雷蒙詹姆斯金融 (RJF) 2006 Q1 法說會逐字稿

Welcome to, each of you, to our first-quarter conference call.

I think before I start talking about this last quarter, I might devote some time to last year's comparable quarter just so that you have a grounding in terms of benchmarking this quarter's results.

We had a 14-week quarter last year at this time, which is an issue with which we have dealt going forward so that we're going to have 13-week quarters consistently.

But for the moment, that did give us quite a fewer number of days of productivity.

So keep that in mind when we discuss the percentage changes in the quarter.

The other thing I would tell you is, there was a very unusual level of activity last year all the way through the holiday season on the investment banking calendar.

And there were large numbers of underwritings right up to Christmas week, and that is very unusual.

We didn't have that same level of last-minute activity.

I think people left on their vacations this year a little early.

So it was a much more normal type quarter.

So with that background, the quarter as you know, we managed to show a 10% increase in gross revenues to 575 million and profits increased to 45.1 million, which is a 15% increase from the prior year.

So there was good growth in the quarterly comparisons.

To be frank, when all of us began to realize what these numbers looked like, we were a little surprised because of the 14-week/13-week comparison and because individual investor activity and even institutional investor activity for us was not particularly exciting during the quarter, especially in October and November.

So we were not expecting quite that favorable a comparison.

And yet, we managed to have a pretty good increase.

And when you looked at the individual activity and commissions, you will see that we were up 3% in spite of the fewer days.

The numbers from our asset advisory fees were up about 15%.

So we had -- and investment banking fees were even out 4% during the period.

So if you look at the major arms, they were up pretty dramatically.

And the revenue line on a gross level obviously at the bank was up considerably, not just the -- not just for the same reasons, but because we have grown the assets in the bank dramatically.

And while that is not totally reflected in profitability, which I will discuss in a moment. we did have good growth on the revenue line there.

So I think you get a feel for the fact that it actually turned out to be a very good quarter across the board with all sectors participating.

And I would even go so far as to make special mention of Canadian performance during the quarter where our Canadian sub did an excellent job.

It increased total revenues of 42% to 63.9 million Canadian and increased pretax profits by 190% to 8.9 million pretax.

So just to give you an idea, actually, I would describe the environment in Canada as a lot more favorable than it was in the United States as there was a large amount of investment banking activity.

While the vast majority of these profits come from the ECM business in Canada, they now have pretty well established a profitable base in the private client group.

This is due to similar upgrading of the salesforce that we have experienced in the United States as well as a pretty active results during the quarter on recruiting.

So both the employee-based broker-dealer and the independent contractor broker-dealer activities there are adding to our base of financial advisers.

So I wanted to make special mention since they had had a record quarter since our acquisition date.

And I think they deserve special recognition and I expect continuing improvement, albeit perhaps not at this level in the future because of increases in personnel and the increased reputation in the investment banking front.

When you come to the bank, I wanted to comment just generally -- as we ramp up the bank, which we intended to do over the coming quarters, we will not to see the profits on a parallel basis.

They will be somewhat lagged.

And the reason for that is, [when you] add assets on the asset side of the balance sheet, not the deposits themselves, but the assets on the investment side, you create your reserves for losses.

And typically speaking, we have an average of about 1% in those kinds of reserves.

And when these are loans of a commercial variety, corporate, et cetera, you will find reserves that are larger.

So the impact will be that we will have profits that don't increase at the same rate as revenues, but were substantially building the future earnings power of the bank.

And that is one of our prime strategic steps in terms of growth in the coming couple of years.

So you're going to see that occur as we go forward.

And you will see that directly.

They way you will be able to measure that is in terms of assets at the bank, which I believe are about 1.6 billion now, up from about 1 billion at the end of the year.

So we are already managing this increase as you can see, and yet profits were about flat on a pretax basis in the segment.

So your conclusion might be -- we didn't do too well, when in fact, by our measure, pretty reserves dealing with only actual expenses which are very low in terms of our bad debts.

We added a substantial profit during the quarter.

On the recruiting front in the United States, again, the numbers are still somewhat misleading.

We had a small increase of 84 financial advisers this quarter to its comparable quarter a year ago, which actually is a slight decline from the immediately preceding quarter which always happens in the December quarter as many of our independent contractor managers elect not to renew weak producers in their offices for the coming year.

That is when you reregister your financial advisors.

The same thing happened last year and in the preceding year.

But we did have very good recruiting numbers for the whole year last year or the preceding 12 months, if you include this quarter and its comparable quarter.

And in terms of gross production, we are adding the kind of historical gross commissions that would keep our 8 to 10% growth intact, whereas the same-store sales increases as you might guess from my prior comments have not been really up like that.

They've been in that 3 to 5 or 6% range.

So we are not seeing that growth yet and I think we need a little better market environment to accomplish that.

But when you see that kind of addition, I would say that amongst our peer group members, that is much better.

I happened to be talking to another CEO of a public broker-dealer that shall go nameless yesterday, and his general comment was that he was remaining about flat in terms of growth on the recruiting front.

And actually complained about the environment that exists from a competitive standpoint because front money levels are back to near all-time highs and that is not a comforting situation for anybody because it really renders the first five years of affiliation as not very profitable incrementally.

So the industry condition is not very good.

Our result is very good and actually our front money costs are considerably less than the average.

So we are happy with the multiple distribution channel methodology that we're employing and the results we're getting from it.

I would say we are benefiting from -- chaos might be too strong a word -- but certainly the opportunities today to recruit from firms that have been recently changed in terms of their affiliations, or from firms that are owned by larger institutions where retention agreements are coming off, et cetera, and we have never seen activities as high as this in our employee-based firm, which indicates that a lot of the firms that are similar in nature to us are losing a lot of brokers.

So that remains strong in what we call our home office visits when these [FA's] come visit us, which might precede by a long period of time the actual affiliation with us.

That activity is still remaining at a pretty high level.

If you look across sectors, and I can mention a couple of other factors here related to this, you would see that our comparisons on the profitability level is -- the private client group had more profits in the quarter and the rationale for that is largely related to reduction in legal costs.

This is a secular trend that I think is in place now as a result of two years of up market.

So I suspect that the industry will have less of a drag in terms of cost in this area.

Everyone is happy when they make money, which is -- obviously the reverse is true in the other scenario.

Equity capital markets -- while we had a pretty active calendar here in the United States, it wasn't as active as last year at this time.

We've ramped up some costs and added a new SBU.

So actually pretax profits for that SBU were down somewhat and they were down more than that domestically.

Canada was up more dramatically and institutional commissions were down, as I mentioned earlier, in terms of commission activity.

So I really don't see anything major there, other than the continuing pressure on the number of cents per share.

The regulators continue to now include payments for commissions in terms of their communications on soft dollars.

Even though they've taken no action against that, it still puts -- it shows that they're putting pressure on this and that they are expecting traditional money managers to pay for these services more out of the management company.

You have also seen this trend to the agreements like Lehman Brothers with Fidelity.

They are making more agreements like that whereby they are doing the transactions for a very low rate as individual commission, you know, $0.015 type numbers, while they are taking hard dollar payment for research.

And I suspect we're going to see that trend continuing.

And I think that may well diminish the number of people that get rewarded for research.

However, I think that our firm has established an important enough position in small and midsize research such that we will continue good institutional payments in whatever format.

So I think that there will be pressure on revenues, but I expect still to be able to increase the share more than enough to make up for that over time.

The pretax segment in asset management showed an increase of 31%, which is a dramatic increase for the quarter.

We continue to add assets net and not much of it was achieved over the last 12 months as a result of appreciation since the markets didn't do much and a couple of our larger managers actually did not match their benchmarks.

So some of the others surpassed them, but I would not have said we got a favorable factor from that as we have in the past.

But we continue to attract a lot of that new institutional and retail dollars on that front.

Again, I said RJBank was basically flat.

Emerging markets, a new category that we broke out of here for further information, shows a dramatic increase in pretax profits.

That results from excellent market direction and activity in the Turkish market, as well as continuing good activity in Latin America and an increase in revenues in India.

Stock loan, stock borrow -- we increased our profits considerably during the quarter, and then the other we were off.

So in any case, you can see that the major drivers of this in total were up.

And I suspect we have a good opportunity, unless the market changes directions considerably. to continue that going forward.

So in terms of market outlook, I guess I have indicated to everyone that I'm still fairly sanguine about this.

I think interest rate increases are nearing their end.

In my interview yesterday with Larry Cudlow, he was indicating he thought there might be a higher than expected probability that the rates might go a lot higher than everybody thinks.

I don't think that is really true.

I would be surprised.

I see some weakening in terms of corporate earnings growth and I think GDP will be probably slowing down over the year.

So I don't suspect we're going to see a dramatic increase unless something unforeseen occurs.

So that means basically that the outlook for us is good.

It's still not great because there are a lot of stocks that are fully priced in the face of any slowdown in corporate earnings at all.

So I don't expect to have the dramatic move on the upside.

I still expect that for our fiscal year, that we will have an improvement in markets by year end in the single digit kinds of numbers.

So with that, Jeff, unless you have anything you want to add.

Talk about these stats, is all.

I guess -- Jeff points out to meet that I didn't reflect on ROE, which we were at 14.1 for the quarter.

That's still below our targeted rates.

One of the reasons for our focus on the bank is to deploy more underutilized capital to have higher earnings at the same time we're looking for acquisition candidates in asset management in the broker-dealer industry.

So book value per share is now $17.12.

So we continue to generate net free cash flow to increase the dividend as we did.

While we increased substantially, we still thought it was a relatively small percentage of free cash flow and that we would generate enough dollars to not only fund any internal growth that we have on the plate, but opportunity to make acquisitions.

It's just hard to find ones that are attractive, to be frank.

With that, I'd like to open it up to questions.

Jonathan Casteleyn.

Good afternoon, congratulations on another nice result.

Could you reconcile your October and November monthly reports with your quarterly report on the commission and fee line?

It looks like through November, you reported 217 million in commission and fees, and I think the quarterly result was 366.

Obviously I think there's some international revenues that run through there that have not picked up on the monthly reports, but the new (MULTIPLE SPEAKERS).

You're homing in on it, but it was a lot stronger month in December.

You were on the money.

I think that's the five-week month in the quarter.

So that makes a difference.

So if you look at your -- while we had 14 weeks in the prior year's comparable one, when you are comparing October to November to December, don't forget to add in that 20% factor, 25% factor.

We have holidays in there, so I cannot quite work that out.

But say 25% increase just for that.

So you're quite correct in pointing out we had a much more active December.

And that is the reason why I was surprised, part of the reason I was surprised, by the results.

Right.

But even at 20% per se, that still would out you like 130 million -- you did like 150 million.

I think last quarter, the differential between international revenues and what you actually reported was like $10 million.

Can you give us some detail as to exactly what the international revenues were?

Month by month?

For the quarter.

Basically, the difference between your monthly numbers and what you reported in Q4, it was basically $10 million.

And I'm just trying to strip out exactly what is domestic and core activity versus your international revenues.

It was 13 million in the -- almost 14 million in the December quarter.

That's helpful, thank you.

Okay looking out into '06, I know you touched on it.

But if I look back at fiscal 2005 versus fiscal 2004, your net interest revenue's up 47%, investment banking up 40%, commissions up 10%.

As we move into this new fiscal year, you touched on it briefly.

But how are you going to grow on those higher levels of revenues?

Aside from -- obviously your banking initiative sounds very strong and you're very active there.

Where do you see those three lines going?

I see the private client group line continuing to grow at a fairly rapid pace because of the active recruiting that occurred in the prior 12 months.

And we will see all of that production seasoning and coming-of-age, and it's still underway.

So I suspect that factor alone can get us 10% growth this year.

And if we have any productivity enhancement -- remember, we still train in the employee firm.

So I suspect we will have some enhancement on productivity also.

So -- and then I did mention the bad debt kinds of costs that go on associated with the 2000 through 2002 period and other similar problems that arise with the private client group.

And I think we're going to have a lot less activity than we did at the same time last year.

So the environment alone, the recruiting environment, should lend to 10% growth -- is that under a flat market forecast?

I think the market forecast, to be frank, is still an irrelevant figure.

I see.

And then you spoke about the banking initiative, up $600 million from recent balance sheet date.

If we look at your 2005 fiscal year net interest revenues, I think the bank accounted for about 23 million, or 18%.

Is it too simple to just say, you increase bank assets by 60%, can you add an incremental 60% to that net interest revenue figure, obviously accounting for some of the charge-off reserves you're taking?

Is that too simpleminded or?

I don't think that it's too simpleminded to do that on your interest income assumption, unless rates continue to rise, in which case it will go up by more than that.

But I think on the bottom line, the impact of that bad debt reserve addition was substantial enough in the quarter to basically offset that increase this last quarter.

And I don't have any reason to expect that you would have substantial deviations from that in the succeeding quarters.

So I don't expect the bank to add very materially to profits this year.

But, it all depends on how fast we grow it.

And you know, part of that's outside of my control.

We don't quite have all of the pieces together, either on the deposit side or on the asset deployment side.

So we've done a good job of that.

We have a large team in place to try to keep these things in parallel.

But it's an imperfect world so I can't really forecast that with a great deal of accuracy.

What I can tell you is, all those additions in the succeeding year will generate a substantial increase in profits on the bottom line.

So that's why I say that we have to deal with this lag a little bit, and that will be fine.

And the other sources of interest that have gone on just in that net interest earnings, which obviously is another driver, which I expect to continue -- it isn't coming very much on the profit side from the bank.

It's coming more from the other growth factors in terms of rates compared to last year, in terms of balances compared to last year.

And I foresee that those comparisons of still going to be -- still remain very good for the rest of the year.

So that's why the private client group, which benefits from much of this, will show good numbers.

And the total bank asset opportunity is between 3 and 4 billion -- is that correct?

I think you stand at 1.6 billion with the $600 million increase.

It has been a $300 million increase since last fiscal year end.

And the total opportunity is?

Well, the opportunity is pretty big.

The ability -- timely execution is the issue associated with this.

I think our own objectives were to add 1 billion this year, something like that.

Probably another billion this fiscal year, and it could be another couple billion over the next couple of years.

So the four may not be far off.

Somewhere between 3.5 and 4 billion.

We're going to stage it, we're not going to try to swallow it all at once.

Fair enough.

Lastly, overcapitalization, I believe you had $10 in net cash per share as of last balance sheet date.

Can you talk about the portion of sort of insulation for just maintenance of capital versus -- a portion of that for growth, (MULTIPLE SPEAKERS) $10 per share net cash?

Apart from borrowing any money, we probably can invest tomorrow 3 to $400 million and we can borrow money if we -- obviously, if we're buying an income-producing asset, we can anyway.

We have very good borrowing capacity.

So we have plenty of cash to make acquisitions, it's just a question of finding the ones that make sense.

And we do intend to deploy -- you don't make that bank growth without a fairly substantial contribution to the bank.

And then -- so you're converting some of the free capital to capital deployed in the bank, which again, ramps up the amount of free cash flow that you turn around and have to reinvest again.

So we describe this as the little mouse running inside of that circle in your child's toy.

The faster we get money deployed intelligently and generate more profit, the faster you have to run to keep deploying it.

So that's a good problem to have, but that's one that we have and that's still number one on my objective list for the coming year.

And that's why we're growing this bank footing rate the way we are.

We are well aware that we need to deploy this capital if we're going to get our returns into the upper parts of the teens here on an ROE basis.

And we think it's going to take us a little while to do that, so it's difficult for us to forecast the exact timing.

But we think we'll get it done.

We've put our mind to this and we have a lot of resources dedicated to getting it accomplished.

I appreciate that.

And then lastly, the new SBU -- can you discuss the industry sector there?

I was afraid you were going to ask that when I said it.

It's a -- business services SBU.

We are already covering a few of the companies in the area, but we wanted to have a larger segment and we were covering them under a different SBU as sort of a part subunit.

And we decided that there was an opportunity here in terms of making money for our clients in uncovering new ideas, and at the same time for the firm to establish a presence in all of its business units in that area.

So that's what we're doing.

Thank you, I appreciate the time.

Kyle McLean.

Can you just how a little bit about why you began breaking out the segments?

I believe it was just the other segment that you had broken out and you started doing it in the K?

You got it, but I'm going to leave that one to Jeff.

I asked him the same question, so I'll let him answer it frankly.

And I guess, it's not as direct as just why did you do it, have you done it because you think you're going to grow these or to highlight the (MULTIPLE SPEAKERS) businesses?

It's really only because the accounting guidance dictated that we show segments as we manage the businesses without tremendous regard to materiality.

I think we will not spend much time talking about them in conference call, et cetera, just because of their relative materiality when contrasted to the other segments.

So it's really more of an accounting-driven, accounting/guidance-driven than it is any phenomenally good insights for analysts or anybody else.

We really don't have an intention, for example, to concentrate lots of assets in the emerging markets.

The emerging market involvement that we have comes from special circumstances in each case.

And while we think because of our geographic location Latin America presents a long-term opportunity, one has to remember that we have a political shift to the left going on again in Latin America for the 14th time.

And as a consequence, you have to be extremely careful about how these assets get deployed, and we are very careful about that.

On the other hand, Turkey is growing apace and we have become the major market player there and the place where most foreign institutions direct our investments these days.

So we think there's good opportunity in Turkey, but we don't expect these markets to keep going like they've thing going in the last 1.5 years.

This has been absolutely incredible.

In the longer-term, I would tell you, it is possible that we would do more in the Far East specifically.

But again, it's very dependent on both our existing partners, whether we stay in markets or add markets, and prospective partners that we identify in the market areas in which we'd like to enter.

We stayed out of China, Hong Kong, Singapore, et al. -- Thailand.

We stayed out of this market mainly because of distance and because of interest on the part of existing people within our organization.

We don't want to commit large amounts of money.

We're more interested in seed funding operations and using our contacts institutional relationships to build businesses in these areas.

And there is a limited amount of management time that we're dedicating to that.

So I don't suspect that you're going to see any major impact in that sector at all.

So I think just Jeff's response was fair in terms of, don't necessarily think that because we have a stock loan broken out, we're going to do a lot more in stock loan.

We're kind of limited in what we can do based on our box and based on our service levels to third parties.

So it's not something we can just go say we're going to ramp-up up five times next year.

It has taken us years to get to this level and I don't suspect that we're going to grow that dramatically either.

So I think you shouldn't draw any hard conclusions on these segments.

I asked the same question, to be frank, only because we're not making some special effort in those areas.

I would rather dedicate our time to the domestic markets, the Canadian market, the UK developed Europe; areas where we are currently operating where we think there's great potential.

I just wanted to double-check.

Can you talk a little bit more about expenses, not -- particularly non-comp expenses, and as well as the tax was a little bit in the quarter?

Just sequentially, they were all a little more further down than we would've expected.

Was there anything special in those items?

Sequentially, they were down.

But look, on the personnel level, what you didn't ask about, the fact is we're having some growth on the employee front.

A lot of that's in FA's, but we also have some growth here at the firm over the last 12 months for the first time since the downturn.

And I think that's natural, but I'm making sure that my department heads are paying attention to that.

We're sort of getting to the point where our comparisons on the last [tower] we added are now normal, so we're not comparing against periods when we don't have the occupancy costs here.

We are opening branches in our employee system that is adding cost, so I suspect those things will go up over time.

And that brings with it all of the communication cost, information processing, probably one of the most rapidly growing parts of the business.

We have 750 people-plus in IT and we're making a real effort on the accountability front to get our arms around this and make sure that our plans are controlled in terms of what we're spending.

We continue to invest a lot of money in providing support to our financial advisors and to our compliance and supervisory divisions here in the home office to make sure that the right things are happening with respect to our clients' accounts.

And to be frank, the state of technology is changing so fast that it's very difficult for us.

I don't know what's going to happen to our Blackberry-based communications system here in the near feature.

I also know that during the last year, we invested a lot of money in growing our backup facilities in Detroit.

We've moved to a new building, we've brought in more employees in Detroit.

Hopefully over time, there will be a one-for-one trade-off with respect to what we needed in total in the firm anyway.

But I can tell you, in the period if build-up, that's not true., It takes a while to train people, to get them effective, and these people are not meant solely as redundant personnel.

Don't get that impression.

These are hot sites and we're trying to have enough operating people there to operate the whole business for some short period of time without flying jet planes to Detroit.

The fact is, there are incremental costs.

Just the IT equipment and reflecting all of the data and moving the tapes and having the communication lines, you're talking about substantial cost to have this backup.

But I will remind you, the last two years of activity and hurricanes in Florida does not make one feel comfortable about the lack of potential of having a hurricane hit our headquarters office.

So we're just prepared for that now.

And up until a couple of years ago, I couldn't honestly tell you that we would not have gotten shut down for couple of days.

And I really don't think that would happen now, so we're in much better shape.

But that comes with real cost.

Kyle, with respect to tax rates, this year's I think is more normal about what we expect going forward, between 37 and 37.25.

Last year had the anomalies.

If you remember if you heard prior conference calls, we talked about altering our nondeductible interest expense methodology as a result of an IRS audit that impacted us last year.

And particularly sequentially last quarter, we recognized that the lack of deductibility of the $6.9 million fine that we were hit with in the [Harula] case.

So going forward for this year -- and as soon as I say this, of course, something else will happen -- but we sort of expect the rate to be in this low 37 range.

Great.

Do you guys have any general any general comments on how the backlogs are looking?

Of deals?

Yes.

Yes.

We still have a fairly active calendar and deals in process.

I talked anecdotally to bankers about their activity levels, and some of them are out of here a lot more than they are here now.

So I can tell you that that activity is pretty good.

The weakest part of the business remains the fixed-income business which is still suffering from a lack of confidence in terms of the direction of long-term rates.

So it's just hard for us to be able to give you any information about when that will turn.

But I actually think ECM, while it might not quite mesh last year and the year [before's] record rate, it's at a different plateau now.

And even in the eventuality of no upsurge, our weakest SBU is still technology.

And you could gather that if you read the Thomas Weisel prospectus.

That segment of investment banking is way below the rates even of 2004.

So -- much less the rates of '98, '99 and the beginning of 2000.

So if that heats up at all, we could have a substantial pickup.

But the other things that we're very active in -- the REITs, the energy -- they are still active.

Health care, financial services -- those businesses are good, both on an M&A front and an IPO business.

So I think it's good, I don't think it's great and we're not going to get massive growth out of this.

Probably what led Larry Cudlow to say that the M&A activity has already been pumped up in the brokerage business, so you don't see a lot of future growth.

But I would tell you, we still do have the opportunity [to increasing] market share.

So hopefully, we'll do that.

Okay, great.

Thank you very much.

We have no further questions.

Sir, do you have any closing remarks?

Just thank you, again, for participating with us, and we look forward to being back with good news.

I'm getting used to these records, so I would like to announce another record next quarter, if we can reach one.

Thank you very much and see you next time.