Stifel Financial Corp (SF) 2003 Q3 法說會逐字稿

Good afternoon. My name is Diana (ph), and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Stifel Financial Corporation third-quarter earnings conference call. (OPERATOR INSTRUCTIONS). At this time, I'd like to turn the conference over to Mr. Jim Zemlyak, Chief Financial Officer of Stifel Financial Corporation. Mr. Zemlyak, you may begin.

Thank you. My role today primarily is to inform you of the following items -- Please note that this conference call is being recorded. I would also like to mind you that in addition, this presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not statements of fact or guarantees of performance, and are subject to risks, uncertainties, and other facts that may cause actual future results to differ materially from those discussed in the statements. For a discussion of these risks and uncertainties, please see the business factors affecting the company and the financial services industry in management's discussion and analysis of results of operating and financial conditions in the company's annual report on Form 10-K for the fiscal year ended December 31, 2002, and management's discussion and analysis of results of operations and financial conditions in the company's quarterly reports on Form 10-Q.

Today with us on the call, are the Chairman and Chief Executive Officer, Ronald J. Kruszewski, and Scott B. McCuaig, the President and Chief Operating Officer of Stifel Nicolaus. Today's agenda will include remarks on the operating results for the third quarter and 9 months ended September 30, 2003, by Ron Kruszewski, followed by a brief question-and-answer session. If you would like to dial into the call and ask a question, the call-in number is 888-676-3684. An operator will assist you. (speaker repeats numbers). Now, I will turn the call over to Ron Kruszewski.

Thank you, Jim. Welcome to everyone on the call and thank you for your time.

As you may or may not know, this represents Stifel Financial's inaugural earnings conference call, or quarterly earnings conference call. We thought if we were going to start having quarterly calls, we may as well start after a good quarter. And, our third quarter ending September, 2003 represents a good, if not excellent, quarter. We released earnings yesterday after the close, and we will review our press release and the relevant numbers during his call. A copy of Stifel's press release may be viewed or obtained at www.Stifel.com.

Now, for the numbers. Remember, these results are for the 3 and 9 months ending September 30th, 2003. I will start with our generally-accepted accounting, or GAAP, numbers. For the most recent quarter, net revenues, which we define as total revenues less interest expense, totaled approximately 60 million, which was a record -- up 33 percent from the 2002 third quarter. Net income totaled 5.1 million, which was up from a net loss in the previous year's quarter of 2.6 million. Both this quarter and the 2002 quarter were impacted by legal charges, and more on that in a minute.

Fully diluted earnings per share was 62 cents for the quarter. For the 9 months, net revenues were a record 155 million -- up 9 percent from 2002. And net income totaled 8.3 million, or $1.02 per diluted share, compared with 1.1 million, or 14 cents per diluted share.

As I said, the aforementioned earnings and earnings per share represents Stifel's GAAP numbers. However, both the third quarter of this year and the third quarter of 2002 had unusual items, both relating to the establishment of a legal reserve last year and a partial reversal of that reserve into income during the third quarter of this year.

During the third quarter last year, our company recorded an after-tax charge 3.5 million, relating to an unfavorable arbitration award and other matters. During this most recent quarter, we settled the matter, which resulted in a $1.2 million gain, after-tax. So, as we tried to explain in our press release, if you exclude the 3.5 million charge from the prior year results, as well as excluding the $1.2 million gain from the current year, our operating net income and fully-diluted operating earnings per share would be as follows -- and we think more comparable on this basis --

Third quarter 2003 net earnings would be 3.9 million, or 40 cents per diluted share, compared to $955,000, or 12 cents per diluted share. And, for the 9 months, our operating net income would have increased 52 percent to 7.1 million, or 87 cents per diluted share, compared to 4.7 million, or 50 cents per diluted share, for the 9 months of 2002.

At September 30, 2003 the company's equity was 93.2 million, resulting in book value per share of 1334.

Our quarterly results were driven, in large part, by record revenues in both our Private Client Group and Equity Capital Markets. This, coupled with strong expense controls, contributed to our record earnings. We believe that an effective way to look at a firm like ours is to examine our results on a segment basis. Stifel basically operates in three segments -- our Private Client Group; Equity Capital Markets; and Fixed Income Capital Markets. We will review each of these segments and provide some commentary as to how we see the business environment in each of these areas. Please note that this is not intended to represent any form of revenue our earnings guidance. But instead, it is to give you a sense of how we view each of our businesses as we sit here today.

First, our Private Client Group. Our Private Client Group net revenues for the third quarter of 2003 were 43 million, which was up 36 percent from the third quarter of 2002, and up 6 percent from the second quarter of 2003. The Private Client Group recorded operating income of 10.8 million, which was a 12 million increase from the third quarter of 2002.

Of course, the aforementioned legal charges that I talked about were recorded in our Private Client Group. So, if you would exclude those items, as we did before from the Private Client Group results, Private Client Group operating contribution increased 86 percent over the prior year third quarter, and increased 12 percent from the second quarter of 2003. For the 9 months, the Private Client Group's net revenues were approximately 116 million, which was up 14 percent from the same period in 2002. And again, if you exclude the legal expenses, operating contribution increased 37 percent over the first 9 months of 2002.

The main story relating to Stifel's Private Client Group is the growth that we have -- that has occurred, really, since early 1998. From 1998 through really the end of 2003, we have grown from 262 -- approximately 262 investment executives and 38 offices to 429 investment executives and 83 offices. As a result, we have absorbed a large amount of start-up expenses during this expansion. We are beginning to see the benefits of the inherent operating leverage that exists in our private client business. And, of course, the reasons -- the market environment hasn't hurt.

Equity Capital Markets is next. For the quarter, Equity Capital Markets recorded net revenues of 12.4 million, which was up 69 percent over the same quarter last year, and up 71 percent from the second quarter of 2003. Operating contributions totaled 4 million, which was a 172 percent increase from the third quarter of 2002, and 238 percent increase from the second quarter of this year. The company was lead or co-manager in 25 equity debt or trust preferred offerings during the third quarter of 2003, compared to 7 in the same period one year earlier, and 19 during the second quarter of 2003.

For the 9 months, Equity Capital Markets recorded net revenues of a little over 25 million, which was essentially unchanged from last year. Operating contribution totaled 5.7 million, which was a 10 percent decrease from the first 9 months of 2002. During the first 9 months, we were lead or co-manager of 49 equity debt, or trust-preferred offerings, and that compared to 32 in the first 9 months of 2002.

With respect to Equity Capital Markets, we see three things which have contributed to our record quarter. First, the general business and economic environment has been good, say, since March of this year. Second, we have been adding people in selected areas over the past few years. And like our Private Client Group, we are beginning to see positive results. And third, the consolidation of our industry has created a tremendous market opportunity for regional investment banking firms like Stifel Nicolaus.

Fixed Income Capital Markets posted net revenues of 3 million, which was a decline of 43 percent from the prior year, and down 9 percent from the second quarter 2003. During the most recent quarter, Fixed Income Capital Markets had a slight operating loss -- about a half million dollars -- compared to an operating contribution of 1.5 million in the third quarter of 2002. During the quarter, our Fixed Income Capital Markets group was senior or co-manager on 31 offerings, compared to 37 offerings in the same period one year earlier. For the 9 months, we had net revenues of a little over 10 million, which was again, down about 19 percent from the prior year's first 9 months.

Stifel's Fixed Income Capital Markets consist primarily of tax-exempt public finance and institutional sales in trading. And while this segment posted a small loss for the quarter, we believe our pipeline of potential business bodes well for this segment.

The third quarter represented a very strong one for Equity Capital Markets. I believe it is important to look at the 9-months segment results to look, overall, as to how we have done. So, if you examine our earnings release for the 9-month segment results, you will note that capital markets combined, which is both Equity Capital Markets and Fixed Income Capital Markets, posted a decline in both revenue and operating contributions. Therefore, the increase in 9-month revenues and income is attributable to our Private Client Group segment. And we think this is, in a lot of ways, validates our growth strategy in our Private Client Group. It is where we attain the most operating leverage. And, while -- I point this out just so people do not look at the quarter and think it was just driven by Equity Capital Markets. That was certainly an important factor, but, the major improvement in our earnings has been the improved business environment, and us reaping some of the benefits of our growth over the last three or four years in our Private Client Group.

Finally, we should look at some of Stifel's statistical data. Of note, book value per share equaled 1334, and total headcount actually declined slightly, even though the number of IEs increased year-over-year -- total client assets that totaled 18.8 billion. The headcount, we think, is important to note, because while we continue to add sales a rather rapid rate, we have been able to utilize technology to keep the inherent cost of adding support people to a minimum.

The last item -- before any questions -- we will discuss is adjusted EBITDA. As you will note, we do talk about EBITDA in our press release. It is on the last page. And let me just tell you what it represents. The accountants say I have to say this. And that is -- adjusted EBITDA, which is defined as net income before income taxes, depreciation, amortization and intangibles and employment incentives and interest on long-term debt, represents a non-GAAP financial measure. We do reconcile adjusted EBITDA to net income. The company believes that adjusted EBITDA is a useful measure of financial performance, because of its focus on the company's results before a lot of the expenses -- primarily transitional pay that is related to our expansion in the past two years. We also believe that this measure is an alternative financial measure of performance used by investors, rating agencies, and analyst estimate the value the company, evaluate its ability to meet its debt. Really, it is just an adjusted form of cash flow that we like to look at.

And I would note -- or you should note -- that the 9 months adjusted -- or the 9 months EBITDA was a little over 24 million. And if you adjust for the aforementioned arbitration settlement, which we reversed, as I said, partially into income, our EBITDA, for the 9 months, was a little over $22 million. Again, a measure that we think is important and one that we do track closely here.

So, with add, I will thank you for your time, and would answer any questions that you may have.

(OPERATOR INSTRUCTIONS). Lauren Smith.

Lauren Smith, Keefe Bruyette. Clearly, you had notable improvement in the Private Client Group, both in terms of operating profits and net revenues. Do you get a sense that the retail investor, given the strong gains in stock market very much improved economic data and the outlook for the economy, going forward -- do you get a sense that sentiment has improved enough and that the retail investor is reengaging and activity levels are sustainable?

First of all, the answer to your question is yes. The sentiment is clearly improved. But, if you peel it back a little bit, Lauren, what we really see is -- activity levels today, for our firm, is at or may even exceed the pre-2000. A lot of people say, you know, it was the market mania of 2000. Our firm did not have a lot of technology business -- certainly not on a relative basis. And, what we really see is that the sentiment is very, very good with the individual investor. But maybe even more, which bodes better for the future, I would say, is that a lot of the individual investors today want an adviser. I think if anything happened in the market meltdown, was that a lot of people -- a lot of the do-it-yourselfers decided they were not going to do it themselves anymore. And, in fact, validated the use of experienced financial advisers. And we are seeing that in just the number of accounts that we are opening. We don't lose as many accounts to the do-it-yourself platforms, if you will.

And, net-net, we think it is a good time to be in the advice business. And certainly, the market environment helps tremendously. I don't know if that answered your question. I guess, long-term -- I remember in 2000, we used to worry whether or not brokers were value-added. We always knew they were; we were not sure of how much it was realized. Today, we see it in spades (ph).

Right. Thank you, that is very helpful.

Thanks, Lauren.

At this time, there are no further questions.

Okay, well, thank you, everyone for your time. And we will talk to you next quarter.

Thank you for participating in today's Stifel Financial Corporation third-quarter earnings conference call. You may now disconnect.