雷蒙詹姆斯金融 (RJF) 2006 Q3 法說會逐字稿

At this time I would like to welcome everyone to the Raymond James quarterly analyst conference call. (OPERATOR INSTRUCTIONS).

At this time I would like to turn the conference over to Mr. Tom James.

Sir, you may begin.

Thank you very much.

And welcome to this quarter's conference call.

If you hear any background noise from this end, it is because we're speaking from rainy Tampa Bay, and we have a lot of lightning and thunder outside.

That might give us a little background music that is not appreciated.

So at least you are now warned.

We obviously have just reported quarterly results.

And as I said in my quotes in the press release, I was actually very favorably surprised by the results this quarter.

Not because I didn't know that the monthly commission rates had been increasing and activity had been good in April and May, as we released, but because the rate of growth that sustained us through June when the market began to fall off, actually didn't impact us as much as I might have guessed.

I will say more about why that is in looking through the numbers.

But I do want to make one comment with respect to expectations.

Analyst numbers were somewhat above, a couple of cents above where our adjusted operating earnings number from our standpoint was reported.

I would tell you that from my standpoint as a manager, the kind of increase in net revenues, the 28% variety here in light of the market conditions we operated in, are pretty extraordinary.

Our long-term growth rate objective is 20%.

And to be frank, for any sustained periods of time I think it is difficult to manage effectively and still control expenses appropriately at a much higher rate of growth.

Given that market condition, I think those numbers were very good.

And actually the operating leverage, which resulted in us being able to report a 75% Increase in net income for the quarter, reflects that we did keep cost growth beneath the rate of revenue growth, and we got a dramatic effect on the bottom line.

And I think it is pretty hard to imagine that we could consistently perform in this kind of a market environment at that kind of rate.

When you look at the immediately prior quarter, which was influenced, if you recall, by the sale of seats on the New York Stock Exchange and the Montreal Exchange, actually our earnings were about flat even though market conditions were much more difficult from our standpoint.

And one other factor everybody ought to understand.

I sort of reported that if you looked at our recruiting numbers, while they don't appear to be adding a lot of net brokers, we have terminated a lot of our low end producers.

And most of the people that had been recruited are high-end producers, many of which are recruited into Raymond James & Associates.

And impact of that is that you had much higher front money costs.

You may have settlements with the firm from which the broker departed.

In addition, you often pay for the exit fees that the client experiences at the firm from which the FA left.

So the total impact of an active recruiting effort today is fairly detrimental and it takes some period of time to get a return on investment because it takes a while to move all the assets over.

Industry statistics often are that even good FAs produce at 75 to 80% of prior year's production before the move because they are consumed by that activity, independent of all the other factors that influence production. (technical difficulty) in the marketplace.

Now when you look at these numbers, we did have a 35% growth in total revenues.

And again that results from the continued increase in interest rates on the gross level where rates have risen and --actually spreads have risen, and now banking activity has risen.

You have a combination of factors that is driving net interest.

But even apart from that dramatic gross line increase of 90%, you see a 22% increase in commissions and fees, 44% in investment banking, 20% in investment advisory.

Training profits are up considerably also.

And then financial planning fees show a big increase, more about which I will say in a moment.

And other number is up.

You're looking at an increase that is really across the board.

This isn't just one number that is influencing this.

When you get into our segment reporting you will see that the Private Client Group accounts for most of the net increase.

Part of that comes from a very favorable increase in production coming from improving the producers in our core, as opposed to seeing it as much in just quantitative statistics of FAs.

But it sort of makes my point that we're going through this improvement process, because you can see it in this line with big increases in securities and commissions and fees, while the FA count remains rather static.

And you have also an environment that might indicate to you that commissions would be down.

Actually, what we have been going through has been very favorable.

And then as I said, the expense line is good.

It is high in areas that you might have expected.

Clearly, anything related to compensation, which is related to production is up roughly continent with the revenue increases, which implies that other compensation elements are up far less.

Things like IT where we have tried to regulate growth in IT expenditures at approximately 8 to 10% range.

The kind of number that we would believe will be below revenue growth.

And we do try to do both top-down and bottom-up control efforts in terms of our costing in IT efforts.

Occupancy and equipment is up a little more.

This reflects the cost of recruiting in another fashion.

As we add new offices in a lot of locations, and they're not independent contractor offices, a lot of them are employee offices.

And obviously those expenses get a little bit out in front of the revenue increases as we fill vacant seats in those offices.

Then clearance and floor brokerage is up a lot because of the volume increases.

Business development is up because recruiting activity requires lots of travel and food expenditures, those kinds of things, additional personnel to accomplish these efforts, payment for some of these fees that I mentioned.

Yes, obviously the advertising levels are high, etc.

Those numbers are at the higher end.

But everything else that is in the controllable categories is actually controlled pretty well.

When you see the $0.48 versus $0.29 for the quarter, as I said, I think that is very favorable.

Now I would also say, as I did in the press release, and I would actually have a different line on here, if I were you.

This is GAAP numbers, but if I -- we try to do the best we can to describe to you what we would call adjusted operating earnings or normalized earnings based on removing some of the significant anecdotal events that occur during the quarter.

And in this case, we had a strange one.

We went through a lot of our accounts and tried to make sure that we were consistent in our revenue recognition methodologies to match revenues and expenses.

And what we found was one big number -- we found a number of instances for small amounts that kind of crossed each other out.

But for one big element here we found an expense -- I mean a revenue item that added $0.04 to the bottom line, which had to do with the fact that we were recognizing on a cash basis our IRA piece.

So we had about an $8.8 million adjustment for that.

And that is a onetime event.

I would like -- I wish we could do that every quarter, but we haven't figured out how to do that.

I can tell you that I don't view that as an operating result.

And that is why I said we performed underneath some of the estimates by analysts.

But again, very good results from my perspective.

The margin levels, the ROE all calculate on the up trend that we have been on in recent quarters.

So that is good.

Now I will say -- I will ask Jeff Julien, our CFO, to comment on some of the items that impacted the tax rate, because there is the higher tax rate attached to this quarter as compared to last quarter and last year.

We have had a number of comments related to this.

And really there are two factors, both of which we will, I guess I will use the word mix, for the future.

One factor relates to an annualization type methodology that we have been using on the interim quarters.

And while it is acceptable and gets you to the right place, at the end of the year it leads to volatility in interim quarters to the extent that some of the permanent differences have a big variance within a quarter.

And that amount then is annualized.

We will follow I think what is probably a more common normalization methodology going forward.

If we had been doing that this full year that probably would've shifted about a couple of pennies from last quarter to this quarter.

The reason that is not evident in the last quarter is the other factor, which had to do with these consolidated partnerships that we are obligated under GAAP to consolidate into our numbers, and which we own 1% of.

Consolidating those partnerships distorts several line items.

It distorts interest expense.

That is not our interest expense, so net interest isn't even quite accurate in my opinion from what we would call our own corporate results.

It distorts other expense.

And at the end of the day, it it is distorting the tax liability because we don't record any tax benefit for those partnership losses, which are flow-throughs to individuals.

You would either have to add that back to the pretax income or show it pretax or some other methodology.

What happened last quarter was the two things worked against each other, and the tax rate came out looking somewhat normal, which is why this didn't jump off the page.

This quarter they went -- the annualization issue plus the partnerships went the same way and that obviously caused a huge distortion.

For those of you that model our results, I think a tax rate of 37.5%, or somewhere in that neck of the woods is still probably pretty good for the long-term.

And we will, like I said, undertake steps to get it more normalized on a quarter to quarter basis.

Whether it is through a change in the face of the income statement with how we present the minority interest, or whether we do it through supplemental disclosures or rate reconciliation tables, so it is very clear to everyone that our own personal tax rate isn't bouncing around as much as it looks like on the statement because of some of these VIEs.

This VIE issue is one where I think maybe the corrections is worst than the disease.

What has happened again is because of some improper use of the entities like this, or other special-purpose entities, by other companies that we are all aware, we now face situations where you distort earnings just to make sure that some of these numbers are visible to people.

I'm still a great believer in footnote disclosure for these things, as contrasted to consolidation of -- for entities where you had very small real beneficial interest in the results.

You might encourage our Accounting Principles Board, and think about all these guys that are now dictating SEC accounting policy, that we try not to distort financial results when we are also trying to address problems of nondisclosure that exist in people that are trying to commit fraud through their income statements, etc.

The fact is legislation ain't going to work with them anyway.

It would be nice if we could fix this.

Now as we move from the quarter to the nine months, the fact is that the trends have continued to be very good.

So if I exclude that favorable adjustment, net revenues were still up substantially for the year.

We saw a 19% increase in the reported numbers.

Obviously this small change doesn't have much effect on that.

And at the bottom line we reported a 50% increase in diluted per share earnings and a 54% increase in net income, so that you would have a similar amount of dilution back to that from the adjustment we had here.

And in addition we had those sales of the New York Stock Exchange and Montreal Stock Exchange so that we would have ended up with $1.28 per diluted share, which is still up at 36% from the 94% last year.

The combination of those two events last quarter and this quarter would reduce what I call this adjusted operating earnings line.

But again, the numbers are good.

Now some of the other numbers we share with you when you look at the FA counts, if you look at the retail counts, actually the change in retail accounts is like 10 in the firm from the immediately preceding quarter, and up only about 50 from the same quarter a year ago.

But again, there is a much higher quality content here, as when I look at reports of production coming on based on historical results versus producers that we have lost or terminated, the ratio is extremely high, in a production term much higher than the quantitative numbers and net additions.

That is even more true with respect to assets under management.

This program we have of upgrading is working very successfully going on.

On the assets under management front, we continue to have reasonably good net sales.

I just came from our meeting, and reports from the Asset Management Group across the board continue to be good.

One of the measures, if you take it at sort of the gross level and not just our money managers, we're looking at $169 billion of assets under our management, or under our administration is what I call it, up from 142 million last year.

And again, since you have about the same count of financial advisers, that gives you some measure of what is really going on in terms of assets per financial adviser that are rising dramatically.

And that is occurring not only in our domestic broker-dealers, but in our Canadian broker-dealer.

We don't actually accumulate in these numbers our other foreign brokers.

But we also are tracking growth in assets under management abroad.

When you look at the assets under management at the firm level, we are up from about 29 billion under management to 35.3 billion.

That is a slight increase over the immediately preceding quarter.

And of course the market didn't -- I gave you -- excuse me, I gave you the gross number before the eliminations, so it is at 31.6, up from 26.2.

It is still very good net growth in terms of assets under management, in spite of the fact we don't have a tailwind that is increasing existing assets in this market to any degree.

I think that is I think going well for us also.

If you look at the investment banking activity, which I also report on, and you look at the total Company, which includes Canada, from a year ago we either managed or co-managed 34 transactions this quarter, up from 23 a year ago, and up by 8 from the immediately preceding quarter

Now I will say while we're at that point, as I did in the press release, that while we have a lot of transactions in the pipeline, the fact is that market conditions have actually halted some of the activity levels in terms of the offering timing of these issues.

It is not so much we're having withdrawals yet, but I can tell you if a stock has a material decline, you'll see some of these issuers differ for what they hope is the short time, when in fact it might be a longer time for their offering because of stale registration statements, etc.

This is an indicator to me that there is a risk.

And I don't know what the probability is.

When we look at all the factors, we've got great corporate earnings out there.

We're probably nearing at least pause, if not the cessation of interest rate increases.

I don't know how far this is in terms of future meetings, but it is not far off in my view.

So we have those favorable factors, and these corporate earnings are a surprise on the upside about 70% of the trade.

And that is all beneficial to us.

But when you are in a world as fragile as ours is with respect to acts that go far and above our control, it is a little discomforting, especially after you've had pretty good run-up.

And you see this in the volatility of the market where you'll have a few days where you are down by substantial margins.

And then you have these kinds of tremendous rallies.

And I'm still -- as you can tell from my comments here -- somewhat uncomfortable with the outlook for our fourth quarter, only because I don't know how to measure the likelihood of these probabilities.

If I were looking at the industry as an industry analyst, I would certainly have that factored into my overall viewpoint here, because we could see some problems occasioned in the market on a short-term basis.

I still think we are in fairly good shape.

I don't think there's much evidence that we have slammed the brakes on too hard or that we going to slip into recession.

But I do think it is possible to have a 10 or 15% market correction.

And then if you have a confluence of negative factors -- we have mentioned hurricanes and weather, and yet this morning's report for the first time that I have seen this year showed some forming storms off the coast of northern Africa.

So we're getting into the season where these events obviously could affect Florida.

But above and beyond Florida, it could affect some of these projections have given places as far north as Long Island, with some kind of major storm.

That is problematic.

Just to show you how we worry about factors like that in discussions with Jeff and other senior management here, we have tried to balance our retail mortgage portfolio at the bank to make sure that we don't have too much exposure to marketplaces that could have these events.

Because the coverage limitations on flood and wind damage are beginning extremely difficult to obtain in our market areas, and the prices where you can get it.

That is also for small businesses.

This is a national problem.

The governor of Florida is working hard on this problem, because we are sensitized to it some time ago.

But we incidentally were the fiscal agent for the refunding of the private insurance efforts here in the state of Florida.

And we raised an additional $7 billion to have cash involved for this coming season.

But I would not feel comfortable, even for this stock gap and backstop, if in fact we had another major storm season that did a lot of damage.

This is a national problem, as I mentioned, and it transcends hurricanes.

We have an industry task force at the financial services roundtable that is working on this issue on a holistic basis to try to see if we can have some recommendations for methods to deal with these kinds of major traumas.

Needless to say the bank exposure, much more than the broker brokerage exposure.

We end up closing some offices for a while.

Banks lose a lot of money if the collateral is destroyed.

This is a potential national problem.

While I mention this bank, I should report to you that our sweep change for some of our accounts to bank deposits from our cash trust and credit interest programs came off as near as we can tell, and I hesitate to ever use a ward like this, without a major hitch, as far as we can tell so far.

We moved roughly 1.2 billion or 1.3 billion over to the bank from these other depositories, which we had already begun to ramp up the asset side.

Now, as we have said, the goal here is to employ more equity capital and expand the size of the bank, which necessarily means we are going to be increasing the impact of banking earnings on firm results, and employing a lot more capital in the bank.

You won't see that on a direct basis.

You'll see the gross interest, but you won't see it on the bottom line.

And the reason for that is we establish the reserves for those loans as they are added, and we're adding at a very rapid net rate currently.

Essentially what you're doing is you're recognizing the loss exposure the minute you put it on, as opposed to spreading it over the quarters in which the loan outstands.

We are building latent earnings.

We look very much at these earnings results before reserves.

I think in coming years this is going to be a major impact on our earnings stream as we are able to deploy more of our underutilized capital into the bank subsidiary.

Other report on this, as you note, I have cited as major objectives here to look at, acquiring especially money management companies, but anything that might be available in the financial services industry that fits within the ambit of our current activities.

And we're continuing to be very active in looking at asset managers.

We don't have anything done.

Some of these may turn out to be left outs as opposed to acquisitions.

But I really believe we're going to achieve this result.

A lot of these are trying to find someone at the dance to dance with.

It takes a long time to find someone that meets your standards.

And that is the process in which we are engaged currently.

But my board will not be happy with me if we don't show some results in the not too distant future, so we continue to work on this going forward.

If I had anything to report I would report it.

We do not.

We continue now to begin to add to our number of total employees.

We're up from overall in RJA, and remember this only involves some of our financial advisers and all of our support employees, because a lot of our financial advisers are in our independent contractors subsidiary, but we're up from 4,835 to 5,255 over the last year.

And we continue to add in the areas.

A lot of them are productive personnel of one sort or another.

We are watching this and making sure that we don't get too far out in front of the curve.

But whenever we see instances of service deterioration, you know, our Private Client Group is extremely sensitive to ensuring that we support all these people that we're moving in here appropriately.

So we don't want any service deterioration.

That is one of the reasons why we have some of this cost increase going on in the system today, even though it is at much lower rate than the revenue increments.

You should understand that we are going to have some of this build up, but we are very vigilant in watching this activity.

The other thing I would say about employees is clearly the economy strength, at least in our Florida headquarters office.

I can't say the same about our back office operations in Detroit, because of the problems in the automotive industry and in suppliers.

The fact is that it has become a tighter market here.

There is more competition.

We are beginning to see compensation increases outside the recent 3 to 4% increase rates in the marketplace.

And there are pockets where is difficult to find people to meet standards.

We are also sensitive to this.

And we have increased the number of efforts in our solicitation for employees here.

But retention has been reasonably good thus far.

It is not a problem yet.

I'm just -- as I would warn you about the fourth quarter results, I would tell you here on the cost side this is one where we need to be sensitive.

Jeff, I don't know if you have anything else to add?

The only thing I would add is that with respect to the bank sweep that Tom mentioned, that actually took place the first week in July, so it is not really any reflection on the third quarter, even though we did set a record for net interest earnings.

That is really just a result of increased client cash balances as we have brought in a tremendous number of client assets under administration, with a pretty consistent 7 to 8% cash portion of their portfolio.

So that really will start showing in the gross interest numbers starting in the fourth quarter.

With that I think we would like to open this up to questions.

(OPERATOR INSTRUCTIONS). [Aaron Cadall]

Just a couple of questions.

And I'm sorry if you addressed it before, but can you discuss at all was there any anything that affected the clearance and floor brokerage fees in the quarter?

Yes, we had a -- Tom has talked about that on a year-to-date basis, but for the quarter we have this quarter implemented a gross up of the regulatory fees, SEC fees that are charged on each trade.

Historically we just reported those more or less as a pass-through, you know, collected it and paid on the customer.

But the truth be known is that SEC is charging us, not the customers for these transactions.

And there is not really a right of offset.

So that added about $2 million this quarter.

And those will be shown gross from now on.

That is another item that is in other income -- in the financial services fees, I'm sorry, income in the financial service fees.

And it is shown in the clearing expense portion of the SEC charges.

That is a $2 million gross up.

Basically -- I'm sorry I missed this before -- so it is a 2 million addition to financial services fees with a 2 million addition offset to clearance and floor brokerage?

Right.

Do you think of clearance and floor brokerage as a percentage of net revenue, and is it --?

We look at it as a percentage of securities commissions and fees, but that is getting increasingly distorted as we have go to more and more fee-based programs.

It still holds some relation, if you believe that there is a consistent number of trades, and that fees are roughly a trade-off for commissions.

But over time we have seen that dwindle down as a percentage as more and more fee-based accounts come on.

Again, I'm sorry if you addressed it before, I wasn't able to listen to the entire call.

But was there any color on the net trading profits this quarter and the sequential decline?

They were somewhat better than they had been last year.

They were down somewhat from the immediately preceding quarter.

The fact is that is sort of a netted out number from all areas.

Institutionally, on the equity side, probably losses have increased -- whereas in terms of supporting commission dollar generation.

We had a little better quarter in the fixed-income side of the business.

But this is a -- these things vary a lot even by quarter.

I would like to say that -- you know, we're not really a large proprietary risk taker.

We tend to maintain most of these inventories for use with our clients.

And we in some cases look at them like pure facilitation, and other cases like there is some opportunity to offer retail sized blocks, for example, in municipal and corporate bonds, not only within our firm but without through bond desk, etc., the industry offerings systems.

And if anything, we're increasing some of those inventories for those purposes.

Is it possible to say in a given -- over a given time what the typical split is of that line item between fixed-income and equities, or it is just going to bounce around?

I don't know we gained very much.

It is predominantly fixed-income driven.

We are not a big equity position or -- it is predominantly throughput, fixed-income driven.

And as long as we have a flat yield curve, there aren't a lot of -- not a lot of activity going out long to capture yield and on shorter --.

If anything, we're hedged.

The fact is we maintain a big swap book and we're hedged.

We don't anticipate any major impact either way.

We're certainly not in a position to benefit like Lehman or Bear Stearns or Smith Barney in terms of being able to generate a lot of these proprietary trading driven strategies.

We have a few that we have in there that are consistently profitable, but not a lot of money is deployed in those efforts.

(OPERATOR INSTRUCTIONS).

We have no further questions.

Thank you very much for participating.

I hope we avoid all of these events that I described as somewhat likely during the next quarter or so, and we can maintain this through the end of our fiscal year.

But I can tell you that all of the engine is in pretty good shape here now.

And it is just a question of having a market environment in which we can operate well.

Thank you very much for your participation, and we will see you next quarter.

Thank you for participating in today's Raymond James quarterly analyst conference call.

You may now disconnect.