Piper Sandler Companies (PIPR) 2014 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 2014. (Operator Instructions)

The Company has asked that I remind you that 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.

This call will also include statements regarding certain non-GAAP financial measures. Please refer to the Company's earnings release issued today for a reconciliation of these non-GAAP financial measures to the most comparable GAAP measure. The earnings release is available on the Investor Relations page of the Company's website or at the SEC website. 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 our first-quarter results. I will spend a few minutes discussing the market environment and the performance of our business, and then hand the call over to Deb to review our financial results.

With market conditions that were mostly accommodative, we got off to a strong start in 2014 as we sustained the momentum in our business in the second half of 2013. Equity markets finished the quarter slightly ahead of their record levels at the end of 2013 and attracted both issuers and investors into the market.

As a result, equity capital raising remained strong and trading volumes were up for the quarter. These market conditions also were beneficial for asset managers.

As for fixed-income markets, we saw interest rates decline slightly during the quarter. These declines contributed to our favorable results in fixed-income trading and investing. The interest rate declines were not sufficient, however, to reignite refinancing activity in public finance that dropped off sharply due to last year's spike in interest rates.

Underwriting activity for Q1 was off about 35%. However, we note some signs of improvement towards the end of the quarter.

Moving on to our performance for the quarter, the primary objectives of our strategy over the past couple of years were to achieve profitability in more challenging markets, produce strong results in healthier markets, and make disciplined investments in our higher-margin businesses. We continue to execute on this strategy, as reflected by our strong performance to the start of the year.

Historically in our financial results, we reported an annualized return on equity for the quarter. We feel that reporting our ROE on a rolling 12-month basis provides a more accurate representation on the performance of the Firm.

Our ROE for the last 12 months ending in March improved to 7.2%, compared to an ROE of 6.7% for the comparable period of 2013. Our return on tangible equity for the last 12 months also improved to 10.9%.

For the quarter, on balance we produced good results in our operating businesses. The sequential decline in revenue from the record levels last quarter primarily was attributable to lower gains on our investments, in the absence of significant performance fees in Asset Management, which are generally recorded in Q4. Nevertheless, our results for the quarter represented a very substantial improvement over last year's first quarter.

Performance in our Capital Market businesses continue to demonstrate the strength we saw in the latter part of 2013. Equity capital raising was up slightly sequentially and more than double a year ago. Capital raising for growth companies was robust, especially in healthcare, our strongest industry sector.

We were particularly pleased with the performance of our M&A business, where we often see a lull in activity in the start of the year. Our results were up sequentially.

Revenue increased in our M&A business for the third consecutive quarter. These results reflect our strategic focus in recent years to strengthen our M&A capabilities.

Our equity brokerage business experienced an increase in activity that was in line with the market. The sequential decline in revenue was attributable to lower gains from our equity strategic trading results. We remain very pleased with the progress we are making in the equity brokerage business, as demonstrated by a substantial increase in revenues versus last year.

As I noted in my comments regarding market conditions in public finance, we were not immune to the significant decline in new issuance activity, as our results indicate. With the sharp increase in interest rates in the middle of last year, we have seen a substantial decline in refinancing activity.

One bright spot for the quarter was a $1.5 billion capital raise for the Texas Department of Transportation, where we were the lead manager. We expect a gradual improvement in underwriting activity as the year progresses.

Fixed-income brokerage performed in line with our expectations for the quarter, as our trading and investing activities experienced a rate environment that was generally constructive. We continue to manage our business on the premise of gradually rising rate environment for the year.

Moving on to our Asset Management business, we finished the quarter with $11.5 billion in assets under management. That was up slightly over year-end levels. The increase in AUM was attributable to a slight net inflow in assets plus market appreciation.

The highlight for the quarter was the new closed-end fund that we completed at the end of the quarter, where we served as a subadvisor to Nuveen. The fund, which invests in small and mid-cap MLP companies, represents a unique investment strategy in the MLP space.

In summary, we are pleased with our results for the quarter. The progress we have made is substantial and demonstrates the operating leverage in our model. We have a solid foundation on which to build as we move our strategy to a more growth-oriented bias.

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

Thanks, Andrew. In the first quarter of 2014, continuing operations generated net revenues on a GAAP basis of $168.1 million, a 54% increase compared to the year-ago period and a 10% decrease compared to the sequential quarter. Net income for the quarter was $17.7 million or $1.10 per diluted common share, and our pretax operating margin was 19.5%.

In addition to our GAAP results we have presented non-GAAP financial measures to provide a more meaningful basis for comparison of our core operating results. The non-GAAP measures exclude revenues and expenses related to noncontrolling interests, amortization of intangible assets related to acquisitions, compensation for acquisition-related agreements, and restructuring and acquisition integration costs. The remainder of my remarks will be based on these non-GAAP financial measures.

In the first quarter of 2014, continuing operations generated adjusted net revenues of $161.5 million, adjusted net income of $20 million, or $1.24 per diluted common share. And our adjusted pretax operating margin was 19.3%.

For the first quarter of 2014, adjusted compensation and benefits expenses were 61.4% of adjusted net revenues, consistent with 61.6% in the first quarter of 2013, and up 80 basis points from the 60.6% in the fourth quarter of 2013. The increase in the compensation ratio on a sequential basis primarily related to a seasonal increase in benefits expense. Compensation and benefits expenses as a percent of net revenues for the current quarter were in line with our goal of 60% to 62%.

Adjusted non-compensation expenses were $31.1 million for the first quarter of 2014, compared to $22.7 million in the year-ago period and $29.9 million in the fourth quarter of 2013. Non-compensation expenses increased compared to the year-ago period due to the receipt of insurance proceeds for the reimbursement of prior legal settlements in the first quarter of 2013, and incremental costs associated with the acquisitions we made mid last year.

On a non-GAAP basis our effective tax rate from continuing operations was 35.7% for the first quarter of 2014, consistent with our expectation of 34% to 37%.

Now I will turn to segment results. For the first quarter, Capital Markets generated adjusted net revenues of $141.8 million, adjusted pretax operating income of $24.1 million, and an adjusted pretax operating margin of 17%. Adjusted net revenues increased 60% compared to the first quarter of 2013 due primarily to higher equity financing and M&A revenue.

The active capital-raising environment at the end of 2013 continued into the first quarter of 2014. This resulted in more completed transactions and higher revenue per transaction in our equity financing business compared to the year-ago period, especially in the healthcare sector.

Our M&A business also has had one of its strongest starts to a year, and generated $39.7 million of revenue as a result of more completed transactions. Equity institutional brokerage revenues benefited from higher client trading volumes compared to the prior-year period.

The increased net revenues for the current quarter were partially offset by a decrease in public finance revenues. This decrease, which was consistent with the market, was primarily driven by a lower level of refinancing activity in the current quarter.

Adjusted pretax operating margin improved compared to the first quarter of 2013 due to higher net revenues, and decreased compared to a very strong fourth quarter of 2013 due to lower net revenues, a higher compensation revenue ratio, and higher non-compensation costs.

Asset Management generated $19.7 million of net revenues, $7.1 million of adjusted pretax operating income, and an adjusted pretax operating margin of 36%. Net revenues increased 8% compared to the first quarter of 2013 and decreased 29% compared to the fourth quarter of 2013. The decrease compared to the sequential quarter was due to lower performance fees, the majority of which are recorded in the fourth quarter if earned, as well as lower investment income.

The adjusted operating margin declined compared to both the first and fourth quarters of 2013, due to higher non-compensation expenses attributable to marketing-related professional services. This concludes my remarks, and I will turn the call back to Andrew.

That concludes our formal remarks. Operator, would you please open the line for questions?

(Operator Instructions) Michael Needham, KBW.

Good morning, guys. Congrats on the quarter.

Thank you.

I was hoping you could touch on some of the ECM strength you have seen, particularly within the healthcare sector. Has the sell-off in some of healthcare and tech names of late, has that changed some of the discussions you are having or pushed back some of the deals in your pipeline?

The pipeline remains strong. The recent sell-off has moderated perhaps the quality of the companies that can come (technical difficulty) and hopefully the markets are open to high-quality, more-seasoned companies.

Okay, fair. On the advisory side, you touched on it, on your comments you made earlier, that some of the investments you have been making in the business are starting to play out there. Is there any way you can share maybe productivity levels or try to give us an indication of how much this is maybe driven by a couple of sectors that have been strong in the first quarter? Because this is very -- seasonally adjusted, it's a very strong quarter for you guys.

So, a couple of comments. First of all, the macro environment is favorable for M&A activity in robust capital markets, including the credit markets. Our activity is across our industry sectors, but it is certainly led by the healthcare environment, which is our strongest franchise. And our backlog reflects that as well.

Okay. On M&A do you expect this year maybe revenues are more weighted toward the first half of the year?

We would certainly view them as more balanced. As you may recall and as you referenced, they were heavily weighted to the back half of last year, and we do not expect that this year.

All right. Last question for me on fixed-income brokerage. It looks like over the last three quarters it has been business as usual for you guys. Can you just comment on -- I know the rate environment has been better. But can you comment on where inventory levels have gone during the first quarter and maybe contrast that with where they were at the beginning of 2013?

Yes. Our inventory levels -- there has been maybe some change in mix and different products; but inventory levels have not changed that dramatically.

They are definitely lower. However, I would say that is not to necessarily representative of the risk that we are taking. A lot of it has to do with how we are hedging, the product mix, the duration of our inventories.

And the last couple quarters in particular, our measurements of risk, particularly in our fixed-income inventories, as measured by DV01 for example, has declined very substantially, being only about a quarter of what it was two quarters ago. So it is more to do with how we are hedging and ultimately the risk appetite that we have in our inventory.

Got it. All right. Thanks for taking the questions.

Douglas Sipkin, Susquehanna.

Yes, thank you. Good morning. So, wanted to dig a little bit more into the ECM; obviously very impressive. I think everyone knows you guys are very strong in healthcare and related.

I am just curious. Were there any other pockets that outperformed in the quarter? I am just trying to think through the breadth of the offering, in the event maybe that sector slows and something else picks up, given some choppiness in the stocks in the middle of the first quarter.

So I am just curious. Maybe you could talk through the breadth of the backlog and the actual results for ECM.

So the backlog, as I mentioned, is diversified. It includes our other sectors of strength, particularly consumer and tech. There is a reasonable representation of healthcare as well, but it is clearly diversified.

Okay, great. No, that's helpful.

And then shifting gears, it was nice to see you guys -- it sounds like you had some inflow on the Asset Management side off of, I guess, the closed-end fund you participated in. How are you guys thinking about the MLP market?

It has been a great marketplace for a while. Is the potential for more smaller-size closed-end deals possible for you guys?

And then maybe just a little bit of color on some of the retail offerings that you guys now provide in the Asset Management business would be helpful also. Thanks. Away from the closed-end fund, I should say. Some of the funds.

Sure. So as to the MLP space, it has performed very well for multiple years now. It appears to be quite attractive to investors still, with the yield at approximately 6%. That may be lower historically, but obviously so are yields across the marketplace in all kinds of products, and fixed-income included. So when you look at it from that context, it remains relatively attractive on a yield basis with capital appreciation.

And flipping over to our retail products, it is similar. We are having steady flow into the products and the lead is MLP.

Great. And then just last question. Obviously, it has been a much improved ECM/advisory marketplace now for a couple of quarters. Are you guys sensing that it is getting -- the competitive framework for accounts getting a little bit more challenged? Or are we still -- I guess some of the small/mid-sized firms benefiting from the structural challenges that the larger organization still are dealing with.

I would say not a particularly notable shift at this juncture. To your point, obviously, the environment is pretty strong. But I -- we have not seen a particular shift in the demand for human capital or changes at other organizations shifting them.

Okay, great. Thanks a lot and congrats.

Thank you.

Thank you.

(Operator Instructions) Michael Wong, Morningstar.

Good morning. So, given your high level of Asset Management fees, I was a bit surprised that the Asset Management segment's operating margin was lower than the previous four quarters. So I was wondering, has the baseline level of expenses in that segment increased?

Or was there something more one-time in nature during the quarter? Like, I believe you mentioned marketing-related services.

Yes, it was really primarily driven by that marketing-related service as you look back over the last number of quarters. And that really aligns with our strategy to increase our assets and particularly going after the retail space. And so it is just another avenue for us to enhance our distribution to build our assets under management within advisory research.

So is that marketing-relating services expense a one-time expense? Or is it expected to recur every quarter?

It is driven by the assets raised. So you don't know what that is, obviously, till the assets are raised.

The one thing I would say is the expenses are coming in, let's say, in this quarter, but the billings for the assets that are raised will come over four months -- or four quarters, excuse me. So over time, you would see that more even out and not have the impact on the margin that it did in this first quarter that we really started using these third-party marketing firms.

Okay, thank you. Just quickly going back to that great investment banking results, especially given it is the first quarter of the year. So how are you thinking about the current quarter's results in terms of it just being a lumpy revenue line; or it being more of a result of Edgeview, Seattle-Northwest, your general investment in human capital; or just the general, more positive state of the economy?

So I would say it is largely driven by the environment, which is favorable. And the acquisitions we made last summer, both Seattle-Northwest and Edgeview, are performing very well.

The integrations have gone well. The teams are intact. We are winning business both from their former clients as well as new clients as our combined resources. So they are doing very well, but consistent with a favorable marketplace.

Okay. Did you have something else to add?

No.

Okay, and just one more quick question. So you mentioned your strategic trading business again this quarter, so have you been growing that organically? Or have you been able to, let's say, lift out teams from banks that have exited those operations?

No. The resources -- we have got a portfolio of activities, and the resources are similar to prior quarters. Steady results.

Okay. Thank you.

There are no further questions in queue at this time. I turn the call back to our presenters.

Thank you very much. Results for the quarter, like the progress we have made in the past few years, driven by our focus on execution and disciplined investments in our existing business. We will continue to pursue this strategy as we seek growth opportunities to drive further improvements in our ROE. Thank you for joining us.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.