Stifel Financial Corp (SF) 2004 Q2 法說會逐字稿

Good afternoon. My name is Stacy, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Stifel Financial Second Quarter Earnings 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. If you would like to ask a question during this time, simply press star, then the number one, on your telephone keypad. [Operator Instructions] Mr. Zemlyak, you may begin your conference.

Thank you, Stacy. Good afternoon, everyone. This is Jim Zemlyak, the CFO of Stifel Financial Corp. On behalf of the company, I would like to welcome everyone to our conference call to discuss operating results for the second quarter and six months ended June 30th of '04. Please note that this conference call is being recorded.

Before we begin today's call, I would like to remind listeners 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 and management's discussion and analysis of results in the company's annual report on form 10K for the fiscal year ended December 31, 2003, and management's discussion and analysis of results in the company's quarterly reports on form 10Q.

With that, I'd like to turn the call over the Chairman, CEO, and President of Stifel Financial, Ron Kruszewski.

Thank you, Jim. Welcome to everyone on the call and thank you for your time. We released earnings today before the open and we will review our press release and the relevant numbers on our call today. You can obtain a copy of Stifel's earnings press release at www.stifel.com.

I would like to cover four topics on the call today. First, general market conditions, which we experienced in the second quarter of '04. Second, the company results for the three and six months ending June 30th, 2004. A review of our businesses by segment, and then finally, an outlook, at least a general outlook, for the remainder of 2004.

First of all, the market conditions. After a very favorable- after the very favorable market conditions which existed for basically a year, the trend changed, beginning in April of 2004. For the second quarter, the equity markets, defined by the Dow and S&P 500, were essentially flat. In addition, the Fed began an orchestrated increase in short-term rates in June. As stated in a June ``Barron's'' article, there was a quote that said, ``Bullishness and bearishness are both a mile wide and an inch deep,'' and we think that was aptly put. As a result, equity valuations have been stuck in a narrow trading range. This has resulted in a reduced level of investor activity on the equity side. Also, during June, the bond market sell-off resulted in one of the worst quarters for bond investors in years.

Despite the difficult market conditions during the second quarter, we recorded an excellent quarter, albeit down sequentially from the first quarter of 2004. In addition, our six month results represented record net revenues and record net income, over any previous first six-month period. For the quarter, net revenues were approximately $59.4m, which were up 14% from the 2003 second quarter. Net income for the quarter totaled $5m, up 102% from the prior year's second quarter, and diluted earnings per share were 54 cents, compared to 31 cents in the second quarter of 2003. For the six-month period, net revenues were approximately $127m, which was up 34% from the same period in 2003. Net income totaled a record $11.9m, which was up 270%, from $3.2m in the prior year. Diluted earnings per share totaled $1.30 for the quarter-- or-- I'm sorry, $1.30 for the period, compared to 40 cents for the six months ended June 30th of 2003. And I'll remind you that the current year results include a $1m tax benefit, which approximated about 11 cents per diluted share, which resulted from the settlement of a state tax matter, covering a number of years. We took that tax benefit in the first quarter of 2004.

At June 30th, 2004, the company's equity was $119.6m, which resulted in book value per share of $16.35. Annualized return on average equity was 21.4% for the six months ended June 30th. During the first six months of 2004, the company repurchased approximately 130,000 shares under existing board authorization, at an average cost of $24.08 per share.

I'd like to comment on two general expense categories. First, compensation and benefits. As a percentage of net revenues, compensation totaled 64.4% for the second quarter of 2004, which compared to 67.4 in 2003, and 66.9% in the first quarter of 2004. A portion of compensation and benefits in our firm includes transition pay in connection with the company's expansion efforts. If you exclude these transition expenses, if you will, compensation as a percentage of net revenues totaled 60.5% in the second quarter of 2004, 63.5 in the 2003 comparable quarter, and 63.5 in the first quarter of 2004.

The improvement in this expense ratio as compared to the first quarter of 2004 is a result of primarily two factors. First, the first quarter compensation expense is generally higher, due to increased payroll tax expense. Second, the second quarter of '04 benefited somewhat by a decrease in benefits expense resulting from better claims experience in our self-insured health care plan. Looking forward, we would like this ratio, excluding transition pay, to be in the low 60s as a percentage of net revenues.

The other general expense category I'll discuss is overall operating expenses, excluding compensation and interest expense. We are pleased with our control over these expenses, as they were essentially unchanged from the 2003 comparable quarter. This was due in large part to reduced legal expenses. The reduced compensation expense, coupled with our cost controls, resulted in pre-tax margins of approximately 14% for both the quarter and the six months ended June of 2004.

Next, we'll take a quick look at our segments. As you know, Stifel basically operates in three segments -- our private client group, equity capital markets, and fixed income capital markets.

Our private client group net revenues for the second quarter of '04 were $44.6m, which was an increase of 8% from the second quarter of 2003, but a 14% decline from the record first quarter of 2004. Our private client group recorded an operating contribution of $11.2m, which was a 28% increase from the second quarter of '03. The private client group net revenues for the first six months of 2004 were $96.8m, which was up 30% from the same period of '03. The operating contribution totaled $25.3m, a 96% or almost a double, from the same period, one year earlier.

I'd like to comment on the increase in operating contributions for the first six months for our private client group. As stated, this measure of profitability almost doubled from the previous six-month period. While the favorable markets helped, we believe it noteworthy to look at the contribution of branch offices open since 1998. These offices contributed approximately $4.3m of operating contribution in 2004, compared to a break even in the first six months of 2003. We believe this validates our growth strategy and investment in this segment over the past several years.

Next, equity capital markets -- our equity capital markets group recorded net revenues of $9.2m, which was up 28% over the same quarter last year, but it did decline 15% from the first quarter of 2004. Our equity capital markets operating contribution was approximately $3m, $2.9m, which was a 116% increase from the second quarter of 2003. During the quarter, we were lead or co-manager of 17 equity, debt, closed-end, or trust preferred offerings, compared to 19 in the same period one year earlier and 23 in the first quarter of 2004. For the first six months of 2004, our equity capital markets group recorded net revenues of $20.1m, which was up 56% from the previous year. Operating contribution totaled $6.5m, up 228% from 2003. During 2004, we were lead or co-manager on 40 equity, debt, trust preferred offerings, and closed-end funds, compared to 26 in 2003.

Finally, on a segment basis, our fixed income capital markets. During the 2004 second quarter, fixed income capital markets posted net revenues of $4.2m, which was up 28% from the prior year second quarter, and up 8% from the previous quarter. Fixed income recorded an operating contribution of approximately $600,000, compared to $367,000 the second quarter of '03, and $353,000 in the first quarter. Our fixed income group senior or co-managed 37 offerings during the second quarter of 2004, compared to 34 in the same period one year earlier and 43 during the first quarter of 2004. For the six months, our fixed income group had net revenues of $8.1m, which was up 13% from the prior year. Our fixed income group had an operating contribution of $946,000, which was a 29% decline from the one year earlier period, and during 2004, we were senior or co-manager on 80 offerings, up from the prior year of 63 offerings. The primary reason for the decline in the six month operating contribution and relatively unchanged contribution for the second quarter of '04, despite a 28% increase in net revenues for the second quarter of '04, was due to some trading losses in our fixed income desk during Q2 of 2004.

Looking at the trailing 12 months, June, 2004, marked a 12-month period of mostly favorable market conditions. I'd say mostly favorable, except for the decline which began in May of 2004 and continued into June. For the trailing year ended June 30th, 2004, Stifel Financial recorded total revenue of $248m, and net income of $24m, which would be up 34% for revenues and almost ten-fold on profits, for the comparable prior 12 months. Earnings per diluted share for that 12 months totaled $2.70. Pre-tax profit margins were 15%, and return on average equity equaled 23%, again, for the year ending June 30th, 2004.

As of the market close today, our stocked closed at $24.73, which represents a P/E -- a price-to-earnings ratio of 9.2 times trailing 12-month dilutive earnings and 1.6 times tangible book. The 9.2 price-to-earnings ratio compares with an industry average of 13.3, and a price to tangible book of 1.6 compares to an industry average of 3.5 times tangible book. EBITDA, as defined in our press release, totaled $24.5m for the six months and $50.2m for the trailing 12 months.

Finally, we should look at some of Stifel's statistical data. Of note, as I think I've already stated, book value per share equaled $16.35, and while the number of IEs remained essentially the same, average trailing 12-month production per IEs who have been with the firm for at least a year increased 22%, to approximately $363,000. Although the improved market conditions have aided this increase, the firm is focused on transitioning out marginally producing investment executives. Total client assets grew to $21.3b at June 30th, 2004, compared to $18.2b at June 30th, 2003.

Now looking forward, we are optimistic about, certainly, the long-term prospects for Stifel Financial. We are in an attractive segment of the market, considering all of the consolidation that has occurred, and we are optimistic. We're also, frankly, optimistic for the remainder of the year. What appears to be a strengthening economy, though, with its resultant improving corporate profits, is offset by the prospect of higher interest rates, possible inflationary concerns, geopolitical risk, and an uncertain election. These certainly make for interesting times.

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

[Operator Instructions] At this time, sir, there are no questions.

There never are. Thank you very much for your time and we'll talk to you next quarter. Thank you.

Thank you for participating in today's conference. You may now disconnect.