雷蒙詹姆斯金融 (RJF) 2003 Q3 法說會逐字稿

Good afternoon.

My name is Melissa and I will be your conference facilitator today.

At this time I would like to welcome everyone to the Raymond James Financial third quarter analyst 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 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.

This is Tom James, CEO of Raymond James Financial.

I'm joined by Jeff Julien and Jennifer Ackert from our financial holding company staff, and I'm here to report the results that we released after the close yesterday.

Let me begin by talking a little bit about revenues for the quarter, both contrasting them to last year's comparable period and to the preceding quarter.

We now have adopted the more common measure of talking about these things in terms of net revenue.

So if I might, I would go to that methodology.

Revenues were up slightly over last year's comparable period to about $378 million.

That was driven principally by a 5% increase in commissions and by a dramatic increase in principal trading profits as they went up 170% during the quarter.

Offsetting those increases were a decline in investment banking revenues which reflects not so much upon poor results this quarter, it's actually quite similar to the immediately preceding quarter.

It's more reflective of the fact we had a big M&A quarter, especially in Canada last year, and we had some lead managed transactions that generated far more revenues per transaction.

We actually had an increase in transactions during this quarter in which we were co-manager.

And in addition, we had a slight decline in investment advisory fees which are driven by the preceding quarter year end's assets under management, upon which most of our fees are based for receipt during the quarter.

So those factors essentially offset some of the increase and we had a dramatic result in the profit side where our control of expenses resulted in somewhat larger increases of 17% on a per-share basis as on a fully diluted basis we went from 41 cents to 48 cents.

So we had a good result, ROE got back to about 10.8%.

After-tax margin on net revenues was 6.23 up from 5 1/2, and those were good results but not dissimilar from Merrill.

A lot of the results really don't stem from retail where we've had somewhat delayed reaction to the market rally, whereas on the institutional equity side and also on a continuation on the fixed income side, we've had good commission activity in our capital markets segment.

What's really dramatic when you look at this is the comparison in net revenues to the preceding quarter where we were up 11%, commissions were up 13%, and expenses were up 7.7%, including all the employee compensation.

So again, you had very good leverage resulting in a 55% increase to $23.6 million, up from $15.2 million in the preceding quarter.

So I would say it was a much more pleasant quarter than those that we've experienced in recent times.

Profits have stemmed more from operations as contrasted to net interest earnings contribution, and the general feel in the organization and in the industry in general, I would say, is much more positive, albeit somewhat fragile as it is dependent on a rally of pretty dramatic proportions during the June quarter that is focused in the high-tech NASDAQ stock group which is not where probably most of us would like to see it.

It tends to make it more subject to an additional correction as the improvements and corporate earnings in this sector probably don't justify this kind of a rally at this time, and that seems to be a pretty common commentary in listening to your major financial news services.

So I certainly am in agreement with that, and while I'm pretty convinced that we tested the bottoms in October, we probably have a 75% chance or so that we won't go beneath those or won't test them again.

I still think we're subject to some volatility in here as we establish a bottom and try to get a more consistent type recovery underway.

That being said, when you look at the economic conditions beginning to take hold, growth back probably in the fourth, third and fourth quarters this year, probably near the end of the fourth quarter, we'll be over the 3 1/2% range, augers very well for a 2004 economy.

If everything goes according to plan, I would say the combination of fiscal policy and monetary policy will result in a pretty good economic conditions domestically next year which coincides with the desires of the administration in an election year.

So I think those things are in alignment and we will benefit from that if that situation does eventuate.

Now, in terms of the base business, I would tell you things are in pretty good shape.

If you look at our segments which, as you know, we have begun to present segment information to you all, the retail segment is performing reasonably well with revenues of $264 million, up from $234 million in the preceding quarter, and if you reach back to June from $259 million, and profitability was up to $22.2 million from $14 million in the preceding quarter and from $17.3 million in the preceding year.

So the segment is performing reasonably well for us.

Our pretax results are better.

The engine, as I always describe it in terms of our recruiting, doesn't look as vibrant as it has in the immediately past quarters as we had net additions in FAs in Raymond James & Associates and RJFS, but we had a decline of 25 in Canada.

So we ended up with a net decline of 10.

The number would have been much more dramatically up had it not been for a program that we've initiated to terminate some of our lower independent contractor producers and establish higher levels of productivity standards as well as results, type qualitative results standards for our independent contractors, and I think that will actually have a beneficial impact on operating profitability going forward and certainly will lessen litigation risks and things of that nature.

I don't think we're finished with that program.

That's one that probably will continue through the next year, but our recruiting, our actual recruiting results are still very good as we're bringing in lots of what we call historical gross production in our independent contractor, and we have a real rejuvenation of activity at Raymond James & Associates where we're seeing very high-quality, talented representatives interested in joining us.

So I think that side of the business is doing quite well.

When you go to capital markets, capital markets as a whole, in spite of that investment banking discussion I gave you, has been up in revenues both to the preceding quarter and to last year's quarter.

And fixed income continues to perform extremely well.

We continue to recruit well in the fixed income segments where we're adding principally to taxable sales force and to high yield in all of our offices around the country, and that business continues to be very good.

At the same time the level of activity in the traditional equity capital markets area has become quite active.

We have a lot more capital market reviews of prospective deals and there are a lot of transactions.

Many of them are in what you'd call the income sectors of the marketplace, REITS, both common and preferred, the master limited partnerships, et cetera, closed-end funds.

We also have had a material increase in activities and other sectors, not just the oil and gas sector, which has been good for us in the immediately preceding quarters also, but financial services, technology, other areas where good growth companies are now coming back to the market after this rally, trying to raise equity capital to strengthen their balance sheet.

So this again demonstrates the direct link that all segments of our business have to the market.

And no matter how much diversification we've introduced into the business, even our concentration now on fee-based revenues versus transaction revenues, we still cannot avoid that direct link and if you were in a period where retail really got caught up in this and started to generate revenues, I think you would see dramatic increases across the financial services industry on the revenue side and profit side for our industry.

You already see it, as I said, on the institutional side, especially at the major investment banks which have large fixed income and equity capital markets efforts.

So both the tenor of the business is better, even though I think we're going to have some sort of an interim correction here, and the activity levels on the part of the issuers is much better.

So those sides of the business are, I think, in good shape.

If you look out at the deal count, you would see that last year at this time we had a very active quarter with 26 transactions.

This quarter we had 18, but as I mentioned before, the real difference here is that the 18 transactions were smaller percentage interest in the transactions as contrasted to lead-managed activity.

We have lead-managed activity currently in the pipeline for this quarter if the conditions continue to be as accommodating to offerings as they have been in the recent couple of months.

So I think the capital market side is good.

So that sort of leads you to -- and incidentally I might mention that M&A activity is actually quite good here, too.

It's just that we had that tremendous quarter last year that we're comparing to.

So I expect that our fourth quarter should be good on that front also.

Although there are no guarantees, as you know, those things are very time-sensitive in terms of how they close.

I don't know if the trading profits that we have managed in the fixed income side will be repeatable in the fourth quarter and succeeding quarters.

I would think that will become much more difficult, given the volatility that we now see in rates with plus or minus 20% moves in the rate in very short periods of time here.

So if you are right trading those kinds of cycles, you can do extremely well, but obviously the converse is also true.

On assets under management, which as I said, were impacted by the fact that at the end of March we had $16.3 billion, we've actually had a $1.4 billion increase as of the end of June and further increases since the end of June thus far in July as a consequence of both net sales where we had $200 million in net sales in our asset management group and $1.2 billion in appreciation.

You know, those things generally, when you have those short-term swings, either add to or subtract from the bottom line pretty directly.

So the outlook is good at least for the quarter in which we're operating.

On the cost side, we have continued to reduce employee head count, apart from the financial adviser side, where we've cut about 25 in IT, 50 in operations, and we had those losses that I've also reported on the FA side in Canada which still are more reflective of the venture type broker in Canada as we continue to re-engineer the sales force there to look more like our domestic sales force with a higher concentration on asset gathering, package sales and financial planning.

So we've gotten through the vast majority of that, I think, but we've still got a lot of work to do on the recruiting side there to attract more people from other firms, and the training side up there is still anemic.

So we need to work a bit on the training side going forward also so we can continue to grow that force.

When I look at all this in summary, I will tell you it's much more enjoyable than the recent quarters to talk about.

I'm also much more excited about the outlook here going forward because I really do believe that as the economy strengthens and corporate earnings begin to increase at a more dramatic rate, that the industry is going to prosper, and I think we're particularly well positioned across our firm to take advantage of that.

The other thing I would say is that this happens to be interestingly, I don't know if it's today, but it might be today, the 20th anniversary of our public offering.

So we're celebrating a milestone here.

We actually had a meeting with employees this morning, and being public has been a good experience for us.

So I can tell potential issuers that it had good value for us, albeit our offerings weren't 83 and 85, and we've been self-funding since then, but what I guess was most dramatically pointed out to me this morning as some comparisons were drawn to that day some 20 years ago that the size of the firm then was almost inconsequential, and today we're so much larger and stronger with our book value now up to $18.30 a share and almost up to the $900 million.

The fact is that we're in a position where, when you go through periods as we've gone through the last three years, we can do it with a reduction in profits instead of losses that we experienced in that period in the mid-'70s.

And I think the industry can say that pretty much also, which means that the industry's healthier, the compensation methodology's improved, and I think after this correction with some of this bubble behind us that we will find that our business will be very rewarding for those that are appropriately prepared to take advantage of the opportunities that lie ahead, and that's where I think we are.

And with that, I'll terminate my formal comments and we'll open it up to questions.

At this time I would like to remind everyone, in order to ask a question, please press star then the number 1 on your telephone keypad.

We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Douglas Sipkin with Wachovia Securities.

Hi, good afternoon.

Hey, Doug.

Just a couple of questions.

You had mentioned in your formal comments that you've implemented a plan to sort of prune out some of the marginal brokers and you had also mentioned that that would reduce some of the litigation risk.

Can you first just address what that plan is in more detail, if possible, and then just explain how that would reduce the litigation factor?

Well, the plan is to increase our quantitative standards for new hires in the independent contractor division.

We're trying to concentrate our activities now on producers, individual producers above $150,000.

Almost the vast majority of our producers are like that, but what we don't control are those that get hired by our branches, and when you look back over past hires, you will find that certain branches have people associated with them that might only be generating $30,000 or $50,000 in commission.

So what we are doing is we're going back and counseling those branch managers on the risks they have associated with having unproductive personnel, and those risks don't just entail litigation.

They entail time commitments and reputational issues and all those kinds of things.

As you well know, it's much better to be associated with people at a very high level of competence and productivity in your organization, that tends to improve the tenor of the organization, and I think we're trying to convince our people of that, and we're making good progress in terms of reducing some of those personnel as well as terminating branches that, for whatever reason, have had their production slip beneath our minimum levels.

Now, when you ask about how that relates to litigation, my response to that is that litigation is largely a function of the number of people out there.

It's almost as if there were some percentage of people whose behavior deviates from what you would like to see happen in the field force so that if you reduce the number, you are much better off in terms of the number of instances of potential problems in the future.

So I don't mean to intimate by this that we've done any very rigorous tests that show that people that produce $50,000 or less are more likely to create fraud.

As a matter of fact, I really don't think that's true.

I think it's much more just a direct people count type relationship.

So that's the effort that we're making currently.

Can I just follow up then on -- and that plan is implemented in the independent channel or in the in-house channel?

Well, the in-house channel, we've always had efforts to try to reduce unproductive people and we are again being more, probably more proactive than we have in the past, but that's always gone on there.

The independent contractor has just raised its standards and become very concerned about this issue and is making a concerted effort to improve that situation.

And now, just that threshold number, that 150 number, is that off trailing 12 months or something along those lines?

Yes, it is.

How long would the broker have to be with the firm to sort of fall under that plan and then basically meet or not meet it?

Well, the strategy in the independent contractors is we're not going to recruit them unless they meet it.

Yeah, I guess that's true.

So once you have some fall down.

Now, obviously if you recruited somebody at $155,000 in March of 2000, they are below $150,000 in all likelihood.

Right, that's for sure.

And given that, if it weren't too far below, I think probably we would be tolerant of that kind of performance in this kind of market condition, and we would understand that that was more a function of market action, and as long as we thought we had a high-quality broker that was working hard, we would be encouraged to keep those people and help them improve the productivity levels.

So given that and sort of your comments about how -- maybe I didn't pick them up but how it's tougher now to get guys and train them, what's sort of the outlook for total FA count, I guess?

Well, no, it isn't harder to get FAs and train them.

We have lots of applicants for jobs in our industry to train at Raymond James & Associates, and we don't train at Raymond James Financial Services.

Our branch managers often will decide to train, particularly family members and friends that want to transition to the business, and that's where they may be more forgiving than we would on our normal training programs and put a lot of pressure on themselves in time commitment to train people when they are not really well organized to do that.

So there are plenty of people to train out there.

I think as a matter of fact, the recruiting side, especially in the traditional business, is going to be more difficult because of the retention plans, because of the consolidation of the industry so that it's going to be incumbent upon those of us who want to continue to grow our field force to train more aggressively than we have in the past.

Okay.

So I mean, how would you characterize sort of the outlook?

I mean, I know it's tough to put sort of a growth rate on what you expect, but normalized, what do you think FAs could grow over the next couple of quarters?

I don't know about the next couple of quarters because I don't know how many they are going to --

I guess your outlook for the next quarter?

I would tell you this, notwithstanding the fact we're cutting people at the bottom, leave out that statistic for a moment.

We're going to continue to grow our field force 8% at the gross rate of additions here

Okay.

through a combination of training and recruiting in the traditional firm and through recruiting at the independent contractor firm, and I think we can continue doing that for the foreseeable future.

I do, however, think when you talk about a few quarters, you are not going to see a lot of secular change in that short a period of time.

Sure.

Yeah, you are right.

But I do believe you are going to see change going forward after that, and it's going to be much more difficult to move brokers from their existing relationships merely because they leave too much money on the table.

Which enforces the importance of training, I guess, going forward.

Absolutely.

And just one final question and then I'll leave it to some other callers.

So I guess with your comments is you are trying to prune some of the lower brokers.

Your outlook for legal, just costs in general, is that improving?

I know when I had spoken to Jeff that you guys sort of update your reserve account pretty frequently in terms of legal claims coming in.

Can you just provide an outlook on that going forward?

I think there's probably a lag between a bad market and completing all actions related thereto by clients.

As you know, many of those actions are ill-founded, some are not, and when you have losses, no matter what the cause, the fact is the likelihood of activity is higher.

So if the market continues its rally, we will see in some lag sequence there, probably six to 12 months, we will see a reduction in legal activity.

But for the near term, especially if we correct again here a little bit, I don't see this becoming less a factor in the industry in the near term.

The numbers that the industry is reporting of complaints and arbitrations and legal actions are still at a pretty high level.

All right.

Great.

Thank you for the help.

Nice quarter.

Thank you.

Your next question comes from Chris Allen with Putnam Lovell.

Hey, guys, how is it going?

Good quarter.

Just a quick question on the capital market segment, revenues were up, I think it was $7.2 billion sequentially -- I mean $7.6 million sequentially and earnings was up $7.9 million, which doesn't seem to really jive.

Was there gains in there?

I know you had a strong quarter in fixed income trading but what drove the huge jump in earnings?

Growth in trading, as you pointed out, institutional commissions, which have high contributions.

Those were major.

We had financial service fees were up about $3 million.

Those things, in conjunction with each other, plus the fact that we managed to actually reduce your SG&A expenses exclusive of FA compensation, drove the improving margins.

I'm just looking at the capital market segment specifically.

That's all fixed income.

Yeah, it was all fixed income but usually I know looking at other firms when trading revenues jump up, usually comp to revenue in that segment so to speak is anywhere from 35% to 50%.

So I wouldn't expect to see the same jump or a greater jump in earnings which in my mind, is there a securities gains going on in there?

I would tell you the incremental comp associated with trading profits is probably less than 20% because you are already paying a good base compensation level.

So I actually think that you got a very big hike from the trading profits.

Okay.

So I guess the comp business expense in that segment is a little bit more fixed than I would expect?

The expense control in fixed income has been pretty good throughout.

The only place that you have violations of that is in some of these recruiting efforts as we've expanded our base of fixed income sales and traders.

Fair enough.

Just one more question.

In terms of the noncomp expenses, is this a fairly good level to look at for a run rate going forward?

Until Tower 4 comes on stream.

And that's 2004, right?

Yeah, it's January.

So it will be in the second quarter.

Second quarter.

For us.

And how much is that expected to pump up non-comp?

I think off hand -- there's a lot of related factors.

Moving out of existing space.

True.

Moving expenses and furniture and all of that stuff, aside from just the building, I think we estimated it would be between a million and a half and two million.

Okay.

So not that much.

All right.

Great.

Thanks, guys.

Right.

Used to make a big difference.

Big numbers, that's the difference.

Additional questions out there?

Yes.

Your next question comes from Lauren Smith with KBW.

Hi, guys, it's Richard.

Lauren had to step away.

Just a couple of quick questions.

One, in the trading profits it is pretty well above trend.

Was there any kind of, I know we talked about this a little bit, any kind of gains, but do you think this is sustainable going forward if the fixed income market kind of hangs in there?

And, two, the comp ratio came down pretty sharply sequentially.

Just give your thoughts on what you think is sustainable, what that is sustainable going forward.

Thanks a lot.

On your first question, as I said before, I'm not really sure that the fixed income trading profits are sustainable.

This is more a function of the fact we've had some pretty good volatility in the quarter, and we've traded it pretty well.

That, in our case, is a very small measure contrasted to somebody like Goldman and Lehman or Bear Stearns who sort of bet the shop lots of times on these moves.

We don't do that.

So it's very hard for me to forecast that.

I'm much more comfortable saying I think we'll be profitable.

I just don't know if we'll be able to sustain that same level.

I would like to think we could, but I doubt we can.

This volatility is -- it's unheard of to see these kinds of quick moves that we're experiencing.

So I don't know if we'll reproduce that quarter or not.

Okay.

And on the comp?

The comp side is the admin and clerical being down 5% through that head count reduction.

A lot of that head count has been in middle management so that the dollar amount of the changes on the few number of people that are incrementally -- or decrementaly affected, the dollar affect is pretty dramatic.

So you know, I think that's the main thing that you see there.

We've had either seven or eight consecutive quarters of declining head count at this point.

That's really starting to show up in that employee comp line.

All right.

Well, thank you very much, guys.

Your next question is a follow-up question from Douglas Sipkin with Wachovia Securities.

Yeah.

Hi, just a follow-up.

Just a couple of specifics.

Could you break out the percentage of commissions that came from retail?

I believe you do it in a 10K versus institutional?

Or is that a --

Well, it's not immediately at my fingertips.

Yeah.

Would you provide the information if maybe I call you off-line or something like that?

We'll be glad to -- I'll ask them to release that in our comments on -- if it's in our 10Q.

I don't know.

Well, yeah, I guess it would just be helpful because you had a sharp jump in commissions but just from your comments it sounds like it was more on the institutional side and not as much on the retail side?

Yeah, that was fixed income institutional.

Yeah, so it would just be easier to decipher where that's coming from.

Equity side.

Yeah.

And then also, could you just give a breakout of what percent of the assets are in asset priced accounts on the retail brokerage side?

The total assets, what percent is customer assets?

Yeah, customer assets, that's right.

You had said it was like 33% maybe last quarter?

That's probably about $25 billion out of $93 billion.

$25 billion out of $93 billion?

Yeah.

Great.

Thank you.

Again, to ask a question, please press star, 1 .

There are no further questions, sir.

Well, very good.

Thank you very much.

We're glad to have more favorable results to report to you, and we look forward to being able to do it again next quarter but if we can't because this market doesn't perform too well, I think we will see good results for everybody next year, and I'm glad I don't have your job as analysts of trying to forecast what revenue rates are going to occur in the securities business.

Profitability projections are almost impossible in this business and that's why we tend not to say very much about forthcoming results just because we don't know anything about them.

But we look forward to talking with you again next time.

Thank you very much.

This concludes today's conference call.

You may now disconnect.