Piper Sandler Companies (PIPR) 2014 Q3 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 of the third quarter of 2014. During the question and answer session security industry professionals may ask questions of management.

The company has asked that I remind you that the 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. And now I'd 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 third quarter results. I will spend a few minutes discussing the market environment and the performance of our Businesses and then hand the call over to Deb to review our financial results.

The firm produced solid results for the quarter which contributed to a 10.2 ROE for the last 12 months. The diversity of our Business mix enabled us to generate these strong results in the context of markets that were generally neutral to negative for our Businesses. Specifically we took advantage of favorable M&A markets to produce record advisory revenues that drove our overall performance.

In a broad sense, equity and fixed income markets in the US were subject to countervailing pressures which led to an environment void of a clear direction for markets during the quarter. Strong macroeconomic growth reported for the second quarter, together with healthier employment conditions for the current quarter, suggested accelerating US growth.

Concurrent with stronger growth we would expect equity markets to perform well and interest rates decline. However significant geopolitical uncertainty, plus perceived weakness in the major European and Chinese economies, had a dampening effect on equity markets. In addition, these factors helped reinforce the US status as a safe haven for international investors, which placed downward pressure on interest rates.

The equity markets demonstrated a balancing act in the context of conflicting influences. Broad indices were essentially flat for the quarter, while small cap stocks experienced a 5% to 10% decline in value. These conditions adversely impacted capital raising during the quarter, particularly in smaller growth oriented stocks.

With valuations at relatively attractive levels and generally low volatility, M&A activity was healthy. Low market volatility had a dampening effect on trading volumes as investors waited for a clearer direction in the market.

Late in the quarter we experienced some higher volatility and trading volumes, which have persisted in October. Unfortunately the higher volumes were associated with a decline in stock values.

Touching on fixed income markets for a moment, benchmark rates came in slightly lower during the quarter, and spreads tightened as well. These conditions were unfavorable to fixed income brokerage as many investors sat on the sidelines expecting interest rate increases in the near future.

Late in the quarter, similar to the equity markets, a bout of volatility hit the fixed income markets with spreads widening. We would expect periods of episodic volatility going forward as the markets surge for a clear rate direction. Our operating performance for the quarter largely tracked the markets, with the exception of our M&A revenues.

We continue to make great strides in this Business and this quarter our consumer team lead the charge with three premiere transactions. We advised NYX on the sale to L'Oreal, we also represented two high-profile restaurant chains, TGI Fridays and Portillo's.

The emergence of our consumer group as a market leader complements our traditional strength in healthcare. As we have noted in the past, we have focused our efforts and resources on growing our M&A capability and this quarter's performance is indicative of our progress.

In equity capital raising we experienced a drop off in activity both sequentially and year-over-year. This was primarily attributed to lower capital raising in the growth sectors in which we compete and also reflected the very robust results we produced earlier in the year. On a year-to-date basis we are 42% ahead of the prior-year.

Our equity brokerage Business suffered from the lower trading volumes impacting the market. Sequentially our trading revenues were down slightly more than the marketwide 6% decline in volume.

Comparisons to last year were particularly unfavorable due to a combination of higher volumes and a significant block trade from a year ago. Strategic trading losses incurred this quarter, versus trading gains last year, also contributed to the unfavorable variance compared to 2013.

Public finance issuance marketwide remains on track to finish the year with a 10% to 15% decline in activity. Our activity in the quarter fell off after a reasonably strong second quarter. On a year-to-date basis we are 10% below prior year levels. While we were disappointed with the quarter we preserved our market share gains of the past couple of years and our performance was in line with the markets which was also off close to 10% versus 2013.

With low rates and generally tight spreads, fixed income investors had little motivation to trade and the activity was concentrated in the short end of the curve. We experienced similar conditions last quarter and, as a result of our sequential performance, was largely an line with prior quarter.

Given the influence of macroeconomic conditions on rates, we adopted a neutral stance with respect to rate movements. In addition, we felt greater certainty that spreads would widen from time to time, and positioned ourselves accordingly.

Late in the quarter we experienced some episodes of increased volatility and widening spreads which, given our positioning, contributed to the sequential improvements in our results. In light of the increased volatility we will continue closely monitoring the markets to enable us to make timely adjustments to our exposure.

Moving on to our asset management business. The group continues to meet our objective of generating consistent earnings for our shareholders. Our international team generated very strong performance for the quarter and our MLP team continued to enjoy steady inflows.

We finished the quarter with $12.2 billion in assets under management, which represents a 3% decline from the second quarter, primarily attributable to the market depreciation with markets for our key strategies off as much as 9% during the quarter. We continued to strengthen and add our resources to our asset management team to enhance their ability to serve their clients and grow their business.

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

Thanks Andrew. In the third quarter of 2014 continuing operations generated net revenues on a GAAP basis of $159 million, a 24% increase compared to the year-ago period and a 6% decrease compared to the sequential quarter. Net income for the quarter was $15 million or $0.90 per diluted common share and our pretax operating margin was 16.1%.

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 interest, amortization of intangible assets related to acquisitions, compensation for acquisition related agreements, and restructuring and acquisition integration cost. The remainder of my remarks will be based on these non-GAAP financial measures.

In the third quarter of 2014 continuing operations generated adjusted net revenues of $156 million, adjusted net income of $17 million or $1.03 per diluted common share and our adjusted pretax operating margin was 17.3%. For the third quarter adjusted compensation and benefits expenses were 61.5% of adjusted net revenues, compared to 62.7% in the third quarter of 2013, and 61% in the second quarter of 2014. The compensation ratio decreased compared to the year-ago period due to an increased revenue base, and increased 50 basis points sequentially due to lower net revenues.

Adjusted non-compensation expenses were $33 million for the third quarter, compared to $29 million in the year-ago period and essentially flat sequentially. Non-compensation expenses increased compared to the year-ago period, primarily due to one-time occupancy costs related to our office space in New York City, higher third-party marketing fees, associated with our asset management business, and higher professional fees. On a non-GAAP basis our effective tax rate from continuing operations was 37.2% for the third quarter, consistent with our expectation of a 34% to 37% tax rate.

Now I'll turn to the segment results. For the third quarter, capital markets generated adjusted net revenues of $136 million, adjusted pretax operating income of $20 million and an adjusted pretax operating margin of 14.6%.

The operated margin improved compared to the third quarter of 2013 driven by higher net revenues and decreased compared to the second quarter of 2014 due to lower net revenues. Adjusted net revenues increased 27% compared to the third quarter of 2013 and decreased 6% compared to the second quarter of this year.

We are seeing returns from investments we made in our M&A Business, as the Business continued its momentum from the first half of 2014, and generated record revenues of $66 million in the current quarter, and $146 million in the first nine months of 2014. We completed 22 transactions with an aggregate enterprise value of $4.7 billion in the third quarter 2014, compared with 11 transaction of an aggregate enterprise value of $1.2 billion in the year-ago period. With a modest amount of stability in the markets, we should finish the year every bit as strong as we started, with M&A activities similar to the first half of the year.

Equity financing revenues were $14 million for the three months ended September 30, 2014, down 52% and 68% compared to the year-ago period and the second quarter 2014. The active capital raising environments in the first half of 2014 float in the third quarter, resulting in fewer completed transactions and lower revenue per transaction compared to both periods.

The low volatility in the equity markets continued to depress client trading volumes in the third quarter, which negatively impacted our equity institutional brokerage revenues. These revenues decreased 27% compared to the year-ago period and 9% compared to the second quarter of this year.

Turning to our fixed income Businesses, our public finance revenues from underwriting issuances, increased 13% compared to the third quarter of 2013, due to more completed transactions. However marketwide decreases in municipal issuance volume continue to adversely impact our public finance revenues, which decreased 28% compared to the second quarter of 2014.

During the third quarter of this year we completed 85 negotiated public finance issues, with a total par value of $1.8 billion, generating $14 million in revenue, compared to 112 negotiated public finance issues, with a total par value of $2.4 billion in the second quarter of this year. Public finance represents a core franchise for us and as challenging market conditions persist we will continue to exercise vigilance in it seeking market share gains.

Fixed income institutional brokerage revenues were up 33% and 8% compared to the third quarter of last year and the second quarter of 2014 respectively. The increase compared to the year-ago period was driven by higher trading gains as trading volume remained relatively flat. We continue to take a neutral stance towards interest rates and are prudently managing our risk profile and inventory levels.

Now I will turn to our asset management segment. Asset management generated $20 million of net revenues, $7 million of adjusted pretax operating income, and an adjusted pretax operating margin of 35.7%. Net revenues increased 11% compared to the third quarter of 2013, due to higher management fees from increased assets under management, driven by market appreciation.

Compared to the second quarter of 2014, net revenues decreased 9%, due to lower investment income, from our investments in funds that we manage, along with lower management fees from decreased assets under management in our value equity strategies. The adjusted operating margin was 35.7% in the current quarter, a decline compared to both the year-ago period and sequential quarter.

Operating margins decreased compared to the third quarter of 2013 due to higher non-compensation expenses, which were primarily attributable to marketing related professional services. The decrease compared to the second quarter of 2014 is due to a decline in investment income.

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

(Operator Instructions)

Douglas Sipkin of Susquehanna

Hello, good morning all.

Good morning. Doug.

Good morning, Doug.

Why don't you just spend a little more time on the M&A. Obviously a really good number and definitely some surprise. Maybe you could just shed some light on some of the things you've done there in the last year or two years.

And then maybe, how should we be thinking about the line going forward. I know it's a volatile line in and of itself but it clearly looks like you guys are just sort of building momentum. I'm just trying to gauge for modeling purposes. How should we be thinking about maybe fourth quarter and into 2015?

Okay. I'll start with the last couple years where it has been a priority, and I think we've spoken to it fairly frequently, and have invested in it both internally and externally. From an internal perspective, more dedicated resources, specific programs to develop principles into MDs, some consistency and disciplined around minimum fees, and importantly, right bankers and right sectors.

From an external perspective two acquisitions: Edgeview as well as a group in San Francisco called PCG and some additional modest hiring but all very high quality, very additive. Finally what I would say is success begets success. It's a bit of a flywheel. We're bringing to the marketplace and executing more and more attractive transactions, which enables us to deepen our relationships and get invited into more and more business.

From an outward perspective, our backlog going into the fourth quarter and early 2015 is very solid. Looks more like the first half of the year then the even higher revenues of the third quarter but it is broad and solid.

Great that's very helpful.

Then maybe, shifting gears a little bit. I know you guys have been, for the most part, positioned for higher rates. I'm wondering if -- just listening to your comments I didn't get the sense there's going to be a change, but I'm wondering, given in light of the recent moves that we've seen in the bond market, if you guys were maybe reevaluating that? Thinking maybe that we can stand a longer rate environment for longer and that may adjust some of your positioning? Or are you still sort of sticking with -- you believe rates are kind of generally moving higher into 2015?

I would say it's more of a rate neutral position that we've been in. We think that the direction is relatively uncertain. While on the one hand you've got arguably some strengthening in our domestic economy, that has countervailing pressures coming from declines in the other major global economies, and again potentially flight to quality.

So our interest rate perspective continues to be relatively neutral. Having said that, in the third quarter we believe there were opportunities for spread increases and we could be opportunistic, and that continues to be our outlook.

Great.

Just a last question. Obviously third quarter, excluding a really strong ECM business for you guys this year, I'm just curious how the backlog looks and what will it take to get a step up again? Obviously it's the summer so some expectation for a slower third quarter is there, but I'm imagining the market played a little bit of a roll. Maybe some color on how it looks, the backlog, if the environment once again got a little more favorable.

Again from a backlog perspective, I would say we continue to have a strong and broad pipeline. In fact have several high-quality transactions on the road as we speak. Influencing capital raising will always be the broader indices, which have been more volatile, and then volatility in and of itself. The VIX did get up and break 30 but it's already back down to 17. So our outlook, barring some extreme volatility, is constructive.

Great. Thank you for taking all my questions.

Thank you

Hugh Miller of Macquarie

Good morning.

Morning.

Good morning.

I had a question with regards to the asset management segment to get some color on the flows. Am I correct in assuming that the fees are typically generated based on the prior quarters ending balance for the AUM?

It varies by product, some of it is primarily driven by the ending quarter values.

Okay as we look at that, there seems to have been a little bit of a fee compression in the quarter. I'm wondering if that's a function of maybe timing or a mix between MLP and equity? Can you provide any color there?

I think it's less around fee compression, just more around the outflows that may have happened during the quarter, not even just markets' impact during the quarter, versus any real fee compression.

Okay then, it just may be a function of whatever assets that may price based on the actual quarters ending balance, versus the prior quarter?

Yes, sometimes it's hard with flows in and out during the quarter, and certain clients on pro rata basis, based on flows, it's hard to do the absolute math just based on ending assets and revenues.

Okay. As we think about the gyrations in the market in October so far, it didn't seem like you made any comments about it. Is there any risk to principal losses, just given positions, and may have been on the wrong side of a trade, or anything like that so far in October?

Yes overall, as Andrew had spoken to, trying to manage to a very neutral position overall as there is so much uncertainty both in rates and spreads. We have really been managing our risk appetite down. Just to give us some perspective, VAR, with is Value At Risk, which is one measure of that, our VAR has declined sequentially quarter after quarter for the last five quarters. So we are really managing on a very tight basis from a risk perspective.

Okay. And as we think about the compression of the yield curve and your ability to kind of see trading activity and generating commissions off of that, how should we be thinking about spreads on those commissions, just given the compression we've seen in the yield curve over the last month?

I would say that that continues to be a challenge and really has been, if you would, in that zone for the last four or five quarters. The combination of uncertainly to rate direction has led to many investors staying in the short end of the curve and there is very little spread there.

Okay. What's the duration look like of your inventory portfolio now? How does that compare to the last couple of quarters?

I don't have that specifically other than to say, again with hedging, we try to remain very neutral overall.

Okay.

That impact isn't as significant.

Okay appreciate it. Thank you so much.

Thank you

(Operator Instructions)

There are no further audio questions registered at this time.

All right I'd like to wrap up the call and thank all of my partners for their hard work and commitment that helped produce these strong results for ourselves and our shareholders. As increased volatility reemerges in the markets, we will continue to carefully manage our Business while looking for opportunities that may arise. Thank you all very much.

Thank you ladies and gentlemen that does include today's conference call. You may now disconnect.