to significantly reduce risk, immediately improve our financial performance and focus our full attention on our strategy to organically remix our portfolio to higher margin, higher return businesses, namely asset management, public finance, and corporate advisory. We maintain our deep industry expertise and our leading growth platform in strong M&A execution in the US and Europe. We may maintain a small presence in Asia to facilitate ongoing US business and will continue to provide coverage by US-based research analysts on China-based companies.

Let me provide some additional perspective. Hong Kong is a growth market, but it is also characterized by significant volatility, accentuated by the global financial crisis over the past several years. We have built a solid franchise in Asia, but it primarily consists of IPOs for China-based companies, raising capital on the Hong Kong or US exchanges. Given the requirements to compete in the market and our narrow product base, the upside potential when markets are constructive is outweighed by the downside losses when the markets are closed. Based on our size and profitability, we do not have the financial resources to build out the business into a broader, more sustainable platform or absorb the significant losses in this market. We are evaluating the alternatives based on the best interest of our shareholders, clients, and employees.

Now let me turn to our outlook. The additional steps that we took this quarter will improve our performance. Also, we are well-positioned for an improved US capital market cycle and continue to build on solid market share. As we look ahead to the last half of the year, we remain cautious about the operating environment. We expect that the uncertainty around Europe, the potential slowing US economy, as well as the US elections will continue to weigh on the financial markets, and consequently, will challenge our equity-related businesses (technical difficulties) [in fixed income] sales and trading.

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

Thank you, Andrew. First I will provide comments on our results for the quarter and then provide additional financial detail around the Hong Kong business decision. In the second-quarter of 2012, we generated net revenues of $106 million and net income of $6.9 million, or $0.37 per diluted common share. Our pretax operating margin was 1.6%.

There were three items that significantly impacted our results. First, we recorded a $7.1 million, or $0.39 per diluted share tax benefit, resulting from the resolution of a state income tax matter. Second, we recorded a restructuring charge of $2.2 million after-tax, or $0.12 per diluted share. On a pretax basis, the restructuring charge was $3.6 million, below the $4 million to $5 million range we discussed in April. The charge included $2.4 million for severance, as we pared headcounts, primarily in areas where we were not realizing revenues. The remainder of the charge was $1.2 million for occupancy as we reviewed our space needs. We estimate that this component will have a payback period of less than one year, and it will reduce our future occupancy liabilities by approximately $10 million. We will begin to realize the full benefit from these actions beginning in July. And third, our Hong Kong capital markets business generated a net loss of $3.9 million, which reduced our EPS by $0.21.

For the second quarter of 2012, compensation and benefits expenses were 62.5% of net revenues, compared to 60.4% and 62.2% for the second quarter of 2011 and first quarter of 2012, respectively. Non-compensation expenses were $38.3 million, or $34.7 million, excluding the $3.6 million restructuring charge, compared to the $35.4 million in the year-ago period, and $31.8 million in the first quarter of 2012. As I stated earlier, the positive impact from the reduction in occupancy costs will begin in the third quarter. Also, we had certain expenses that were higher in the second quarter, for example, T&E was higher due to several client conferences.

Now I will turn to our segment results. For the second quarter, capital markets generated net revenues of $89 million and pretax operating loss of $2.1, or pretax operating income of $1.4 million, excluding the $3.5 million restructuring charge attributable to the capital market segment. Capital markets generated a pretax operating margin of a negative 2.3%, or a positive 1.6% excluding the restructuring charge, down from the comparable quarters due to lower revenues, offset in part by lower compensation expenses.

Asset management generated $17 million of revenues and $3.7 million of pretax operating income. The segment pretax operating margin was 22.1%, compared to 24.1% in the second quarter of last year and 25.1% in the first quarter of 2012. The decrease was mainly driven by lower revenues offset in part by lower compensation expenses. Assets under management were $12.7 billion, compared to $13.2 billion in the first quarter of 2012. The decrease in AUM was driven by market depreciation and net cash outflows. Turning to the balance sheet, in the second quarter of 2012, we acquired $27 million, or 1.2 million shares of our common stock at an average price of $22 per share. Year-to-date, we have acquired approximately $42 million of our common stock, and we have reached the covenant limit for this year under our three-year bank credit agreement.

Now I will turn to our decision to exit the Hong Kong market. We anticipate realizing net cash proceeds from an exit of $13 million to $18 million. There are three main drivers of the cash proceeds -- first, a significant US tax benefit, which drives the majority of the cash proceeds; second, cash realized the value of the net asset; and third, our Hong Kong lease write off.

We provided a supplemental schedule for our Asia operations with our earnings release. As shown by that schedule, with very limited revenues generated during the time periods presented, the operations had a significant negative impact on our financial results. For the second quarter of 2012, our consolidated compensation ratio was higher by 1.9 percentage points, and our pretax operating margin was decreased by 3.7 percentage points. For the full year of 2011, the compensation ratio was increased by 1.3 percentage points, and the pretax operating margin decreased by 1.3 percentage points.

In summary, the more challenging operating environment reduced our results in the quarter, but we believe we performed relatively well. The additional actions we have taken to exit the Hong Kong market, repurchase shares, and reduce our cost structure will improve our performance going forward.

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

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

(Operator Instructions) Our first question comes from the line of Joel Jeffrey with KBW.

Quickly, thanks for all the disclosure in terms of what the charges were. We are struggling a little bit to get an operating EPS number. Would you say, based -- backing out all the after tax impact that is more in line with a $0.31 number, or is it more towards the $0.37 number appropriate?

(technical difficulty)

Yes, operator, are there additional questions?

We do have Mr. Jeffrey on the line.

I am sorry, I did not hear the answer. I apologize.

I'm sorry. Yes, the $0.31 is what we believe is appropriate from a continuing operations perspective.

Thank you. Thinking about the expense levels going forward, can you give us any thoughts on a non-comp number we should be thinking about in future quarters based on the absence of Asia and some of the other things you have done?

Given, as you mentioned, those two items, the absence of Asia and the cost-reduction initiatives that we have been working on, from a continuing operations perspective, we believe that non-comps in the range of $30 million to $31 million are appropriate.

Per quarter.

Per quarter, yes.

Okay great. And thinking about a very strong public finance quarter, is this level sustainable going forward, or was there something specific to this quarter in the market that led to higher issuance levels?

It was a very strong quarter both for us and issuance, and I would think of the back half looking very much like the first half of the year for us.

Okay great. And lastly, in terms of the share repurchase, I think you said you had reached your covenant level, so is there any way you can buy back additional shares, or are you maxed out for the remainder of the year?

For the remainder of this year we are maxed out. Next year, then we have the ability to buy back shares to offset dilution again under our bank line of credit.

Your next question comes from the line of Devin Ryan with Sandler O'Neill.

Within the equity sales and trading business, were there any trading losses in that line or was the softer quarter purely a function of lower client volumes?

It was largely volumes; there was a small loss.

Okay. In the asset management business, you highlighted some net cash outflows. What products were those and what was the driver of the outflows?

They were spread out across a number of equity products, to some degree offset by our sole yield product, which is MLDs, which had modest inflows. So it was not a significant number in any given product.

Thank you.

The driver for the quarter was the market valuation.

Okay. And just on the exiting of the Asia business, to the extent you cease operations there versus an actual sale, should we expect further restructuring charges this quarter? Do you have any estimation of what those would be at this point?

So if we do shut down versus a sale, again, the range from the net cash proceeds we believe is within that $13 million to $18 million range in either of those situations. But from a restructuring perspective, specifically with a shut down, it would be somewhere in the range of $8 million to $10 million is what we anticipate, which is already contemplated in that net cash proceed range of the $13 million to $18 million.

Got it. Great. Helpful.

I was going to say all of that then gets reported in discontinued operations, starting in the third quarter.

(Operator Instructions) I'm showing that we do have a question from the line of Joel Jeffrey with KBW.

I had one more follow-up question, on the cash benefit you talked about from exiting Asia, will that actually flow through the P&L, or is that just a cash benefit?

We would have a modest gain, the majority--the $13 million to $18 million cash benefit is larger than what will actually flow through the P&L. But we do anticipate recording a modest gain on either of those situations, whether it is a shut down or a sale.

I'm showing that we have a question from the line of Michael Wong.

Michael Wong from MorningStar. Just a really quick question, what is the AUM break out between equity-type funds and fixed income or yield type funds?

The vast majority is equity. There is approximately a little over $3 billion in MLP, and then some modest additional fixed income assets. All in for yield is probably something like $3.5 billion.

(Operator Instructions) There are no further questions in the queue at this time.

Thank you for joining us this morning. Operator, that concludes our call.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.