Piper Sandler Companies (PIPR) 2013 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 2013. 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 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 early 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. Please go ahead.

Good morning and thank you for joining us to review our first-quarter results. I will spend a few minutes discussing the market environment and performance of our businesses and then hand the call over to Deb to review our financial results.

Let me start with an overview of the market environment this quarter. Our businesses experienced mixed market conditions to start the year. On the favorable side, equity markets registered net inflows for the quarter compared to net outflows throughout 2012. This resulted in more accommodating conditions for our cash equities and asset management businesses.

On the more challenging side, fixed income markets faced increasing headwinds as the quarter progressed due to uncertainty over interest rates.

In addition, M&A activity, particularly in the middle market, dropped off significantly compared to the last quarter of 2012. This was expected due to a surge in transactions at the end of 2012 in anticipation of higher tax rates in 2013, which we noted in our last earnings call. The impact of market conditions was evident in our results, particularly the drop-off in M&A activity. For the quarter, we generated net revenues of $110 million, a sequential decline of 22% from Q4 2012, and essentially flat with the first quarter of 2012. The sequential decline primarily was attributable to lower revenue in our advisory business. However, due to our efforts last year to streamline our business, we produced solidly profitable results that generated an ROE of 5.5% compared to 1.6% one year ago.

In our Capital Markets business segment, public finance produced another strong quarter. Given the seasonality of this business, Q1 typically starts out slow so the sequential decline in activity from the prior quarter was expected. Year over year, however, our business was up 15% as we continue to realize market share gains attributable to the geographic expansion of our public finance business.

Our fixed income brokerage business performed well also. Revenues were up 19% sequentially and flat with Q1 2012. The expansion of our middle-market resources, coupled with solid strategic trading results, more than offset weakness in our flow trading during the quarter.

During the quarter, we added 14 sales and trading professionals as part of our middle-market buildout. Results in our equity financing business generally declined both sequentially and year over year. We experienced a healthy capital raising environment in our focused sectors during the quarter.

Our activity levels, as measured in number of transactions, were consistent with the overall market, but our results for the quarter lagged at the broader market. The number of booked run transactions was lower than normal, and this depressed our average fee transaction during the quarter.

One area of recent progress was our investment banking business where we are investing in the biotech subsector. This subsector represents about a third of our focused sector's fee pool for the quarter. We recently added resources as part of our plans to pursue this opportunity.

I already mentioned the decline in M&A activity for the quarter. This decline has seasonal aspects to it, and the tax-driven activity at the end of 2012 contributed to this deeper decline.

As the quarter progressed, we started to see an increase in pitch activity.

Performance in our cash equity business was consistent with the broader market. Our business was up sequentially and down slightly year over year as net inflows into equities in Q1 drove higher volumes.

It should be noted that our cash equities business has improved sequentially for the past two fiscal quarters.

Moving on to our Asset Management segment, we benefited from rising markets during the quarter, and the business continued to produce strong margins for us. Revenues were up 12% sequentially and 10% year over year.

Our assets under management at the quarter end exceeded $10 billion. While net inflows into our products were flat for the quarter, our strategy to reach retail investors through our mutual funds continues to show steady improvements led by inflows into our MLP product.

Now I will turn the call over to Deb to review our financial performance for the quarter.

Thank you, Andrew. In the first quarter of 2013, continuing operations generated net revenues of $110 million. Net income from continuing operations was $10.7 million or $0.60 per diluted common share, and our pretax operating margin was 16.6%.

For the first quarter of 2013, compensation and benefits expenses were 60.4% of net revenues, down 30 basis points from the full year of 2012 and in line with our goal of 60% to 61%. Non-comp expenses were $25.3 million for the first quarter of 2013. The decrease from both the year ago period and the sequential quarter was primarily due to receipt of insurance proceeds for the reimbursement of prior legal settlements. We expect non-compensation expenses to return to more typical levels in the second quarter.

Now I will turn to segment results. For the first quarter, Capital Markets generated net revenues of $91.2 million, pretax operating income of $12.8 million, and a pretax operating margin of 14%. Net revenues decreased 6% compared to the first quarter of 2012, due to declines in M&A revenue from fewer completed transactions and lower revenue from equity financings. These decreases were partially offset by improvements in public finance revenues and gains on our principal investments.

Pretax operating income was higher compared to the year ago period, primarily due to lower non-compensation expenses and less than the fourth quarter of 2012, due to lower revenues. Asset Management generated $18.3 million of net revenues, $5.4 million of pretax operating income, and a pretax operating margin of 29.6%. The operating margin was higher relative to the comparable quarters, primarily due to higher management fees. Assets under management were $10.2 billion, up from $9.1 billion at the end of 2012, due to market appreciation.

Now I will turn to discontinued operations, which includes both our Hong Kong Capital Markets business, which we shut down, as well as FAMCO, a division of our Asset Management segment.

The firm has announced the sale of that business. For the first quarter, the net loss from discontinued operations was $0.5 million as we incurred a net loss from FAMCO's operations and incurred residual shutdown costs in Hong Kong.

In summary, although we experienced a challenging market environment in the first quarter in certain businesses, we continue to focus on increasing revenues and gaining market share across all of our business lines. We also remain focused on improving our ROE and operating more efficiently with higher productivity.

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

This concludes our formal remarks. Operator, we would now open the line for questions.

(Operator Instructions). Joel Jeffrey, KBW.

Good morning, guys.

Good morning, Joel.

Can you talk specifically, how much was the insurance benefit you had this quarter?

I think the easiest way to think about this is without the insurance proceeds that were offset by some other one-time costs, our non-comps would have been below our range of $30 million to $31 million for the quarter.

Okay. That's helpful. And did that benefit have any impact on the tax rate because that came in a little bit lower than what we are looking for?

No. The lower tax rate is really just a result of the level of tax exempt interest that we have in the business for the quarter.

Okay. And then on the fixed income side, the revenues that are on the trading side were certainly a little bit stronger than what we were looking for. Can you just talk about how much the strategic trading activity may have impacted that number?

The strategic trading was really normalized, I would say, within the mix of revenues -- our fixed income revenues. There was nothing unusual in the quarter.

Okay. And then on the M&A side of the business, I mean, certainly you guys let everyone know that there was going to be a pull forward in the last quarter. I'm just wondering, though, how long is this going to impact the M&A side of the business? I know you said that pitches seem to be up towards the end of the quarter, but is this something that could drag on for a few more quarters?

Joel, it's Andrew. I look at our business over time, and there is a seasonality to it. I think it was exasperated this year with the tax dynamic at the end of the year. We typically have a stronger second half to the year, and we would anticipate that this year. Our pitch activity is definitely up.

And then just lastly for me, what was driving other revenues in the quarter?

The other revenues are really driven by gains on principle investments. So this primarily relates to gains within our merchant banking portfolio, as well as seed investments in some of our asset management strategies.

Great. Thanks for taking my questions.

Thank you.

Michael Long, Morningstar.

Good morning, Deb and Andrew.

Good morning.

Good morning.

Would you say that your business is fairly well rationalized for the current environment after scaling back on your international operations in FAMCO?

I feel it is, and, again, as Deb referenced, our noncomps are also well in line with what we tried to achieve last year, yes.

Okay. So for the most part, there shouldn't be any more material operational changes, and assuming an improvement in economy, we should see a fairly gradual increase in returns on equity as you emphasize capital-light businesses?

I think your assessment is correct. There is leverage in the business, at this point, with the cost reductions that we've done on improving revenues.

Okay. And just a reminder, have you received the tax reimbursement for winding down your Hong Kong operations yet?

That is something that was -- some of that was initially -- some of it is coming over time, but the vast majority of that has been realized.

Thank you.

Thank you.

(Operator Instructions) At this time, I'm showing no further responses.

Well, thank you. We continue to focus our efforts and resources on developing our higher margin businesses, including asset management, public finance, M&A advisory services. We will prudently deploy our capital against opportunities we see in the market where we bring a unique perspective. Finally, we remain diligent in managing our costs irrespective of the market environment.

Thank you all for joining us.

Ladies and gentlemen, thank you for participating in today's conference call. You may now disconnect.