Stifel Financial Corp (SF) 2004 Q3 法說會逐字稿

Good morning. My name is Tara and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Stifel Financial third quarter earnings conference call. [Operator Instructions]. Thank you. Mr. Zemlyak, you may begin your conference.

Thank you, operator. Good morning, this is Jim Zemlyak, CFO of Stifel Financial. On behalf of the company I would like to welcome everyone to our conference call to discuss the operating results of the third quarter of 2004. 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 '95. These forward-looking statements are not statements of facts or guarantee the 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 discussion of these results, of these risks and uncertainties, please see the business factors affecting the company, and the financial services industry and the company's annual report on Form 10-K and management's discussion and analysis of results in the company's quarterly reports on Form 10-Q. With that, I would like to turn the call over to the Chairman, CEO and President of Stifel Financial, Ron Kruszewski.

Thank you, Jim. Welcome everyone, thank you for your time. We released earnings yesterday after the close and we will review our press release and the relevant numbers on our call today. You can get a copy of our press release at www.stifel.com. Today I would like to cover four topics. First, the general market conditions that we experienced in the third quarter. Second, our results for the quarter and nine months ending September 30th third we will look at our business by segment, and finally we will talk about the remainder of 2004, although as those of you that are on the call know that we do not provide any form of earnings guidance. Please note that all prior periods share and EPS amounts have been retroactively restated to reflect the four for three stock split distributed to shareholders in September 2004. When I completed my remarks, we will be happy to take any questions. As widely reported, the overall business environment for securities firms, especially ones with large private client businesses like Stifel Nicolaus has been sluggish.

The uncertainties surrounding the elections and geopolitical concerns have contributed to the overall malaise. Hopefully, the winner of today's election can be determined quickly, and that level of uncertainty removed from the market equation. As it relates to the company's results, I would say that Stifel's most recent quarter is a tale of two cities. On one hand, we are pleased with the company's nine-month results, which represent record revenues and record profits to this period. In fact, the nine-month earnings exceed last year's record annual profitability. Also, the company is on track to achieve its ninth consecutive year of record revenues. On the other hand, reflecting the aforementioned sluggish business environment, the just completed quarter resulted in net revenues, which were down both sequentially and from the prior year quarter. We are not alone in this front, and the securities industry as measured by the SIA is also projected as a down quarter both on asequential and year-over-year basis. For the quarter ending September 30 2004, net revenues were approximately $56 million, down 7% from the 2003 third quarter. Net income for the quarter totaled $4.3 million, which was down 17% from the prior year third quarter. We must remember, though, that the prior year third quarter included a benefit, which was the reversal of a legal charge taken in previous quarters of $1.2 million net of tax, which was approximately a $0.11.

Diluted earnings per share for the quarter was $0.35 compared to $0.46 in the third quarter 2003. If you adjust for the prior year benefit, net earnings actually increased 8% while diluted EPS remained unchanged to $0.35. For the nine months ending September 30, 2004, net revenues were approximately $183 million, which was up 18% from the same period of 2003. Net income totaled a record $16.2 million, up 94% from the prior year. Diluted EPS was at $1.32 compared to $0.77 for the nine months ended September 30, 2003. The current year results, including $1 million tax benefit, which totaled $0.08 per share, resulted from a settlement of a state tax matter. This tax benefit was taken in the first quarter of 2004. So, if you exclude the prior year benefit and the current year tax adjustment, net income increased a 112% for the nine months to $15.2 million or $1.24 per share. At September 30th, the company's equity was $123 million, resulting in book value per share of $12.71. Annualized return on average equity was 19% for the nine months ended September 30, 2004. During the first nine months of 2004, the company repurchased approximately 415,000 shares under existing board authorization at an average cost of $19.26 per share.

On the expense side, just look at two general expense categories: First, compensation and benefits. As a percentage of net revenues, compensation totaled 64.4% in the third quarter of 2004. It was 65.7% in last year's third quarter, and it was 64.4 in the second quarter of 2004. You know, a significant portion of comp and benefit includes transition pay in connection with our expansion efforts, and we exclude those when we look at overall trend in compensation. So if you exclude those, compensation as a percentage of net revenues totaled 60.6% in the third quarter 2004. 62.2% in the 2003 comparable quarter and 60.5% in the second quarter of 2004. This ratio is in line with our business model, as we would like compensation excluding transition pay to be in the low 60's as a percentage of net revenues.

The other general expense category is overall operating expenses, which we define to exclude compensation and interest expense. As I discussed, the prior year third quarter's non-interest expenses included a $2 million pre-tax reversal of a - of which resulted because of a settlement of an arbitration award. If you exclude the prior year reversal, total non-interest expenses actually declined 9%. We are pleased with our control over these expenses. The reduced compensation expense ratio coupled with our cost control resulted in pretax profit margins of approximately 13% for the quarter and 14%for the nine-month period. Next, let's look at our segments. First, our Private Client Group, Private Client Group net revenues for the third quarter of 2004 were unchanged from the prior year third quarter, but were down 2% from the previous record second quarter of 2004. However, reflecting excellent cost controls and improving profitability of branches opened in the last couple of years, the Private Client Group's third quarter operating contribution was 11.2 million. Pre-tax margins were 26% as compared to 28% in 2003.

However, the prior quarter included this legal charge that I have been talking about, but if you exclude that, both profits and margins for this segment increased over the prior year quarter. Year-to-date, the Private Client Group's net revenues increased 15% and operating contribution increased 31%. This demonstrates, really, the good market conditions on the first six months of the year, and also the leverage that exists within this segment. Operating margins for the nine months were 26%, up from 21% from the prior year. Equity capital markets for the quarter recorded net revenues of $8.4 million, which was down 32% from the record quarter we had last year, and was also down 8% from the second quarter of 2004. Operating contribution totaled $2.1 million, which was half of the third quarter of 2003,and a 27% decrease from the 2004-second quarter.

During the quarter, we were leader or co-manager on 19 equity debts closed-end, or trust preferred offerings compared to 25 in the prior year third quarter. Operating margins for the quarter were 25.3%, which is acceptable, but was down from a robust 35% in 2003. The prior year quarter again was strong; from a revenue perspective and the margins reflected the inherent operating leverage, which also exists in this business. On a year-to-date basis, excuse me, equity capital markets net revenues totaled $28.5 million, which is a record, and was up 12% over the prior year revenues. Operating contribution increased 27.5% reflecting the improved equity markets during the first six months of year, which was offset by the very sluggish environment in the third quarter. For the nine months, the equity capital markets group was lead or co-manager on 60-equity debt, closed-end fund trust preferred offerings compared to 51 in the prior year.

Operating margins for the nine months increased to 30% up from 25%, 2003. Fixed income for the quarter posted net revenues of $3.6 million, which was an increase of 22% over the prior year third quarter, but it was also down from the previous quarter. It was down 14%. During the 2004 third quarter fixed income, our fixed income group reported an operating contribution of $564,000, which was compared to an operating loss in the third quarter of 2003, and it was essentially unchanged from the prior quarter. The fixed income capital markets group was senior or co-manager of 28 offerings in the quarter compared to 31 in the prior quarter - the prior year quarter. Operating margins for this segment totaled 15.5%, and again, as compared to a loss. We see some opportunities in this segment to increase the operating margins. We believe that each of our segments should have operating margins of 25% to 30% and we see profit improvement in this segment.

Year-to-date, fixed income capital markets had a 14% increase of net revenues, while operating contribution increased 42%. The fixed income capital markets group was senior or co-manager on 108 offerings for the nine months compared to 93 in the prior year. On a trailing 12-month basis, Stifel Financial recorded total revenue of $244 million and net income of $23 million, which would be up 22% and 128% respectively over the comparable prior 12 months. Earnings per diluted share would be $1.86, pre-tax profit margins of 15% and return on average equity of 21%. Again, this would be for a year ending September 30, 2004. As of the market close yesterday, our stock closed at 19.70,which represents PE of 10.3, based on trailing 12-month diluted earnings and 1.6 times tangible book value.

EBITDA has defined in our press release totaled approximately 35million for the nine months and $49 million for the trailing 12 months. Finally, take a look at some of Stifel's statistical data. Of note book value per share equaled 12.71. The number of investment executives is up from last September, and the average trailing 12-month production for IE's who have been with the firm more than one year increased a 11% to approximately 350,000. Total client assets are approximately $20 billion at September 2004. Again looking forward, while we don't give guidance, we believe that the markets have a better tone in terms of investor settlement. So we were optimistic about our remaining quarter, and hopefully into 2005. With that, I will take any questions. Thank you. Operator.

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

Very good. Thank you, everyone, for your time on the call, bye.

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