雷蒙詹姆斯金融 (RJF) 2004 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen.

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

At this time, I would like to welcome everyone to the quarterly analyst conference call for Raymond James. (Operator Instructions).

I would now like to turn the conference over to Mr. Tom James, CEO of Raymond James.

Please go ahead, sir.

Good afternoon, everyone.

The numbers that we released earlier today constitute a record revenue level and a record net income for any quarter achieved by Raymond James in the past.

In addition, I would like to note since I have not noted otherwise in my commentary today that this also is a significant milestone for us in the sense that our shareholder equity passed $1 billion for the first time this quarter.

Hopefully it will stay above one billion because we are not past it by much.

I am also here with Jeff Julien, our CFO, who will be available to answer any technical financial questions that you have to ask.

Our revenues for the quarter exceeded $480 million, which was a 41 percent increase from last year and probably more importantly, was a 16 percent increase from what otherwise was a pretty good quarter in December.

The comparison to last year -- or the comparisons to last year, including net income, actually are representing a comparison against a particularly weak quarterly result.

So, I think it's important that we perhaps look at other benchmarks for comparison.

And indeed, I might also add at this juncture that next -- our next comparisons will not nearly be as easy for us to make this kind of favorable comparison because our revenues began to increase with the market in the June quarter last year.

So, basically that increase in revenues was enhanced by excellent non-compensation expense control, such that we had only a 31 percent increase in total expenses, most of which is accounted for by the compensation expenses.

And as a result, margins improved dramatically to, I believe, about 9 percent after taxes for the quarter, generating $43 million in net income, up from 15.2 million, which represents 183 percent increase.

We had a few more shares outstanding as a result of option exercises, etc., so that earnings per share were 58 cents versus 21 cents.

And I might say that comparison now reflects the 3-for-2 stock split that occurred since our last meeting.

So you need to adjust in your mind some of these numbers; instead of looking at roughly 50 million shares outstanding, we are now around 75 million.

When you add that to our first quarter, our net revenues were about 894 million, up 33 percent for the year-to-date.

Non-interest expenses were up 26 percent to 789 million.

And income -- net income -- was up from 29.6 million to 67.3 million, which results in earnings per share of 91 cents diluted versus 40 cents.

Obviously, all of these numbers are unaudited, which is 128 percent increase in the earnings per share to date figures.

Now, when you take a look at these numbers, I think it's important for you to recognize that most of what has really occurred in this quarter is a full quarter not impacted by the seasonality that we had in the December quarter with the holidays -- was up 42 percent in terms of commissions generated.

So that we had an extremely good quarter -- 16 percent from the immediately preceding quarter.

Investment banking continued at the rates that we have been achieving for the last three quarters.

As a result, we were up 133 percent to 32 million in revenues during the period.

And investment advisory fees were up 27 percent to 34.4 million.

In addition, financial service fees, which are related to transaction activity, increased 38 percent, pretty much in line with commission increases.

And that generated the revenue growth that occurred.

And as I said, we had pretty good control in the non-compensation cost levels, except for clearance and floor brokerage, which obviously is variable with commission revenues and activity.

So it was an excellent quarter.

But the fundamental facts that I have mentioned consistently during this period -- during this down period that we had had, all the way up through the last years of the rally in the market, I think are still present.

We have added financial advisers on a net basis.

Some of you may have seen our recent advertisements, where we are focusing on the multiple distribution channels that are available to prospective recruits, that join our firm.

We think that has been met with excellent results thus far; although it is much too early to really comment, the initial inquiries for the first month following our advertising are up 92 percent.

You don't see the results really in the numbers yet.

It takes a while for the pipeline to filter through to successful conclusion.

Probably, we can evaluate this campaign much better a year from now, as opposed to even next quarter.

But, I think we're on the right track there.

There's certainly a lot of buzz on the street concerning all the options people have to join us now.

So, the recruiting is good.

And at the same time. because of the increased activity by retail clients, productivity per financial adviser has been enhanced during this period.

And again, I will remind everybody that we have been still windowing out some of the lower-end producers and some of the lower-quality producers in the sales force.

We probably still have a bit more of that through this year's end.

So, but I think most of that has occurred to date.

And this is just really a question of continuing to raise standards, especially in our independent contractor networks, as the independent contractors we have that run offices have a tendency to add people that might not meet our standards.

And we have to educate them with respect to the costs that they actually experience as a result in making mistakes in hiring or in trying to support people who produce at levels that are simply not effective enough to generate value-added in terms of their office economics.

If we then look at these overall economics with respect to segment information, and again, this would tie more to our gross revenue kind of line, which is 491 million, the Private Client Group accounted for 40 percent, increased to 327 million.

Capital Markets accounted for a 45 percent increase in the quarter to 113 million.

And just to comment briefly on that, that is all ECM generated because actually, Fixed Income experienced a pretty material decline from last year's comparable as it became very difficult to make trading profits in fixed income during the quarter.

And commissions are less than they were last year in the fixed income side, in spite of the fact we have been very successful in recruiting there also.

And then Asset Management, we had 38 million in revenues, up 28 percent.

The Bank revenues were roughly flat; and other was up 161 percent to 5.5 million.

And when you look at profitability, profits in the Private Client Group grew by 84 percent to 35 million.

In Capital Markets, by 359 percent to 21.6 million.

In Asset Management, by 227 percent to 8.9 million; and RJBank grew by 22 percent to 2.4 million.

And then a balancing other entry loss of a million generated the pretax profit line of 66.9 million.

I would also comment that our tax rate was somewhat less, about 1.5 percent lower than what we expect our annual rate to be, as a result of some refunds related to prior periods from state taxes that resulted in $3 million of a bottom-line contribution this quarter.

That's about the only event that I would call unusual, nonrecurring kind of event in the quarter.

Obviously, there are continuing legal expenses and the things of that nature resulting from different cases.

But, when you look at them as a group, not that much change in terms of this quarterly activity from prior quarter activities.

You notice that the Asset Management increase in revenues drove a disproportionate share of profitability.

Actually, when you cross breakeven, you tend to have about a two-thirds to 75 percent type contribution in Asset Management.

So clearly there is a tremendous amount of operating leverage should we be able to continue to grow assets under management.

And in that regard, the assets under management increased from 16.3 billion to 21 billion.

And what is particularly important about that is all of that growth occurred in the non money-market asset categories, resulting about 45 percent from market appreciation and 55 percent from net sales, so that we have continued to attract substantial assets, both within and from without our organization to our Asset Management alternatives.

And we have a number of our asset managers that are still performing in one, three, five and longer-term periods -- you know, four and five star-type levels of performance, both in mutual fund area and in the private account management area.

So, I think that as long as this market remains relatively in the same kind of ranges that we can expect to continue to attract large amounts of money.

You don't have to have a major market increase to drive that.

It is more a function of not having a disaster in the market that really deters investors from adding money to professional management.

At the same time, we increased assets generally under our control to $107 billion, which is a material increase from the 84 billion last year at this time.

And the specifics on the account executive counts are a little confusing in the numbers because a year ago, we still had a methodology that included what we now call AFA's, which are not full-time producers; they are sort of helpers of FA's in our account.

If you adjusted for that, we still have increased our count by about 40 or 50 people during the year.

And we're up by 46 in the quarter, net.

So in spite of this continuing windowing out, the actual numbers growth have been dramatic.

Now, you might say what happened in equity Capital Markets that generated those kinds of increases?

Well, in the first place, we were kind of slow last year in this time frame.

There was virtually no activity.

As a matter of fact, in lead underwritings, we had four domestic and one Canadian for a total of five managed underwritings in the period.

And during this comparable period, we had 26 domestic underwritings, and I believe seven in Canada for 33 managed underwritings.

So we've had dramatic activity.

The pipeline remains full in this area.

In addition to normal activity, while some income-related security activity is down, like REITs, the fact is, we've been looking at some of these newly structured income trusts with pared debt and equity offerings.

And if we decide to pursue that with some of our client base, we have a pretty good backlog of activity there, in addition to our traditional sectors of you know, energy, health care, consumer and all the traditional SBUs that we operate here at Raymond James.

So, it's a great quarter.

They asked me -- CNBC -- what could we do for an encore.

I guess my response to that is that the encores will be more difficult to make going forward, just because the comparison base will be more difficult.

But yet the market continues, I think, to have some favorable underpinnings.

Number one, corporate earnings are continuing to grow at a rapid rate, either in the high teens or better in the March quarter, I'm sure.

We saw those retail numbers today, which are more indication that GDP will be north of 4 percent someplace for the March quarter, especially after the adjusted quarterly numbers come out.

So, and unemployment numbers, I think, are going to be showing some improvement as we go along later in the year.

And all of that provides strength to the market in general.

Although we do need to have some digestion of the increases that we've had, particularly in the first nine months of this rally.

We saw a quarter of that in the March quarter.

I think we'll probably see a quarter of that in this quarter.

But I still think it's going to be a relatively benign environment for the securities industry.

So I think we can look forward to good numbers.

I know these numbers were substantially higher than analysts' estimates.

I empathize with those who try to analyze and project results for this industry.

The fact is, I wouldn't.

We're too dependent on market and other related factors like its beta to try to really generate any kind of reasonable projections.

And all we can do as a management task is try to make sure that the platform is running efficiently, such that when conditions present themselves to take advantage of, we do take advantage of those opportunities.

And fortunately, I think we've seen that in this quarter and we've returned to the kind of margins that we have in other upturns.

And I would also say that analysts should learn from this experience because if you look back over the last 10 or 20 years at market cycles, after you have material flat or down periods in the market, you do tend when the market rallies, to start generating 30 to 40 percent type increments in revenues.

And that really does have a dramatic impact on margins.

And as a result, you'll get a much more dramatic impact on earnings.

The only other factors that I would comment on is we have and are in the process of moving into tower four.

So costs of that quarter have been added into our expense lines this quarter; but they have been partially offset by the fact it was five years ago this quarter when we moved into tower three, so that the five-year depreciable base of furniture, equipment and those kinds of things had some things run off.

And we haven't bought a lot of new furniture in terms of filling tower four.

So it hasn't been as dramatic effect as we probably anticipated two quarters ago.

So, that really has not had an impact.

On the front of mutual fund discounts, as you know, we have been -- we paid our fine and we'd accrued that for the December quarter.

We are still in the throes of generating a reliable automated run of amounts to return to clients.

And there are enough errors in it that we still don't know how good our estimating procedure was and probably won't know until the end of this month.

And we're still planning, hopefully, to make distributions early in May -- in the first half of May at some point here.

Part of the data we're getting from mutual funds is unreliable.

It has missing data periods.

It has wrong NAV's.

I mean, it's -- this has been a real problem for the industry to try to correct, and obviously was a real problem that generated the errors in the first place.

So more will be forthcoming on that.

We hope we have a conservative estimate.

But the jury is still out.

With that, I will open it up for questions.

(Operator Instructions).

Lauren Smith.

Hi, Jeff, hi, Tom.

How are you?

Good.

We're fine, Lauren.

Well, obviously a fantastic quarter, so congratulations.

I guess we can just focus firstly on the retail business.

And can you update us -- it's been a long time I think, at least that I have talked about it or inquired, about Killick & Co. and that effort in the UK, in terms of transporting the independent contractor model there?

Sure.

The independent contractor market at Raymond James in UK is continuing to add new advisers and grow revenues.

Unfortunately, the period of asset transfers there, where it's a manual process, much the way it was here 20 years ago before ACATS, is not as fast as we would like to see.

We have also had to build more infrastructure there I think than we anticipated when we started to provide the platform for those financial advisers.

We are attracting some financial advisers that have large assets under their management.

And as a consequence, I would say that we are still losing money in London at the rate of probably a couple of million dollars a year.

But it is coming down monthly.

And hopefully, we are going to get these expenses reigned in a little bit because we are higher than we originally budgeted.

We are higher than we budgeted at the beginning of the year.

And a lot of it relates to the fact we've simply had to build things that we didn't anticipate we were going to have to build, that we really thought we're going to get from a combination of Killick and Pershing, which just haven't been available.

But we're not discouraged with the number of FA's we're adding.

We have a lot in process still.

So I would still classify this in the too early to comment on how successful we're going to be.

But the evidence is there.

There is demand for this.

And we tend to be very long-term players in this kind of activity.

And certainly, the loss rates that we're experiencing are probably smaller than those that someone like Edward Jones had to experience, building from total scratch when they started.

And the growth that we see in our Canadian independent contractor subsidiaries has also been probably more robust than the additions in financial advisers in our employee-based Canadian operation.

I didn't really mention Canada in my presentation.

But Canada is doing quite well.

They had an excellent quarter, much the same we had.

Retail was profitable and equity capital markets was very profitable.

I anticipate here that the independent contractor activity there, which obviously is using a platform that is already in place, will continue to add value there faster than it does in the UK, even if we recruit at the same rate, which I have no reason not to believe is achievable in the UK.

So, I am still positive on those activities.

I think you would find that our international operations are doing well, especially South America is still doing well, in Argentina and Uruguay, where we're concentrated.

So our other activities outside the United States and our international offices attached to our institutional equity capital markets area are doing extremely well.

Their revenues are up even more dramatically than they are here domestically.

So how many on -- just even roughly -- number of FA's do you have in the UK at this time?

Do you disclose that?

Just to get sort of a sense of the scale.

Yes -- we have 50.

Fifty, up from 15 a year ago.

And if you were to look at the average production in domestic and then in Canada and I'm not even sure it's a relevant question yet -- for the UK -- what would that look like?

Again, even if it's in estimated terms.

The UK still -- I would hesitate to give you a number on the UK, only because, if you have 50 in there at the rate we were adding them, I would tell you that these FA's are still debilitated by the fact that they don't have all the assets yet in place to manage.

So, it's too early for me to give you a statistic.

I haven't even looked at them myself because I didn't think that they would be very useful, in terms of productivity.

Do you know the Canadian productivity?

Jeff?

No, we just don't know that number.

We can look and check on that for you.

But it's certainly up dramatically this quarter.

And what would the average production number look like at the end of this quarter, for US?

Just a second.

Jeff will run that number.

If you have any other questions, we will give that to you.

Sure.

Are there any major -- again, just sticking with retail -- do you have any major technology projects on the near-term horizon or any broker station upgrades coming over the near-term?

That is a good question because what I would tell you the major thing that we're building here currently is a data warehouse that is virtually completed.

And we're going to be providing all of that information and the tools to manipulate the data in a fashion that enables the FA's to just do about anything they want to in terms of numbers generation.

It is also going to be very helpful to sales management because we're going to be able to do product commissions, generated comparisons in real-time, almost in everything we do.

It just -- it provides a tremendous amount of flexibility in terms of number generation.

And so I would tell you by the end of June, you're going to have a lot of that data out.

At the same time, we're very far along in building our performance measurement system for all of our accounts, as opposed to the one we now use just for elite accounts.

We had to build a system that would generate AIMR-compliant results.

And this has taken about a year longer than I anticipated it would take to build.

But I think on -- certainly on the June quarter -- we're going to have all that data available to our financial advisers and accounts.

So than -- and these projects are well along the way and with respect to the cost of all this, it's pretty much --?

Yes, we really, as you know, have a large IT department -- about 650 people.

And in addition to those two things, they have taken that data warehouse and they are essentially using that and performance data also in conjunction to build a compliance package along with all kinds of additional reporting.

We could not find a compliance package in the marketplace that really generated enough information for us to make us comfortable.

So, we have built our own.

We are essentially going to have a tremendous amount of compliance data available to all of our branch managers and our compliance personnel here in the home office.

And we're working diligently -- we are continuing to work -- on our institutional and retail contact management systems, which are two developments with similar components, but with a lot of specific application differentials.

And we're making great progress on those.

And we just took the last release from CSS, our joint venture in Colorado, and we are working that now through our lab.

We will be adding these enhancements that come with that in the near future, which will enable our financial advisers and our investment bankers, analysts and institutional salesmen, to have a lot more information available on their fingertips than they have right now.

In addition, we are trying to install some content management.

With all these new programs we have, the problem of simply operating with all this in an effective fashion is difficult.

But we are working hard on improving our website, and the content of all this data that we're providing generally speaking.

So, there are a lot of projects.

Talking to IT is always an interesting thing.

They have more projects that they're involved in of a major nature than are going on anywhere else in the company.

It sure sounds like it.

Then just lastly, switching gears to Asset Management, you noted I guess two-thirds of 75 percent above breakeven is incremental to the bottom line.

What is breakeven?

Is that something you --?

In what terms what is breakeven?

In what terms are you deeming the breakeven level?

I guess revenues would be -- I'm guessing -- is what you would be referring to, such that everything else drops to the bottom line at a two-thirds to 75 percent increment.

In terms of the segment information I gave you, it's probably about 25 million revenues per quarter.

And so, we're at the level now where it's -- as I've said before, we really think that we can run this business at a one-third to 35 percent type margins on a consistent basis.

At some point, you would have some incremental expenses, just because of the volume.

But most of it is automated.

And we did have substantial capacity remaining in most of our management disciplines, so that we did not have to add a lot of managers.

We have added some more analysts.

And my guess is that if we add substantial amounts of money, especially in the SmallCap areas -- to Bert Boksen or Jim Awad, we would have to begin to expand the teams that they utilize because you really have a limited number of stocks that a team can cover.

And if you're going to increase management in the smaller account areas, it's hard.

Whereas in LargeCap, if you wanted to take our core management beyond 3 or $4 billion to 10 billion, I don't think it would require any more people.

So, it really depends on where it comes.

And that's your big dollar costs, are in those personnel, not so much in the systems where we've already got those in place.

Okay, great.

Thanks, very much.

Lauren, on the production side.

Yes.

The reason we don't dwell on this number or talk about it very much is that there's a whole bunch of different ways of counting this in terms of who's a producer and who's not a producer. (Multiple speakers) account trainees, (indiscernible).

Using the all-in FA accounts that we've got, the independent contractor side, the annualized gross for this quarter was at about a $200,000 rate.

And on the employee side, was at about a $335,000 rate.

Okay.

And then again, that is all-in.

So trainees are in that number as well?

Trainees are included, that's correct.

Yes, and you probably have 150 -- 125 to 150 trainees in the RJA employee sales force currently.

So you can make your own adjustment and raise those numbers.

But that would probably take it up another 15 or 20 percent

Okay.

Thanks, very much.

Gentleman, there are no further questions from the phone lines at this time.

Well, thank you, very much, for joining us.

And we look forward to being able to report some continuation of these numbers in future quarters.

If you have any questions, please feel free to call Jeff Julien.

Thank you, ladies and gentlemen, for your participation in today's call.

You may now disconnect.