雷蒙詹姆斯金融 (RJF) 2004 Q4 法說會逐字稿

Welcome to our year end analyst conference call.

Let me begin by talking about quarter.

I might say that our fiscal year went out like both a lamb and a lion.

Unfortunately, the lion part dealt with 4 hurricanes that threatened our headquarters operation here.

And in fact, directly impacted our numbers of our branch offices.

As those of us in Florida suffered through probably some of the psychologically most depressing times I can remember over a month period.

This really made our business continuity plan a real test.

Because Ivan, the last of the 4 storms that threatened us, - - not the last, the next to last, of the 4 storms that threatened us was originally scheduled to make landing in Tampa Bay, with 160 mile-an-hour winds and the lowest barometric readings that had every been recorded for a hurricane.

That was a little frightening for us.

And certainly lead us to the conclusion that the County, if that happened, would be evacuated.

And we would have difficulties since that hurricane was arriving during the week.

As contrasted to the 2 hurricanes that did pass through the Tampa Bay area.

Consequently, we actually engaged the services of a charter 737 and flew a lot of people to Detroit to augment our site.

Such that this flight occurred on a Sunday so that we would be fully operational on Monday to be able to handle business in the event that we were unable to access our headquarter's office.

As I told you before, I believe, in prior meetings, we do have a totally reflected IT system up there.

And we do have what I will call a skeleton staff in the sense that it operates every day, to serve part of our client universe.

But certainly is not large, relative to the overall demands of handling all of our business.

But we did this real live test.

And fortunately, Ivan passed to our west, about between 250 and 300 miles to our west.

We still had some impact from that storm because it was so large.

But nothing of major consequence that would shut us down here.

So we were able to bring back the staff on Tuesday night.

And the test, though, I would describe as successful.

So, in that sense, while expensive, this was a good event for us to test.

And when Francis and Jeanne went through here, they came after initiating land on the east coast of Florida and we had 60 to 70 mile-an-hour continuous winds here.

We had a lot of power failures in the area.

But since they came through on the weekend, we didn't have any problems.

And needless to say, we had total backup power here, anyway.

So, the power was would not have been an issue.

And neither of these was threatening with respect to title flood or inability to get to the office.

Except that these questions often come down to the last few hours.

And what we learned here is that it is extremely difficult to manage, in the face of these storms, that are arriving.

Which has lead us to a conclusion that might be interesting to you, which is that we are going to increase the size of our second regional center in Detroit.

Such that over the next year or two, we really will have a large enough staff to process business for some period of time.

And not have to move a large staff from here to be able to accomplish that.

Even though, I would say that went fairly smoothly.

And again, we would operate as a hot site with those people serving a larger subuniverse of our clients than they currently serve.

So that we really wouldn't have a lot of extra out of pocket costs, except to the extent that Detroit is more expensive to operate in than St. Petersburg, Florida.

The second comment relates more to the business conditions with respect to retail clients: as the second half's volatility in the market and in the decline in the major indices in the fourth quarter lead to less retail activity than we would otherwise have experienced.

And certainly was a lower rate of increase than we had obtained during the first half of the year.

However, we still managed a net revenue increase of 11% to $446.7 million.

Unfortunately, the expense lines, more about which I'll say in a minute were up 13%.

And as a result, net income was down 7% from 33 million to 30.6 million, which yielded 41 cents versus 45 cents.

Now, the expense line differential is largely related to this ubiquitous but always difficult to interpret it, "other" that appears in financial statements.

And in this case, relates to some unusual charges.

We have been running at $15 million to $16 million in this category per quarter, both last year and in the immediately preceding quarter.

But we ran 24.5 million in this quarter because we took an impairment charge of $4 million on a lease of a 757 to Delta.

That we entered into some 12-years ago.

And given the plight of our airline industry, the secondary market and commercial jet aircraft is depressed.

And actually while we used very conservative residual values, we actually find a market time now when the amount of loan is more than value of the plane.

And consequently, when we looked at valuation issues, we decided to take a $4 million write-down on our asset collateral.

Obviously, the plane is still in good shape.

It's an efficient airplane.

So, some of these estimates that we are making are just that.

They are not necessarily real world kinds of numbers.

But we have to do the best we can.

the other thing we did was we added more money than normal to some of our legal reserves.

Consequently, if you just look at that $8 million increase, most of it is attributable to extra kinds of charges from what had been our normal kinds of levels.

And that really explains the difference in net income in the period.

I was, actually, pleasantly surprised by the quarterly results.

Because of the slow down that had occurred in retail.

And, actually, in as a result of the hurricanes, we had a lot of people whose environments were affected in terms of you don't have any power outages and things like that.

And we have 15% of our offices - - or our volume related to Florida, one way or another.

And that's impacted it somewhat.

And so, I was basically happy with these results.

Generally, I would say that other than for the column that I just described, expenses were not out of line.

We have had some more increase in business development, largely of a result of some of the activities in our institutional efforts etc.

So, that's kind of the quarter.

When you look at the whole year, we had revenues - - net revenues, that is, net of interest expense of 1.78 billion which represented a 23% increase.

As I said, most of that increase was kind of pumped into the first half.

And we had net income for the period at another record, both of these are records, $127.6 million, which was 48% increase in net income.

Which yielded $1.72 a share versus $1.17.

And when you look at those numbers on the yearly basis, the major contributors were investment banking up 49%, investment advisory fees up 20%, net trading profits had good increases.

Essentially, everything increased to pace except probably our net interest earnings.

Where we didn't have the same level of growth as we did in some of these other categories.

But, the numbers were still very good overall.

So, I would say it was a very good year.

Now, when you look at our - - some of the other data that we share with you on a quarterly basis, I would like to report the asset numbers continued to increase.

In fact, when you look at the total assets under management, we increased to 22.3 billion up from 22.1.

We had bigger increases in our Eagle assets and A1 assets during overall period.

Mainly from the institutional side of the business.

And our freedom account, which is our discretionary managed rebalancing mutual fund account, based on our mutual fund research, increased, again, dramatically.

So that we are beginning to really attract a lot of our smaller accounts into that activity.

And the accounts that aren't included in that total that we call our fee alternative billing assets increased again to 15.2 billion.

Which means that from last year at this time, they are up from 11.2.

So you can see there has been an dramatic increase in the value of assets.

And in all cases, net sales were positive, Heritage Asset Management and in Eagle.

Plus we had the benefit of some appreciation.

So we had, basically, everything working well.

So, that worked out very well for us.

When you look at the combined number of financial advisors that we have in the U.S. and Canada, we reached another record and increased to 5,130 from 4,996, at the beginning of the year and 5,085 at the end of last quarter.

And again, I want to remind everybody that growth in the independent contractor force has been muted in terms of its impact on the quantitative count by the fact that we have been essentially counseling people - - or actually branches with less than 130,000 in gross out over the year.

And also, of course, as always removing anybody that we had any compliance issues with.

And as a result of this first time pruning over the last year and a half and I'm told - - I'm kind of thinking this might end in the next 6 months.

I know, for a fact that they are talking about affecting another couple of hundred people between now and year end.

So, this is our normal pruning time, actually, during the last quarter.

Because you don't renew all of the licensure for the people that you know are not making standards.

So, I actually think this is a very favorable exercise for the firm to go through.

And that we are actually increasing productivity at the same time we are doing this on a gross basis for the whole firm.

And think the attitude and the self image of the sales force will be improved as well.

As the favorable impact on any potential liabilities from having a lot of people who are underperformers.

So, I basically think that is a positive activity.

When you look at our investment banking activities, actually, the U.S. had a terrific period during this year.

We had 96 managed and co-managed underwritings with $20 billion worth of business.

And we have had M&A fees at a little over $21 million.

So, we had good activity, there.

Record numbers and that's in spite of the fact that there was a little slowdown, which really related to just some timing issues Not any kind of a trend change during the September month.

Which is probably good because everyone was so consumed with all of this hurricane activity.

And some of our travel was curtailed as a result of that.

But, that continues to be active, in terms of flow of new ideas and capital market committee activity.

So, the outlook there is favorable.

I think the market conditions are being impacted by the election process uncertainties that creates.

Oil prices which - - you get a lot of negativity as a result of some of these economic pricing trends, along with the rhetoric of both parties.

That probably is overstating the negative aspects of our economy.

Which I think is still managing to operate well.

Corporate earnings are reasonably good, generally speaking.

So, I'm sort of favorably disposed to the outlook for 2005, once the election process is completed.

Whichever party wins.

So, I think the outlook is reasonably sanguine.

That's pretty much covers the comments, other than client assets.

Which I would mention in our traditional numbers are about 110 billion up from $96 billion at the beginning of the year.

And that is exclusive of annuity assets.

Which my best guess and that's all that is is probably another $10 billion.

And there are other assorted assets that we don't have on our - - some direct ownership and some mutual funds that were not networked with.

That would raise that somewhat more.

But we have had good growth in our client accounts also during the period.

And with that, Jeff, I don't know if there is anything you would like to add.

Yes.

The yearly ROE was 12.8% up from 9.9% last year.

And actually, the after tax margin on revenues was up to 7.2 from 5.9.

And, I would still tell you there is considerable friction imposed by the level of legal activity that I have reported before and the amount of reserves that are established during this period.

Consequently, there is still room on the upside for margins.

Clearly, that was demonstrated a couple of quarters ago.

So, you know, I think we still have the capability, albeit it's not as clear to me of reestablishing the high teens to 20% rate of returns on equities.

And if we could just get 4 quarters of reasonable market.

And maybe that's impossible in the current economic environment we are in.

With that, I'll open it up to questions.

[Caller instructions.] The first question comes from Jonathan Casslin.

Good afternoon, could you discuss the breadth of banking business in the quarter?

I mean we know about the BioMed transaction.

But just as far as the breakout of fixed income, municipals, investment grades, what have you?

We actually - - during the quarter, we didn't have that much public finance activity.

The vast majority of these numbers relate to equity capital markets.

And in fact, when you look at this number, just to get a feeling, it's pretty much across the board within our SBU's.

We do have a lot of read activity, as you pointed out with BioMed.

But we have a number of other transactions in which we participated.

Although we turned down a lot a participation just because of the current pricing in the marketplace.

We were very cautious with respect to selling things at substantial premiums to NAV.

So those kinds of transactions, the MLP's, we have largely cut back on because of pricing considerations.

But that dollar volume that we were participated in there is more than double since last year.

So, you can see that the growth is large.

Actually, technology and healthcare had terrific years proving that sort of the contrarian logic that was applied to opening an office in Silicon Valley and expanding our effort, based in Atlanta for technology based underwritings has proven itself to be appropriate.

So, and not much public finance activity.

There is a lot more in the hopper there in terms of activity.

And we have been doing some hiring in the public finance area.

More outside the state than in the state.

So, in our strategic state approach that we have, we have expanded that effort over the last 6 months.

And we are expanding our housing effort as a functional area.

And so, I expect to see more there.

And some of the expected activity that we thought we would have in military housing and - - was actually deferred.

So, it would come into 2005 business.

Right.

So, as far as backlogs, can you sort of discuss the status quo?

Is that pricing environment still prevalent in some of those fixed products you talked about, the MLP's?

Are you sort of going to step back from here?

Or --

It is still prevalent.

Hence our preference for high quality new issuers or special situations.

So, we are going to be very cautious.

The major issue is always price on those issues, today.

It is not - - you know, we are talking about good managements with proven records.

And we are just cautious.

And I think the institutional buyers are cautious consequently.

If you read our research reports, you would see that we often have market perform type 3 ratings.

Which we define as available funds sources.

So perhaps more negative than the whole.

And Consequently, you won't find our Capital Markets Committee prone to approving except very occasional exception offerings in those research categories.

Right.

So, as far as the bankable backlog - - you know the banking backlog, can you give me an adjective?

Are you going to need new deals to come into the pipeline from now?

Or are there deals there that are of other quality that you can push out?

I would say it's still very good.

Still very good, okay.

On the other expense line, the legal expenses running through the P&L in the quarter.

Are these - - are you sort of shoring old issues here?

Or are these sort of new reserves?

Old issues being the [Herulia] case or the Premiere 72.

Are these new issues coming online that you are taking reserve for?

Both.

What I would tell you is I've noted some decline in new activity now that we have separated ourselves from the 2002 period.

But there still is new account activity.

There is also - - whenever you have a large backlog, it seems to me that evidence that occurs during discovery has a tendency to be unfavorable.

So that as long as you have a growing inventory and as these things age before resolution, you tend to increase your reserves.

The [Herulia] case as we stated in our press release was largely a surprise to us in terms of the level of complaints.

And so we added to reserves.

But I don't think it has changed at all.

Right.

And to be frank, I would like to tell you that in spite of the fact that I have a legal background that I have got a lot of attorneys on our staff here that we have some degree of expertise in being able to estimate cases like the [Lapen] case.

But, we don't.

And you see such variability if terms of responses of arbitration panels.

That we do our best based on our experience in settling some of the cases etc.

And trying to determine whether they were client related or non-client related.

And all of these factors that enter into the evaluation.

But unfortunately, the plus or minus standard deviation here is a large number.

Fair enough.

So basically, everything in the 10Q you feel adequately reserved for?

Because there was sort of a litany of things that were still pending.

I feel adequately reserved for.

But as I said, in my own press release, the variability in these results could mean if we could get a negative decision on say one of the [Lapen] cases that would impact our logic on the rest or vice versa.

So, you know, I wish I could be more definitive, but it's absolutely impossible.

No that's fine.

On the aircraft charges, usually, in impairment accounting there's an event.

Either a liquidity event or some sort of an even that you have to then compare the undiscounted cash flow to the fair value.

Can you sort of identify that event?

Yes.

The even is that Delta's condition has continued to worsen.

They have actually gone into the marketplace and asked holders for reductions in the income streams - - the future income streams.

And so we use those kinds of factors to determine the impairment value.

Right.

So going forward, what's the next contingent event as far as the accounting system works?

Is there another one or is it just simply that?

We still have an asset on the books.

So, could there be another event?

Yes, they could take bankruptcy and give us back the plane.

And that would be a new event that would require additional write down.

But you are not talking about a write down that is much different from the one we have already taken.

So, it's not a major - - we only have 2 aircraft.

And this is the one that Delta leases.

The other is leased to Continental.

And Continental is in much better shape than Delta.

Albeit, the industry looks like we've run out of stretchers.

Now, actually Morgan Stanley provides a metric where they compare the carrying value to the value of the aircraft.

Is that something that you're aware of?

Do you know the fair value of the 2 assets?

I have an idea of what the fair value is.

Some sort of percentage-wise against the carrying value?

I would tell you if that we had to write down the fair value, we wouldn't have any equity value in that one plane.

Assuming that our estimate is correct.

Which I, honestly, don't know.

We still have an attractive airplane and, you know, we actually foe a lot of people in this business.

So we got our information.

And we don't have the precision and knowledge that Morgan Stanley does because they have a much larger part than we do.

Right.

And they are able to gain more information.

What I find out here is when you are a small holder, the other lessors tend not to share their information with you.

So the big guys are negotiating at different levels.

They have a lot more ideas about what they are going to do with these aircraft.

At the same time, I would tell you that we have the advantage of smallness.

Meaning that whether we agree to a settlement or don't agree to a settlement is not going to make or break Delta by any stretch of the imagination.

So, I'm not sure that they would violate their lease on that basis.

Right, was there an opportunity to renegotiate the financing?

You talked about the loan being greater than the offset.

Is that something you are milling over?

It's public debt.

Public debt.

Okay.

Fair enough.

And then very quickly, I know I'm using up my time here.

Just an update on the lending efforts at RJF Bank.

I've spoken a little to you guys about the senior lending situation, I think you have 3 currently you are trying to move to 6.

Just wondering if --?

I actually would like to move to 10.

You are less ambitious than I am.

We are in the marketplace, trying to hire.

We have had some turnovers there where we were unhappy with productivity and other issues with respect to a couple of the lenders.

I assume that over the next 6 months we will add substantially, to that team of lenders.

It doesn't have a - - it won't have a dramatic immediate impact on any kind of financials.

Longer term, in order to meet our growth projections, which exceed the growth expectations we have for the business in general.

Because of its relative size.

We need bigger lending tickets.

So, you know, we need to get this done.

And actually, we have just done the review in this area.

And we are attempting to address this and increase the size of the staff.

And then what sort of asset opportunities are you looking to pursue?

Is it real estate based or is it industrials or --?

Well, traditionally, real estate has been our - - the largest part of our portfolio because we are an S&L, by definition.

And we also have great familiarity and comfort with various forms of real estate.

So we are - - I would say, though, at the same time, that we have attempted to access our other client relationships in the corporate world.

As well as our connections in the banking world for more participation opportunities.

And there are plenty of them out there.

The spreads are such these days that we are probably less aggressive than we would otherwise be trying to meet our rate of return objectives without compromising quality.

But, I really think there is tremendous opportunity for us to grow traditional corporate lending.

Consequently, we think that there will be more growth from that sector relative to real estate going in the future.

Right.

Two other quick questions.

Just on the net trading profits, how did you guys get there?

I'm just curious, with this sort of murky atmosphere in equities?

You posted 7.2 million on 5 last quarter.

Just wondering, sort of what was the driver there?

Fixed income did better.

Fixed income?

Yes.

Equity trading in our business is not a big deal.

Okay.

And then I'm just wondering, is there any compensation leverage?

You talked about possibly 200 more pruning on the independent advisors side - - contractor's side.

I mean to my understanding, I think you pay out more to them.

So I mean is there any sort of relief on the compensation expense line?

Actually, what I would tell you is that the independent contractors don't - - that doesn't help our overall net margin to do what you are saying.

Because the tradeoff is that you are really - - while you decrease that overall average payout, the contribution level of this business is still very positive.

Because we don't have the the location costs associated with the Raymond James and Associates full time employees.

So margins or contribution to the private client are better overall in the independent contract network.

Great, understood, thanks very much.

Your next question comes from David Trone.

Hi, how are you?

Is there any way you could quantify for us the combined costs and loss revenue associated with the hurricane?

Probably not.

I just don't have a clue is what I would tell you.

The only thing I can tell you, for sure is probably shipping these people around and overtime considerations and stuff like that cost us $0.5 million during the month of September.

And that doesn't have anything to do with lost revenue.

This all has to do with just incremental costs associated with moving people.

Right.

And you said 15% of your activity in Florida.

Was that the brokerage or the whole Company?

I was talking about commission brokerage.

Okay.

My other questions were answered, so, thank you.

Okay.

at this time, there are no further questions, Mr. James, are there any closing remarks?

No, other than to thank everybody for participating.

We look forward to starting a new fiscal year and look forward to conducting future quarterly reviews with you.

Thank you very much.

This concludes today's Raymond James quarterly conference call.

You may now disconnect.