雷蒙詹姆斯金融 (RJF) 2006 Q4 法說會逐字稿

Welcome, participants.

I'm glad once again to be able to report favorable results for the fourth fiscal quarter ending September.

As you noted from our release, net revenues were up only 4% to $587 million.

I would remark that you will see that gross revenues were up considerably more, by 16%.

The only point I would make about that is that it not only reflects the interest changes that occurred in the year, but it also, I think, reflects the dramatic growth of the bank during the year, more about which I will say later.

On an after-tax basis, our unaudited net income was up about $51 million, which was up 14% from the comparable quarter last year.

That translates to $0.44 per share, up from $0.39 for a 13% increase.

I might also add that those results include the write off on the last of the large case on [Lipand].

We still have one case outstanding remnant of one case there, but essentially that gets rid of the last of that large case.

The year had much better results in the quarter, and the reason for that is, essentially, I would have described the revenue line in the Private Client Group as kind of moribund.

There was a lot of uncertainty in the marketplace, and September was a particularly weak retail month, I think across the industry.

We do not remember this, but the market has only turned rather recently, so it's in this fiscal year, from our standpoint, that the retail activity levels have returned to the kind of levels that existed prior to the June quarter and during the June quarter.

So when you look at the year, net revenues were up 15% to $2.33 billion, and profits were up 42% to $214 million.

Again, that represented about a 39% increase in earnings per share, up to $1.85 a share.

So it was an excellent year for us, and I think that the kind of trend lines that we had at the end of the quarter have actually reversed during this period that we saw ending in September.

At year-end, you will note that the assets on the balance sheet increased significantly to $11.5 billion.

That is about a $3 billion increase, and you can relate that to the growth in customer assets that are shown here at about $30 billion, where about 9% of those balances are represented in cash.

So the vast majority directly related to that factor.

Essentially, the quarter was up because, while Private Client Group revenues were relatively flat, the fact is that has occurred in recent quarters, the lack of litigation activity, etc., has substantially increased margins so that we actually had higher profits in the Private Client Group; and we had good growth in Asset Management during the period in income.

If you look at the quarter, you would also see that Capital Markets was not particularly good.

It was kind of flat with last year, but you have to remember that the fourth quarter last year was a big record for us and Capital Markets; and there was a lot of underwriting activity, as you will see later in the underwriting statistics.

So actually, I would count that as a very good quarter, more commensurate with the activities that we had heretofore.

If you want to just try to look at the specifics on that, you would see that last year in the quarter, we had 32 U.S. underwritings and five Canadians, and this quarter, we had 22 and 3.

That is kind of reflective of that activity slowdown that I mentioned in the quarter but yet the overall results in the quarter were still pretty good.

So I think that was good.

You would also see that assets under management essentially increased from $27.5 million to $31.8 billion, both in the quarter and for the year.

So we have larger billable balances now in those individual accounts for the Asset Management group.

You might also see here that, for the year, we had some decline in total rep count.

That decline in rep count has continued to reflect this upgrade activity; and you will see good net additions at RJA in our employee distributor, but you will see some net decline in RJFS.

Again, that reflects ridding us of some of our lower producers.

If you want to measure that, you can see in RJFS that the average productivity per financial adviser has increased year over year from $236,000 to $273,000; and the average production in RJA, which is probably not fully reflective of how well we have been doing in recruiting there, only because we don't include anybody in these numbers that has been with us for less than a year, whether that is a trainee or a full-service financial adviser recruited from another firm.

But in any case, the increase there was from $370,000 to $404,000.

So we have continued to be involved in this quality upgrade.

I am reminded by my CFO, Jeff Julien, who has joined me here, that we have recently added a head of recruiting in RJFS internally -- a transfer from a regional vice president slot in Raymond James & Associates.

His job is to now reverse this process and start adding net sales people during fiscal 2007, and grow RJFS again.

So I think you will see an inflection point here from the bottom of our rep count.

So essentially, PCG is in pretty good shape, I would tell.

You can see that we had, as I remarked in my press release, we had a 20% increase in client assets to $182 billion; and we had a small decline quarter to quarter in our margin balances, but they're still up by about 5% from last year to $1.360 billion.

So good results, I would tell you.

If you look at our segment reporting, you will notice that the Private Client Group revenues were up about 20%.

The Capital Markets revenues were up between 6% and 7%.

Asset Management revenues were up 16%.

Raymond James Bank revenues were up 153%, which again reflects the first phase of our movement of Heritage Cash Trust balances into our bank, as the primary sweep alternative for our clients.

That was done at no disadvantage to clients in terms of the rates charged.

As I have explained before, our purpose there is to employ more equity capital, upon which we can earn a higher rate of return than kind of the under-utilized levels that it has now -- while at the same time, we can pay clients the same kind of rates they were getting in Heritage Cash Trust, and do that while affording them FDIC insurance coverage.

The interesting thing about that is is you look down to the pre-tax income line of this segment reporting, you will notice that we were only up 11% in the bank profit line; and yet we had a much larger increase on the revenue line.

That is not just a change in interest levels; that reflects the fact that as we take those new deposits and we invest them in bank loans, and we added net $1.3 billion of loans at the bank last year -- which would not impress one of my larger brethren in the banking industry, but when you start out with around $1 billion in assets, it is a substantial increase on the balance sheet.

The fact is, that when you do that, you essentially end up reserving somewhere around a 1% average of bad debt reserves against those loans.

And at the same time, as you create that new reserve, you have not created any revenue until the future period.

So essentially, if you growth those bank balances as fast as we are growing them, it pretty well offsets any potential for profit improvement in the first year.

That is substantially building the latent earnings power of the Company.

So that particular objective we had at the beginning of the year, that I think I have cited to you as my number-one challenge by my Board of Directors, was to utilize some of this under-employed capital, has proceeded in accordance with plan.

We are in the process of planning another large sweep movement -- hopefully in the second quarter of next year, the third fiscal quarter for us, which will -- and we continue the bank loan activity as I speak, because we still have a couple hundred million that we have not invested yet.

One of the things that we have become relatively good at over the last 18 months is adding new loan mortgage pools in the purchase market, but also participating in syndications of loans with major banks in areas where we have expertise to be able to do, essentially, our own underwriting job here.

And you would see us, since we're strong, for example, in the areas of REITs and real estate, in general, and in energy, we would have had large additions in those segments during the year, although we try to maintain normal segment type balance that you would expect in terms of portfolio management.

So I think we bring more to the table in terms of being able to analyze those loans; and we have been fortunate so far not to really experience much in the way of bad debts.

So we're looking forward to the point where the bank will contribute more money this coming year.

But its major earnings growth will actually be in 2008 and 2009, and should be a pretty consistent earnings growth vehicle, so long as we do not trip up with bad performance in the loan portfolio.

So I think that is going well.

We are also -- now have the capability of making larger loans, about probably $35 million max type loans to clients, which enables us to be very close to the point where we actually could lead syndications for our clients, which is a project probably after we finished most of this sweep that we will undertake.

So progress is good there.

Progress has been good in the Private Client Group.

As I said, in Asset Management, we have done a good job of growing assets organically as well as through market appreciation during the year, but the majority has actually come from net sales growth in those assets.

So we are doing very well, raising funds from outside broker-dealers in addition to our own field force and on the institutional front.

So I expect, as I told you, my second goal to employ that capital was to do purchases of Asset Management companies.

We have been active in the market looking for lift-outs of teams or buying existing Asset Management companies, and we are looking at a large number, but we have nothing to report at the moment.

I am hopeful that we will conclude some transactions sometime during fiscal 2007, however.

Those are the major segments.

There are other segments reported there.

Just on some other general points, this quarter was about a 14% ROE, 8.7% after-tax margin on net revenues versus 7.9% during the quarter last year.

Similarly, when you look at these numbers on a yearly basis, it means we had an after-tax margin of about 9.2% and a 15.6% ROE, which is getting back to the levels that we are more comfortable with in terms of our history.

As we continue to employ more of this under-utilized capital, I think we have opportunity for more operating leverage here at the firm.

So, essentially, the only thing I would tell you in that capital markets activity number -- ECM performed well, as I mentioned.

However, there is really no change in terms of the fact that we have been experiencing annual downturns for a couple of years now.

In fixed income, hopefully, with a little higher rates now, there is some opportunity as people think the risk of rates going higher is diminishing.

I would say it has still not gone away, because the spreads are still below historical norms.

So I do not see a quick turn, but I see it being about bottomed out here on the institutional fixed income side.

Even retail clients will feel more comfortable as soon as the spreads -- the duration spreads -- broaden a little bit to move some of their money out longer term, which affords the opportunity of increasing commission volume and both retail and institutionally, as a matter-of-fact.

So I think that's really the only soft spot I would tell you that we currently have in our overall operations.

Jeff, I do not know if there's anything you'd like to add to that.

I think I would point out that net interest for the year, we have talked about how important a factor that is, and that the bank sweep program will accelerate that.

But we have set consecutive -- for a number of quarters in a row -- consecutive records for net interest earnings and for the year, we ended up with $173 million in net interest, which is up 36% from a year ago.

So a combination of higher rates plus some of these customer balances that we have been bringing in has had a pretty dramatic effect on the net interest earnings here.

Reporting on net revenues is going to be a little disadvantageous to us, because those really are operating earnings for the bank.

They really are operating revenues for the bank.

It's not that we are a highly-leveraged shop, like some of our brethren, where net interest reporting makes perfect sense.

I think it is going to hold us down a little bit, in terms of net revenue growth, because we are concentrating so hard on the bank growth.

Nonetheless, we will report both numbers going forward.

So you can make the adjustment as you see fit.

I would add two other points on the ECM front.

If you look at the general activity in IPOs during this prior 12-month period, you essentially have a flat environment in terms of number of transactions.

We actually gained market share during this period.

We also did the same in over-the-desk business; and that continues to reflect core competency and research that we possess, and that we continue to get good ratings on that front.

So we continue to try to build our research capability around the world to be able to add to this core competency.

But I do not have anything specific to report to you on that today.

With that, I think we would open this up for questions.

Douglas Sipkin.

Just a couple of quick questions.

First, I want to hone in on the bank.

Generally speaking, the accounting methodology -- just so I am clear -- you guys reserve -- you take a 1% provision once you issue a loan.

Am I correct on that?

That is a weighted average of our mix of loans that we have between residential and commercial.

Currently, it hovers within 10 basis points or so of that, as the mix changes a little.

Just generally thinking, so --

The corporate loans actually have a higher reserve normally associated with them.

So as the institution continues to grow this activity with [syndicate] participations with you and other banks all across the country, we will essentially see somewhat differing numbers in those reserves.

But that is the weighted average now.

So just generally thinking through the life of a loan, given that accounting methodology that you guys implement, when does a loan become profitable?

It sounds like 2008, 2009, but I am just trying to think about that from just a specific loan.

I know that is not how you look at it, but through the life cycle of a loan, assuming there's no credit issues and that 1% is taken, how long should it be when you issue a loan that starts out to be a positive for the P&L?

Six months. (multiple speakers) -- some profits.

But that is not the impact that really is going on here.

What is going on here is that the rate of loan additions has been accelerating the whole period, so that essentially, you are creating a lot more 1% reserves than you are earning on the prior six months.

Until you level that out or decrease the amount, you do not really see the dramatic income effect.

So in all of our modeling, we expect that to start happening really rapidly in 2008. 2007 should be better.

We will look very good as a bank that year.

In terms of the size of the bank, where is it now, and where do you think you can get it to?

You might have said it already, so I apologize.

$3.1 billion in total assets today.

It has got $200 million in capital deployed.

We think at the end of next year, it will be maybe $4.5 billion.

So a 50% increase in capital base.

Then, on the segment breakout, you provide bank revenues.

I am assuming most of all of that on the segment is spread, correct?

On the revenue, that is predominantly gross interest earnings.

On the net, it is the net interest earnings minus the significant loan loss provision.

So when I think about -- but there's no fee-based revenue in the bank on the segment breakout?

There is some (multiple speakers) .

There is some, but we --

Almost all spread.

It is almost all spread.

That is helpful.

In terms of -- you guys talked -- I know there's acquisition opportunities you're looking at (indiscernible) Asset Management capability.

But, you know, you do have a pretty significant amount of cash.

You guys had mentioned potentially doing something with it.

Obviously, acquisitions are part of that.

But any update on potentially special dividends, anything like that, that might be a little bit more efficient on share use for shareholders?

Yes, I think we are a little premature to conclude that we will adopt the special dividend methodology; or we may increase dividends.

I mean, all these things, as we go through the year and look at our cash flows, we will do some of that.

But we are still focused on continuing to deploy this capital internally in our existing businesses or through the purchase of additions to that.

I think our policies will have some success in the future.

So I am a little cautious about just sending out cash other than through normal increased dividends, as has been our practice, until we give this a chance to bear fruition.

As you know, if you employ bankers to do searches for you, and then you identify potentials and then you go through this screening process, and then when you finally get to the negotiations you are already fairly far out.

And by the time you conclude them, you can be talking about a year or two.

So we obviously are cognizant of everything that is going on during this process.

But I can tell you my Board is focused on increasing rates of return on our existing equity capital, and we will continue to work very hard to get that done -- whatever methods are required to achieve those results.

No, I am just curious.

It sounds reasonable.

Just a nitpicky item on the income statement -- the financial services fee line.

This quarter looks a little bit more normal.

Was there something last quarter -- and forgive me if you mentioned it in the last quarter conference call -- $38 million last quarter back down to $29 million this quarter.

Is there anything --?

I did mention that in the quarterly report last quarter.

That had to do with recognition -- a special one-time recognition of IRA fees, because we had been actually recognizing them in arrears.

So what we did was on a cash basis.

What we did was our accountants made us move it to a mashed timing with the actual earnings process through the period.

You know, it is probably -- it is appropriate accrual accounting, I would tell you; and to be frank, until they brought it up, I could not have told you whether we were doing it for the future year or the last year.

But that is why the change occurred. (multiple speakers).

You know what?

Now that you mentioned that, I do recall it. (multiple speakers).

$9 million.

It is just a one-time catch up from a cash to accrual basis.

Yes.

That is fine.

The recruiting environment -- I know you guys have been a big beneficiary of that over the last year and a half, with some of the big mergers, people not wanting to work at the bigger firms.

How would you categorize the recruiting environment now?

Is it getting tougher because of demand for front money and things like that are increasing, or just in color around that would be great.

It is always tough because of those demands for front money.

You know, brokers are very good advocates of their own value.

You are correct that some of the majors that have lost a lot of net financial advisers in this front money world have moved up in terms of their size.

In our experience, front money has been more in the 60% to 70% range, on average.

So we clearly are not paying the top end of the rates, and yet I would tell you that we see no abatement whatever in terms of the interest in joining us.

We measure that by something called home office visits here -- HOVs.

And I think we are running at the rate of 250 a year now.

This has been a steadily accelerating rate of -- I would describe high-quality financial advisers, most of whom are employed by major New York broker-dealers.

Terrific.

Thanks a lot.

Thanks for taking all my questions.

Thank you.

I appreciate the participation.

We are looking forward to our new fiscal year, and we hope to see you at our institutional conference or at some of the other financial industry conferences here in the not-too-distant future.

Thank you very much, and at the very least, we will talk to you next quarter.