雷蒙詹姆斯金融 (RJF) 2005 Q2 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the Raymond James quarterly earnings conference call.

All lines have been placed on mute to prevent any background noise.

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

Thank you.

Mr. James, you may begin your conference.

Thank you.

And welcome to all those that are participating.

I'm glad to have you with us today.

The March quarter, as you might guess from the market action that occurred in this quarter versus the preceding quarter end, in fact, the comparable quarter last year, was a more difficult market environment in which to operate.

Individual investors tend to be disturbed by the volatility in the market and some general downward trends and that was sort of reinforced by the media's comments on interest rate trends, inflation trends, the high price of oil, specifically, and so we saw basically a slowdown.

If you look at securities commissions and fees, our gross commissions were down about 3% and some of that was also occurring in the Institutional side of the business.

So you should be aware that it was affecting Institutional Investors as well.

In spite of the fact that our Institutional Conference, our big one, which is held in Disney World every year at this time, which was extremely well-attended and well-received, we still had some commission downturn, indicating that there was some melees in the market.

As a consequence, our total revenues were up by 4%, but most of that was in interest.

So I think it's more instructive to look at the net revenue figure in this case, which was essentially flat, up about 0.06 percent for the quarter.

So it was sort of lack luster.

And you had conjoined with that commission decline a decline in Investment Banking, which impacted the bottom line more than the client and revenues did during the quarter.

And as a consequence, earnings dropped from 43 million last year to 34.7 million this year, and earnings per share diluted from $0.58 to $0.46.

The expenses were reasonably well-controlled, I would tell you.

Business Development areas is the only place where we had any kind of a measurable change in business.

And the "other" category, while it was higher than last year's comparable period, it was pretty much in line with the immediately preceding quarter.

So nothing particularly exciting to report there.

When you look back at last year's comparable quarter, I think you have to keep a couple things in mind.

I've mentioned that in our prior conference that we were going to have a quarter with 12 weeks in it and we're comparing to a year-ago period of 13 weeks, which is unfortunate that we don't get the same production days every quarter with this, the methodology that we're currently utilizing for financial reporting.

Second, we had a $3 million income item from tax, state tax rebates in the preceding year's quarter.

And then when you looked at that bottom line, since Investment Banking was so robust and the contribution was so high in conjunction with a tremendous increase in commissions, in the year-ago period versus the two years ago, you -- we generated record earnings for that quarter at a level much higher than, I would say, would be normal.

So I would point this quarter out as more the aberration.

And what happened in this quarter, aside from the commission decline in the Private Client Group, is that while we had a pretty robust activity level in Investment Banking, it wasn't enough to match that prior-year quarter.

So investment advisory fees were up; net interest earnings were up, to offset that.

So the number -- if someone had asked me to guess which, you know, we tend not to do prior to the period, there's so many variables that enter quarterly numbers these days, that, and the dependency on the market is so direct, that it's extremely difficult to project.

But I would have told you that the range that we would have been in, assuming we had a quarter like the preceding quarter, would have been 35 to $40 million aftertax, and we actually had a worse market than the preceding quarter by a good bit.

When you look at the preceding quarter, it benefited from a 14-week period, which obviously generated higher revenues so that we effectively had a 3% decline from that immediately preceding quarter in revenues.

And as a result, we had profits of 39.2 million for the immediately preceding quarter, which generated $0.52 a share in earnings.

Which I think caused the analyst to coalesce around that kind of number, and, again, perhaps not be quite as sensitive to the immediate market activity that's going on.

So I'm not really disappointed in this quarter, is what I would describe to you as my response to this, even though we were about $0.05 beneath estimates for the quarter.

I thought results were pretty good.

We didn't have a lot of unusual kinds of events happening in the quarter to confuse the numbers.

And then when you look at it for the year-to-date for the six months, the numbers, you know, were 982 million in net revenues versus 894 million, which was about a 10% increase, and profits were up still for the year.

So when we look at net income, it was up about 7% to 73.9 million, and we generated I think $0.98 for the quarter -- I mean for the six months versus 91 in the prior year.

So year-to-date numbers are pretty good.

Now, when we look forward, which gets a lot more complicated, of course, we still have a pretty good Investment Banking pipeline.

We had some M&A transactions, one of which has been announced, but has not closed.

So revenues have been recognized of $2.2 billion M&A transaction that we had in the quarter.

And we have a number of filed underwritings where we are lead underwriter, fairly sizable, underwriting some which are in their initial marketing periods now.

So I would say that the pipeline's pretty good, but it's not as good as it was a year ago.

So it's a little hard to try to determine what the last six months are going to look like and much as I hate to do it I, you know, I have to hide behind the generalization that market activity is really going to determine what happens here.

And when I look at that, I think most investors, certainly the professionals, are looking very hard at quarterly corporate earnings to determine the direction.

We have a pretty good idea that, you know, general economy is doing all right, that Fed is going to continue to raise rates, that there's still going to be some inflationary pressures, while for the summer the price of oil might back off a little bit.

The fact is we have more of a secular trend going on here than we do a cyclical trend above and beyond this summer effect that we have, which might knock prices down, I wouldn't think much below 40.

So and I think we would be right back up again a year from now.

So actually the, the outlook for our largest SBU in Investment Banking is energy, is still quite good long-term for financing transactions.

And we just recently announced some deals there that we're doing.

And I think they will be somewhat insulated from the market.

So I suspect that's going to be good.

The negative that I would tell you that's occurred is a lot of the income-oriented securities, which have been the bred and butter of retail-oriented firms over the last couple of years, are not as attractive now for the investor, merely because the yields that they pay have caused the stocks to be bid up above underlying NAV and, you know, that makes us look askance at financing in this market environment for retail customers.

So I don't think you're going to see as much activity in that sector as we've seen in prior years.

So you have sort of factors that are offsetting each other there.

When we look at our business, the underlying factors that we always discuss with you to, I think provide the fundamental basis for how we're doing, are positive.

We continue to grow assets under management.

The assets at the end of March reached $25.4 billion, which was up 450 million roughly from the prior period, in spite of the fact the market was off.

So net inflows are still positive for us as we continue to attract Institutional Investors.

We have filed a mutual fund managed by our Premier Core Group, Growth Core Group manager that I think will be well-received, not only by our sales force because of the excellent track record that he's achieved since he joined us and before that when he ran the Evergreen Fund.

So I think that's going to have some good results in the period.

I also think that that particular manager, who now has assembled more than a three-year track record with us, has now reaffirmed the excellent results that he had had in prior years before joining us and as a consequence, we're in a lot of searches.

And you know when you're talking about big cap core, you can get very large mandates from Institutional Investors.

So I'm bullish about that.

The results of most of our managers are still good.

And we also have continued to grow the wrap fee alternative accounts that we have.

We're up from 13.7 billion to 16.9 billion from a year ago, and I should have said when I gave you the assets under management that we were up from 21.8 to 25.4 for the professionally managed assets.

So we can continue to see this trend towards more fee-based compensation systems in spite of the questions that the NASD and SEC have raised with respect to that methodology, which those of us who have been in the business a long time think is probably the best methodology for both the client and the FA.

And as a matter of fact, is lower by leaps and bounds in terms of compensation to the brokers than your typical trading account would generate.

So we're somewhat puzzled by the reaction of the regulators to this.

And I think part of this is that the industry is not done a very good job of proving the case of what services it provides for the revenue it receives.

And we're hopefully going to do a better job of that going forward.

And as I mentioned on the Investment Banking side, we had 20 managed and lead managed underwritings during the period.

That was down from 26 in the immediately preceding quarter and that same number a year ago.

But the size of the offerings was roughly in the same general range, so in dollar volume.

So it's not that so much.

What's always difficult to ascertain is how many of those underwritings are small pieces as a minor co-manager versus lead management.

And we -- as I said, we have some good lead management assignments going forward in this quarter.

So I think that outlook there is good.

We haven't seen much change in terms of client assets.

We haven't seen -- mainly because the market is offsetting some new clients that have joined us, bringing assets aboard.

Margin balances haven't changed very much.

They have been very flat for a considerable period.

That is I think consonant with my comments about investor concern about the market, which results in impassive behavior.

So the passive behavior is, you know, I think impacting the results here as they tend to be inactive at these times.

When we look at the financial advisor accounts, they're up a bit over the last quarter and we really are about nearing the end of this cleansing that we've had in our independent contractor sales force.

So I really expect to see substantial net additions going forward from now as the pipeline of people that have visited the home office, that we have met with, has increased.

We've had more inquiries as a percentage and generally the people we're talking to have much higher productivity than they would have had a couple years ago.

So I'm quite bullish about the Private Client Group scenario.

And that really is a much different picture than you would get on the industry as a whole or certainly a lot of our peer group firms' numbers.

The number count in employee counts are starting to go up.

We tend to be up about 7% over last year now in total employees.

Some of that is in income-producing areas, so it isn't -- this isn't all support people.

But the fact is we have been doing some growing and you don't have to think very long about why that might be.

We have added people to Compliance.

We have added people to IT because we are going through a two or three-year period now where we're doing a material upgrade of our systems, introducing what has been developed at CSS over the last 10 years to our systems here, which enable us to have more modern technology, using C++ programming and using Windows-based technology throughout the system, although we already used that.

This is a much cleaner system where we had a lot of add-ons over the years and a lot of work around the SIS system that we brought in-house a year or two ago.

So, again, the people growth, I think we were up 25 people last quarter in IT, which is not a big percentage, but essentially given the experience and low turnover that we've had in IT, you might have thought all things being equal, that we could have done it with less people.

So-- but we can't with this new project under way.

So I suspect that you're going to see continued growth here now as opposed to the flat kinds of expenses that we have maintained over the last couple years.

And I also begin to see some payroll pressure in the marketplace.

So, you know, the 3% type of salary increases that you have seen over the last several years I think are coming to an end.

I think you're going to see higher average increases going forward.

The only thing that I would add to all this before I open up to questions is that our Canadian subsidiary helped generate some of these results for us this quarter.

Their growth in Canada was actually far above our growth.

Again, doesn't take long to ascertain what factor might lead to that.

There's been a lot of focus on the Natural Resource stocks.

That's their specialty in Canada.

We have very good research there.

We have good Institutional business.

We have a good Investment Banking business, and we're adding financial advisors at both the employee-based firm and the relatively new independent contractor subsidiary we have there.

And then the rest of our international operations had a very good quarter as many of the developed countries are having good times in their own stock markets.

I can't forecast that will continue.

Those things are so volatile, it's very hard to even talk about them.

But I think that pretty much covers the factors that I'd like to brief you on, and I'm glad now to open it up to questions.

I've got Jeff Julien and Jennifer Ackart from our Financial side of the business here who can answer the more difficult questions that you might like to ask.

Thank you.

[OPERATOR INSTRUCTIONS].

Your first question comes from Jonathan Casteleyn.

Yes, good afternoon.

Could you discuss the negative operating leverage in the quarter?

I mean your revenues were up about 1% year-over-year, non-comp expenses up about 14% year-over-year.

Do you think this is a short-term phenomenon, meaning do you think the cost base can come down or are you going to have to grow your way out of it on the revenue side?

I would generally say that we are going to have to grow our way out of it.

That, you know, we have built sort of a growth mentality here where we would like to see revenues average increases of 15 to 20% a year.

Because of this big investment we're making in IT right now over the next two or three years, I don't foresee that it is easy for us to maintain status quo.

Now, I will say that as we introduce these modules, we in fact have been able to and will continue to be able to reduce the counts in operations and other areas of the firm, where processing efficiency will be improved.

And since this is our entire system, you have to understand, this is about the only thing that we're not going to change is OMS.

Everything else is being substantially upgraded and we have completely architected the changes, not only that CSS has provided to us over the development period, but enhancements that we require for implementation.

And because of the volume of our business, which is far more than Southwest Securities, which is on CSS currently and Stephens, which is about to convert is so much higher that we have some architectural issues.

Another issue that I would remark, obviously, is not an individual specific issue, is SOX 404 and other related costs associated with increased scrutiny and more regulation and rule-making.

These costs are substantial.

I happen to have my midyear budget review yesterday with my IT department and the number that was cited by him was, you know, this year he expects that the cost of consultants and his internal costs for SOX 404 by themselves will be 1 million to 1.5 million.

That's not the whole firm.

That's just the IT department.

So it gives you some sort of reference point for what might be going on all across public America, public company America in these costs.

Now, I really do believe in this case that the Government is beginning to understand the cost of some of this and that they are taking a pretty hard look at some of the rules to see if they created more activity than they needed to.

And I think that's appropriate.

The second more important thing to us, which is on the revenue side that results from this, is that a lot of companies that might have elected to go public before might not elect to go public now.

We haven't seen much impact of that yet because the real cost of this have not really been felt by the small- and medium-size companies yet.

And that's happening over the next year or two.

And I think as those costs are well advertised to people who are thinking about going public, we really do run the risk that we have a chilling effect on the public offering side of our business, which has served, you know, the free enterprise system very well.

So I'm a little nervous about that.

And as I said, with the cost of compensation increasing by an inflation rate here, in addition to some of these additions in some of the personnel areas, I don't foresee that we're going to be able to have, you know, no growth in these expenses.

Now, when you look at the costs overall there on non-interest expenses, I mean they were only up 3% over last year's March period and down a bit from the preceding quarter.

So it's not as if they are running amuck.

This is just a trend that I can tell you has changed.

We were really able to hold these absolutely flat or reduce them over prior quarters.

So we have eliminated some middle management people.

We've gone through some restructuring and operations, which will reduce some costs, but the fact is this big program, which involves both Operations and IT, is not going to enable us to make major improvements.

Right.

So non-compensation here at about 82 million, you think basically you might get an offset with other and then, you know, obviously the subsequent increase in technology that you were talking about?

I mean, does that feel about right, 82 --?

Yes.

The non-compensation, if you looked at occupancy, it's sort of flat.

Right.

Communications is sort of flat.

Business development was up somewhat, and the "other" category, we were comparing against an abnormally low quarter that had some offset reversals.

So you can't -- that 42% thing there is really not a relevant number to compare against that growth.

Okay.

So I really don't think those areas are going to hurt us.

Okay.

It's going to be in the compensation area.

Okay.

Fair enough.

Can you discuss what's going on with your ticket charges?

I mean you've seen a very Draconian environment with the discounters, meaning Charles Schwab and Ameritrade.

Can you sort of discuss what you're seeing with your commission levels, tickets per trade with your client base?

Pricing power going up, down, sideways?

Yes, I'd say it's almost a non sequitur with respect to our business.

We already substantially discount for those that are active traders.

As I said, a lot of our revenues are moving to fee bases.

You -- our stated rates are pretty much constant now.

I really don't see much pressure from customers.

The switch-to-fees will lower the ratio of total revenues to assets under management as it has been lowering over a number of years, as transaction commissions declined.

And I think that's a healthy trend and in the past we've been able to more than offset that trend through additional sales people and higher productivity in our sales force.

And I really see an opportunity in our case to, from some of these changes we've made on the IT side, you know, and we now have a data warehouse that gives every piece of information that any retail salesman could ever use to help make decisions about; who to market to, how to market, what parts of its business are either neglected or very profitable.

And consequently, I think they are going make more effective uses of this kind of system support going forward and they are going to be able to increase their productivity and have more assets under management.

And in our employee-based firm we probably run a third below where our average commission equivalence ought to be, and so I think that there's substantial improvement that's going to go on here.

And when I look at the kind of people that we're recruiting into the sales force today, I mean a lot of them are 0.5 million plus gross producers and every time we hire somebody that's below our 357,000 average, they get a memo back from me saying why are you hiring this person.

So you know, I'm keeping intense light on insuring that both the quality and productivity of any recruits we have are first class.

So I really think that that's making a big difference.

And our retail management is very sensitive to this issue in both of our sales forces.

Just lastly, I'll get back in the queue, the tax rate quarter-to-quarter was up about 100 basis points is there something embedded in there?

Is that a new stepped up level?

Was there a reserve for an SEC charge potentially with the issue that we discussed in the Wall Street Journal a couple of weeks ago?

Can you just discuss the tax rate?

Yes, I'll let Jeff respond to the tax rate question.

Thanks.

The only odd item, Jonathan, is that we have just been undergoing an IRS audit and one of the things that they are questioning is the potential disallowance of some of our interest expense as some of our revenues, as you know are generated from municipal bond interest income, that their calculation would yield at a different figure than we had done internally.

So we had -- we provided this quarter for any exposure we might have for the potential disallowance of a little interest.

I would expect the tax rate -- we expect the tax rate to hover in the 39, 38.5 to 39% range for the rest of the year to reflect that and then we should be in -- have fully provided for that particular item.

By the way, I mean this isn't a major factor for us.

We don't have very many general borrowings.

So it's not -- we're not a highly leveraged organization.

Right.

Okay.

Thank you very much.

Your next question comes from Lauren Smith.

Hi, Tom, Jeff.

How are you?

Hi, Lauren.

Good.

Couple questions.

First, can you update us on Capital Management and whether your thoughts there have changed of late?

I know we've talked about it, that you are overcapitalized and perhaps you were revisiting some of the things you were thinking about on that front.

Yes, it's actually number two on my objective list that I supplied to my outside directors.

And we're always actively looking at acquisition prospects now and we actually have some people that are spending the vast majority of their time out proactively contacting people.

So I think we'll make some progress.

Again, as you well know, we're a conservative buyers.

Yes.

We kick every tire in sight and we don't like to pay very high prices.

And that kind of behavior was not favorably impacted by the timing of the acquisitions of Roney and our Canadian subsidiary, which happened to trigger, I think, the down market in 2000.

So we didn't see the kinds of returns that we expected to come out of those new acquisitions.

Now, I would say that that's not true today.

Today's earnings rates, both of them, look like intelligent acquisitions.

So we weren't totally turned off by this experience either and we do understand the cyclicality of our business.

But we also are looking at -- there's certain -- a few niche areas in the asset management area where we would like to add money managers and we're looking at that.

And our trade-offs there are always, is it better to buy it than it is to do a liftout or incubate someone that we know is a pretty good money manager and built from scratch.

And since we have this excess capital, we're probably more inclined than usual to go out and buy someone, but it takes a very good track record to really encourage us to do this.

So we're going to be fairly cautious in terms of making sure who we do business with on this front.

And we continue to look at broker dealers and other affiliated-type operations.

We're not looking at things that are far afield from our normal plan.

And we don't have anything that is in any serious level of discussion, but we have a number that we're looking at internally and in some cases, have made a couple phone calls.

So hopefully we'll be able to do something here in the not too distant future.

And on the asset management side, I mean presumably you would want to fill out on the Institutional side and could -- I mean could it be meaningful in size or should we really be thinking about really kind of bite-size type acquisitions?

Well, we're not limiting ourselves on the size -- on the downside because the quality of the manager or management team and the track record are the most important ingredients to determining the price.

On the other hand, if we saw something that had 10 or $12 billion under management that we thought fit those criteria, we would be comfortable with spending the amount of money that would be required to do that.

So it's -- we have a pretty broad range of things we would look at now on that side of the business.

You have the ability, so that's, that's a good problem to have, I guess.

But also, just I guess sticking with the theme of potential acquisitions, I just -- you know, it's not a business that we talk a lot about.

Raymond James Bank is not recognizing -- it's not a huge contributor to pre-tax income, maybe 5 or 6% I think, but certainly is a nice margin business, high 20s, if not 30s.

I just wonder, is that an area that you ever think about or consider building some scale?

Yes, as a matter of fact, I mean we tend to look at it on an ROE basis and typically the banks, the very well managed ones in the business, might get up as high as 15.

Lot of them are in the 12, 13% range.

We're not there yet.

And part of the reason was all that restructuring on the asset side.

We now have adequate loans on the books to leverage these returns as soon as some of our hedges disappear.

So I think that we're going see a higher rate of return on the bank.

And the second factor that we've looked at there is a possibility of converting other deposits at the firm in our money market funds; for example, as Merrill has done and others, to bank deposits, which would afford the opportunity to have the same kind of yield with better insurance and would enable us to leverage the growth and employ a lot more capital.

For example, if you move a billion dollars and you're trying to maintain a 7% capital ratio, you immediately require a lot more capital there going in.

And I think we could -- we're close to the point now where we have got a team assembled and a methodology established whereby we could leverage this growth rate now and deploy a couple billion dollars of deposits intelligently.

And add, you know, $140 million or 150 million in capital and we have the power to add more than that.

So -- but just staging at some kind of reasonable pace of deployment, I think would be a good use of capital.

The fortunate thing about this -- just like having the capital available to buy things -- is that as we deploy this capital with the kinds of returns we can get from scaling up, the problem is going to be compounded because we're going to be generating a lot more excess cash.

Right.

Which is a nice problem to have, but that's what we foresee here when I look at three to five years.

So I'm sort of encouraged that we are now at the inflection point of really taking this bank to a different level.

And, again, while it wasn't our original goal, it is now our goal to do this to afford our Equity Capital Markets area more competitive foothold in the business through the combination of debt and equity offerings to clients.

So I'm -- we're going to do some of this.

I mean this is going to be -- over the next year, you're going to begin to see some activity on our part to grow that bank faster.

Great.

And then just one last question.

It's good to hear that the Canadian subsidiary is really getting traction and contributing more to the overall pie and I'm just wondering how the U.K. business is doing and do we see good traction there perhaps?

We have a new manager in the U.K. subsidiary who was getting his grounding in the business now.

I would tell you he hadn't been with us that long yet.

The operation, because of the difficulty in the U.K. of moving assets for FA's as opposed to our ACAT system here in the United States, we kind of lost momentum on the recruiting side just because we weren't -- we were having difficulty processing the transfers.

And that is not going to get easier.

It's a manual, intensive, labor-intensive job and there as opposed to what we have here and we're pushing the regulators over there to deal with this issue.

But you see with the way they have run this business over there in the past where there really hasn't been much of a middle-class market at all served by the real investment firms there, you've had some where you have annuity salesmen and fund salesmen do some of this, but you really haven't had firms that do what we do over there.

So if we -- I think if we can address that particular issue and when we ramp back up, which we're in the process of doing now, we're seeing productivity enhancement there as these assets come over on the people we've already recruited.

But the rate of recruiting is still not meeting our budgets and we're not very happy about it and I will have a different response to you if a year from now we're not doing a lot better.

Okay.

Thanks so much.

[OPERATOR INSTRUCTIONS].

At this time, there are no further questions.

Mr. James, are there any closing remarks?

No, other than to thank everyone for participating.

Let's all root for a little better market environment in the coming half, and I don't foresee we're going to see anything very exciting, but on the other hand, we don't need that.

All we need is flat market to perform better than we did during the last quarter.

And as I said, we've got some very favorable things going on inside the firm now that I think are going to bear fruits in the future.

So thank you for participating and we look forward to meeting with you again next quarter.

This concludes today's Raymond James conference call.

You may now disconnect.