Stifel Financial Corp (SF) 2004 Q4 法說會逐字稿

Good morning. My name is Trinity and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Stifel Financial earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. (OPERATOR INSTRUCTIONS). Thank you. Mr. Zemlyak, you may begin your conference.

Thank you Trinity, good morning everyone. This is Jim Zemlyak, CFO of Stifel Financial Corp. On behalf of the company, I'd like to welcome everyone to our conference call to discuss operating results for the fourth quarter and full year 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 1995. These forward-looking statements are not statements of fact or guarantees of performance. They 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 our financial services industry in the company's annual report on Form 10-K and management's discussion and analysis of results in the company's quarterly report on Form 10-Q. With that, I would like to turn the call over to Chairman, CEO and President of Stifel Financial, Ron Kruszewski.

Thanks, Jim. Welcome everyone to the call and thank you for your time. Well, what can I say? We had a great year in 2004 which was capped off by a record fourth quarter. I would like to start by thanking our clients for their confidence in Stifel Nicolaus and also my partners and associates for their dedication to excellence during 2004.

Our fourth quarter ending December 31 represented a record quarter for net income. Our 12-month results also represent a record for net revenues, net income and diluted earnings per share. In fact, of note, this is the company's ninth consecutive year of achieving record annual net revenues. We released earnings this morning before the open and we will review our press release and the relevant numbers this morning. If you need a copy of Stifel's press release, you may get it at www.Stifel.com.

Today, I will cover four topics. First, the general market conditions in the fourth quarter; second, the company's results for the quarter and the year ended December 31, 2004. We'll look at our business by segment and then finally, we'll briefly discuss 2005.

Please note that all prior period share and earnings per share amounts have been retroactively restated to reflect our 4-for-3 stock split, which we did in September 2004. Of course, when I have completed this discussion, I would be happy to take any questions that any of you may have.

Let's start with the market conditions, which were very favorable in the fourth quarter of '04. The market's positive reaction to the November presidential election was evidenced by the increases in the Dow, S&P and the NASDAQ. All three were up over their September 30, 2004 close by 7 percent, almost 9 and 15 percent, respectively. This resulted in increased volume across all of our equity-based businesses. However, we're comparing against a very strong prior year quarter. The fourth quarter of 2003 was a record at the time for revenues and net earnings.

Let's take a look at the company's results. For the quarter ended December 31, net revenues, which are defined as total revenues less interest expense, were 64 million, up 4 percent from the 2003 fourth quarter and up 15 percent from the third quarter of '04. Net income, $7 million -- a record, which was up 5 percent from 6.7 million in the prior year quarter and up 64 percent from the third quarter of '04. Diluted earnings per share was 56 cents for the quarter.

On the revenue side, commissions and principal transactions declined 1 percent -- again, this is comparing to the prior year quarter -- and that was offset by a 7 percent increase in investment banking. Fee revenues increased 16 percent in the quarter which reflected an increase in fee-based business.

On the expense side, we look at compensation and we look at compensation as a percentage of net revenue. On this basis, compensation of benefits totaled 59 percent in the fourth quarter of '04. It was 59.5 percent in the 2003 comparable quarter and 64.4 percent in the previous quarter. A portion of comps and benefits excludes transition paying connections with the company's expansion efforts. And as we have done the past as many of you on this call know, we've spent the last several years growing and recruiting individuals. That does not come without expense. But we do track those expenses. If you exclude those transition expenses, compensation as a percentage of revenues totaled 55.7 percent in the fourth quarter compared to 56.3 in the 2003 comparable quarter.

I think for the quarter, the metrics that we are most pleased with and probably a long-term reflector of the health of the business is return on equity and pretax margins. Return on average equity for the quarter, annualized return on average equity was 22 percent and pretax margin was 18 percent, both of which I think represent very good metrics.

Taking a look at the year, again, net revenues a record 247 million, up 14 percent from 2003. Net income totaled 23.1 million -- another record -- or $1.88 per diluted share. That compared with 15 million which was the last year's record or $1.37 per share in 2003.

Net income for 2004 includes a $1 million tax benefit or 8 cents per diluted share which we recorded in the first quarter and that resulted from a settlement of a state tax matter covering a number of years. The prior year results were also positively impacted by a reversal of a $1.2 million charge net of tax, or approximately 11 cents per diluted share. That was from a reversal of an arbitration award.

So, as we explained in our press release, if you exclude both those items, to try to get maybe a more apples-to-apples comparison, our 2004 net income increased 60 percent to 22.1 million, and that would be $1.80 per fully diluted share.

At the end of the year, the company's equity was 131 million. We are very well capitalized as a firm. That results in a book value per share of $13.53. For the year, again, the numbers that we're pleased with. Return on average equity was 20 percent and pretax margin was 15 percent for the year. During the year, the Company repurchased approximately 473,000 shares of our stock at an average cost of $19.38 per share.

Looking at revenue for the year, commissions and principal transactions were up 10 percent; investment banking was up 16 percent and our fee-based business was up 27 percent. Again, in many ways, this reflects our growth initiatives over the last several years.

If you look at expenses, again, we look at compensation. Compensation is the biggest expense in the firm. As a percentage of net revenues for the year, compensation totaled 63.7 percent compared to 65.1 percent in 2003. And again, if you exclude those transition pay expenses, compensation was 60.1 percent compared to 61.3. And as I said, our goal is to have this ratio in the very low 60s, and we achieved that in 2004.

If you look at non-interest expense as a major reason for the company's improved pretax margins is due to diligent cost control. As I said, significant portions of our expense is compensation related and those are variable with revenues. But if you exclude comp and benefits and if you also take out the prior year reversal in legal, non-interest expense has increased only 1 percent over 2003. I think it's that diligent cost control which has certainly improved our pretax margins.

If you take a look at our segments, let's start with our Private Client Group. Our Private Client Group's net revenues for the fourth quarter were 47 million. It was an increase of 5 percent from 2003 and up 11 percent from the third quarter. Our Private Client Group's operating contribution was 11.4 million, up 9 percent from 2003 and up 10 percent from 2004. We are also pleased with our margins in this segment. For the fourth quarter, the margins were 24 percent in our Private Client Group. For the year, Private Client Group net revenues were a record 187 million, which was up 15 percent in 2003 and our Private Client Group's operating contribution was a record 47 million, up 32 percent from the same period a year ago. It's in this segment that we recorded the legal item, the benefit last year. So if you exclude that on a comparable basis, our Private Client Group's profitability was still up 40 percent over 2003. This segment has been the engine of the firm and continues to do so in 2004 and we are very optimistic about the continued growth in this business. I had done an interview for the Wall Street Transcript that I think sort of explains our philosophy and our view of this business. If you get a chance, you might want to read that interview. You can get it on our web site.

If you look at our Equity Capital Markets Group; Equity Capital Markets had net revenue for the quarter of 10.4 million which was unchanged from the same quarter last year, but it was up 23 percent from the third quarter. Their operating contribution totaled 4 million, which was down 11 percent from the fourth quarter of 2003 but up significantly from the third quarter. The company was lead or co-manager on 27 equity debt closed debt or trust preferred offerings during the fourth quarter of 2004 compared to 18 last year and 19 in the third quarter of 2004.

On a year-to-date basis, we had record net revenues in equity capital markets of 38.9 million with an increase of 9 percent from our record last year. Operating contribution was also a record 12.7 million. It was up 17 percent from 2003. During 2004, we were lead or co-manager on 87 equity debt closed debt or trust-preferred offerings, compared to 69 in 2003.

Fixed Income -- our last segment for this call is -- Fixed Income for the quarter posted net revenues of $4, almost $5 million which was down 7 percent from 2003 but it was up 36 percent from the prior quarter. During the fourth quarter, our fixed income grew per quarter as operating contributions of 1.5 million compared to an operating contribution of about 2 million in the fourth quarter of '03 and $0.5 million in the third quarter.

For the quarter, we were senior or co-manager on 32 offerings compared to 47 a year ago and 29 in the third quarter. For the year, the fixed income group posted net revenues of 16.6 million, which was up 8 percent from the prior year and an operating contribution of 3 million, which was an 8 percent increase from the same period one year earlier. During 2004, we were senior or co-manager on 143 offerings, just down slightly from our 145 offerings we did in 2003.

On a statistical basis, of note is our book value per share increased to 13.53. Total headcount was up 3 percent year-over-year while the number of IE's increased 7 percent.

Finally, on the financial basis is EBITDA. EBIDTA, we define and reconcile it to net income in our press release, but you will note that 12-month EBITDA was $50 million as compared to 38 million in 2003. So that's a strong measure and one that we think people should look at in terms of determining the enterprise value of this company.

Looking at 2005, as I think many of you know, we do not provide any earnings guidance. And so with that, I will talk about a little bit about what the industry is seeing. If you look at the Securities Industry Association, they put out their projections for the industry. And according to the SIA, their preliminary forecast for 2005 projects a 13 percent increase in industry profits, which is based on revenue growth of about 7 percent for revenues and a slower growth of non-interest expenses. So the SIA believes that 2005 is going to be a better year than 2004 for the industry.

You know, I'm not so sure the combination of rising interest rates, $50 oil, the war, soaring deficits in the dollar, all cause me a little pause. Of course as we all know, the market climbed the wall of worry -- it just seems to be a lot of worry in my book. But, we have outperformed the industry over the last five or so years, and if the industry does well, we expect to participate in the favorable market conditions if they so develop.

So with that, I will thank you again for your time and we will see if we have any questions. Operator?

(OPERATOR INSTRUCTIONS) Chris McCampbell (ph).

Good morning guys, how are you? Jim, I got a question for you. Have you all quantified the impact of FASB's stock option expense stuff?

Chris, we are still determining that with our accountants and we have not done that yet.

It's in our footnote, Chris, this is Ron. But we have not been a big issuer of options over the last couple of years. The ops expense -- most of our options are vested, and so I think it will be minimal.

(OPERATOR INSTRUCTIONS). There are no further questions at this time, sir.

That's great. May everyone have a great day and again thank you for your time. Goodbye now.

Thank you for participating in today's teleconference.