雷蒙詹姆斯金融 (RJF) 2005 Q4 法說會逐字稿

Welcome to our year-end analyst conference call. Let me begin by talking about the quarter. I might say that our fiscal year went out like both a lamb and a lion. Unfortunately the lion part dealt with four hurricanes that threatened our headquarters operation here, and in fact, directly impacted large 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, and this really made our business continuity plan a real test, because Ivan, the last of the four storms that threatened us, not the last, the next to last, of the four 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 ever been recorded for hurricane. That was a little frightening for us, and certainly led us to the conclusion that the county, if that happened, would be evacuated and we would have difficulty, since that hurricane was arriving during the week, as contrasted to the two 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 even that we were unable to access our headquarters office.

As I've told you before, I believe, in prior meetings, we do have a totally reflected IT system up there and we do have what I'll 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, in fact, 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 Frances and Jean 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 haven't any problems, and needless to say, we have total backup power here anyway, so the power would not have been an issue, and neither of these was threatening with respect to tidal flood or inability to get to the office, except that, you know, these questions often come down to the last few hours, and what we learned here is, you know, it is extremely difficult to manage in the face of these storms that are arriving, which has led us to a conclusion that might be interesting to you, which is that we're 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 large sub-universe of our clients than they currently serve, so that we really wouldn't have a lot of extra, out-of-pocket cost 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, in fact, the decline in the major indices in the fourth quarter, led to less retail activity than we would have otherwise experienced, and certainly was a lower rate of increase that we had attained 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 yield $0.41 versus $0.45.

Now the expense line differential is largely related to this ubiquitous but always difficult to interpret ``other'' that appears in financial statements, and in this case, relates to some unusual charges. We've 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 during this quarter because we took an impairment charge 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 in commercial jet aircraft is depressed, and actually while we used very cash flow residual values, we-- we actually find a market time now when the amount of loan is more than the value of the plane, and consequently when we looked at valuation issues, we decided to take a $4 million writedown on our asset collateral. Obviously, the plane is still good shape, it's an efficient airplane, so you know, some of these estimates that we're 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 is we added more money than normal to some of our legal reserves. Consequently, if you just look at that $8 million increase, you know, most of it is attributable 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 slowdown that had occurred in retail, and actually in the- as a result of hurricane, you know, we had a lot of people whose office environments were affected in terms of, you know, having power outages and things like that, and we have about 15% of our offices, or our volume, related to Florida, one way or another, and that 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've had some more increase in business development, largely as a result of some of the activities in our institutional efforts, et cetera. 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 yield $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, you know, I'd 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 [Aiwad] assets during the overall period, mainly from the institutional sides 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're up from 11.2, so you can see there's been a dramatic increase in the value of assets. And in all cases, net sales were positive, in 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 looked at the combined number of financial advisers 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 the growth in the independent contractor force has been muted in terms of its impact on the quantitative counts by the fact that we have been essentially canceling people with- 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, you know, I'm kind of thinking this might end in the next six months, I know for a fact that they're 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 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're actually increasing productivity at the same time we're doing this, on a gross basis, for the whole firm, and I 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 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 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 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 our 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 know, 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'm- I think the outlook is reasonably sanguine.

That 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 then there's other assorted assets that we don't have on our direct- some direct ownership, and some mutual funds, that we're not networked with, that would raise that somewhat more, but we've had good growth in our client accounts, also, during the period. And with that, Jeff, I don't know if there's anything you'd like to add?

If you want to add anything about margins and ROE?

Yeah, 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's considerable friction imposed by the level of legal activity that I've reported before and the amount of reserves that are established during this period. Consequently, there's 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 re-establishing the high teens to 20% rates of return on equities, and if we could just get four quarters of reasonable market. And you know, maybe that's impossible in the current economic environment we're in.

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

Your first question comes from Jonathan Castelyn.

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 grade, 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, so- and in fact, when you look at this number, just to get a feeling, it's pretty much across the board, within our SBUs. We do have a lot of read activity, as you pointed out, with Biomed, but we also have a number of other transactions in which we've participated, although we turned down a lot of participations, just because of the current pricing in the marketplace. We're very cautious with respect to selling things at substantial premiums to NAV, so those kinds of transactions, the MLPs, we have largely cut back on, because of pricing considerations. But that dollar volume that we- participated in there has more than doubled since last year, so you can see that the growth is large. Actually, technology and health care 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, not much public finance activity. There's more in the hopper there in terms of activity and we've been doing some hiring in the public finance area, more outside the state than in the state. So in our strategic state that we have, we have expanded that effort over the last six months, and we're expanding our housing effort as a functional area, 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, you know, the status quo, and I mean, is that pricing environment still prevalent in some of those fixed products you talked about, the MLPs, and 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. The-- so we're going to be very cautious. The major issue is always price on those issues today. It is not-- you know, we're talking about good managements with proven records, and you know, we're just cautious, and I think the institutional buyers are cautious. Consequently, if you read your research reports, you would see that we often have market-perform type three ratings, which we define as available funds sources. So perhaps more negative than the ``hold,'' and consequently, you won't find our capital markets committee prone to approving, except for the very occasional exception, offerings in those research categories.

Right. So as far as the bankable backlog, you know, the bankable banking backlog, can you give me an adjective? I mean, do you-- are you going to need new details to come into the pipeline, you know, from now, or are there deals there that, you know, are of quality that you can push out?

I would say it's still very good.

Right, still very good. OK. On the ``other'' expense line, the legal expenses running through the P&L in the quarter, are these-- are you sort of shoring up old issues here, or are these sort of new reserves? Old issues being the [Arulia] case or the Premiere 72? Or are these issues coming on line that you're taking reserves for?

Both.

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's also, whenever you have a large backlog, it seems to be 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 Arulia case, as we stated in our press release, was largely a surprise to us in terms of the level of complaint, and so we added to reserves. But I don't--

--that was during this quarter, correct?

--but I don't think the case facts have changed at all.

Right.

So- and we just, to be frank, I mean, I'd like to tell you that in spite of the fact I have a legal background and I've got a lot of attorneys on our staff here, that we have some degree of expertise in being able to estimate cases like the [Lipan] case--

--right.

--but we don't, and you see such variability in terms of the responses of arbitration panels that you know, we do our best, based on our experience, in settling some of the cases, et cetera, and trying to determine whether they were client-related or non-client related, and all 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 litany of things that were, you know, still pending?

I mean, I feel adequately reserved for, but as I said, in my own press release, you know, the variability in these results could mean if we could get a negative decision on, say, one of the Lipan cases, that would impact our logic on the rest, and- or vice versa.

Right.

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

No, that's fine.

--I don't know how to do it.

That's fine. On the aircraft charges, I mean, usually in impairment accounting, there's an event, either a liquidity event or some sort of event, that you have to then compare the undiscounted cash flow to the fair value. Can you sort of identify the event, or events--

Yeah, the event is that Delta's condition has continued to worsen.

Right.

They have actually gone into the marketplace and asked holders for reductions in the income streams, the future income streams, and so we used 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, it's just--

You know, we still have an asset on the books, so could there be another event? Yeah, they could take bankruptcy and give us back the plane, and that would be a new event that would require additional writedown, but you're not talking about writedown that is much different from the one we've already taken, so you know, it's not a major- we only have two 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, you know, we've run out of stretchers.

Right. Actually, Morgan Stanley provides a metric where they compare the carrying value to the fair value of the aircraft. Is that something that you're aware of? Do you know the fair value of the two assets?

I have an idea of what the fair value is.

And sort of, percentage-wise, against the carrying value?

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

OK.

Assuming that our estimate is correct, which, you know, I honestly don't know. We still have an attractive airplane, and you know, we actually know a lot of people in this business, so we've got information. We don't have the precision and knowledge that Morgan Stanley does, because they have a much large problem than we do, and they're able to gain more information. What I find out here is when you're a small holder, the other lessors tend not to share their information with you, so the big guys, you know, are negotiating at different levels, they have a lot more ideas about what they're 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-- I'm not sure that they would violate their lease, on that basis.

Right. So is there an opportunity to renegotiate the financing? I mean, you talked about the loan being greater than the asset. Is that something you're milling over, or--

It's public debt.

Public debt?

Yeah.

OK. Fair enough. And 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 bit to you guys about the senior lending situation. I think you have three; currently you're trying to move to six. I'm just wondering if--

I actually like to move to ten. You're less ambitious than I am.

That's your fault, not mine.

The- we are in the marketplace, trying to hire. We've had some turnover there, where we were unhappy with productivity or other issues with respect to a couple of the lenders. The-- I assume that over the next six 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 a bigger lending team. So, you know, we need to get this done, and actually we've just done the review in this area and we're attempting to address this and increase the size of the staff.

And then what sort of asset opportunities are you looking to pursue? I mean, is it real estate-based or is it, you know, industrials, or--

Well, you know, traditionally, real estate has been our- the largest part of our portfolio, because we're an S&L by definition, and we also have great familiarity and comfort with various forms of real estate, so we're- 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're probably less aggressive than we would otherwise be, trying to meet our rate of return objectives without compromising quality. But I really think there's tremendous opportunity for us to grow traditional corporate lending. Consequently, you know, we- 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 know, you posted $7.2 million on five last quarter, just wondering, you know, sort of what was the driver there?

Fixed income did better.

Fixed income?

Yeah.

OK.

Equity trading in our business is not a big deal.

OK. And then I'm just wondering, is there any compensation leverage? You talked about possible 200 more pruning on the independent adviser side, independent contractor side. I mean, to my understanding, I think you pay out more to them, so is there any sort of relief on the compensation expense line, should that--

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're saying, because the tradeoff is that you're really, while you decrease that overall average payout, the contribution level of this business is still very positive, because we don't have the location costs associated with the Raymond James & Associates full-time employees. So margins, or contribution to the private client group, are better, overall, in the independent contractor network.

Great. Understood. Thanks very much.

Yep.

Your next question comes from David Trone.

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

Probably not. I-- I just don't-- I 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 half a million dollars during the month of September, and that doesn't have anything to do with lost revenues. 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 commissioned brokerage.

OK, my other questions were answered, so thank you.

OK.

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.