雷蒙詹姆斯金融 (RJF) 2006 Q2 法說會逐字稿

Good afternoon.

My name is Shaquita and I will be your conference operator today.

At this time I would like to welcome everyone to the Raymond James second-quarter 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 session. (OPERATOR INSTRUCTIONS) Thank you.

Mr. Tom James, you may begin your conference.

Thank you very much.

Welcome to the second quarter conference call.

I am glad to be reporting good results to you today.

As you are aware from our press release, we had net income of $61.5 million or $0.53 per diluted share and that was up 77% from last year's comparable period.

The net revenues were up 23%, which was somewhat less than gross revenues again reflecting the more rapid growth of interest both at the top and expense lines and also at the net interest line absolutely speaking.

So that obviously was a good contribution for us in the period also.

I did remind everybody that you should caveat those results.

We like other members of the New York Stock Exchange experienced a conversion of our seats to cash and stock.

We also had a conversion in our Canadian subsidiary in Montreal.

Consequently we had earnings that I would describe as not usual.

I hate to use the word extraordinary because it has different connotations sometimes for accounting purposes.

But actually I would not obviously sell our licenses to do business were that not part of the normal course of change of the organizational structure.

So this is something that obviously we wouldn't take credit for this gain in spite of the fact the value of the seats have gone up.

And so we have reduced staff for your consideration to show that we have adjusted the earnings to $0.44 per diluted share for the quarter, which means that adjusted net income was up 48% as opposed to the 77% that GAAP requires us to report.

When you review the results of the quarter, we were actually pretty strong across all product segments and all business lines.

It was a very good period.

The market was positive.

Private Client Group activity was good.

So commissions and fees were up dramatically.

When you look of the Private Client Group, I would cite for you the fact that especially in Raymond James & Associates we have continued to have dramatic increases on the recruiting front and that has resulted in a large addition over the last year to our office count where we are up from 80 to 115.

Again I would remind everyone that we have this one adviser select distribution alternative that often are small offices, so these are not all major offices, but a lot of them are.

And we have recently opened large offices in places as disparate as Cincinnati, Ohio, Springfield, Massachusetts, Newport Beach, California, as well as in areas of the country where we clearly have a history of continuing to grow.

So where we have opportunity in these somewhat chaotic periods of change with respect to ownership of brokerage companies in the marketplace, we have continued to take advantage of that to grow the employee distribution alternative that we have.

I would also say that as I have commented in earlier quarters, we have seen a trend now as a result of a better market since 2002 of a reduction of complaints and legal actions.

Consequently those costs are beginning to abate.

That is a very positive factor overall in the economic results and contributions in this area.

And of course the net interest that I mentioned earlier largely accrues to the Private Client segment largely because margin accounts and deposits in our credit interest program as well as deposits in money markets generate revenue sources to us that are profitable for the Private Client Group.

I would comment on the negative side that one of the ramifications of rapid growth in an employee segment of the broker-dealer implies pretty large initial costs and necessarily drives some margin shrink in the short run.

Of course the main reason for that is up front money, but there are many other less direct costs that are attendant to the process like ACATS cost reimbursement, branch office opening costs or carrying those branch offices during the period when you are filling the branches.

Consequently I always view this as frictional costs for growth and in some sense kind of a deferring process of part of your margins.

We think we are making good investments in this process.

So we believe that it will pay off for us.

We continue to have excellent retention statistics in RJ&A.

We have only lost several producers above the 300,000 level in the last 12 months.

So we have excellent retention when we measure off that baseline.

The place where turnover occurs is that we train around 100 people a year and we have a fairly high failure rate in trainees and that necessarily impacts turnover.

So I would basically report to you that that side of the Private Client Group is going well.

Similarly we are achieving record commission and fee numbers in our independent contractor subsidiary.

We continue to raise our standards for productivity there, which I think will have a long-term positive effect but in the short run as I have described before somewhat diminishes the financial adviser account, but again the retention statistics, the losses of large producers is less than 1%.

So we have excellent retention vis-a-vis the competition in terms of good producers.

I would also say in the Capital Markets -- oh, I might mention Canada because Canada actually overall had very good results this quarter and since the time around the acquisition of Canada, we have established a new record earnings level both in terms of Capital Markets and the Private Client Group activities there as we've gained traction in the independent contractor business in Canada as well as grown the productivity and the number of employee-based financial advisers in Canada.

And that has been done with relatively no change in the employee-based offices where they are cost attendant to the growth.

So the margin expansion there has been dramatic.

On the Capital Markets front, we have continued to have a very active calendar on the underwriting front both here and in Canada, probably more importantly during this quarter when you look of the numbers, M&A activity has raised dramatically, so most of the revenue enhancement stems from M&A and strategic consulting activity which is somewhat reminiscent of what is going on amongst our larger competitors in the marketplace.

But of course we do that in mainly the small and mid-sized company markets.

But just to deter the need for a question at the end of the presentation, if anything the pipeline has expanded during this period, which led me to comment in the public release that we had good pipeline activity which I thought was [ardered] well for the upcoming quarters.

Finally I would say the institutional equity commission activity in domestic U.S. was up during the period a pretty large amount and some of our offices abroad are experiencing similar kinds of activity in our U.S. research commission sales.

So I think there's good opportunity here also for continued growth in spite of the fact as we all know we are undergoing some shrinkage in commission rates and general longer-term impingement on margins as a result of declining commission income on this side.

And what drives profitability here is of course more activity in the underwriting calendar where commissions are larger and also a secondary trading is material.

So that continues to have interrelationships on both sides of the business here and it is not all one-sided.

On the Asset Management front, we have continued to have excellent net sales both in terms of our own proprietary managers and those we offer from outside as well as in our wrap programs.

We have been experiencing new money conversions to these programs in the neighborhood of $1 billion a month.

So we continue to dramatically expand the fee base so that again ardors well for the future as the sort of recurring generation of commissions increases as a percentage of the total.

So the Asset Management side has continued to raise new money from both retail and institutional sources.

I would say there's been some slowdown in terms of our relative performance versus the competition which is somewhat disquieting but these things tend to go in cycles by investment manager, so we don't necessarily have all our people in the top quartile these days, which is a concern for longer-term sales, albeit we have tried to train our sales force to focus on three and five-year and longer performance durations.

So I think the Asset Management side is going well too.

The fourth thing I would comment on that I think is important is banking where I made a special comment in the public release because we had dramatic increases in interest income and that reflects much larger total footings, a lot of new loan activity and purchase of mortgage loan packages as well as the commercial business that we participate in.

And necessarily as you grow the loan portfolios, you establish reserves based on experience and we tend to use conservative kinds of estimates for this.

But the immediate impact is in the quarter that the loan goes on the books you establish the reserve, so as long as you have net growth in the loan portfolio, you will have a deleterious affect on current income, albeit you are building a base for much improved profits in the future.

So I see that process continuing as we are still in the early stages of ramping up the growth of our bank and I suspect that it will become a more meaningful part of corporate profitability.

We have recently added a new president who is the head of Banc of America in the Tampa Bay area, so he's very well-known in our market area.

He has good chemistry with our associates here.

He knew a lot of our people before he came.

He is aggressive, knowledgeable and I think because of all these contacts he has will enable us to more easily add to our lending staff and our credit risk assessment staff etc. in growing the bank and as well as direct contacts in terms of originations in our own marketplace, which is a small part of our business because we tend to look at ourselves as a wholesale bank buying participations in loans in industries where we have a lot of local knowledge here based on our own research and the experience of the bankers we brought in.

So we are often participating in the major banks originations in areas where we feel comfortable.

I give you an example.

We obviously have large SBUs in energy and real estate.

Both of those areas are areas in which we feel very comfortable in analyzing the credit risk in the loan process, so I think this is going to become a more major utilizer of capital.

That was one of our original goals if you recall that I cited to you that we really would like to deploy a total of around and $300 million in capital going forward in the bank.

And I say going forward, it is one I announced to you; we have actually deployed some of that capital already, so this process is underway.

And you will see that profit as long as we can continue to rack up the excellent performance on an actual basis in terms of losses.

I think our losses have been nominal over the whole history of the bank to date because we tend to be somewhat risk averse and do use that knowledge base that we have in a lot of the industries to accomplish the growth.

So I think this is going to be a good year.

I would tell you that I don't really see conditions changing in the near term enough to affect the September year-end results much.

So when you look of those operating earnings that we have had in recent quarters, I think we should be able to perform in that range for the rest of the year.

I always hesitate to say anything like that and it is always subject to what the market conditions actually develop, but there's no question that the conditions in which we operate today are somewhat more like the middle '90s than they were like the early 2000s, and when I say the middle '90s, I don't mean '98 and '99 and the beginning of 2000, where things were so good that you really made money in spite of yourselves.

So I think the outlook is fairly stable here.

Corporate earnings are continuing to grow.

So I suspect we're going to be able to continue to participate in this and I would again point you to one statistic other than the growth of all these revenue lines from the various segments, I think it is important that you continue to watch the assets under our administration or control.

That is not necessarily managed money, that's the assets that our clients have here.

And I think we recorded $167.5 billion in client assets and that is up from $136 billion a year ago, which is a -- that's a pretty dramatic increase and probably one of the best measuring points you can take about the earnings power of a firm when you're trying to measure on an average basis.

These market aberrations tend to revolve around the line that measures the total assets.

So I would ask you to look at that and I would also ask you to look at the managed asset line too, which again is a measure of how well the Asset Management business is doing.

I think we've made some progress in some of our other broker-dealer subsidiaries around the world.

We are beginning to build a base in Brazil to complement the smaller opportunity that we have done a good job of harvesting in Argentina and Uruguay.

I think we will soon have research product that subsumes the Latin American continent and that will enable us I think to have begun to build the global research core product that we have as an objective.

And in that regard, I would also comment that we are producing research in our affiliate operation there, Raymond James European Equities where we have analysts employed in Paris that are writing research on the continent and for the UK consumption and European stocks.

So one of the things that we're having to reengineer at the firm today is looking at not just disparate units around the world in terms of producing brokerage and financial services, but also trying to integrate this on a global basis so that the research has the same quality standards, the same feel, the same educational backgrounds and the professionals, things that many of our larger brethren have well in tow after years of involvement have become important to us.

I know next week for example we have a meeting scheduled with our director of research sharing a meeting of all of our research leaders around the world to try to obtain some of these standard levels and have more homogeneity.

So this is a fun challenge for us.

I think a lot of our growth will come here.

If you look at our larger competitors you would also see that a lot of their profits now emanate from abroad.

There are a lot of opportunities abroad and many of them are difficult to execute, but the fact is the opportunities often justify those efforts.

So I expect that we will continue to grow carefully some of these external activities in addition.

So that kind of covers the waterfront.

I would like now to open it up to questions and I will be glad to or Jeff Julien who is here with me, we will be glad to expand on any of these comments and address any other concerns you have on an industry basis.

(OPERATOR INSTRUCTIONS) Lauren Smith.

Just a couple questions.

With respect to the sale of the NYSE and the Montreal seat, I know you gave us the net income number, but if I wanted to -- I kind of grossed it up assuming the corporate tax rate trying to get to an adjusted revenue number -- but I just wanted to verify that it would not have been at a different tax rate.

I just want to be able to get a core net revenue number.

Between the two is right around $16 million.

There are some -- it's not just pure taxes.

There's some bonus ramifications on a small part of it as well.

Okay, great.

That's helpful.

That's all in the other segment too.

As you can see the revenue and pretax side of the other segment grew dramatically this quarter and that is what it is comprised of.

Great.

Okay.

On the expense side you did note in the release that you had a big add to loan loss reserves.

Certainly I am assuming that flowed through on the income statement through the other line.

Could you quantify for us the magnitude of the delta that was the reserve?

Just to try and -- I guess that's one part of the question.

And I guess the second part is trying to get a feel for what is a better run rate of other expenses?

It has kind of bounced around and certainly there's been some legal costs and the like in there, but just trying to get my arms around that a little better.

You know, it's size.

You're going to continue to have more volatility than you would in a more mature and sizable operation.

But we watch as you are obviously attempting to do earnings before loss reserves as well as earnings after loss reserves to try to get a feel for what the earnings power is of the current operation.

Maybe Jeff can --

On a year-to-date basis, which is what I have in front of me, Lauren, the provision at the bank level was about $7 million for the year-to-date.

Last year for the year-to-date it was about $0.5 million to give you an example of the --

Sure, the magnitude of the ramping.

Right.

And that is even with a somewhat lower rate in a couple of the categories in terms of the loan loss reserve calculation.

Unfortunately the auditors and what always astounds me in today's market argue for less conservative reserving techniques.

This most immediate quarter was about 60% of that year-to-date, it was about $4.4 million.

Okay, great.

That's helpful too.

I guess just staying with the bank for a minute I know you have said $300 million kind of what you would like to commit capital and just to refresh -- was it about 80 or $90 million that you have actually allocated at this juncture?

Last August we used $80 million, which has to date kept us to a pretty healthy capital ratio.

We have the first phase of what we will call the bank suite project but the redirection of some balances from the money market fund to the bank occurring in July.

That will likely engender the next round of capital infusion from the parent.

And then there may be one more beyond that of similar magnitude.

Okay.

Just one more question.

I don't want to hog it.

On the investment banking side, could you just give us a sense for the mix of, say, underwriting versus M&A?

Of even roughly percentages?

In terms of revenue?

Revenue splits?

Yes, if we were to look at the 38.9, what was the breakdown?

The problem is you got fixed income mixed into equity Capital Markets in the Capital Markets.

In the most recent quarter I show M&A to be just $17 million.

Okay, so $17 million of the $38.9 million.

Yes.

Versus a year ago that number was $5 million, to give you a comparison for M&A.

Right, yes.

That has certainly been growing rapidly.

Actually that is one of the objectives built into the ECM evaluation process here that we build a base, a larger base on the M&A and strategic consulting because we also do the -- help in bankruptcy restructuring activities as well as other consulting assignments.

And that is a good business for us.

We don't have many conflicts in the bigger cases and there's no reason why we are not able to build that segment of our business.

Right, the vast majority of the balance is investment banking fees, which is relatively flat as the number of deals were relatively flat.

Okay.

Yes, I was -- given the number of deals that you disclosed in the release actually being down quarter on quarter yet you had such a meaningful really good sizable banking quarter.

Did you have any I guess a couple of particularly large transactions or --?

It wasn't in the underwriting side, remember.

So we had a couple of large M&A transactions but I would tell you it is not really out of line with current type of product assignments that we have.

So I think, it is hard to ever predict these with any degree of certainty because they are discrete and they don't occur evenly so it is hard for me to say except to say that I know from the type of deals that we are working on at any time whether the activity levels are good.

And as I reported in our public release, activity levels are good.

The pipeline in all those segments is good.

If anything, the underwriting part of the calendar is up, not flat now, whereas it was flat in the first half.

Right, okay.

Terrific.

Thanks very much.

Jonathan Casteleyn.

Just sticking with investment banking, I'm just trying to understand, we talked about mergers and acquisition fees and also underwriting.

Just trying to understand what your outlook is for the tax credit business?

I believe that you've mentioned before that it does better at higher levels of rates and potentially a good year could run about 25 million in fees.

Just wondering where is that business and is there incremental powder if it comes back?

It is not a question of it coming back.

The investment tax credit business has been a pretty consistent grower in recent years.

It took ten years for us to convince the management team to grow an institution in that business.

And we are in the process now of growing that business and it is always difficult to call because the majority of the business seems to fall in the latter quarters of the year and so it makes it very difficult.

All I can tell you is that in terms of the number of people we have out working with developers, that number is a lot higher than we have had in the past.

The activity levels in terms of lining up deals to be completed is at higher levels than it was last year.

As to whether they all close this year or not, I never have a clue.

So I am actually anticipating that there's no reason to believe this business does not grow at a 20% growth rate like the rest of our businesses.

They seem to have the personnel growth and the relationships with developers.

We don't have any trouble selling any of this stuff.

This is mainly the other side that causes these issues.

I am actually bullish on the business long-term.

Okay, but it's a pretty nominal contribution this quarter if you back out $17 million in M&A, the balance being somewhere in underwriting and then the tax credit is the residual?

You've got it.

And usually it's pretty nominal all the time except for the last quarter or the last two quarters.

Is that -- I'm just trying to understand what is contributing to the minority interest, the loss sharing that you're booking out the $4 million?

I thought there might have been have tax credit but I guess, is that some the international --?

Yes.

Is it solely tax credit?

Not international.

It largely relates to the tax credits that we own.

Partnerships that we have to consolidate that we only own 1% of.

They're throwing off tax losses so the other 99% are shown there as (inaudible).

Right, I mean you have a $3.5 million increase of loss sharing, if you will.

Listen to what he said.

Under the new rules for consolidation we have to bring in 100% of the tax losses and then take out by minority position off a 99%.

Sure.

Understood.

So when did the change take place then?

Of the first (multiple speakers).

The beginning of the fiscal year, this year.

Right.

I was looking at the quarter-to-quarter change.

I'm just trying to reconcile why this $3.5 million increase.

Onto the next thing I wanted to ask you.

Last year, you are right, I think it was international operations.

This year it is tax credit (inaudible).

Okay.

Just looking at the share count obviously a pretty substantial rise quarter-to-quarter.

I know you buy back stock actively at 1.5 times book.

Obviously the valuation is a lot higher than that.

Just wondering how do you plan to manage the equity unit base going forward and why the sequential rise?

Obviously the stock did fairly well in the quarter but I'm just trying to understand how you plan to manage any continued accretion in the share count?

Actually I would say we manage to the best returns obtained for the employment of our capital.

So we buy back stock when it makes sense, not just to have the same share count.

We don't have a lot of outstanding dilution like some of our larger competitors or like other industries have from large option programs etc.

We have managed that very conservatively over the years, so we don't anticipate very large growth in share count and so what will happen is you don't have a match.

We do not have a program that says if we add 3 million shares this year we buy back 3 million shares.

We instead have that program that you described that says if the stock is reasonably priced we buy it back relative to our other investment alternatives.

As I pointed out at the beginning of the year and have talked about in the annual report, if in fact we don't have opportunities like we do in the bank to deploy capital at 15% type after tax rates of return over the long run, we might buy back stock.

We might pay special dividends.

But we obviously feel the obligation not to have a lot of underdeployed capital.

So it's really a question right now we see some opportunities with the bank investment and with other things that we are involved with both internally and externally that we may have capital requirements going forward.

So it is unlikely unless this stock comes down some that we would buy back a stock with the $12 book value in this price range.

It is just not in our DNA to earn that kind of return on capital.

I'd rather give it back to our shareholders and let them deploy it at higher rates.

Okay.

I'm just trying to back into the potential, the asset build in the bank in the quarter.

What exactly is the loan loss percentage per dollar of asset put into the bank?

I think it was close to 1% and does that occur throughout every incremental dollar put into the bank in new assets?

Does the loan loss build occur over the entire growth in assets in the bank or at some point do you top off?

Pretty much it grows because almost a very, very high percentage of the bank's assets are deployed as loans so it almost is on a given dollar and it's just under 1%.

So for the foreseeable future here, yes, it will affect every dollar going in.

If we converted to a bank from an S&L status we might have a higher percentage of corporate loans which carry a higher average reserve.

So it really depends on the product mix too, so it has been pretty consistent lately as Jeff pointed out other than to say as I pointed out at the beginning, this reserve percentage has somewhat come down given the fact that our history of actual losses has not been -- we just have not had many.

Total puttings, Tom keeps talking about currently are about $1.850 billion, just as an FYI at the bank of which probably $1.650 billion is deployed as loans.

Okay.

Can you remind us very quickly of the negative credit history of the bank?

I think you said there was one event over 15 years.

Is that right?

I just want to make sure I have that number right?

It's not one event, it’s nominal events. (multiple speakers) It's like $300,000 in cumulative losses.

One commercial loan event which was a couple hundred thousand dollar hit.

Then there have been some very minor tax -- CRA type investment loans etc., low income housing type loans that we have made for generally for CRA purposes along the way.

Okay, thank you.

All very immaterial in aggregate.

(OPERATOR INSTRUCTIONS) A follow-up from Lauren Smith.

I looked back at my notes and it has probably been 1.5 years if not two years since I've asked you this question, so -- but your European private client efforts, how is that progressing?

Have we seen any traction there?

Traction might not be a word I would've applied to this.

We have had improvement in the recruiting effort there and in terms of the production and productivity too of the existing salesforce in the UK.

I would say that in the next 18 to 24 months it will have an operating breakeven run rate.

So we have not invested for as long or as much as Edward Jones has in their UK operation, but I would say in the UK that the independent contractor concept is breaking new ground and it is not as well received to some of the old-time brokers that we would normally have recruited in other markets.

So it is taking longer than certainly any of us thought it would take.

I think we have a good management team now.

I think we have a good product and system foundation and good operations in the UK.

So it is more a matter of time for the recruiting effort to get enough momentum to get this to be a meaningful contribution.

Is it still something --?

You have been more generous to us by not asking that question than my own Board, which asks me quarterly why it is we're not making money in this already.

And I have a view that a lot of times in these international operations if you keep the run rate or the losses down in early periods and don't try to do one of these critical mass plateau leaps that you will have better long-term rate of return on the cumulative investment when you get it turned around.

And so we have been kind of taking it slow there.

It has been slower than I would say we wanted to take it.

So I don't want to impart the view that we are satisfied with the results, but I do want to say I see light at the end of the tunnel for the first time, albeit it is not a very bright light.

This is going to be a slow growth activity.

We have had much better experience in trying to build Asset Management in France and building this European trading operation than we have in the retail business in the UK.

And in Canada, the independent contractor growth rate is reasonable and I think the acceptance is good and we are big enough now to get people's attention.

So a lot of this has to do with getting enough momentum for the radiation from the people you have already employed with you to encourage others outside in the marketplace to join us.

And it's hard not to get frustrated over a period of time when we are used to seeing 25 new FAs in the United States every month or 30 new ones joining us net, whereas in the UK we go look at a quarter and receive four new offices that are one or two-man offices and it's just so slow it does not excite us.

But I still think we're doing the right thing.

I think there is a market there for our services and I think the growing complexity of products that are now being offered to the middle-class investor in Europe are opening up opportunities for nontraditional distribution sources like ours where we directly access clients and often use financial planning as the methodology.

Is it still about 50 or 60 independent contractors?

Is that still kind of like the number?

To be frank, I don't even know.

Is it that high?

It was 50 I think.

50 sounds -- I was going to say it was 45.

But it might be 55 or 60.

I just don't know.

We don't watch those statistics.

This has not made it under our radar screen for financial information.

It is more of a report in terms of how we think this is developing.

This is -- we are actually looking at other markets.

I would tell you we are still fooling around trying to see if we can do some of this Private Client Group type expansion in other marketplaces.

We have some in our European offices where it is sort of a natural adjunct to the institutional sales, but we have not made a concerted effort to go after middle-class investors there.

So there is longer-term opportunity there if we get aggressive enough management running our international business here to get it moving at a little better clip.

Chet is our COO is supervising the UK business and as I said, I think we have a good national running it now.

So I really think it will have traction.

When you ask me that question 18 months from now I think I will say we've got it profitable now and the recruiting rate has picked up and we now see a little brighter light at the end of the tunnel than we do now.

Okay, thank you very much.

There are no further questions at this time.

I'd like to thank everybody for participating today and again as I always say, I hope we have a good report for you next quarter.

Have a good day.

This concludes today's conference call.

You may now disconnect.