Stifel Financial Corp (SF) 2003 Q4 法說會逐字稿

At this time I would like to welcome everyone to the Stifel Financial conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer period. (OPERATOR INSTRUCTIONS). I will now turn the conference over to Mr. Thomas Prince, General Counsel.

Good afternoon everyone my name is Tom Prince, and I am the General Counsel of Stifel Financial Corporation. I'm standing this afternoon board Jim Zemlyak, our Chief Financial Officer. On behalf of Stifel Financial I would like to welcome you to our conference call to discuss our operating results for the fourth-quarter and the full fiscal year ended December 31, 2003. Please note that the conference call is being recorded.

Before we began today's call I would like to remind you that 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 factors 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 in the financial services industry in the 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 the MD&A of results of operations and financial conditions in the company's quarterly report on form 10-Q.

With that I would like to turn the call over to the Chairman, Chief Executive Officer and President of Stifel Financial, Mr. Ron Kruszewski.

I might challenge you for the next call to see if there's a way we can shorten that forward-looking statement disclosure. I always go to sleep during that thing. With me, welcome everyone and thank you for your time. With me today is Scott McCuaig, President of Stifel Financial Corp., as well as Tom Prince and David Soshnik (ph), who is in charge of Strategic Planning, Operations, IT and a number of other things I am sure.

I am here to talk about the results for 2003 and the fourth-quarter. Our fourth quarter ending December 31, 2003, represented a record quarter for us in terms of revenues, net earnings and earnings per share. In fact our twelve-month results also represent a record for revenues net income and net earnings per share. 2003 also was the Company's eighth consecutive year for achieving record annual net revenues and I will start by congratulating all of our 1300+ associates for their dedication hard work in achieving those results.

We released earnings yesterday after the close and will review our press release and the relevant numbers. By the way if you need a copy, you may order it or print it off of our Website www.Stifel.com.

Remember these results are for the quarter and the year ending December 31, 2003. First, our generally accepted accounting principle numbers or GAAP, for the most recent quarter net revenues which we defined as total revenues less interest expense were approximately 62 million which was up 36 percent from the 2003 fourth quarter and also up three percent from the third quarter 2003. Net income for the quarter totaled a record 6.7 million which was up from 1.7 million in the prior year fourth quarter and a 30 percent increase from the third-quarter.

Fully diluted earnings per share totaled 78 cents for the quarter as compare to 21 cents for the fourth quarter of 2002. For the 2003 year, as I said net revenues were a record 217 million up 15 percent from 2002 and net income totaled 15 million or $1.82 per diluted share compared to 2.8 million or 34 cents per diluted share in 2002.

As I said the aforementioned earnings and EPS represent Stifel's GAAP numbers however if you when remember from last quarter's call, both the third-quarter 2003 and the third-quarter 2002 had unusual items relating to the establishment of a legal reserve in 2002, and a partial reversal of that reserve into income during this year's third quarter.

During the third-quarter of last year our Company recorded an after-tax charge of 3.5 million relating to an unfavorable arbitration award and other matters. Then during this year's current third year quarter we settled this matter which resulted in a $1.2 million gain after-tax. As we explained in our press release and hopefully I guess I'll have to do it again next year one more year of all these comparative numbers, if you exclude the $3.5 million charge from the 2002 results as well as excluding our gain of $1.2 million gain from this year's results, our 2000 operating net income and fully diluted earnings per share would be 13.8 million or $1.67 per diluted share compared to 6.3 million or 78 cents per diluted share in 2002.

And as such on a pro forma basis which I think is more accurate, our net income increased 117 percent over 2002.

At December 31, 2003, our Company's equity was 100 million resulting in book value of 1447. Return on average equity, a number I am pleased with was 28 percent for the quarter and 17 percent for the year. During the year the Company repurchased 168,000 shares approximately which includes 87,000 shares from our tender offer. Both of those at an average cost of 1277 per share. Our quarterly results were driven in large part by record revenues in our private client group and very strong revenues by both equity and fixed income capital markets. This coupled with strong expense controls contributed to our record earnings. We believe an effective way to look at a firm such as Stifel is to examine our results on a segment basis.

We operate basically in three segments, our private client group or PCG as I will refer to it for the remainder of his call, equity capital markets or ECM, and fixed income capital markets, FICM. We will review each of these segments and provide some commentary as to how we see this business, how we see the business environment in each of these areas. Please note this is not intended to represent any form of revenue or earnings guidance, but instead give you a sense of how we view each of these businesses today and going forward.

First, our private client group. Private client group or PCG net revenues for the fourth-quarter of 2003 were 44.4 million which was an increase of 34 percent over the fourth quarter of '02 and was up three percent on a sequential quarterly basis. PCG recorded operating contribution of almost 9 million, 8.9 million which was a 4.2 million increase from the fourth-quarter of '02 and a 1.9 million decrease from the 2003 third quarter.

Our private client segment is where we recorded the unusual legal expenses which I referred to previously. Excluding those items PCG's operating contribution remained relatively unchanged from the third quarter of 2003.

Our private client groups net revenues for the year were 160.2 million which was a record with an increase of 19 percent from 2002. Our operating contribution to the private client group was also a record 30 million, 129 percent increase from the same period one year earlier. If you exclude those legal charges again as operating contribution of private client group was up almost 43 percent over 2002.

I often feel like a broken record commenting on the performance in our private client group but in fact it is the same story, simply put we have invested in the segment both in terms of quality people and we believe cutting-edge technology over the last six plus years, from 98 through December of '03 we have grown from 260 IE's and 38 offices to over 482 offices. We have absorbed and continue to do so a large amount of startup expenses during this expansion. However, there exists tremendous operating leverage in our PCG business. We saw some of this operating leverage in the fourth-quarter and the full year of 2003. Of course the market environment starting in about March of last year has certainly -- well it hasn't hurt.

Looking forward we see the past as (indiscernible) . We will continue to grow until shareholder value by attracting and retaining first-class investment executives. We believe our technology and culture which considers the investment executive as the company's clients bodes well for our future growth.

Next equity capital markets for the quarter, ECM recorded net revenues of 10.4 million which was up 51 percent over the same quarter last year but down 16 percent from the third quarter of '03. ECM operating contribution totaled 4.3 million which was almost a 200 percent increase from the fourth quarter of '02 and a 7 percent increase from the '03 third quarter. The company was lead or co-manager on 18 equity debt or trust preferred offerings during the fourth quarter of '03 compared to 10 in the same period one year ago and 25 during the third quarter of '03.

For the year, ECM's net revenues were a record 35.5 million increase 11 percent over the same '02 period. ECM's operating contribution totaled 10 million which was a 28 percent increase from '02 and during the year, our ECM growth was the lead or co-manager on 69 equity debt or trust preferred offerings compared to 47 in 2002.

As I have said previously, the consolidation which has occurred and is continuing today within the financial services industry has created a void for the proverbial if you will, middle market company as it relates to M&A and capital raising opportunities. We see ourselves as filling this void.

Fixed income capital markets posted net revenues of 5.3 million an increase of -- and this is for the quarter -- an increase of 22 percent from the prior year fourth quarter and also was up 78 percent from the previous quarter.

During the 2003 fourth quarter our fixed income group recorded operating contribution of 1.9 million compared to 729,000 in the fourth-quarter of '02. And an operating loss of approximately half a million in the previous third quarter.

Fixed income capital market was a senior or co-manager on 47 offerings during the fourth quarter of 2003, compared to 39 in the same period one year earlier, and 33 during the third quarter. For the year our fixed income capital markets grew net revenues of 15.4 million which was a decrease of 8 percent from a strong '02 and even stronger '01.

Fixed income capital markets recorded operating contribution of 2.6 million, a 23 percent decline from the same period one year earlier and for the full year we were senior or co-manager on 145 offerings which was essentially even with a number of transactions in '02.

Our fixed income capital market group consists primarily of tax-exempt public financing and institutional sales and tradings. We believe our current pipeline of potential business bodes well for '04 but we do have to temper our optimism in this group with the interest rate outlook and I am certainly not about to predict the direction of interest rates, but I certainly don't foresee the steep decline that we have had in interest rates of certainly up to '01 continuing, in fact, it can't continue. So our fixed income group will continue to do well but we don't expect it to achieve the levels of '01 anytime really soon. A lot of the refinancing business is over as it relates to the fixed income group.

Both ECM and fixed income are important contributors to our company's results. If you examine our earnings release for the full year, if you look at our segments you will note that our capital markets combined both ECM and fixed income posted a combined 2.2 million increase in revenue and a 1.4 million increase in operating contribution. If you compare that to the increases in the yearly revenues and operating contribution for our private client group, revenues were up 26 million and contribution up almost 17 million. You will see as I said before that the most significant leverage and what drove our results can be attributable to our private client group segment.

Finally we should look at some of Stifel's statistical data of note. Book value per share equaled 1447 at year-end. Total head count declined slightly year-over-year while the number of IE's remain the name. Of note, about the number of IE's remaining the same, we have not slowed down on our recruiting. We recruited a number of people but we also managed some of the bottom if you will, out of the business and so our average productivity per guy is up significantly.

Total client assets totaled $20.5 billion. That is assets that we (indiscernible) for our clients. The last item before I will take questions is adjusted EBITDA. First as I did last time, I define adjusted EBITDA, the accountants say I should do this and that is it is net income before income taxes, depreciation and amortization of intangibles and employment incentives and interest on our long-term debt which is our trust referred offering. We know that this represents a non-GAAP financial measure and as such will reconcile that number to net income in our press release. And you can you can look for yourselves in our press release and do the math.

The reason I bring it up is I believe that this adjusted EBITDA is a useful measure of financial performance because of its focus on the company's results from operations before taxes, depreciation and what I mentioned before. This measure -- it effectively measures cash flow and it is an alternative financial measure of performance. We think rating agencies look at it and financial analysts to estimate enterprise value of a company.

As you'll note our twelve-month adjusted EBITDA was 38.2 million as compared to 17.4 million in 2002. If you adjust for the positive arbitration award we had, adjusted EBITDA for the year was $36.2 million.

So with that I would like to thank you for your time and answer any questions that anyone may have. Operator?

(OPERATOR INSTRUCTIONS) Jerry Cronin (ph) .

Two questions if I could. First of all, in the ECM segment, could you just talk about what other areas I know you mentioned FIG just what other areas are experiencing strength? Secondly, with respect to the trust referred securities there has obviously been a lot of talk about the securities being either eliminated or restricted as a use of capital for the banks and I'm just wondering, first of all what your outlook is or expectation is on that? Secondly, what the potential top and bottom-line impact on your firm would be? Thank you.

Thank you for your question. First of all historically for those of you that no Stifel Financial historically our equity capital markets grew strength in equity capital markets has been our FIG group. We have very strong group of people that have been together for a long time, a very good analyst, I won't use analysts and investment banking in the same sentence, although maybe I just did. Because of all the rules that we know about. But this group has been together a long time and we do well in our FIG group. Continue to do so and I think will -- and that group is not necessarily the money center banks but a lot of smaller regional banks in the country and I believe we do an excellent job in that area.

However we have expanded in the last couple of years, up five years ago we had four analysts and today we have 20 plus. We are in energy, technology, I don't have it all in front of me, I should -- various other, equity REITs is an area that we have done a lot of business in. We have infrastructure, we follow utilities and so we have made a big investment in other areas similar to FIG and we think that we will continue to do so and if you have been using our FIG research, I will --call me and I would like you send you our other research products that is every bit the quality that our FIG is. We were pleased with the results.

It drove a lot of our business last year especially in the equity REIT area which was a strong area for us. As it relates to trust preferred securities I guess your guess is as good as mine. If they are ruled out then I really don't have an outlook for you as to whether or not what is going to happen to them. I believe that it is hard to eliminate trust preferred from the capital structure of the banks. If they do that, I suspect there'll be a lot of business to do to raise common equity to replace that traunch of tier one or tier two capital that is needed. That could bode very well for the capital raising.

If they eliminate it entirely from a future funding capability for the firm while we have been successful in that area, as I told you in my remarks, the primary driver of our business is our private client group and even as such a lot of our trust preferred -- I'm sorry -- a lot of our FIG business has been in common equity offerings and M&A. We have been strong obviously in trust preferreds. I would not view it as anything that is going to negatively or seriously impact us because we're not doing it any more.

Very good, thank you.

Chris Baines (ph).

Look like you had a great quarter. I guess my first question is for Scott or Ron to answer. You gave a little bit of color on kind of the decrease in investment executives during the quarter, where do you guys see that trend going? Have you been talking to people? Where do you see that going from here? My second question has to do with the stock price. You guys have had a great run for the past year and it looks like you guys are getting a pretty good acquisition currency. If you could comment on the outlook for acquisitions, either on a lift out or a whole company basis? Thirdly, you guys used to pay stock dividends and is there a chance we may see that again, maybe to help shore up a little bit of the liquidity crunch in the stock?

Was that three questions or four, Chris?

Three or four. We can always revisit them.

Our outlook is that we will continue to grow our pipeline if you will for people that we are talking to it is as large as it has ever been and that is the results of the fact that regional firms like Stifel Nicolaus just don't exist anymore. You can argue one way or another as to whether that is good or bad. Our experience is that the people that we are talking to and the people that we are recruiting at least certainly the ones that come to us want to be in an environment that we offer. And we set a lot of competition for these people and a lot of our competition is now a part of money center banks and while there certainly nothing wrong with that model, the investment executives -- a lot of them don't like that model. They like the autonomy and the more traditional firm.

I view our -- simply put, our ability to continue to grow in that front has been as positive as it has ever been. It has helped that the markets are better because it is more difficult to recruit in difficult markets. It is easier now. We really foresee a very good year on that front and based upon who we are talking to today, it is going to continue to be very positive.

Scott is telling me that in January already we have added over $3 million in new production and while you have to put that in perspective a little bit that is a big month for us. We will continue to see that. As it relates to the current acquisition front, I heard you ask about if our currency what that means and certainly with our stock price appreciating, we always look at the ability for us to acquire someone. But in our business it is a people business and it has to be a right fit and the currency helps. But matching with the right people is more important.

I can tell you it is not our intention to try to do a big acquisition just for the sake of size. We think our size is an advantage so to do an acquisition it would be dilutive or significantly dilutive to book value to our earnings. It is not something that we are going to really be very excited about. We think we can grow organically and create a lot more value but if the right situation came along we would do this. I wasn't sure if you were asking about us, but I'm not going to answer that because we like our independence and leave it at that if I may.

That is fair enough.

As it relates to a stock dividend, I kind of got rid of that because I could never keep track of all of the numbers. Our accounting staff threw me a party when we got rid of it because adjusting earnings per share every year was the analysts hated it. But that doesn't -- your real question, I believe is what do we do about the lack of liquidity in our stock and I think eventually that will take care of itself.

We certainly understand it but if you can own our stock and if you look at it, you are joining a boat with the employees that own over 50 percent of the firm and that lack of liquidity while it may be a detriment on one hand, is an extreme positive as an outside shareholder looking in. In that we all are significant shareholders and management whatever they do, they are looking at building shareholder value. So I don't know if I can answer your liquidity. You could always split the stock. There is a lot of ways to do it. I am not saying we are doing anything. There is no thoughts or anything but we certainly understand the issue. Did I get your questions, Chris?

I think that is all of them. Good quarter. Thanks.

Eric Wayne (ph) .

I noticed your comp to revenue was down this year. Is that sustainable? Two, can you talk a little bit about your long-term revenue growth prospects; and three, what do you think your sustainable ROE is? Thanks.

I do think that our comp ratio was down in the fourth quarter, that is not unusual for a lot of brokerage firms, a lot of pay is discretionary in their estimates so that is more of a quarterly phenomenon for the quarter. As it relates to the year, our comp ratio is down because of operating leverage. We can continue to add people without adding overhead and you will see that in a lot of our numbers if you go back and look at our numbers of headcount, you will see that our headcount goes up primarily by producing sales people or producing bankers. And so as we continue to add revenue-producing people without adding infrastructure or overhead, that by definition will lower your comp ratio. And that is what you have seen and that is what we project without factoring in the vagaries of the market that can also impact that.

We have a very, very strong and capable platform that can add a lot of growth without adding a lot of overhead. So we will continue to drive that ratio lower just as how the numbers work.

With respect to revenue growth I think was your next question. I only look at it that revenue growth in a lot of ways is determined on the industry and we are in a very cyclical industry as I'm sure everyone on this call knows, but over the next six years we have significantly outpaced the industry in revenue growth. While I am not going to predict revenue growth, I will tell you it is my belief that we will continue to outpace the industry on revenue growth.

I pretty much really can't say anymore than that because it is so cyclical. I expect to do that. To me we are gaining marketshare and we are going to continue to do that. We doubled the size of the firm effectively in the last six years and have grown in the last four. And where the industry is probably essentially flat. We see that occurring going forward.

With respect to return on equity, we are pleased with the number. We had a good year. It is sustainable that is -- it is earning sustainable, we are cyclical and I really can't comment on that going forward. I will say this, I think '04 is shaping up, absent some unforeseen events that can always occur but certainly the economy is primed with the election and all the things that are going. I think the wind is at our back in '04 as an industry and I think we can continue to perform well relative to the industry. Sorry I can't give you a little more color on that. I think it is very difficult to predict earnings.

Thank you.

(OPERATOR INSTRUCTIONS) There are no further question at this time. Do you have any closing remarks?

I would like to thank everyone for taking the time and we will talk to everyone next quarter. Thank you again and goodbye.

This concludes today's Stifel Financial earnings conference call. You may now disconnect.