雷蒙詹姆斯金融 (RJF) 2002 Q4 法說會逐字稿

Good afternoon. My name is Jason. I will be your conference facilitator today. Welcome to the Raymond James quarterly conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdrawl your question, press the pound key. Thank you. Mr. James, you may begin your conference.

Thank you. I'd like to add my welcome to everyone on the call. As you know, we reported our quarter yesterday. We had flat revenues for the quarter at about $383 million. We had total expenses that were down 4% to $345 million, but expenses ex-interest were up 3%. Net income was up considerably because we had a dramatically poor quarter last year for a comparable period. So, we were $22 million up from $12.6 million last year or 44 cents a share versus 26 fully diluted.

If you go underneath the numbers, I think what's interesting is that fixed income is -- as most people would expect, during the market environment in which we operated during that quarter, had an excellent quarter, which was simply a continuation of what had occurred for the preceeding two years. That was to be expected but I would report for the year those revenues and profits were at new record levels. What was more surprising is that equity Capital Markets managed good results so that the 74% increase that we managed in investment banking was a large contributor to the results this quarter.

Trading was up a little less than $5 million. And commissions were down somewhat as retail continues to be impacted but institutional commissions were up, which is one of the reasons why the numbers don't appear as bad on the commission line as you might expect from the overall retail environment. When you go out further to the 12 months, revenues were down from $1.67 billion to $1.52 billion, which was a decline of 9%. But really more than all of that, or that difference was more than offset by $174 million decline in gross interest revenues. So, in spite of the very difficult times, I think we did a reasonably good job of maintaining our revenue lines. And as I said there, you can see commissions are down 2% in spite of the increases in the institutional areas that I recorded.

And investment banking had a good year, both fixed income and equity Capital Markets and trading was up slightly by about $4 million for the -- for the year. I mean down $4 million for the year. So, you can see that really the quarter was -- it looked an [INAUDIBLE] but overall for the year, trading didn't make much difference to us.

It is very difficult for to us make transactional profits in equities and because of the general movement of the fixed income market during the year, we had good profits in fixed income, largely related, I would say, to the in fact we don't totally hedge accounts, we're normally around 2/3 hedged. So, in an up-market you see a little better result than you might anticipate. There is a bit of a continuing market bet and the way they manage that risk is when they see rates beginning to move the other way, they shorten the portfolios considerably and reduce inventories to much lower levels than inventory maximum. So, it's pretty much the strategy that we employ.

As a result, for the year, our profits were $79.3 million, down from $96.4 million, which results in $1.60 a share fully diluted versus $1.98, but I will remind everyone that we still had that odd adjustment upwards in our corporate "X" reserves during last year's comparable period. Meaning for the year we were down 11% for that per-share earnings comparison. So, basically I would report there that things were relatively good, basically the control of cost was reasonably good.

You can see that in unemployment numbers where we've continued to slowly not replace people that leave, resulting in a decline in our total employment base ex-financial advisors of 40 during the September quarter and if you look all the way back to that March '01 peak point, we were down 7.7 from there.

At the same time, that is highly productive in terms of servicing the financial advisors because we increased financial advisors over that one-year period from 4828 to 5183, which means we were up around 31 in the quarter. But the yearly increase was 7.4%, somewhat slower than you would expect, but I would say some of that is accounted for by the fact that we've had some poor producers that have windowed themselves out of the broker dealers and some of the branches have spurred on as the overall economics are more difficult carry those people. And their charges at our independent contractor level for individuals that don't make certain numbers and at year end, there are reductions in the on-productive force.

But the point I'm making here, really, is, as I have in the past and throughout the year and even last year, as we're going through these declines in revenues, the fact is that we have continued to build our core engine and our revenue-producing F-8 counts have continued to grow. The -- as I said, though, they have been impacted by the markets and you particularly saw that in September and I would comment that in the September quarter is the first time I've seen real panicking in the retail client base where you actually had people coming in and selling out their accounts, going to cash, it is usually a signal of at least being near a market bomb when that happens. But the attitudes of our financial advisors are still surprisingly good.

I just returned from a national conference of RJFS in Nashville. There really isn't panic in the sales force, they're managing under difficult conditions, but I can tell you it is painful when people go cash because, you know, often our financial advisors fear they won't be able to convince those people to return to the market for some period of time. I knew we were near a market bottom the day before the market rally started in October, one of our board members on our heritage asset management board went to cash. That was a pure counter indicator and I called him and reminded him that we were going to start using him as an investment advisor in reverse for our portfolio manager.

Asset under management during the period dropped but not because we didn't add new assets or net sales.

We did have good net sales, again, performance of our asset managers has actually been excellent, but when you have a decline, like we experienced in the September quarter, which was the worst September in dow Jones terms in 65 years, the fact is that it's not surprising that market [INAUDIBLE] would more than make up for the net sales so we actually dropped down to $50.3 billion from $16.6 billion at the beginning of the quarter, which is bad news for the investment management division because they bill at quarter end market values. So that means that revenues you will see for this particular quarter will reflect lower asset base and be down from the preceding year.

Equity Capital Markets performed well as I said earlier during the year, and if you look at some of the indicators, we managed 50 underwritings, up from 25 in 2001. And we had a slight increase in M&A fees, up to around the $22 million level for the year. So, the numbers were actually good. I would say that largely results from good demand and fixed income-related products, Reid offerings, preferreds, et cetera, those kinds of things, in addition to the traditional kinds of offerings, in areas where the market had less impact.

You've seen that during the year in healthcare and energy at different times during the year, so, we've been able to generate some results in that period. So, all in all, given the difficult market conditions, I would say that -- actually the financial results are good. I'm troubled by some trends in the industry as I've remarked before, the volume of claims by investors has escalated dramatically, most of which relates solely to market declines and their accounts and now all investors claim they never wanted to see a technology stock, consequently, you know, with the investments were unsuitable.

We also have a case that's just surfaced which relates to the bankruptcy of a side business that one of our RJFS reps had that I'm unable to assess any particular liability at this point for, but I know the losses in bankruptcy court were substantial. Even though we weren't brought into the case early. You can be sure that the plaintiff's bar will find some way to attempt reach any deep pockets it can, so, we may have some liability from that, which is troubling to me. But, you know, those were the times.

The results in our Canadian subsidiary were not good in the fourth quarter, again, related to retail. I would say, however, that while the core engine doesn't show the same growth that the domestic engine does, the replacement factor of the brokers who did what they called venture transactions in Canada, smaller brokers, who essentially sell highly speculative stocks in the market have been replaced by more traditional bank brokers moving toward a planning asset gathering model as we have here in the United States. And the company has invested substantially in building an independent contractor model for use in Canada as soon as we can obtain regulatory approval in the various provinces there. I think that's forthcoming.

I also just had a report from our English independent contractor of operation, it appears that we're making some progress on the recruiting front. Again, the results there of anybody that we have recruited haven't probably met historical levels merely because the market there, if anything, has been worse than the market here. But I am actually very hopeful that this will turn into a -- an extension of the success we've had in the United States market and both Canada and the U.K. So, this is an area that I think is attractive.

One of the other negatives that I would mention is you can see our building coming out of the ground now here for tower 4 and obviously from the employment numbers that I gave you, we don't really have too much need for it at this moment, I still believe that our timing with the building expected to be delivered in the end of next year, the first part of the first quarter, this is 2004. That we'll probably be close to when we begin to need the space. That's been our tradition and needless to say you've got to take some risk here to be sure you've got space to be able to move people into.

So, what I would say is we're also on the asset management side, I should report we've had good experience during this quarter of adding institutional accounts and I suspect that if anything, that rate of addition is going to increase because the performance against benchmarks of our key managers there is still extremely good and while it might not appeal to a retail client to see an account that is down in a quarter, the fact is if there's a 500 basis point advantage over indices, then that looks very attractive to institutional investors and we've got three and five-year track records where we have that find of differential and I think that's beginning to attract funds. I'm still encouraged in that area of the business.

This market rally has me a little concerned only because of the repetitive of recent market. It shouldn't surprise anybody when you look at the rate of decline, but the fact is that there is still plenty of negative markers in terms of earnings, warnings, et cetera, coming out on a daily basis, right alongside some of the favorable information which would tend to cause me to think you're going to have a pretty jagged bottom here, certainly nothing that ought to resemble a "V", but certainly does thus far in the -- in the last 10 or 15 days.

So, you know, I would suspect we still have more volatility we've got to work our way through but I do think a breath of fresh air here for customers' sanity was not a bad thing and that's also probably true for our financial advisors. On the general corporate governance front, you know, we're moving to follow both the adopted and the recommended changes that have been made by the U.S. stock exchange, SEC and other regulators. We will be changing our board competition, we are already certifying financial results, et cetera.

Our audit committee meetings are now taking as long as our regular board meetings. As, I think our outside board members are taking their jobs extremely seriously. I think they were doing a very good job to begin with in this manner and, of course, with the faster form for filings and, you know, all the other elements that one sees here. I think they are having a somewhat favorable effect in the sense that they are drawing at tension of everyone to better quality corporate governance and better quality corporate earnings, but I'm not sure it's needed any regulating to accomplish what was pretty obvious to the marketplace already. But I am, in general, whenever it came from, I'm favorably impressed by that.

We did close our balance point venture capital first phase financing in a very difficult environment with $40 million against the $75 million total goal and we're still in the process of raising additional money through probably the middle of the first calendar quarter of 2003. And we have some institutional potential for adding to what was mainly corporate executives with whom we do business as well as company affiliated employees here.

I think the timing of that is real good, we're seeing an excellent flow of potential business ventures and more traditional venture capital marketplace which is what this particular team has done well in the past. So, I think hopefully we can raise all the money here because from the standpoint of a start-up business it would be nice to reach ongoing break even which requires $60 million of investment funds for to us be able to do that. But from our standpoint it is more important for to us get started and begin to establish a record and immediate profitability. I don't know, Jeff, if you had anything to add?

The only thing I want to mention... Oh, yeah, since we have analysts in the group, we're going to begin to expense options beginning next year. This year, I guess is the appropriate way to say that now. October 1 -- we're estimating the impact of that at about $3 million a year or 6 cents a share. And we're doing that in a fashion by way we're -- we're kind of reaching -- in the way we're going to do it, we're going to do it is so it doesn't come on piece meal.

So, I think we're adopting, you know, we've always had conservative accounting. We would have more conservative accounting were we able to under GAAP as I've reported before on the litigation reserve methodology which I really believe is better handled in the way banks handle bad debt reserve estimates, but, you know, I can't make this point with GAAP well enough. To have an impact by myself. This takes a whole industry of effort to accomplish. With that, I think I will open this up to questions and am glad to respond to anything you might wish to know.

At this time, I'd like to remind everyone, in order ask a question, please press star, then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Again that, would be star 1 in order to ask a question. At this time, sir, there are no questions.

Huh! Going once, going twice!

That would be a new first! [ Laughter ]

Wait a minute more, if there aren't any questions, then we thank everybody for participating and look forward to being able to report better results next quarter.

Excuse me, sir, you have a question from Jeff Hires.

Very good.

Sorry to ruin it for you, guys.

No, you didn't ruin it! We were surprised!

I've never seen this before! First of all, congratulations on the quarter. The second thing, what are you seeing in terms of you know, when? looking out to the next year, what does your gut tell you right now about the strength of the retail segment and how are you feeling about -- there are very few estimates out there with '03 earnings, but can you give us guidance on $1.70, which seems to be the average, how do you feel about tat? And just kind of -- just general view of that rate?

Well, you know, I sort of share the analysts' mystification with what the numbers look like. I basically view last year as, you know, reasonable results under the circumstances, or good results under the circumstances and I find it hard to believe that it is certainly not impossible, but I find it hard to believe that you can have another year as bad as the last three have been in terms of overall market performance.

And, you know that, would lead me to tell you that you -- your assets under management revenues would begin to grow as -- as market values improved, that comfort with doing transactions and re-entering the market would increase, which would increase transaction revenues and that there's clearly a lot of latent equity Capital Markets-type activity out there as we saw pretty good activity in a down market environment. So, with a little higher prices and a little better tone to the market, I would expect hat to pick up.

Now, on the other side of the coin, if the economy begins to chug up some, which I still anticipate is the higher likelihood, we could begin to see some interest rate increases which would lead me to believe that fixed income will have difficulty in matching the revenues and profits that they reached this year. So, on the other hand, I think the operation that we have in that area is much stronger than it was a year or two years ago and I would expect them to do fairly well because I still think on balance, fixed income is going to be more attractive than normal to investors, especially if rates get a little higher and they feel more comfortable going out the yield curve for a little longer period. They certainly don't feel that way now. So, you know, I would tell you that I'm -- I'm probably 60/40 towards feeling that results are going to be up for this coming period. I -- I still think it is possible that you could break those lows, but, you know, what I would have told you is 35% before it broke through this last time. I probably got down in the less than 20% category now. Maybe 15%.

So, I'd see a trading range is more likely and that normally means that our financial advisors, our asset managers: Outperform averages in this kind of an environment and we can add value for our clients. And I think that really creates a good foundation for improved results which might not be dramatic this coming year, but certainly would be subsequent to some sort of an upturn in -- in subsequent years.

On the other hand, I would tell you when I look back and I see periods like this of two or three years, normally the upsurges we have in revenues are dramatic. And, you know, on the order of 30 or 40%, when you have an upturn here, that might be an instructive thing for the analysts to take a look at, coming out of market correction periods because normally there is a very rapid escalation in revenues. At the same time, expenses are very low relative to the revenue growth and it takes time for the expenses again to catch up. So, you get a burst in margin growth at the same time.

And it would not surprise me, somewhere in the same numbers, to see something more extraordinary like that happen in the 20 to 25% range next year or this year. So, my overall attitude is better even though I'm still not completely comfortable with the valuations relative to normal fair market volumes. You certainly could see when we were down at the lows here that there were a lot of good values individually stocks. I mean some stocks had been totally destroyed, when, in fact, they had momentary aberrations in their results or their amount they fell short was a very low amount.

That's great color. Thank you. I have to apologize for the next question, I jumped on the call midway through the discussion of the bankruptcy-related lieutenant.

No, I was reciting an instance with one of our independent contractors. They had a side business in the mortgage business that went into bankruptcy and I know that we have a number of suits filed by ambitious plaintiff's attorneys that we just recently received. And to be Frank, I haven't been able to assess any potential damage from those filings.

Okay.

For fact, it was nothing that the firm authorized or approved, but, you know, sometimes that doesn't its late you the way you'd like to be insulated.

Is it premature to quantify the maximum --

I don't have a clue.

Okay.

I just know it's a big number. That's what I've reported. The amount of securities outstanding is a big number, I still don't know the losses precisely and we've got a team going to assess that as we speak.

Great. Thanks a lot.

Operator: At this time, there are no further questions.

Well, thank you again. I look forward to talking to you again next quarter.

Thank you for participating in today's conference, you may now disconnect.