雷蒙詹姆斯金融 (RJF) 2005 Q1 法說會逐字稿

Good afternoon, my name is AILEEN and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Raymond James quarterly conference call of the all lines have been placed on mute to prevent any background noise.

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

If you would like to ask a question during this time, simply press star then the number 1 on your telephone keypad.

If you would like to withdraw your question, press the pound key.

Thank you.

I will now like to introduce our moderator, Mr. Tom James.

Sir, may begin.

Thank you.

Welcome to the first quarterly analyst call.

We had a very good quarter, which resulted in 23% increase in total revenues and a 21% increase in net revenues.

That's the first time we've approached a run rate of their $2 billion in revenues on a net revenue bases and obviously exceed that a little bit on gross basis.

The comment I would make is that that's clearly a revenue record for us this quarter.

Normally we expect this quarter, this first fiscal quarter to be somewhat slow as activity is muted, especially in investment banking in retail transactions by the holiday season.

Of course when we're comparing to the same period last year, we should eliminate that, but what really occurred since revenues were up from the preceding quarter also is more a function of several factors.

The ones that I mentioned in the press release, our 14-week quarter.

I'm informed by Jeff Julien, our CFO, that we're going to have sort of an odd reporting period with the way we elect to report with weeks.

We're going to have 12 weeks in the quarter in which we're in, then we're going to have 13 weeks and then 14 weeks again that for the year-end quarter, so we're going to have some differences that occur here merely because of time periods.

So that clearly makes a difference in revenues, especially on the commission and front and on some of the expense fronts.

The biggest factor that I would cite was the increase in net interest income where we essentially had a $29 million profit up from $20.5 million.

So we had a dramatic increase and I think that you might characterize this as more of a trend.

As rates rise we obviously earn more on our free overnight invested balances, but equally important, we have an increasing spread as rates go up over our cost-of-funds so that I suspect that you will see continued growth in net interest, albeit not quite at this level during this quarter because, again, of that 14-week period.

When, when you look at this also, we've had a relatively flat number of dollars in our credit interest program deposits here at the firm for awhile.

I would suspect that as rates begin to increase in the net pay to our customers goes up, you will see more dollars move to near cash deposits as opposed to some risk-taking on the part of some of those people with respect to CDs or these very short-term money market funds that are longer than the 30-day periods that typify cash trusts.

So I really do expect this to increase over time.

Investment banking had another excellent quarter.

As you can see from the revenues, we had a 45% increase.

We had a high level of activity at the firm.

We had 34 lead-managed or co-managed transactions during the quarter.

Normally that slowdown that would have occurred in the latter part of December really didn't occur to the same extent this year as people were somewhat concerned about the outlook for the markets.

They were trying to make sure that they got as much as possible out of the pipelines before year-end, and so we saw a particularly active period.

Merger and acquisition activity was also good during that period.

The third, the fourth reason that I cited was a 44% increase in trading net profits, which means that our fixed income area had a better quarter than they've had in recent periods also.

So that, that's a positive trend, specifically in the fixed income area.

I attribute some of that to our NACENT (ph) high-yield effort where we've added a number of institutional salespeople and traders in several locations and built a department in fixed income.

Other areas showed more normal growth rates.

We saw investment advisory fees up 17% and we saw financial service fees up 20%.

You would sort of expect them to correspond to the growth and securities commissions, which was up 18% year-to-year.

So again a lot of that is attributable to the extra week, but not all of it.

So we had a very good period.

When you look at noninterest, noncompensation expenses, we had about a 14% increase.

So obviously there was a good amount of positive operating leverage improvement during the period and that's what caused our numbers to look like about $39 million on a pretax basis last year up to 64.8 this year, which resulted in a 62% increase in net income to 39.2 million, which is equivalent to 52 cents fully diluted share for us and also means that we had an after-tax margin on net revenue of about 7.9% which, again, means that we had about a 14.3% rate of return on equity, which is still below our standards and the only negative thing I would say that you can see subsumed in these numbers as you see a pretty large increase in other expenses, one never quite knows what that means.

Well, in this case, about 5 million of it is attributable to increases in legal reserves; from sort of our standard levels, but basically most of the stars were in alignment during this quarter, so it was actually a very good quarter for the period that includes a holiday season.

So my comments are that you can't extrapolate because of the 14 weeks, so when people ask me if they can annualize this we're in fact in the process of some kind of a secular trend that is going to go quarter-to-quarter, I can't say that.

Of course, the biggest determinant of that will be market action.

Our biggest number by far and our revenue lines is still the commission in fee revenue income, which comes from our private client group and if, you know, the markets would change directions, that would cause us a problem.

On the other hand, if we have a sanguine-type operation in the marketplace, I think we could even do better.

On the basic front I would report the pipeline is still pretty good.

Even given the fact that not as much entered the pipeline during the month of December as would be entering in normal month, but we still have pretty good activity at the capital markets level.

So I think the outlook's pretty good as long as the market doesn't come apart at the seams.

For everybody in the industry.

When you look at some of the determinative elements of what generate the numbers, we actually had a slight decline in FA's for the quarter.

Again, that doesn't represent a real slow-down, there is some slow down during this period in terms of movement of FA's, but our recruiting pipeline still looks good.

We're still hiring higher-end financial advisors, but we're still in the process of this whittling out of some of our lower producers where we gave them some goals to hit, and I suspect a lot of that occurs in the fourth calendar quarter because of licensing, timing, looking at your list of financial advisors and making decisions at year-end.

That kind of planning that goes on in branches, but we're up year-over-year and I suspect that you will see a resumption of that growth in succeeding quarters.

I would like to say that we have had no growth or a decline in nonFA employee, but that's really not true.

We, over the last four, five quarters, we have seen increases in, we have still not reached our high, I don't believe, but we're back growing again, which is necessary given these volume increases.

Another way to measure this kind of volume increase is to look at the assets under control that we have at the firm for clients.

If you look last year at the end of December, we had $103 billion, and today, we have $136 billion and it's been a pretty consistent increase quarter-to-quarter.

Those don't include all the assets because we still have certain annuities that we don't capture and certain direct mutual fund positions that aren't captured through this accumulation of assets that I just reported, but it gives you some feel for the revenue base growth, a 34, 35% growth rate is -- arbors (ph) well for future growth revenues.

When you look at asset management side of the businesses, the fact is that Eagle has crossed the 10 billion level to 10.4 billion in its individual account.

Management and the total assets under management in our asset management sub reached 27.4 billion up from 22 billion at this time last year.

Less related assets, which nets us 25.1 billion up from 20.6, so 22, 23% increase in assets under management.

We continue to have good net sales.

We continue to make progress in growing our institutional assets at Eagle, and we have just begun to sort of spread our wings and offer sub advisory services in our areas of expertise to European and Latin-American vehicles for accumulating assets.

So I see things as fairly positive as long as we can continue to maintain above-average performance in each of these vehicles that we have.

So Canada had a reasonably good quarter.

They're also growing their number of financial advisors as we continue to have success in the independent contractor area there.

And we've had growth in our UK operations we've not yet achieved profitability there, but if we maintain the same kinds of editions to our financial advisor base in the UK, it's -- you can now sort on of see the end of the lost pipeline in the next year or two.

So we're hopeful that that will become a larger contributor going forward also.

So generally I would tell you that most of our business groups, and we normally give you a report on our segment reporting.

We haven't quite finished that.

I think we're going to mail that out probably at the first of the week, but generally the equity capital markets part, or the whole capital markets part of the segment, which includes both fixed income and equities.

Had a pretty good increase in terms of profit contribution during the period which necessarily means that the private client group, instead of accounting for over two-thirds, probably accounted for more like half during the period and the percentage contribution on behalf of asset management activities is also growing.

So we're seeing a somewhat of a change in the mix of profitability in our segments, much more so than on the revenue line.

So I think that actually harbors well for the future because they're higher-margin businesses going forward.

Jeff, do you have anything you think I should add? [ Indiscernible ] I did mention the margins and ROE, but I didn't mention the result in book value and for those of you that set down and do your calculations on book value per share, you can't just subtract dividends from earnings this quarter and add them to last year's book value.

It won't work because we had a lot of options come up for exercise and we had a lot of exercises during the period which, added substantially to book value.

So, actually our book value per share now is $15.01, so up more than our earnings for the quarter.

In terms of outlook as I said, most of our results are going to be determined on what kind of market environment we operate in for the rest of the year.

My own views are that we're not going to have a very material increase in the equity markets and on the fixed income side, we may actually relieve some of this uncertainty if rates continue to be increased by the Fed in some kind of uniform fashion, the way they have been doing it lately, which I expect will continue.

So when you you see interest rates rising consistently, I think the next increase would make the sixth, and you see inflation rates, which I would tell you to the common man are certainly going up faster than you read for core rate kinds of reports, if you're out there not just filling up your gas tank, but you're buying produce at the supermarket, or even if you're buying hard goods for the first time you're beginning to see some price increases that are actually sticking and being passed through I also think that unemployment declines, we are going to see more pressure on the employment side.

So, I'm not quite as happy about the outlook for inflation, which necessarily means that the long-term rates, forget the short-term increases by the Fed, ought to begin to reflect the short-term increases and I think that's going to dampen our results going forward, essentially when you can join that with continued discussion of the twin deficits, which are becoming problematic to us, especially in light of some of these programs we're trying to alter at the national level.

On the other hand, I still suspect that corporate earnings are going to increase.

Not at the rate they did last year, but they're going to have a pretty good increase during 2005 that the U.S. economy's going to have pretty good GDP growth, albeit slowing as a result of some of the factors I just mentioned.

I just think the market will probably move in advance of seeing changes in either of those two statistics and so I'm, I'm somewhat cautionary but still very positive on what is going on in the fundamental engines here that we're operating.

And with that, I think I will open it up for questions.

Be glad to respond to anything you might like to have us expand upon.

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

We will pause for just a moment to compile a Q&A roster .

Your first question comes from Jonathan Casteleyn.

Yes, good afternoon.

Afternoon, Jonathan.

You spoke a little bit about the elongated quarter.

But, it looks like trends in December in and of themselves picked up by about 5% over November, and about 25% over October if you look at weekly commissions.

I am just sort of wondering, is that FA efficiency taking hold or is that part of the institutional business you spoke about?

There is no doubt that productivity, FA productivity when you measure the average production is increasing.

Some of that is a function of just a longer period of recovery, which leads to more confidence on the part of the individual investor.

Some of it is being caused by this success of the institutional side of the business as we continue to capture a growing marketshare in our institutional markets in the U.S., Canada and Europe.

So as our research [inaudible] becomes better known, I think that's been a good trend for us, so, you know, I think you're right on the mark.

You're, I wouldn't say you're wrong, and if the market continued to increase albeit at a slow rate quarter-to-quarter going forward, I would suspect that we would continue to see productivity enhancement in terms of average broker productivity.

Right.

Okay do you have any internal mandates or thresholds you're looking to coss with your refreshing the sales force?

How do you measure that yourselves internally as to how your FA's are producing?

Well, of course, we do keep charts of individual productivity.

We do have minimums that have been established for recruiting.

And effectively, we have established some minimums for retention.

So all of those things, while they don't happen overnight because of some of these time periods we often give people, the fact is that all also contributes to some of this productivity numbers.

And I suspect we ought to be finished with the base process of catch up in doing this in our RJFS sales force during this calendar year and most of it will then be at a more normal rate of people simply not cutting it, contrasted to those that are successful.

I see.

Can you speak a little about your asset management business.

It looks like I saw some of your fourth quarter number.

Overall annually, it looks like you had a good performance in large-cap conservative and large-cap growth, I'm sorry, small-cap growth.

Any material or significant wins on the account side or is it just generally the existing accounts are performing better.

No, we continue to win new account assignments on the institutional side.

And we do have a very good level of net sales growth and individual accounts.

Both from outside and inside the firm as more and more firms have proved us as part of their platforms.

So they're FE (ph) platform.

So I'm actually, I think that part of our business is growing.

It will continue to grow and you hit it right on the head when you you pointed at the performance.

The the core growth account, which obviously is one with a lot of capacity because of the size of the companies that are involved in the portfolios has continued to perform extraordinarily well.

We don't as yet have a vehicle for a mutual fund vehicle for that particular discipline and we're looking at that.

And I also believe that it will become more attractive to institutional account management.

We really, because of the time periods of the association with the team that does this, we, we've only recently gotten to enough years.

I think this is the fourth year we just finished.

It's -- that we can be attractive to consultants to suggest that account management and if they have beaten the indices, you know, year-over-year here by a substantial margin, so there is a lot of opportunity there.

Our small-cap and mid-cap disciplines have also performed very well and I suspect we're going to attract more money in those accounts.

And as a result of sort of this market outlooking of not thinking we're going to have dramatic increases in equities, I would say in our own models here where we try to make sure that our financial advisors are marking asset allocation that we will see an increase in fixed income management here, too, so I'm actually fairly bullish about that side of the business.

I think we're in good position to continue to grow and it's one of our objectives to, you know, consider acquisitions, to -- we don't have anything currently that I know of underway, but we, we definitely want to add one or two more groups to our complex here either by acquisition, liftout or total incubation here over the next year.

So we'll continue to grow these activities.

All right.

Lastly, I mean it looks like, if I'm correct, you guys skipped Sarbanes 404, the preparation of it this year because of the fiscal close.

I'm wondering would that preparation begin over the course of the year or is it a Q4 event and do you have any idea of the impact?

I have a real good idea of the impact and it's well-underway.

This is not something that you start now.

This is -- we actually started in anticipation of the fact that we would have already been pushed into the period and, you know, made the delay.

So we've done a lot of the work here.

Uh-huh.

It's been extremely expensive.

My I.T. department, for example, estimated to me that the cost of Sarbanes just for them was a million dollars for them in the last twelve months.

So when we look at the whole firm, we're talking about substantial costs.

I have yet to see substantial benefits.

I was sort of astounded by the I.T. costs, which leads me to believe that I needed to do some work there.

But we clearly are going to have spent probably a half a million dollars in incremental fees with our auditors last year on Sarbanes on the 404 control issues and untold hours of internal time, whether it's an internal audit staff, personnel in the department lines, our accounting people, our financial experts here.

We've spent an awful lot of time just documenting a lot of this activity.

I'm told that these things will be reduced after monumental investment required in the first year but actually, given the rate of change in our business, I am not as sanguine (ph) about that as they are, and I would tell you that this a substantial tax on the public market here of the not just on us.

And I wish -- I wish it were otherwise. [ Indiscernible ] [ Overlapping Speakers ]

Is that what you're saying essentially?

We got that all over, actually.

Right.

I would tell you that is spread around pretty well.

The dollar are there and, you know, it's sort of a frictional element not dissimilar from the frictional elements that we have in legal costs and settlements related more to the market in 2000, 2002 than anything else.

So, I, I say it's going to be hard for us to sit here and say I'm going to have a 10% after-tax margin on revenues.

I would like to be able to tell you that we can do that here in the near-term, but I don't see that, given the tales on some of those costs, as well as the frictional costs associated with Sarbanes and other control activities here of the increased regular scrutiny, I don't know how many e-mail copies we have made during the last year, but we could back up the trucks for a line to carry the stuff out of here.

So, it's not been a pleasant period of time.

Understood.

Thanks for your time.

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

At this time, Mr. James, there are no further questions.

It's been a pleasure discussing these results with you.

I told you the last quarter that I hoped that we could continue the trend that has been established last year and we obviously did it for the last quarter, and I am in hopes we can do it again for the March quarter and I look forward to meeting with you again then.

Ladies and gentlemen, this concludes today's Raymond James quarterly conference call.

You may now disconnect.