雷蒙詹姆斯金融 (RJF) 2004 Q1 法說會逐字稿

At this time I would like to welcome everyone to the Raymond James financial quarterly onference call.

After the speakers' remarks there will be a question and answer period.

Mr. James, you may begin your conference, sir.

Thank you very much.

Welcome to those of you that are participating on the call.

For our first fiscal quarter quarterly conference call with respect to our earnings release yesterday.

As you are aware by now the conditions that existed in the proceeding six-month period were matched again here in the December quarter.

Revenues increased 25 percent for us during the quarter to 414 million, and the drivers were 28 percent increase in commissions which is, of course, the largest revenue category. 76 percent increase in investment banking activity, 22 percent increase in investment advisory fees, and a 83 percent increase in principal trading profits.

So it was, as you might guess, pretty much across the board increases on the revenue side.

When you look at the expense side, you would note that we had, obviously a higher expenses because a lot of it's related to commission generation so the total of non-interest expenses were up 22 percent.

However, the registered REP comp was up 27 percent, admin and clerical was only up 3 percent.

Then you have data communications up 1, occupancy and equipment down 2, clearing and [inaudible] brokerage was up a little bit more than -- by the amount of gross increase in commissions.

But, essentially, that gave us positive leverage, and, as a result, during the quarter, we made $24,200,000 versus 14.4 million for a 68 percent increase.

I'm told by those that interviewed me by the press last -- yesterday that that was one percent below the estimates of the street.

One cent below the estimates of the street.

And, of course, this included, as I reported to them when they asked the question, 8 cents for various mutual fund related costs dealing with reimbursement to clients, where we voluntarily extended the 2001 and 2002 period back to '99 for automatic reimbursement to those with over $2,500 purchases of mutual funds.

And, at the same time, our best estimate for SEC fines, which are not fully resolved, but we think we have a pretty good handle on what their general level is going to be currently.

So hopefully, while this is a formulaic estimation prossess based on samples, we have a reasonably good estimate for what the overall impact to this will be.

It's going to take us probably until the end of February, or sometime thereafter, to be able to determine precisely what those numbers are as we run more precise estimates based on some of the linkages for affiliated discounting potential, etc.

That generated for us a 9.2% pretax margin up from 68 last year after tax margin of 5.7%.

The -- that gave us a ROE of about 10.8% up from 6.8.

Now, those numbers, when you contrast them to the immediately preceding quarter are somewhat lower, but what I would say about that is that, number one, you have the seasonal factors that occur in the December quarter.

Essentially business shutdown on the financing side for customers -- I mean for clients that are corporate and municipal, in the last half of December, if not for a longer period, and for individual clients, they tend not to be involved as much in market activity during the holiday season.

So, we always experience some kind of a slow down during that period.

On the other hand, as I indicated with the revenue numbers that we were generating, we actually had a pretty vibrant investment banking activity during this period.

It was down from the immediately preceding quarter because that's the quarter when everyone's catching up to get everything in in revenues for the year.

But the actual results during the period were very good, and if you looked at activity, for example on the ECM side, you would see that domestically we had 23 managed or co-managed underwritings in the U.S. and 9 in Canada for a total of 32.

The ones in Canada are typically smaller size and of less importance.

But when you look at this we only had nine last year domestically and none in Canada during the comparable period.

So that 32 total is down from 36 in the preceding quarter, but the fact is that activity indicates to me, that it -- were it not for the holiday season we were roughly running at the same pace.

So we're experiencing good results in terms of continuing financing activities.

It's become more difficult to make the same level of trading profits and fixed income, but we still making trading profits, and they were up, as I reported over last year, which was a difficult period.

On the side of asset management, I would report to you that our professional asset management is up from the 20.1 million currently, up from 16 billion -- up from 16 billion a year ago and 18.8 billion last quarter.

Most of that, of course, is now being generated by market performance, but we continue to experience good net sales.

So assets under management are growing.

There's a little bit of a disconnect between the revenue increases and that amount because we have reallocated some of the wrap fee revenues from the asset management company to retail.

So you'll see some slight disparities in the numbers, but actually asset management is going very well.

And a lot of the activity that's being created in terms of new accounts is coming from the institutional side.

So we continue to be encouraged about the general outlook for selling more of our objectives institutionly than we have in the past.

At the same time, our wrap fee equivalents, which aren't professionly managed, but represent commission alternative compensation methods, are up from 9 billion last year to 12.6 billion so we've had a large increase there, and when you add those two categories together, we have 32.6 billion now under some form of wrap fee income generation as contrasted to total client assets of 103 billion.

And if you look back a year ago, we had 84 billion total client assets in our custody.

So I would say that activity continues to go apace.

I reported to you in our last quarterly meeting that we had begun to prune our independent contractor sales force, and as a result you wouldn't see as rapid growth in terms of net additions to our sales force, and that's really been true during this period where, when you look at sort of the cumulative counts, for all of our financial advisors in the U.S., Canada, both retail and institutional, we now have 5,021 financial advisors which is actually down from 5,196 a year ago but up from 4,996 last period.

Part of that results from a reclassification of some of the brokers from a year ago to a more associate category.

But we have continued to have active recruiting, and I might say we are about to introduce a program whereby we are, in the traditional recruiting magazines like Registered REP, Financial Planning Magazine, other related financial periodicals.

We are going to be advertising on a more concentrated fashion than we have in the past and also advertising for all of our brokerage operations in the same ad so our people are quite excited about the new campaign that we are launching on the recruiting side.

So, hopefully, that will have some good followthrough, although, as I told you we're actually doing quite well in terms of adding brokers.

In any case all of that adds up to 29 cents, up to 49 cents for the quarter, which is a similar 68 percent increase to the net income increase, and reflects good improvement, as I said, if you added back that 8 cents we would have even been over what had been estimated by the street.

I see no reason, based on current market action and activity to see any diminishment, but we are so directly related to market activity in all these segments of income with the exception of perhaps our bank, that, you know it's very difficult for us to project results in any more detail than, you know, just talking about how the market's doing relative to how it has been doing and what kind of rates of improvement we see.

There is no question that the retail investor has been impacted favorably by the markets, and after 9 months of cumulative impact on their psych, there's more activity on the retail side.

So that argues extremely well for our overall operations, which in December of course, the private client group accounted for 68 percent of our revenue stream.

The capital markets segment accounted for 92 million, asset management accounted for 34 million, RJ Bank accounted for 6.6 million, and other for another 5.8 million.

So you can see we haven't had a dramatic shift, but you can see some increase in the retail segment as related to the rest of the businesses as commission increased somewhat outstripping some of the other sectors.

On the profit side, the same thing is occurring where we're seeing dramatic increases in profits in the private client group, where we increased from 8.8 -- or 8.9 million to 27.2 from a year ago.

Capital markets doubled from three to six.

Asset management was down 10 percent, but all of that relates to the shift in revenues.

Actually their gross profits were, you know, overall the two segments were higher.

And the bank numbers were down from 3.1 million to 1.9 million and that really results from the fact that we had a very good period in terms of generating net additions to our loan portfolio, which necessarily results in increased reserves, so you have about a $600,000 charge for reserves there, and since interest rates have remained rather static, the fact is that, you know, our hedging costs accounted for about a -- for some losses, too.

So, the business is actually running quite well and we are making good progress with the redeployment of the assets.

So, you know, I foresee that we're going to have a pretty good year.

So I would basically tell you that things are going well, it's a lot more fun when growth is occurring than it was before.

And with that summary, we'll be glad to answer any questions that you might have today.

If our assistant is there, could we turn on the questions?

[OPERATOR INSTRUCTIONS]

Your first question comes from David Trone.

Hi, Tom.

I have a couple of questions.

First of all on the regulatory side, a lot of noise on that subject over the past couple of months.

The fact that you took -- I understand the reimbursement side, but on the kind of quote, unquote penalties or fines side, it sounds like you're fairly certain that something is coming, and -- number one.

And number two, as I recall looking at the 10K you guys had a top estimate for that, and it looks like you're seeing that coming out, half of that original amount that you talked about.

Is -- and then, you know, if that is coming, why do you think it is that they would feel compelled to fine Raymond James?

They actually have -- I can't tell you why they feel compelled to fine anybody, but they actually have a set of regimens and rules they are following somewhat arbitrarily with respect to what percentage of errors occurred and what the absolute number of the errors and overcharges were.

And, they have established a general benchmark for how they are going to fine based on the numbers that occurred in 2001 and 2002, and the first -- I guess 2001 and 2002.

So, once you establish what you think your losses for that period are, you have a pretty good cut.

What I would say has happened to us differently from where we were a quarter ago, is that we were really not of a mind, or hadn't decided to actually settle this, because we think there are many distinguishing characteristics on our part for what we do with general notification to clients.

But the fact is, it appears that, you know, there's going to be a general settlement and you better be a part of the general settlement kind of a thing, to put it behind you.

Yeah.

So that's kind of where we are.

Now, what we did since then -- and you're quite right.

That amount was actually more that we reserved than has actually occurred when we went back with a more definitive approach to establishing the amount of liability.

What expanded it was that we then went back, if you recall the NASD formula for '99 and 2000 was that you would offer to people, during that period, who were overcharged, to reimburse them if they requested.

And we determined voluntarily to do it automatically for those that purchased over 2,500.

I have some difficulty trying to distinguish them from the ones in the later period.

So, you know, and I think it's the right1thing to do, for whatever rational there might be for having these errors.

The fact is they did occur and we got paid more than we should have been paid and clients should get paid back.

Mmmm-hmmm.

Do you foresee anything happening in terms of a prohibition, at some point, directed brokerage, or quote, unquote revenue sharing, and how much would that impact your institutional business?

That's a -- I wish I knew the answer to that question.

There is no question from my point of view that the regulators have certainly known for some time that commissions have been given to broker dealers who sell their funds.

Now, you know, in our case we don't pass any of that kind of remuneration to our financial advisors, so those that make the decisions on selection of funds have not been vesheated [ph] in their decision process or seduced into some sort of a directed business as used to exist at broker dealers who were selling their own funds.

So, you know, we don't really -- we have a very large panoply of fund companies that we offer by virtue of our independent contractor relationship, we really have to, you know, those that meet due diligence criteria, we have to have almost a laise faire policy with respect to them in order to be able to support our sales force that come with various behavioral characteristics in their selection of funds.

To be frank, I have not seen any evidence in our firm, and very little, if any evidence since broker dealers have ceased paying more money to their inhouse brokers, that brokers are being influenced very much in their selection of the funds they sell.

So, you know, I'm a little -- I'm a little put off by these discussions.

On our -- you know, on our side, we were one of the 15 firms that was in the survey.

We haven't heard anything back from the regulators with respect to that.

We disclosed to our clients in our rights and responsibilities and on our confirms that we are paid back in business for research in securities commission transactions from the portfolios for research, execution and sales.

So we've made disclosure of these things, albeit not in the specificity that you often hear the regulators talking about they'd like to see.

Although I find it difficult to believe that any of that disclosure would change any investor behavior.

So, you know, this is -- this is a strange thing they're entering into here, and I can't quite -- you know, it would be all right with me if they came out and said you can't have any compensation for sales, so long as the implication of that were not that you couldn't get paid for research just because you did have sales.

I mean that would be severely detrimental to the securities industry's, particularly the regional firms who are providing research, and it would be detrimental to the larger firms that also have good institutional and research efforts to service those large institutional clients.

So I'm a little bit perplexed by what this next area of activity on their part is.

So I don't really know that they're finally going to do.

We've always believed that full disclosure is the way to deal with these.

That seems to have been the SEC's prior position.

When they first started to point out the conflicts that could exist, back 25 or 30 years ago, with respect to mutual funds and commissions done from portfolios with broker dealers, they elected not to establish fixed rules to eliminate it, as long as you were providing service and the -- you know, the prices were appropriate, the commissions were appropriate.

And, you know, I think that's true in the industry today.

So I don't know what they're going to do.

It's a material amount of revenues, but it's not, you know, I couldn't say that it was going to -- if you eliminated all that revenue, that it would impact us by -- I don't really know what it would impact us, I guess is what I would tell you.

I mean my guess is in a year it could be as much as $10 million after taxes if they just took it away.

But I -- you know, I don't foresee that that's going to happen.

I would think you would redirect commissions to those that either provide execution services and/or research, and we would pick up some incremental dollars on that side that would offset part of this.

The hard dollar kind of support that they give firms is, you know it's pretty well disclosed in prospectuses.

I have some difficulty dealing with this, I mean you know, I don't really know where they are going.

It most likely looks like more robust disclosure.

Is that something that would really be meaningful in terms of incremental costs or is that pretty much trivial?

It depends on what the methodology they determine is.

If you needed to establish the dollar potential commissions, or hard dollar payments, or some combination thereof per order, that would require some pretty complex programing to do.

It would involve very low dollar amounts in terms of disclosures.

I don't think it would be an useful process, personally, but that seems to have been what they've talked about a couple times.

Yeah.

So I -- I am concerned that they might go that way, but, you know, I just don't know.

I wish I knew better what they're doing.

Okay.

Thank you.

Again, I would like to remind you if you would like to ask a question, please press star then the number one on your telephone keypad.

At this time there are no further questions.

I'd like to add, remind everybody again underline again on this mutual fund issue, you know, we have made some reserves for the amount of prospective fine, but we don't have an agreement, as of yet, finally on what all of these numbers are we've reserved.

So we have done the best we can, but until all this is finally resolved, we won't know the exact numbers.

I am hopeful that some of these regulatory issues will, you know, come under better control in the industry and we won't have as many of these.

I -- I'm not fully aware of what the reasons are for the postponement and finally coming to some kind of a group solution here.

With that, I look forward to --

Oh, I'm reminded by Jeff Julien our CFO, that I failed to mention Tower 4 and there are two things I should mention about Tower 4.

Number one, we are beginning to occupy the building currently and people are actually moving in to Tower 4.

And number 2, while we are eliminating some commitments we have in moving the people here to Tower 4, there will be an incremental impact on the expense side as this quarter includes our first charges for this particular facility, even though we're eliminating some that occurred before.

So that will have a negative impact.

Jeff, I don't really know what size, have you done any work on the magnitude of that?

Um -- I can't say with certainty.

I have to look at the net number relative to the leases we've given up.

Yeah.

It's not -- it's not going to be tremendous impact.

But we don't intend to have it filled up immediately.

We, as you could tell from our expense comments, we have continued to manage personnel count extremely well on the nonproducing side, but, you know, even that will begin to edge up if these revenue increases that we're currently dealing with continue for any extended period of time because we're probably a little undermanned even with all the productivity enhancements we've had to handle this level of continuous revenues going forward.

So -- and I would tell you, if the market continues to rally here, these revenue lines do well go up apace.

Thank you very much, and we look forward to talking to you again next quarter.

Thank you for participating in today's conference.

You may now disconnect.