Piper Sandler Companies (PIPR) 2015 Q2 法說會逐字稿

Good morning and welcome to the Piper Jaffray Company's conference call to discuss the financial results for the second quarter of 2015.

During the question-and-answer session, securities industry professionals may ask questions of management.

The Company has asked that I remind you that statements on this call 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 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 measures. 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.

Thank you. I will now turn the call over to Mr. Andrew Duff. Mr. Duff, you may begin your conference.

Good morning, and thank you for joining us to review our second quarter results. This quarter we generated strong performance for our shareholders, as our business produced solid results. We made important progress in our growth initiatives, and we returned a significant amount of capital through share repurchases. We took full advantage of market conditions, and, in certain areas, outperformed the markets to drive strong results for the quarter.

Our capacity to invest in growth, which we did this quarter, is underpinned by our focus on operating discipline and effective capital management. We continue to produce solid returns for our shareholders, as our return on tangible equity has been around 11% or better on a rolling LTM basis for 6 consecutive quarters.

Here are a few business highlights for the quarter.

Public Finance produced a very strong quarter. The various investments we've made in this business enabled us to outperform a very strong market where issuance is close to an all-time high. We continue to look for opportunities to expand this business.

Our Equities business picked up in the quarter, despite the sequential decline in market trading volumes.

Fixed Income produced steady results, despite market volatility.

We enjoyed positive net new asset inflows into our Asset Management strategies, while equity funds, broadly, experienced outflows.

Finally, our Equity Capital Raising activities held steady with the healthy levels we realized in Q1, while our Advisory business produced a substantial uptick from Q1 levels.

I will now hand the call over to Deb to review the financial results in greater detail, and then I will finish up by spending a few moments on the meaningful progress we've made this quarter on our growth initiatives.

Thank you, Andrew. My remarks on our quarterly results will be based on the non-GAAP financial measures we referred to at the start of the call.

For the second quarter, on an adjusted basis, we produced net revenues of $164 million, which were up 5% sequentially. Increased activity in our debt and Advisory businesses more than offset a decline of about $10 million in investment income to drive most of the sequential improvement.

Net income of $19 million was flat sequentially, and down about 9% compared to the very strong quarter in 2014. The year-over-year comparison reflects investments we have made in the business as part of the growth initiatives that Andrew will speak to in a few moments, and higher compensation expense that was related to business mix.

I would like to provide some additional color on how our businesses performed during the quarter, starting with our capital markets businesses.

In Public Finance, we experienced robust market conditions as capital raising, which totaled $215 billion in the first half of the year, was close to an all-time high, driven by considerable re-funding activity. Our investments in this business over the past few years, which included both hiring and the acquisition of Seattle-Northwest, positioned us to take full advantage of the favorable market conditions.

Our debt capital raising revenues, which were up almost 40% sequentially and 50% year over year, reflected both strong market conditions and market share gains as our investments in the business produced dividends.

Equity capital raising in our focus sectors was up significantly, both sequentially, about 20%, and year over year, over 45%. Capital raising in the market, which had been dominated by healthcare companies, bottomed out into other sectors, particularly tech, where we do not enjoy the same market position as we do in healthcare. As a result, our equity capital raising revenues were flat sequentially and down year over year, consistent with the shift in the market.

Moving on to our Advisory business, market conditions for M&A remain favorable, highlighted by healthy valuations, CEO confidence levels, low interest rates, and available capital. Our Advisory business, which was up 37% sequentially and essentially flat year over year, continued to produce strong results as we outperformed the market.

In the market segment where we generally compete, sub-$2 billion, both the number of transactions and the deal volume declined in the second quarter. Similar to public finance, we are reaping the rewards from investments we've made in the business over the past few years.

Shifting to our brokerage businesses, our equities trading compared favorably against the broader market, both sequentially and year over year. Average daily volumes for equities declined 5% sequentially and increased 6% year over year.

Our trading activity outperformed the market with revenue up 8% sequentially and 11% year over year on the strength of higher trading volumes, which included additional revenues from our FIG expansion.

In the fixed income brokerage area, our results reflect healthy flow volumes, coupled with our risk posture, which has -- which we have discussed over the past several quarters. We remain largely interest rate neutral until we have better visibility into the pace of interest rate increases.

During the quarter, rates increased amid considerable market volatility. Our neutral posture protected us, but, as a result, we saw limited opportunities in our trading P&L. Given our current risk posture, the steady results for the quarter were in line with our expectations.

In our asset management business, the positive net new asset flows to which Andrew referred partially muted the impact of declining markets. Revenue declines, both sequential and year over year, reflect the adverse impact of market depreciation on our levels of AUM and losses in our seed investments. Notably, we experienced, year over year, significant declines in the valuation for MLP companies, which represents about half of our AUM.

I will now spend a few minutes on costs and capital management before handing the call back to Andrew. Our adjusted comp ratio for the quarter, at 62.6%, moved above our target range of 60% to 62%. This was a combination of two factors.

First, our mix for the quarter, which included a $10 million negative swing sequentially in investment income, and lower asset management revenues, drove the comp ratio to the higher end of our target range.

Second, investments we are making in the business, particularly the expansion into financial institutions, added to the comp ratio as the new producers begin their ramp to full productivity. We expect that these investments will add as much as 200 basis points to our comp ratio over the next two to three quarters as production begins to ramp for our new professionals. In the 12 to 18 months after that, we would anticipate 100 to 150 basis point impact to our comp ratio from these investments.

For the quarter, adjusted non-compensation expenses of $32 million reflected our persistent focus on operating discipline. Given our recent growth initiatives, we would expect our non-comp expenses to increase in future quarters to a range of $34 million to $36 million, ramping within that range as we close on our recently announced acquisitions. We would look to increase operating leverage for non-comp with revenue growth over time.

Overall, despite the combined impact on both comp and non-comp costs, we do not expect our combined growth initiatives to be dilutive to earnings in 2016.

Finally , we deployed capital to purchase shares during the quarter. We returned $59 million to shareholders through share repurchases. These repurchases will have a favorable impact on both ROE and EPS going forward.

Now I will turn the call over to Andrew to discuss progress on our growth initiatives.

Thanks, Deb. I wanted to spend a few minutes to update you on a couple of meaningful growth initiatives on which we have recently focused. Our strategy over the past two years was centered on improving our operating performance and shifting our mix to higher-return-on-capital activities like Advisory to increase our EPS and ROE.

Our successful execution is reflected in the improvement to both of these key metrics, however our strategy also had a longer-term goal to grow the business. We believed that our improved performance and operating discipline would position us as an attractive destination for professionals and firms, and provide us with financial and management capacity to execute on opportunities in the market.

As these initiatives suggest, we are accelerating the growth phase of our strategy. We have indicated that growth opportunities in investment banking could come from expansion into major sectors where we do not compete, FIG and energy. We would characterize the opportunity of a fully ramped industry practice, including investment banking and institutional brokerage, as averaging a minimum of $50 million in annual revenue.

The steps we've taken over the past few months firmly put us on a path to achieving this in FIG over the next two to three years. Earlier this year, an opportunity emerged in the market. We responded quickly and attracted a number of professionals who judged us to be a good home for their clients. This effort also helped us surface the opportunity to acquire River Branch, a FIG advisory firm.

Between the acquisition and the organic build-out, we now have about 25 professionals in banking, with a practice that is centered on depositories and is large M&A driven. We have senior leadership team in place to manage and grow the business.

The River Branch acquisition brings active client engagements that should accelerate our revenue ramp as we develop the practice, and provides meaningful enhancement to our leadership team. Through the River Branch acquisition, we have doubled our resources in FIG investment banking.

We also have about 20 professionals in research and distribution, and expect to cover about 150 additional companies by year end.

The other initiative is our acquisition of BMO's Griffin, Kubik subsidiary. We emerged as the successful purchaser through a process run by BMO to find the best fit for their business.

GKST has a long history as a high-quality fixed income sales and trading business, with considerable exposure to municipal securities. The acquisition represents a meaningful addition to our fixed income sales professionals, strengthens our analytical services, and enhances our trading teams.

We believe this addition will bring critical scale to our middle-market fixed income business, which will improve our operating leverage and expand our margins in the business.

As we continue with our focus on growth, we will seek avenues for expansion into energy, adding advisory resources to our investment banking practice, and product teams to our asset management business as examples of other growth areas we intend to pursue.

We will now open up the line for questions.

(Operator Instructions). Your first question comes from Douglas Sipkin with Susquehanna International Group.

Thank you. Good morning.

Good morning.

Good morning, Doug.

So, obviously, a lot of good information on the call. I guess my first question is, it certainly feels like you guys are definitely making a bigger push on the investment side now, and I'm wondering, is it a function of seeing good opportunities combined with maybe a little maturation in some of your leading franchises? Or is, maybe, there something else going on in the marketplace? Because it just feels like tracking you guys it seems like you're more involved in investing right now than I've seen in a real long time.

It's very much the former, Doug. We thought it was imperative in the prior couple years to get our returns on equity and our EPS up with a consistent margin, regardless of the environment. We're pleased that we think we've demonstrated our ability to do that pretty consistently now. Again, I'd point to the tangible return on equity of 11%-plus for 6 quarters, and think it's time we coupled that with the fact there are opportunities emerging, and we did believe that consistent, solid performance as a leader in the middle market would surface opportunities and make us an attractive home.

The priorities that we've stated now for, perhaps, a couple of years are exactly the ones that are coming to us. Growing our Advisory business, which we've done in the last couple wears, Public Finance, very focused on FIG and energy now for a couple years.

So, I think we're really right on track for the strategy that we've been articulating.

Great. And then, just focus a little bit on sort of the economic outlook related to the transactions. I guess we're probably thinking it's an investment year for 2015, with the potential for some sort of incremental benefit in '16. Am I -- did I pick up those comments correctly?

Yes, Doug, you're correct on '15, where this is an investment year. As we would look at, holistically, the FIG build-out, both the hiring and the River Branch acquisition, as well as the GKST acquisition, so all of those growth initiatives combined, we would expect them to be about neutral to earnings next year.

Neutral to earnings next year? Okay, that's helpful.

Yes.

And then, maybe, just -- obviously, just shifting gears on the capital returns, a pretty meaningful buyback, and I'm just -- I'm curious what you guys saw or was there some sort of a unique situation in the marketplace related to the stock? Just given how you guys have sort of shied away from doing that in the past, given where stock levels were. Obviously, maybe a little different today, but I'm just curious if there was some unique situation or a change in sort of the buyback philosophy?

Yes, I don't think we necessarily changed our buyback philosophy. It's always been a part of one of the options that we think about for use of our capital. Obviously, as we looked at our ongoing capital accumulation, we always have to be cognizant, as well, is just impact to tangible book value per share, and so, those dynamics became more favorable to us. So, I think, just overall, we saw that as an opportunity to return some of the accumulated capital to shareholders during the first half of this year.

(Inaudible).

Great. And then last one -- I'm sorry, go ahead.

Doug, if I could, I'm going to go back to your prior question, too. So, Deb focused on the integration of using some capital here in the P&L for the build-out, much of which is coming to us at the back or even the final quarter of 2015.

So, it ends up net/net neutral for our net income in '16. But if you look out a little bit, I'd like to characterize that, as well. The full FIG build-out, River Branch included, looks like $50 million to $60 million in revenues, and the GKST ought to be a 20% increase to our fixed income sales and trading resources.

So, when you get out past '16, you've got some significant additional revenue that ought to have the kind of margins that we're used to in those businesses.

Great. That's very helpful.

And then, final question, I think late last year -- and correct me if I'm wrong -- you guys sort of indicated you thought Public Finance markets would be flattish. It feels like maybe it's trending better than that, I guess. What's your sort of forecast now? And, obviously, you guys seem like you're pretty excited about it with the pending acquisition.

So, the volumes are tracking. So, the first half was like $215 billion. So, if you double that, that would actually meet the peak year of $430 billion. I forget which year that was, about five years ago.

So, it's maybe stronger than we would have anticipated. Having said that, we laid a lot of groundwork with our hiring and acquisitions in the last three, four years. So, we're in a very good position for it.

It's partially driven by re-fundings and a view, I think, by a lot of our clients that rates are going to rise. And so, they're looking at what are those possibilities and very actively coming to the market. A lot of it was re-funding activity.

When we look at the balance of the year, I'd expect that, more or less, to continue. Where we are in '16, let's talk about later in the year, but --

Great. Thanks for taking my questions.

You bet.

Thank you.

Your next question comes from Doug Doucette with KBW.

Good morning, guys.

Good morning.

I just had one question on the Asset Management business. Are there any specific strategies you guys are looking at, or maybe see any opportunity in? Or really any color you could provide? Thanks.

So, we have a lot of confidence that our core infrastructure, marketing, sales and trading, compliance, et cetera, has a fair amount of capacity and is very high quality. And when you think of our franchise, obviously really essentially three sets of products -- the value, international, which we really seeded and developed in the last couple of years, and the strength of our MLP.

You could see a number of, most likely, equity strategies that could be very complementary, anything that's growth oriented, for instance. That could be very complementary.

So, we've started to look and think about that and are already seeing some opportunities. So, we'll be thoughtful about that, but it seems likely that we can find complementary products.

Okay, great. That's it for me. Thank you for taking my question.

(Operator Instructions). Your next question comes from Hugh Miller with Macquarie.

Hey, good morning.

Good morning.

Good morning.

So, I guess I wanted to start out -- you kind of alluded to, on the growth initiatives, mentioning kind of energy as an area, in addition to kind of the healthcare and the FIG verticals that you have now. I think you kind of mentioned it a few times. Is that something that you're kind of, maybe, in active engagement at this point? Or is that just a longer-term opportunity where you see the market and you feel as though it's something that you can grow into?

It's more the latter. When we've talked about FIG and energy, the qualities both of them have is they have very large middle-market fee pools, and pretty good sales and trading alongside of that, and third, very good Advisory activity in the mix with capital markets.

So, those three qualities all make sense to us, and it feels like, also, they're complementary to our other four industry verticals, which are, maybe, a little more growth oriented leaning, so you could get some balance and have a broader portfolio. And I would contrast that with some other, more mature, industries that are considerably up-gap.

So, those two have always made sense to us, and we've actively looked at both, and we continue to do that.

Okay. That's helpful.

And regarding M&A, the Advisory business came in a bit stronger than what we were looking for, but you guys, previously, had alluded that you anticipated that your pipeline was solid, but that you'd expect it to be kind of more back-end-weighted in the year. Obviously, there's always seasonality to that business, but was there a potential pull-forward into 2Q for things that you may have expected that were going to close later on, or are you seeing any difference in there, in just general trends, color there would be great.

No, I'd restate exactly what we said. We expect it to be more active in the second half. We have some significant transactions already announced that are expected to close. So, we expect a very strong second half, continue to.

Okay. Okay, and you gave a little bit of color with regard to the trading side of both businesses. It seemed like your businesses kind of maybe bucked the trend, where we were -- we were seeing some industry trends with a pickup in fixed income and weakness in equity. And I think you had mentioned that -- that the addition of the FIG business was a positive. Were there other things that were kind of driving the strength for your equities, quarter over quarter?

I would say, especially sequentially, the vast majority of that was driven by the financial institutions initiative.

Okay. It just seems like, that the hiring was done during the quarter. I guess were you guys surprised with the pickup, just given the hiring efforts?

So, the hiring and the broad, big build-out here, the sales in trading actually was earlier in the quarter. So, we did have a couple months, and we like the early indications that we're going to be able to ramp this successfully.

Okay. And just a question about the asset management business. Can you give us a sense as to, as we look at the MLP AUM, I think you guys mentioned it's about half of the total. But of that, what percentage is closed-end relative to open-end funds?

It's about half and half is in the closed-end and the other is in either separately managed or neutral funds.

Got you. Okay.

And maybe I'd just add a comment there, just our point of view on that asset class is that it's very attractively valued at this point. Many of the -- much of the distribution is still running at full capacity, and you've got the yield, now, back to -- for yield-oriented investors, to something that's very compelling relative to other asset classes.

And so, I mean, just given some of the energy-related challenges there, I mean, how are investors really looking at that? Are they -- are you seeing kind of demand shift at all between just concern over asset quality versus looking at a compelling yield? What are you seeing, just in general, with regard to demand for that product?

So, on the depreciation side, so, it was a tough quarter. They declined about 6%, particularly in June, and our assessment is that decline in -- the declines in new production coming online, had a view towards the impact of the growth prospects for MLPs. So, I think that's where that headwind came from. On the other hand, the view we hold, continue to hold, is that the fundamentals still are very strong for capacity utilization and the asset class is now yielding 7%, which is very compelling.

And then maybe the last thing I'd say is, our team is doing a really good job on a relative basis. They outperformed in the quarter by 500 basis points. Tough quarter, but we outperformed notably.

Okay. That's very helpful.

And on the equity side, I think you guys had mentioned that you saw some inflows. I didn't -- sorry, if I didn't pick that up. But what are you seeing there? What are you seeing on the relative performance from the equity side of the business, and are you getting any sense that you could see improvements in a more substantial way for net inflows for those products?

Yes, we are -- we did see net new asset flows in our value products about -- I guess it was probably about 3% of asset value in the quarter.

So, that's a good shift in the trend for us.

It would also include some inflows into our international, which has slowly, but steadily, been built over the last two, three years, and then lastly maybe supporting our particular point of view, some good flows into our energy product, as well, our equity energy product.

Got you. All right. That's helpful. Thank you very much.

(Operator Instructions). There are no questions at this time.

Thank you very much. We'll look forward to our third quarter call. Thank you, operator.

This concludes today's conference call. You may now disconnect.