雷蒙詹姆斯金融 (RJF) 2003 Q1 法說會逐字稿

Good afternoon. My name is Brandy, and I will be your conference facilitator today. At this time, I'd like to welcome everyone to the Raymond James quarterly conference call. All lines have been placed on mute to prevent any background noise. After the speakers' 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 withdraw your question, press the pound key. Thank you. Mr. James, you may begin your conference.

Thank you very much. Welcome to our quarterly conference call. Please forgive my voice if it falters. I'm suffering from a cold, which was not improved by visits to New York city yesterday in a conference on corporate governance. Actually, we had pretty much of the same kind of environment that's been plaguing our results for almost three years now. Revenues were down 5%, and when you look at the -- at the revenue lines, you see declines in securities, commissions, and fees of 5%, investment advisory fees of 5%. You see the continuation of lower gross interest revenue, which is down 24%, and you see trading in investment profits off 37%, which really reflects a more volatile fixed income market and some losses in municipal securities, offsetting the kinds of gains that we've been achieving heretofore, so not really terrible results in trading at all, but nonetheless, down. While financial service fees and other income were up 75%, and the reason for the large increase in other revenue line is principally the sale of our seats on the Toronto Stock Exchange, actually the stock underlying those seats that got issued to members in the original offering, which resulted in an $8 million-plus Canadian profit, or about $5.2 million, or $5.3 million in income in U.S. dollar terms, that I would describe as extraordinary, because we obviously don't have events like that occurring on a regular basis.

On the expense side, when you analyze the expenses, we actually have had pretty -- expense levels that are pretty consistent with immediately prior quarters, but we do have some increases with respect to expense levels, and last year's December period, things like business development were up 9%, occupancy and equipment were up four. Clearance and floor brokerage were up 5% during the period, and communications and information processing were up 10%, and the reason for that, it relates principally to our costs for CSS in Colorado, which are now being radically distributed this year as compared to last year when there was a write-down on our equity position in the fourth quarter, and now we're taking those expenses on a quarterly basis. Just as some insight into those expenses, as you may or may not know, Southwest Securities has completed its conversion to CSS and is operating on that system successfully, that enhancements continue to be delivered to them, and those of us who are also owner brokerage firms, and all of us are in various stages of adopting parts of the system that have been developed. Our principal efforts here at Raymond James currently in contact management for both institutional and retail purposes, whereas Five Serve and Stevens are actually in the process of converting their operating systems to CSS software, so I would tell you there's been very good progress there, and I'm very positive about developing use of that system and its functionality as well as the potential market response to the availability of some of these modules that are now available. You obviously can buy a whole enterprise system, but you also can purchase some of these modules, like Contact Management or Mutual Fund Processing, or Imaging, numbers of modules that are available independently.

So, you know, we think that the expense level that has been assumed by the OBS, at least in the calendar year 2004, probably ought to be down as other sources of revenue are either found for the product lines or, in fact, we gear down as the implementation of the system is nearing completion for the owner users of that system. When you translate all those expenses that I mentioned against the revenue lines, you find that our profits dropped 20% from $18.1 million to $14.4 million. The major expense category that I didn't mention when I was going through expenses, I did mention in the press release, which were larger than normal reserve additions, really reflects the times against a volume of cases where we increased reserves by $10 million during the period on a net basis, so that you essentially have, you know, a much larger provision this year than last year in the comparable period, one very similar to the September immediately preceding period, so we have, I think, shored up the reserves for the level of activity that's going on now in customer litigation arising from market losses principally.

So the results are down from last year, as I mentioned, by 20%. They're also down from the immediately preceding quarter by 34, and the reason for that relates to seasonality in the December quarter and, also, to the fact that Equity Capital Markets' activity during this quarter was, it was certainly not more, we had nine deals as contrasted to nine deals in the same period last year, but it was down considerably from the rates after that first quarter last year. So our pretax margin dropped from 8.1% to 6.8%, and net interest income was up slightly over last year by about 6%, but, again, suffered dramatically from both lower margin balances and other balances, like stock loan, lower spreads and lower gross rates on the amount of capital that we employ in generating some of these interest income flows. The return on equity was 6.8%, down from 9.6%, which, you know, is a very low from our perspective in terms of average returns.

We continue to recruit aggressively, especially in our independent contractor division during the quarter, but we also went through one of these periods of year-end catharsis where we tried to rid ourselves of some of the lower-producing offices, and some FAs at those levels didn't even need any encouragement from us to depart, because of the economics of the business during this time frame. So we had some attrition, but we did have net additions during the quarter, albeit slight. So that for the first time our retail FA level crossed 5,000 to 5,004, so we're up 6.5% for the last 12 months, and we were only up 10 individuals for this count. But, actually, given that -- the times, I would tell you the recruiting results are excellent. As I've said in prior conversations, it's unusual to witness so many entrepreneurs willing to take the financial risks in a very difficult market when you don't really want to put decisions in front of your clients, as they may elect to either change financial advisors to go to cash, et cetera, so this is a difficult time to make conversions, and, nonetheless, we continue to attract lots of high-quality, new financial advisors in all of our divisions, and we continue to build our financial institution division through the implementation of the agreement we entered into with Legg Mason, where we acquired their small operation.

Although all of those conversions didn't occur by the end of the December quarter. We pretty much are there now. So that process is ongoing, and in our independent -- our investment advisor division, we continue to add new fee-only brokers, so I'm actually quite comfortable that we're making the right kinds of changes here to overall operations. The fixed income contribution, because of the fact that we're at about the bottom of the rate -- the range, is probably slowed down in terms of commission activity and in terms of trading profit opportunities, so that in pretax, we are off 33% in that area, and while assets under management really grew $900 million in the quarter, the real growth was $500 million as we moved -- no, no, no, it was 900 million real growth, we show a net 500 million growth because we moved $500 million for intangible tax purposes at year-end, which we move back immediately after year-end or were moved back already. So we actually had a very good quarter in terms of adding net sales on a retail and an institutional basis, and performance in the accounts was good in the quarter.

So we continue to begin to add to the assets, though while investment advisory income was down for the December quarter, you can kind of anticipate that it's up for the March quarter, about the only thing you can project in our business because of the fact that we bill in advance in the beginning of a quarter, based on the prior quarter's end, is that those revenues will be up, because the assets were up. So those things are going quite well, I would say, and when you look at those -- that 900 million increase, about 50% of it really is attributable to net sales and 50% to market increases. So the divisions, given the times we're in, with the exception of what I call the retail sales part of our business, are performing quite well.

Some comments about the retail business and the reason why my quarterly publicity release probably read more negatively than normal, even though, as you know, I have a conservative vent in terms of my outlook going forward. I am still fairly convinced that the economic recovery won't cease, although there are challenges out there, certainly the consumer lost a little bit of his and her impact during the December quarter, and if it hadn't been for automotive sales, those numbers wouldn't have looked so good. But I still think that we're going to see some improvement. I do not think that the improvement on the corporate earnings front is going to match the improvement on GDP simply because pricing power is not there, foreign competition is still strong, the capital expenditure levels are low, you see sort of the paranoia that exists in corporate America through the Intel release and things like that, that are showing even when current results look okay, they're still fear out there and not a great deal of confidence going forward.

So I think it's going to take a little while to bring these corporate earnings back, which brings me to the market, and when I look at the market, I would say that we have no reason to believe we should have a strong recovery in the stock market. The valuation levels, as I've pointed out in prior meetings, are still high. Admittedly, the alternatives are not attractive, but it's disquieting when you're through three years of market declines and you haven't gotten to the point where you feel very comfortable with the market on a fundamental pricing basis, so that means that if I were to assess risk, boy still assess a risk that we might have a 35% chance of the market reaching its lows again, like those experienced in October. So -- in early October. So, you know, that doesn't give you a great deal of comfort, and when you look out, say, a three-year period, based on the economic and the stock market outlook kind of things you might look at 6% or 8% compound increases in the -- in stock prices, but the other side of that coin is that we have an investor who's been subjected to Chinese water torture for this period since March of 2000, and consequently, the memories of the pain are not gonna quickly go away, and the activity levels, as we experienced in December, are not where you would like them to be given the fact that from really October 9th on, in that quarter, the market was good enough to generate more retail activity, but, in fact, in spite of the fact we're comparing against the 9/11 quarter, the quarter immediately following 9/11, we were actually down, as I said, going through those revenue lines.

So, this is not a time when, you know, you should have a lot of real comfort in the outlook for the coming periods. On the other side of that, you know, we continue to add brokers. We continued to generate good asset management results relatively speaking. And we continue to work on these cost levels and pound into our people's heads that they've got to be tougher on the cost front, because there is no guarantee that this recovery is going to be swift. We know it'll come. We don't know when it will come.

We also commenced the expensing of options during the quarter, which resulted in a $1.65 million of losses compared to nothing -- or expenses compared to nothing applied last year, but that's probably going to be a recurring type of number going forward. We had an increase in our book value per share greater than what you would have expected from our net earnings minus dividends, and that results from stock option exercises and restricted stock bonus plan issuances where we expense the cost, and then issue part of the bonuses in stock. So the book value per share increased more than you would have expected. I don't know if I've missed anything, Jeff. I'm here with Jeff Julien, my CFO. Obviously, we're open to answer any questions you might have, and I think we'll open it up for questions now.

Again, if you would like to ask a question, please press star then the number 1 on your telephone keypad at this time. The first question is from Pat Row.

Hi, this is Pat Row from Kennedy Capital. I just had a question in regards to the amount you set aside for reserves. Can you tell us a little bit about the volume of cases that you mentioned that you're receiving? Are these cases dealing with a lot of your independent brokers? Or is there some kind of, you know, trail that you're seeing a certain kinds of litigation going on within a certain group of your business?

No. This is a pervasive condition, mainly related to the number -- to the amount of losses experienced by clients when you conjoin that with, you know, billboards and on TV and ads in the newspaper, asking people if they have any securities losses, call your favorite plaintiff's lawyer. The fact is, the activity level increases, and a lot of these are settled for nuisance value, some of them go to arbitration. And there's just more activity, I can tell you our legal staff is busier than it's ever been, and if you think through the timing, we really haven't experienced a lingering down market since the '70s, as I've pointed out, and the rally started in '82, and, you know, with the exception of '87 and '89 and '94, which lasted for very short periods of time, you know, you didn't have any -- any situations where you generated a lot of activity. I do not believe that our activity levels are unusual, and, if anything, they're lower than the national firms are experiencing because of the fact we practice a lot of financial planning, and unfortunately, even some of those brokers and clients were seduced by the technology and internet rallies in the late '90s, and people lost money, and you no they don't remember why they bought the stocks they think they bought them, and it was too much risk, and, therefore, it's our fault. So, that's not to say that, you know, some clients don't have real cases, but as I read these, the vast majority of the cases are solely related to market losses.

Do you feel that reserve level right now is appropriate?

Well, I don't know if you've heard me on this subject before, but under the current law, I would tell you we have conservative reviews -- reserves. The fact is, if you ask me what I thought reserves would be, I would tell you they still ought to be higher, because I believe you ought to use the -- the guarantee method of -- the warranty method of accounting much more like an insurance policy, because we're adept at estimating what percentage of revenues over the next seven or eight years would -- or what revenues this year would generate in future costs over the next seven or eight years. So, I would tell you that's more appropriate way to do it, but the Cap and Accounting Principles Board don't agree with me, and others in our industry that that's the most appropriate way to account, to end the match revenue and expenses. Under rules that we have, we get cases or complaints, we're able to estimate the costs of those and set up reserves based on a currently known case basis, and that is a very limiting factor, that's an industry-wide practice, that's not ours, certainly we would do it the other way if we had our choice.

But at the beginning, you said that you said these are based on where we are in the market and the conditions that you feel like are just right for litigation.

Well, no, no, no. I mean, we still did it within -- what I'm saying is the activity levels in this market -- if these market conditions have increased. We have more cases out there that we have to establish reserves for.

Okay.

Than we have in the past, and, you know, we've done that. We go through it. It's an imperfect science. I don't know how else to describe it. We sit down with operating top management and our legal team. We review the cases above a certain level. We set kind of standard reserves for those below that, and we also set reserves on kind of a standard basis for cases that we don't have any facts on yet. But we're not able to take what you might call a general reserve based on the revenues we've created, and the transactions of this year, and based on experience, what percentage of those revenues would result in some kind of future costs. So, you know, I don't know what to tell you other than the whole system is somewhat under reserved based on the current state of the laws, I would call ours reasonable and conservative.

Okay. Just going back to the independent brokers. How are they supervised? Or how does that work, if could you explain that a little bit? I mean --

In most the independent offices, our one, two-person offices, it's pretty much people supervising themselves, those people are at the first level. Those people are -- have good records when we hire them. They're experienced, trained people with, you know, years in the business, and we do a good job of screening. Then, we have a large compliance department here in the home office that, you know, reviews all the transactions and raises any questions we might have with activities in those independent contractor offices. By and large, the independent contractors are financial planners rather than stock traders, although we have some of each, and consequently, as contrasted to a traditional broker dealer, you have less of the kind of transactions that result in lawsuits than you do at, you know, most of the -- the typical brokers. Our experience is that losses in those offices are less than the offices in the employee-based broker dealer, and higher losses overall are smaller than our peers', in terms of a percentage of revenues. And if you think through a little deeper than saying, "gee, you got these guys out there, they can do anything they wanted," let me just say the fact is, those people have their own dollars at risk first. They're responsible for any of the losses. They're small businessmen and they tend to be sensitive to these kinds of risks, so there are fundamental logical reasons why my generalization about, you know, where we get more cases per financial advisor, are actually experienced by us.

Okay, thank you.

Your next question is from Lauren Smith.

Hi, Lauren.

Hi, Tom. Hi, Jeff. How are you?

Good.

A couple questions. First, am I correct in that it looks like you guys finally reconfigured, if you will, or on the -- restated how you report commissions in investment banking? Am I correct?

Correct. Yeah, Jeff would say, "yes" is the answer.

Yes, that is correct.

Thank you.

We should be more in line with the rest of the universe now.

Okay. Terrific. I just wanted to be sure. And could you talk to -- even considering that, I was a little -- I was off in my forecasting, I think pretty substantially, on the investment banking side, so could you maybe just, you know, add a little color there, maybe what does the pipeline look like and how meaningful of a contributor this quarter was, the Canadian subsidiary, or not? And then, you know, maybe just talk about activity there broadly?

Yeah, and the Canadian subsidiary front, Lauren, the $5.2 million U.S. gain on the Toronto seats was effectively all of their income. They were slightly profitable on an operating basis. They lost money in retail and made money in investment banking. So, actually, I think they're doing a good job of cost-control up there, we're still positively disposed to this, once we get through this kind of marketplace, we think we have a good future there. On the independent contractor front in Canada, we're beginning to make our first hires and have a pretty active pipeline, so, I'm actually favorable -- I think the results are more than satisfactory under the circumstances. With respect to investment banking, we actually experienced a loss during the period in Equity Capital Markets, and I think we experienced a loss during this quarter last year, didn't we, during this quarter?

Yeah, slightly lower --

It's slightly worse this year than last year. Again, as I said, the activity level was about the same. The actual pipeline in the industry-wide, it is not very good, we tend to be a little better, and the reason for that is we have a lot of activity in energy. We continue to have some real estate activity and a little tech activity, especially in the government services sector. So, you know, I'm encouraged that they're doing okay under the circumstances, but until this market gets a little more clearer direction, I don't anticipate that -- I thought last year was extremely good under the circumstances. I can tell you we've had a number of capital markets meetings lately in those sectors that I mentioned that indicate to me that, you know, if the market will support the offerings, we have both lead managed and co-managed offerings under way today that are pretty good.

Mm-hmm.

So, you know, I'm kind of surprised that there's much activity at all. So, you know, I'm encouraged there, too. I'm not discouraged by the amount of activity. And on the M&A front, we continue to see lots of assignments.

Mm-hmm. Okay. So, I mean, it was really -- so you're not --

-- same. You know, it's not -- I don't know whether -- the market indicates that somebody read this release that I issued as something much more negative than normal, and, actually, I would tell you what I was basically telling people was that I don't expect that we're going to see an immediate reversal, that we're going to see the kinds of quarters we've experienced. That doesn't necessarily mean that, you know, I know whether next quarter will be -- or I think next quarter will be less profitable than December quarter. December quarter has lots of special things in it all the time, and I can't ever project these quarterly results anyway. I wish I could. What I can tell you what I think the underlying fundamentals are, and when I look at the underlying fundamentals, I am concerned about the marketplace out there, especially for retail investors, improving very much in the future. And consequently, I don't want people thinking that all of a sudden, you know, next quarter, we're going to be able to make twice the profits we did in the December quarter. I don't think that's true. So, that's really the message I was trying to convey in the press release. You know, the market -- I usually have cautionary words in press releases. And yet, the market is obviously decided from -- as a result of yesterday's and today's market movement, that somehow I said something a lot stronger than I have in the past.

Mm-hmm. Or maybe people broadly are just not willing to accept the fact that we are maybe in a slower growth recovery type mode than, you know, everyone was hopeful for.

Well, you know, and I -- everyone's hopeful for a much more rapid rate of recovery, but I would have thought that most the professionals in the business did not expect -- at least our industry -- to recover that quickly. The investment banking part certainly could if conditions in the market warrant that, but the retail investor is, I think, going to be a little bit behind the eight ball.

Mm-hmm. And just, in terms of investment banking, I mean, other than, you know, energy and real estate and, you know, maybe some pockets of technology, I mean, you know, energy, real estate and financial services broadly has been driving, you know, what deals, not just for you, but across the industry, those are the deals primarily getting done, are you seeing any signs of life in other sectors at all, or is it still pretty much, you know, the handful of segments where you're seeing activity?

We have some activity in all sectors, but those are the ones, as I said, the government services business, is a good sector for us, so we continue to see activity there. You know, consulting and outsourcing and all the things that government service sector provides. So, you know, I think that's going to continue during the year. I don't think that's going to stop anytime in the near future. But other than that, it just takes a little better market to encourage people to want to raise equity capital, either in an IPO or an additional offering for public companies. And we're not -- outlook for that is not terrific, so, you know, I'm not going to be real positive about that, except to say that if I'm wrong and the market recovers quicker than I think, or we have a spike up, that we're certainly well positioned to do a lot of business.

Mm-hmm. Do you see -- are there any acquisition opportunities, in your opinion, in this kind of environment for some of the smaller shops, you know, that might be struggling? Are you hearing anything along those lines? Or your view on that. At this point of the cycle, you've traditionally not been an acquirer, but might you be rethinking that strategy or considering that?

If we saw an attractive acquisition, we'd certainly consider it as we always do. And, actually, my attitude is we'd like to do one or two acquisitions a year if we could find the right ones. We're just very conservative.

Yeah.

And consequently, we're not going to pay up. I've seen less opportunities, outside of the money management area, in the typical brokerage business than I have in preceding periods. So, you know, a lot of that has to do with the time of the year. So, you know, we're not seeing anything now that I could report.

Okay. And then, just shifting gears for a sec, I know you give us financial advisor head count, but what did total head count look like? And I'm just wondering, have you been able to continue to hire given, you know, sort of the, you know, the hacking of head count that's happening on sort of main street/Wall Street here in New York, and just in terms of, you know, your compensation to net revenue ratio, you know, it was up versus last quarter, but, you know, looking at it on an annual basis, it's come down a little bit. Are you seeing --

it's up because --

-- flexibility on that side? Because you've done a very good job, I think, on the non-comp side of expense control.

Well, the comp side, the only difference is that the ratio of revenues coming from independent contractors has increased relative to our full-service -- I mean, our employee-based network, and the reason for that is that they've been more successful on the recruiting front, so that almost the entire difference in payout is related to that shift.

Mm-hmm.

It's not an increase in payouts or anything like that, at the broker/dealer level. I mean, it's -- I appreciate the comments on expense control, but the fact is we still can do better on expense control than we have done, and, you know, in the Raymond James & Associates retail system, it's imperative that we hack some additional costs out of the branch system, just to ensure that, you know, can you have some positive margins here. This is very hard to make a profit at these revenue levels. At the same expense levels that we have. So, you know, we're looking at every expense line religiously to try to get these costs down.

But on the comp side, you know, the dynamic of, you know, independent contractor, you know, have you -- I mean, how much flexibility do you think -- do you think you have in terms of the driving that number down on an overall basis, and/or maybe you don't, and that goes back to my earlier question of, have you been hiring at all, and, you know, picking up talent in, you know, say sales, trading, or banking as the pool of talent, you know, continues to grow and grow?

Yeah, we've -- we've actually added a couple of people in research and, I think a couple of bankers from sources like the ones you've described, we're talking to a series of others all the time. There are a lot of people available in the marketplace. But unless they're very high-quality people with relationships --

mm-hmm.

-- and we're not going to give any big guarantees -- guarantees, we're just not going to add the people. So, you know, we're trying to -- I'm actually trying to force Equity Capital Markets to make sure that they're right-sized in each one of their SPUs for the opportunities that are out there, and, you know, it may be that in a couple of these, given the outlook in their businesses, not that we should be out of the business, but that we should have smaller manpower commitments than we do have, so, actually, I would almost come out saying that while we'll certainly pick up experienced, talented people, whenever we see them, if I looked at the gross counts, I would try to probably encourage our people to reduce them.

Mm-hmm.

Lauren, we were down 38 more in terms of employee head count during the quarter.

Okay.

Which is now -- it's probably -- that's probably seven or eight consecutive quarters of decrease now, and we're down now over 300 people from our peak.

Okay.

It's just the employee side. Our contractor count continues to rise.

Right. Right. And then lastly, I promise, on share buy-back, were you active in the quarter, and then, you know, what are your thoughts given, you know, the activities in your stock today, and at these levels, would you be inclined to get more aggressive?

We have not been active up to date in the recent past. We, as you know, have sort of an evergreen program authorized here, and our trigger points, as I've said before, are typically at about 1 1/2 times book, so when we see volume of stock available at or below those prices, we become buyers.

Mm-hmm.

So, you know, given the last two days, I getting close to that level, and, you know, if we go to that level, we'll certainly be buying stock.

And what's your outstanding authorization right now? I'm sorry.

2 million shares.

2 million. Great. Thanks very much.

Again, if you would like to ask a question, please press star then the number 1 on your telephone keypad at this time. At this time, Mr. James, there are no questions.

Okay. If there are no more questions, I thank you all for joining us. This quarter, as I've said in recent quarters, I'm looking forward to a quarter where I can give you a much more upbeat presentation than I just did, but, as I said overall, I don't think conditions have changed very much, and I'm not discouraged. This is the time when good firms have the opportunity to differentiate themselves from some of the competition, and we're going to continue to strive to do that, and I thank you for your confidence.

Thank you for participating in today's call. You may now disconnect.