Piper Sandler Companies (PIPR) 2016 Q1 法說會逐字稿

Good morning and welcome to the Piper Jaffray Companies conference call to discuss the first-quarter 2016 earnings results. During the question-and-answer session, securities and industry professionals may ask questions of management.

The Company has asked that I remind you that statements made 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 filed 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 the 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 first-quarter results. Markets had a material impact on our results this quarter so I will discuss these impacts for a few minutes and also review progress we are making on our important initiatives. Deb will then discuss key elements of our financial performance.

We produced solid results in the first quarter against market conditions which were generally difficult for most of our business groups. The highlight of our quarter was our advisory results. This business outperformed the market with a very strong start to the year. For some context, our advisory revenue in the quarter exceeded our full-year results for most years prior to 2014, an indication of the strength of our business and the investments we have made over the past few years.

Elsewhere trading, capital raising and asset management markets were challenging this quarter. We experienced volatile conditions in both equity and fixed income markets which depressed results in each of these areas.

The primary indicator for volatility in the equity markets is the volatility index or the VIX. It spent most of the quarter above 20 and spiked above 25 several times during the quarter.

Historically, we see an uptick in our trading commissions during periods of higher volatility. This quarter, however, trading revenue for most firms did not reflect the higher volumes. We believe increased trading volumes were being directed to low touch service providers.

Volatility at these levels normally subdues equity capital raising and this quarter was no exception. Capital raising was very light for the market and our firm. As volatility subsided at the end of the quarter and into April we might expect to see some early signs of issuers coming back into the market to raise capital.

Volatility also extended into the fixed income markets during the quarter. As we have indicated for some time, we have generally been interest-rate neutral in our market exposure. We managed our rate exposure well.

However, we experienced episodes of rapid widening or even gapping of credit spreads in certain asset classes during the quarter. As a result, our trading P&L was adversely impacted by our exposure to credit sensitive products.

In public finance we saw capital raising activity in the market start the year at constructive levels that were up sequentially but down year over year compared to a very strong market at the beginning of 2015. Our public finance business, which has been outpacing the market for an extended period, lagged the market during the quarter. Nevertheless, the investments we have made in the business over the past couple of years continues to perform well and we are comfortable that we will pick up the pace of activity in the second quarter.

In our asset management business, the broader equity markets started the year with a slight gain in values while the benchmarks we track our products against generally were down to start the year. Market values for one of our major products, MLPs, declined almost 5% through the end of the quarter and 32% year over year. We started to see some recovery in valuations late in the quarter which has continued into April.

In addition to market depreciation, we are confronted with the ongoing trend of investors favoring passive vehicles over active managers. This trend is most pronounced in domestic equities, particularly in the larger cap funds. This has adversely impacted net asset flows, primarily in our domestic value products.

Countering this trend we are seeing more activity relative to our small cap value product where our performance remained strong. In addition, we have accelerated our efforts to find product teams to add to our platform with particular emphasis on global- or yield-oriented products.

Last year we undertook several initiatives and I'd like to provide an update on these starting with our acquisition of GKST business. We closed the transaction last October and the increases we are seeing in our fixed income flow activity are commensurate with what we expected with the additional sales and trading talent that joined us.

For the most part, our expansion into FIG is meeting our expectations. This initiative was largely executed through a significant hiring effort across both investment banking and equities. We added a couple more bankers to round out the team this quarter.

We allow for a certain period of time for the new producers to season on our platform. Thus we expect revenues to ramp throughout the year for both banking and non-deal commission areas with the pace of the ramp determined to a certain extent by market conditions.

Our acquisition of Simmons & Company International closed late in the quarter and we are happy to officially welcome them into the Piper Jaffray family. All the key leaders and producers are now part of the firm.

This combination has occurred during a time in which their markets are very difficult. We have worked closely with the teams in Houston and Aberdeen since we announced the transaction last year and we intend to manage the business to be accretive to non-GAAP earnings in 2016.

Finally, we significantly expanded our debt capital markets and restructuring capabilities last year. This team is starting to gain meaningful traction in 2016.

Maybe most important, the team began coordinating closely with the Simmons team once we announced the transaction. Their capabilities represent a very attractive and timely addition to Simmons product mix from which we expect to realize some revenue synergies in what might otherwise be considered challenging markets in energy.

I will now hand the call over to Deb to discuss our financial performance.

Thank you, Andrew. That market color provides useful context for our financial results. I'll be referring to our non-GAAP adjusted results for my comments this morning.

For the quarter we generated $0.70 per share in adjusted EPS which represents a 50% decline in EPS sequentially and a 39% decline year over year. The sequential decline primarily was attributable to a 22% decrease from record revenues reported last quarter and the inherent operating leverage from revenues at that level. I think it's useful to discuss the year-over-year comparison in EPS in greater detail.

With very similar revenue levels in the two periods the comparison isolates the impact of our initiatives and revenue mix on the operating margin. First, revenue mix plus the ongoing absorption of the FIG team adversely impacted the comp ratio for the quarter. The significant addition of FIG professionals began in earnest in the second quarter of last year, so the comp ratio at the start of 2015 excluded that impact.

Our previous guidance suggested a target comp ratio of 64% this year as these professionals begin to ramp up their revenue production as the year progresses. This quarter's elevated comp ratio of 66.4% exceeded that target largely due to mix. Advisory compensation funded a higher rate than most of our products.

In this quarter it represented almost 54% of our revenue versus 20% in the year-ago quarter. We expect the comp ratio to move back in line during the year as our revenue mix shifts into a more balanced blend and as the FIG team increases their productivity level.

The non-comp ratio also adversely impacted EPS. With revenues flat year over year our non-comp expenses increased 11% due to our corporate development activities.

While the absolute level of non-comp expenses is in line with our guidance it did degrade the operating margin by nearly 300 basis points at these revenue levels. We should see improvement in the non-comp ratio through revenue growth from our various initiatives. We hope to mitigate the near-term adverse impact on EPS through share repurchase activity over the last 18 months.

As Andrew noted most parts of the firm registered weaker results both sequentially and year over year largely due to the impact of difficult markets. The major exception was our advisory business which was down slightly from a record fourth quarter in 2015 but nearly tripled the revenue versus a year ago.

After two consecutive quarters of $80 million-plus in revenue, I think it's important to add some context. In 2014 we started to realize in a meaningful way the impact of our investments in this business. In the five years prior to 2014 our average annual advisory revenue was less than $80 million per year.

Based on the robust level of advisory activity we have enjoyed over the past three to four quarters, we could expect to see some cooling off in the near term. However, with the incremental additions from our FIG buildout and the Simmons team we expect that our advisory revenue for 2016 will surpass our record level established last year.

I will briefly address current and expected activity levels in other parts of the firm. In equity capital raising if volatility continues to subside we could expect to see a gradual improvement in equity issuance as the year progresses. Our debt capital markets team is starting to gain serious traction and should be constructive to our revenue outlook going forward.

Relative to public finance coming off a record year in both revenue and market share in 2015 we believe the first-quarter represented a reloading period for the team. And we expect the business to strengthen in Q2 and throughout the year.

Our brokerage activities present a mixed picture. On the positive side our major initiatives in FIG and GKST are making positive contributions to equity and fixed income commissions respectively.

Unfortunately, the markets are not entirely cooperative. In equities we need to arrest the trend of trade volumes moving away from us by attracting consideration for a significant expansion of coverage. In fixed income we will continue to cautiously manage our risk profile as we assess the quality and direction of the market on an ongoing basis.

In asset management, we are cautiously optimistic that the recovery in MLPs we saw late in the quarter and into Q2 is sustainable. Our internal view was that asset class was in an oversold position and we will see how the markets play out.

Andrew referenced the passive versus active trend in the market. Our net asset flows reflected the impact of this trend as a large investor in our all cap product shifted to passive investments during the quarter. Those assets together with deleveraging in our MLP closed-end fund accounted for the majority of net outflows in the quarter.

Across our other asset management products our focus is to continue to produce better returns for our investors. Where our performance is strong, small cap for example, we are seeing a reasonably good level of interest in the product.

We have also seen some opportunities to expand our product offerings and add talented teams as firms separate distribution for manufacturing of asset management products. We have strengthened our overall platform in recent years including marketing, product management and trading areas and represent a stable and competitive home for teams seeking a new platform.

Thanks, Deb. That's a very good summary.

Before we get into Q&A I would like to sum up with a couple of comments here. Clearly we can never immunize the firm from the impacts of the market as this quarter demonstrates. Our objective, however, is to produce -- is to position, excuse me, the firm to produce the best possible results for our shareholders across a range of market conditions.

The diversification in our business and the number of material investments and initiatives we have undertaken over the past year are specifically intended to achieve this objective. The firm continues to make important strides.

Today our performance in a tough market is better than how we performed in a relatively good market just a few years ago. Our strategy continues to play out as intended. By maintaining management discipline and with opportunistic and prudent investments we continue on our path to improve shareholder returns.

Now we'd like to open up the call for questions.

(Operator Instructions) Hugh Miller, Macquarie.

Hi, good morning. So I wanted to start off with a couple of questions on the capital market side and I appreciate some of the color you had given us. As we think about kind of the pre-tax margin in that business I think you mentioned just kind of the shift towards more M&A advisory business was a bit of a headwind in the quarter.

I guess as we think about the business in general, advisory I guess I view as kind of a higher-margin business relative to kind of fixed income commissions, debt underwriting, those types of things. Can you give us a sense of how we should be thinking about that margin and what were the drivers I guess to why it was down given the strength in some of the investment banking arena relative to the trading businesses?

Yes, so I think in essence you're saying that if our advisory business is really strong, which is a higher-margin business, why did that necessarily drive a lower margin in our capital markets business. Am I understanding that general question?

Exactly. Yes.

Okay, so part of it is you're talking about one quarter of business where we do have from a comp ratio perspective we talked about higher comp ratio, driven by the advisory business. Now you're correct, advisory tends to have lower fixed costs, or non-comp I should say, and so ultimately a higher margin.

But we have a broad business and overall as we looked at the revenues that came in in all of our other businesses, which do have higher non-comps, in some cases more fixed cost structure, one quarter there's not a way to flex and adjust those non-comp expenses relative to that significant decline in revenues in a number of those products. So it is challenging when you're looking at one quarter versus what you might do over a longer period of time if your business mix was to shift in that direction on a more permanent basis.

Got you. Okay, that's helpful. Thank you.

Then obviously you mentioned as you see the revenue ramp you leverage the investments in FIG and Simmons, etc. What's the time horizon in which you guys would expect to get more towards the targeted comp ratio goal?

So when we talk about our guidance for this year even with the FIG investments in there we had talked about 64% and obviously we were higher than that this quarter partly from what I just described in our mix of business. As our investments ramp, and I will give you some context on this in a minute, and we do believe this year the mix shift more towards a more normalized basis, we do expect that comp ratio to come back in line.

So as we talk about that overall revenue mix for the year and some of the context that we just provided in our comments we feel good about our public finance business, the equity capital raising should increase if the markets continue to stabilize here. Asset management should benefit from improved valuations and specifically with our FIG investments we have a pipeline that very much supports that that would be in line for the full year with our expectations.

Okay, great. That's helpful, thank you. And then looking at asset management, obviously you mentioned that you view kind of the MLP business as oversold.

What are you seeing in terms of -- you've indicated that it's not really more of a flow issue, but what are you seeing in terms of appetite for that asset class being that it's oversold, it is a volatile environment? Are you seeing demand for that or has that kind of waned just given the volatility?

So we had, during the decline in 2015 we had net inflows every single month. The first quarter of this year it was essentially neutral. So it has moderated.

We have not been in a significant outflow to date. I would be of the mind that potentially here we could start as it stabilized and improved a re-ramping.

Got you. And as we think about kind of the margin profile, the pre-tax margin coming in at close to 10% for the asset management business, obviously it's a highly leverageable business. But are there ways to see an improvement in the margins for that business without seeing a meaningful rise in AUM or is it just a function of having to kind of ride through it and growing the business?

Yes, so let me just start there. And Andrew may have some comments as well. But that business overall, our asset management business we reported pre-tax operating margin at 17% for the quarter.

Now we have reported and shown it without the investment loss because the investment gains or losses that we have on our capital that's invested does not have -- not just a firm investment, there isn't any compensation one way or are another on that. If you look at the core business margin of about 23.4% this quarter down just slightly from where it was in the fourth quarter and obviously down from what was just under 34% in 2015.

Your question then is what can you manage that to at these types of revenue levels? I think we can improve the margin if the revenues were to stay depressed for a period of time here which is not actually what we believe is happening given the valuation trends we're seeing in MLPs.

But to get back to the margin levels that we saw in the first quarter of 2015 we likely need to see some improvement in revenues. Again if we were going to stay down at these levels for what we believe a longer period of time then obviously we would take cost actions to improve the margin.

Got you. And so I apologize, I was quoting the pre-tax margin for the capital markets but you are correct with those.

And then as well as we think about kind of the shares issued in the Simmons transaction, do you have a horizon now in which you would now expect to be able to repurchase those shares? I know that that's the target but what's the time horizon in which you think you'll be able to complete that?

You're absolutely right we do fully intend to offset the dilution of shares related to Simmons. And just for perspective, we bought back 40 of the 60 that we did issue as part of that transaction and at the end of the day we want to maintain discipline in terms of the price and we believe it will serve our shareholders well by just being opportunistic in our buyback. So I can't speak to an exact timeframe.

Okay, understood. And obviously it's early days now with the deal, but as you've kind of seen the markets develop a bit in the energy space do you have any updated guidance as to the accretion you're anticipating from the Simmons transaction?

Yes, let me say a couple of things. So the M&A environment is extremely challenging. With the volatility I think that's kind of intuitive, pretty hard to put deals together when you have this level of volatility.

Offsetting that to some degree is our product set where we've got restructuring and debt advisory. And again I touched on that. We're very encouraged with the dialogues there and in fact a couple of mandates.

We did endeavor collaboratively with them to look at the cost structure and make some adjustments to help us through what's probably a more difficult period. So we had at the time of purchase talked about their prior trough in revenues for a 12-month period being $85 million.

We would believe that this trough with this level of volatility may go lower than that, will go lower than that. But we're committed to it being accretive in 2016.

Okay, thank you very much.

(Operator Instructions) Mike Adams, Sandler O'Neill.

Good morning, guys. I'd like to start with a question related to the Simmons deal. So initially you guys had discussed I believe something around 20% book value dilution.

We didn't see that this quarter. So I'm just wondering, could there be some residual impact or is there anything else you can do to explain that delta? Because the numbers did come in a bit better than expected?

Right. So when we talked about that initial dilution in the tangible book value per share we were looking at the Simmons transaction in isolation. There were other things that impact our tangible book value per share.

For example, annual grant issuance is part of our compensation which happens in February. That added just under $40 million to equities. So what that was I would say probably the primary driver of what drove it outside of the Simmons transaction.

Got it, okay. That makes sense.

And then sticking with the capital markets side of the business here, Andrew, you mentioned that with the credit spreads gapping out that some of the credit-sensitive products you know you recognized some trading losses there. Would you mind quantifying that for us just so we've got a little bit better feel for the fixed income sales and trading now that you've got GKST in the mix?

So a couple of things I'd say, Mike, is that from a flow activity the ramp with the additional salespeople and trading capabilities is very much in line with what we would have anticipated. The productivity of the group is actually ahead of what we would have participated.

The trading P&L in the quarter was challenged. Across of all our fixed income trading we were profitable but less so than we typically would be. And part of that is just the level of volatility and the gapping in a couple of products.

We have been largely interest-rate neutral. We have hedged out a reasonable portion of the credit exposure but you literally had some gapping in areas of hundreds of basis points in a matter of 10, 15 days. That shows up in our P&L.

I guess I wouldn't quantify it to the dollar, just say that another profitable quarter. But significantly impacted by the volatility and the lack of opportunity.

We tend to bring capital into that business when we see opportunities and what we saw was volatility. So a little less capital in the business in the quarter.

Got it. But overall you did say that the trading P&L was roughly neutral?

Yes, throughout all our fixed income.

Got it, okay. And then moving on to the investment income, and I know that you guys made an investment into an MLP strategy a couple of quarters ago.

Has there been any change in the size of that investment? Were you guys able to shrink that at all?

Yes, we've moderated it fairly meaningfully and have a strategy now that it's consistently appreciating again. We intend to keep moderating it but, yes, it substantially moderated.

Got it. And once that is completely wound down, is it your intention to look for ways to lever the balance sheet in a similar manner or have you sort of backed away from that strategy?

So that was outsized for us. What we would typically do with our asset management products is put in a more modest investment, Mike, to help seed a product to help build the track record and then attract other assets. And occasionally clients are very drawn to the fact that the firm or the employees put capital in our own strategies.

This was outsized. It's a convergence of a number of things. There was some additional institutional interest that has really been developing in MLPs and they were interested if the firm saw that same opportunity and we had excess capital waiting to go into the Simmons investment. We did not get the timing right.

But it was relatively unusual for us to do. So the short answer would be that would be unlikely prospectively. We have more modest, quite diversified investments, unlikely to do that.

Understood. And last one for me, sort of a housekeeping item, but maybe I missed it but did you guys break out the end-of-period AUM between the MLP and the equity strategies? And if you didn't, could you?

Yes, we did not but I have it here. So end-of-period total AUM of $7.5 billion with $3.5 billion in MLP and $4 billion in the value strategies.

Got it. Thank you very much. That's it for me.

At this time we have no further questions. I will turn the conference back over to you for closing remarks.

Thank you very much for joining us today. That will be it, operator.

Once again we'd like to thank you for your participation on today's conference call. You may now disconnect.