Piper Sandler Companies (PIPR) 2016 Q3 法說會逐字稿

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

The Company has asked that I remind you those 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 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. Strong performance by our investment banking businesses propelled us to record revenues for the quarter and through the first nine months of the year. On the call today, I will provide highlights of our results in this market context and Deb will provide a more detailed review of our financial performance.

Finally, before we turn the call over to questions, I would like to spend a few minutes on an important addition to our senior leadership team that we announced last week. For the quarter, market share gains on top of generally strong market conditions produced record revenues. This was particularly the case for equity capital raising and Advisory groups, which benefited from the meaningful contributions attributable to our investments in Energy and FIG. Equity capital markets for our focus area sub $2 billion market cap companies saw some slight sequential improvement for the quarter as the market continued recovering from trough levels earlier in the year.

Our underwriting activity was up over 80% on a sequential basis, reflecting significant market share gains. Our Advisory business once again contributed strongly to our results and continued to outpace market activity. Through three quarters, the business is close to exceeding the record revenues we've produced for the full year in 2015. Again, significant contributions from the Simmons energy team and our new FIG team. The additional talent in our Debt Capital Markets Group help drive these strong results.

Our Public Finance business also performed very well in Q3, albeit slightly behind the record revenue we generated in Q2. The quality of the people we have added geographically and by industry sector, for example, Senior Living, supplemented by the expansion into new products like loan placements, have driven revenues to the $100 million level annually.

Markets continue to be supportive for this business. With the interest rates still relatively low, the market reflected steady refinancing and expanding new issue levels in the quarter. Equity trading activity for the quarter was mostly lackluster. Stock markets experienced very low levels of volatility, which is correlated to low levels of trading activity by hedge funds, one of our more significant client groups. We are very pleased with the addition of the Simmons research and sales team and believe that their reputation as best-in-class, provider of energy sector expertise, will have a positive impact on the entire Piper Jaffray research platform.

In Asset Management, indices were up for most of our key products. Moreover, we produced strong relative performance against the benchmark for a number of our key products, most notably, our MLP strategies. Improved performance on top of market gains serve to more than offset outflows to drive total assets under management higher for the quarter. Macro trends continue to create headwinds for asset managers. These trends while challenging for our business, also create opportunities to add high-quality investment teams to our platform. This is consistent with our strategy to diversify our business.

We made significant progress to this effect with the addition of the COPs capital management investment team, which we announced during the quarter. Their aggressive growth strategy complements our suite of value products. The team formally joined us at the start of the fourth quarter.

Now, I would like to turn the call over to Deb to discuss our results in more detail.

Thank you, Andrew. As context, my remarks will be focused solely on our adjusted or non-GAAP results, unless otherwise noted. As Andrew highlighted, we generated record revenues of nearly $200 million for the quarter. While revenue was up 19% sequentially to 55% increase in our operating income demonstrates the operating leverage in the business at higher revenue levels. Most areas of the firm contributed to these strong results.

Capital raising activities including equities and debt were up a combined 22% sequentially. These results reflect our strength across geographies, products and industry sectors. Our Advisory business produced another strong quarter with revenue up well over 50% both sequentially and year-over-year. The most significant driver to the increase was our new Energy team.

We also benefited from increased activity in our industrial and FIG groups. The energy team is starting to see signs of momentum building now that oil prices are finding some stability in the mid to upper $40 price per barrel range. If oil prices remain at or above these levels through year-end, we believe that the team will meet our revenue expectations for the year despite getting off to a slow start. The ramp in FIG Investment Banking revenue is meeting our expectations as the team continues to gain traction in the market.

Moving onto our brokerage businesses, our equity brokerage revenues were down around 9% sequentially. Low volatility in equities had adversely impacted our business, but to be fair, has helped our capital raising activity. Also, we do not believe our results reflect a full impact of the Simmons team joining the platform. There is a natural lag between when the team joined us and our clients voting cycles. We would expect to see the full impact of the increase in the quantity and quality of expertise we are bringing to there for our clients over the next year.

In Fixed Income brokerage, our revenues were down around 10% (sic - press release, "11%") sequentially due to fewer trading opportunities in municipals, as a robust level of new issuance had a subduing effect on the secondary market. Our Asset Management business experienced a bit of a rebound for the quarter. With performance improving across most of our products, we saw investment returns drive asset levels higher with revenues increasing 9% sequentially.

Moving on to the cost side. Our comp ratio was just under 64% for the quarter, and 64.7% year-to-date. Our comp ratio has continued to moderate downward as the year has progressed. We started the year with a comp ratio of 66.4%, which was a function of business mix and our aggressive hiring program, primarily related to the expansion into FIG. This quarter, the comp ratio has improved 260 basis points compared to our first quarter results. As our FIG team and other recent hires continue to ramp their production together with a more balanced business mix, we have made considerable progress in bringing the comp ratio back into our target zone.

Despite the higher level of activity in the quarter, our focus on cost discipline resulted in non-comp expenses of $38.6 million, which were flat sequentially. So, as you can see, the benefit of operating leverage in our business at higher revenue levels drove most of the improvement in margin, as non-comp expenses were 19.4% of revenue in the current quarter versus 23.1% in the sequential quarter. Comparisons to the year ago period are skewed by a $10 million legal settlement we incurred in 2015.

I will now turn the call back over to Andrew.

Thanks, Deb. I wanted to spend a few moments on the appointment of the new senior executive, we announced last week. Stuart Harvey has been appointed as President and COO of Piper Jaffray, effective November 7. Stuart originally joined Piper Jaffray in 1993 as a Senior Investment Banker. He left in 2003 to join Elavon Global a subsidiary of U.S. Bank. He led their international expansion into over 40 countries, and was promoted to CEO in 2008. In 2010, he joined Ceridian Corporation as its CEO. He orchestrated a turnaround of that firm, which included a spin-off and sale of Comdata. He rejoined Piper Jaffray last year as a partner in our merchant banking group. As President and COO, Stuart will be responsible for our operating businesses, including investment banking, brokerage and asset management. He will be a member of the leadership team and report to me.

We will now open up the call for questions.

(Operator Instructions) Hugh Miller, Macquarie.

So, couple of questions, I guess one to start on the Advisory side of the business. Obviously, a very meaningful increase in the number of deals closed in the quarter relative to the quarter-over-quarter and year-over-year comparison. Obviously, 4Q tends to be the seasonally strong quarter, was wondering I guess, was there any pull forward of deal activity in the quarter and if you could just give us a sense overall of what you guys view the pipeline as we look into 4Q and head into 2017?

So, our fourth quarter is already off to a strong start with several significant transactions announced especially in energy. So, we expect it to be another strong quarter.

And I guess you've alluded to Energy FIG in addition to the core businesses driving some of the third quarter strength. I guess, can you just maybe give us a rough break out between Energy and FIG, Healthcare, Industrials, in terms of the production during the third quarter from those verticals in Advisory?

So what I would say is, all of our sectors participated; Healthcare remains robust, but we really saw a significant ramp in both Energy and FIG relative to the first half of the year, so much better participation there, but it was really relatively broad-based.

And I guess maybe you gave us a little bit of commentary with regard to the outlook in Energy. If we see sustained prices for oil here, I guess have you gotten feedback in terms of client CEO Confidence within Energy and whether or not our firm still in the mode of kind of holding capital at this point given uncertainty about oil prices or you are starting to see maybe within the middle market, more of a sense of a willingness to consider consolidation and use capital?

So, we would -- which is reflected in frankly our third quarter and our outlook for the fourth. There is notably an improvement in the CEO Confidence and now that we've had relatively stable oil since maybe mid-summer, there is clearly a backlog of activity now that can start to be worked through and that's what we've experienced. I think the other thing I would note with our Simmons acquisition and the combination of the two firms, we are also seeing some really nice synergies, business activity that neither one of us would be likely to have accomplished independently. I'd point to two things; we priced our largest sole managed high yield financing $600 million was actually in this quarter done for Transocean, one of their energy clients. And we also just did a bookrunner IPO from Mammoth Energy Services. And historically, they had not had books, so two very good examples of activity, the two of us can do together.

That's very helpful. And I guess maybe shifting on to the Healthcare side of things. Obviously, you guys have a strong franchise there, but I was wondering, I guess that the pulse of CEO Confidence there within that vertical, given maybe some of the uncertainty post-election for that segment in both Healthcare and Life Sciences.

It appears to be very constructive from our perspective and unless there is a highly -- an unanticipated outcome here that gets people to rethink things. The activity, the dialog seems quite consistent from our perspective and CEO Confidence is solid.

Okay, that's helpful. And I guess maybe shifting to couple of questions on the Asset Management business. Can you give us a rough or split picture for AUM between the MLP strategies and the equities?

Sure, I can do that. So at the end of the third quarter, we had -- MLPs were just under $4.6 billion and the value strategies in total were just under $3.9 billion, so total of $8.4 billion.

And the Cupps AUM, the contribution there?

So, they just joined us in the beginning of the fourth quarter and we had set a range of [$3 billion to $3.50 billion], it appears to be coming in at close to the high-end of that range. So, those numbers would not be in the third quarter.

Understood. And then it terms of just to center it towards the MLP investing, obviously we've seen kind of a rebound this year in terms of performance within that strategy, but still say may be some modest outflows in terms of the investor interest, but are you seeing kind of investors that are more willing to look at the space, given the yields and the improved performance?

Really, you said it well. I'd say that's exactly what we're seeing, very modest outflows still, but the interest level is quarterly picking up for the reasons you said, stable oil prices, attractive yields. So, we feel a turn in our performances once again quite strong as well, so that seems all set up for a turn in some inflows.

Okay. And I guess in terms of the equity side of the business, obviously, we continue to see challenges for actively managed equity product, and I was wondering, in your opinion, what do you think might have to change in order to see more of an investor interest in overall equity managed -- actively managed equity products in addition to obviously being able to just benefit from market share gains from relative performance?

So, from my perspective, one of the obvious catalyst might be shift in the interest rates, which has really driven us this extremely low yields. The amount of liquidity globally that's chased at and created, but I would suggest as bubbles. But, there is so much written now about this dynamic. It would appear to us that you're starting to see people really contemplate a reversion to the mean just based on, you can come up with so many examples of things that have been irrationally priced. Consumer companies that have had 1% to 2% growth for a decade have multiples and PE multiples of 28 and 30. And you just can look at that and see that it really doesn't make a lot of sense, just based on the fact that they have a dividend yield.

So, I maybe not smart enough to know exactly what the catalyst is, but it's a tremendous amount of dialog and focus now about how far we've gone from normal pricing in many asset categories. So, I think that's a setup for the beginning of a reversion.

Okay. I definitely appreciate the insight there. And maybe a question or so on the fixed income business, definitely appreciate some of the color you gave on the newly trading and the difference between the new issuance in the secondary volumes. But, I guess in the press release you mentioned just the strategy of reducing capital deployed and lowering interest rate risk within that business, partly because of the addition of the GKST franchise, but I was wondering how do you guys think about in terms of just overall trading activity, if you are taking a strategy may be using the balance sheet a bit less?

Yes. So, our use of the balance sheet in some principal activities has really been always based on our outlook, and whether we thought there was an opportunity in return available, and we have moderated that significantly in the year in a number of asset classes that we thought offer that opportunity and we see those meaningfully diminished and we really haven't changed that outlook in the last quarter. So, I would tell you that, let's see, our year-to-date revenues are up about 18% and ours down about 18%, and I think that's the course we're on for the foreseeable future.

And then just, I mean last from me, in terms of the modeling, obviously very impressive non-comp ratio during the quarter. I wouldn't imagine that you guys would expect to sustain a sub 20% non-comp ratio, but I guess, as we think about over the near to medium term, how do you guys view given the pipelines and the growth expectations, and also considering maybe additional investments into business lines that they targets for the adjusted comp and non-comp ratios?

Yes, let me start on the non-comp side, maybe. So at $38.6 million, we were at the lower range of what we had talked about after adding Simmons under the platform we had set around $38.5 million to $40.5 million, and really it's -- as you noted that 19% non-comp ratio was driven by these really high revenues. And so, we look at that while we are targeting to bring down that non-comp ratio from where we saw it in the third quarter. Really what we focus on are, what are the total dollars there that we're spending more so than the ratio. And so, what we would say given some cost reduction work that we've done is that new ranges more $37.5 million to $39.5 million, really taking about $1 million a quarter out of that range going forward.

Then, on the comp ratio side, as you saw throughout the year, we have continuously reduced our comp ratio and grew about 66.4% in the first quarter of the year and we've worked that down now below 64%. With our current business mix, that stays fairly consistent, we would expect our comp ratio to continue to trend down.

I'm hesitant to give specific guidance, as obviously there's a number of factors that play into that, be it revenue levels, mix of revenues and as you actually were pointing out investment opportunities. As we look at the marketplace, we have seen a lot of success in our recent initiatives and our incline to continue to invest in the business, albeit at a lower pace and you maybe start with us bringing on the FIG team.

Our focus, holistically, is to focus on continuing to expand our operating margin, and that's really the key metric for us and the best way we believe to do that over the long-term is through growth and obviously you saw the leverage in our business in what we produced here in the third quarter.

(Operator Instructions) There are currently no further questions in the queue.

Thank you operator and thank you all for joining us today.

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